Great Expectations – When we place an order, we now expect the product to ship as soon as we press the “buy” button. Free shipping is a given, as is tracking info. If there is a problem, expectations are that with no cost, action, or responsibility on our end it will be taken care of.
Breaking the Duopoly – Beginning in the late 1990’s, we watched as Thermo Electron began an unprecedented acquisition campaign that continues today. In 2002, then VWR Scientific Products (now Avantor) was at near parity with Fisher Scientific, each with about $4B in sales. In the 15 years since, Thermo Fisher has grown to over $45B in sales while Avantor has grown to roughly $7B. Internally, both organizations have considered their positions “safe” because they are, in their words, a “duopoly.” As a duopoly, their market dominance was beyond challenge.
Changing Consumer Mindset – Do you allot time for sales reps to come by your lab and detail their new products to you in person? Do you call or fax your orders in? Are you content to have someone outside your lab tell you that your organization has a contract in place with BigCo and that you should never look beyond BigCo’s portfolio for the products they offer? If you do, and if you insist, will you need to write an extensive letter of justification and gain approval? Do you still rely on another person on your staff to search for an item you may need for your lab or do you just Google it yourself?
In Physics, we learned Newton’s 3rd Law: For every action there is an equal and opposite reaction. Market forces aren’t immune from this law either. Mia Hamm famously said: “It’s more difficult to stay on top than to get there.” And these words are not lost on Fisher and Avantor.
And it was an ancient Greek philosopher named Heraclitus that said:
“The only thing that is constant is change.”
Manufacturers revolt. In the past, the allure of Avantor and/or Fisher were the only path to huge volumes of business to customers they would have no hope of ever contacting on their own. Avantor and Fisher extract profits and fees from their vendors for the privilege of being a "core" vendor . Their negotiators demand huge margins and if you want your ad in their publications, you pay more. It all begins to feel like a big shake down if you are a smaller manufacturer.
Fisher and Avantor need the manufacturers’ products. By buying up key manufacturers, they reduce their dependency on manufacturers but realize they are now their supplier’s biggest competitors! Considering the duopoly, they went ahead with the acquisitions, seeing that the manufacturers had no other path if they walked away.
Increasingly, over time Avantor and Fisher have been asking their vendors to drop ship more of their products to customers. This was another financial blow to manufacturers who counted on distributors to buy in bulk, then sell and ship their goods. By making this push, Fisher and Avantor could focus on the items that turn rapidly and avoid having to invest in warehouses expansion.
Sell on Amazon. If you must carry your own inventory, why not just go direct to the consumer on Amazon? In some cases, they are selling at distributor cost. Every item sold this way generates more revenue. But you still need to play the Avantor and Fisher game if you want to reach the biggest customers with contracts in place.
Sell through Independent Distributors. While Amazon offers a broad audience, the biggest downside is that it is up to the consumer to find what they want. If you know exactly what you want – or you have bought it in the past – you can probably find it again. If you want to browse, you can’t. Independent distributors are the method to market that many manufacturers expected to find at Avantor and Fisher. Reps have good relationships with their customers, and will support and defend their vendor’s brand rather than taking a lead and selling another (usually private label) product. Also the Independent Laboratory Dealers Association has made it easier than ever to reach these independent dealers at meetings held twice a year around the country.
Sales through web sites. This method works well if your business model is to only reach customers by selling direct. If you are also selling through distribution, large or small, you are effectively selling direct to the customer. Life science companies such as 3M, Qiagen, Roche, Life Technologies, Bio-Rad and have gone to great lengths to ensure that their products are sold exclusively to end users. This strategy works well for big, well-established products and brand-loyal customers. For smaller players, even with exclusive products, it is nearly a guarantee that they will remain a small player.
From the Harvard Business Study “The Consolidation Curve” by • Graeme K. Deans, Fritz Kroeger, and Stefan Zeisel. To view, click here.
This study was initially conducted in 2002 and published in the December issue of the Harvard Business Review. Fisher, Avantor and to some extent Millipore-Sigma have long since reached Stage 4, Balance and Alliance:
Stage 4: Balance and Alliance. Here the titans of industry reign, from tobacco to soft drinks to defense. The industry concentration rate plateaus and can even dip a bit as, at this stage, the top three companies claim as much as 70% to 90% of the market. Large companies may form alliances with their peers because growth is now more challenging. Companies don’t move through stage 4; they stay in it. Thus, firms in these industries must defend their leading positions. They must find new ways to grow their core business in a mature industry and create a new wave of growth by spinning off new businesses into industries in early stages of consolidation. They must be alert to the potential for industry regulation and the danger of being lulled into complacency by their own dominance.
Slower firms eventually become acquisition targets and will likely disappear. Most companies simply won’t survive to the endgame by trying to stay out of the contest, or worse, by ignoring it.
Given this information, how is it that Fisher and Avantor have allowed Amazon.com and Millipore-Sigma to upend what they once considered a perfect stalemate? Senior leaders within the duopoly have stated that their strategy is to keep an eye on the other guy and make sure that when he makes a move, you copy it. Of all the threats to the business, other than a manufacturer revolt, the last thing they would have forecast was a resurgent group of small and regional players, or someone from the dot.com boom, rising to threaten them.
The Manufacturers. They were highly motivated to seek other paths to market to increase profits.
Investment Banking Firms. Both Fisher and Avantor have been bought and sold through the years by investment banking firms. Fisher was more fortunate than Avantor, because their last sale was to Thermo Electron Corporation, whose motivation for making the purchase was not to acquire the distribution business, but rather the stable of quality manufacturers that the seller of Fisher offered to Thermo. Thermo has continued to purchase blue-chip companies such as Life Technologies, which now makes them nearly indispensable to big pharma, CRO’s and university and medical research. Meanwhile, then-VWR was initially purchased by CD&R, then sold a couple of years later to Madison Dearborn Partners. Madison Dearborn made the purchase knowing that CD&R had saddled VWR with a mountain of debt, which made it impossible for it to keep up with the acquisition pace of Thermo. Madison Dearborn then sold VWR to Avantor, owned by New Mountain Capital. The Philadelphia enquirer had this to say about the sale:
“VWR International, the slow-growing, Radnor-based lab chemicals, glass, and instruments maker, has agreed to sell out to Avantor Performance Materials, a Lehigh Valley-based company whose owner, Wall Street buyout giant New Mountain Capital,uses it to acquire rivals, cut costs, and squeeze more profits in the global lab-supply business. The buyer didn't announce whether it will fire headquarters’ staff at VWR's Radnor offices, or at Avantor’s Bethlehem-area headquarters, or say which plants it might consolidate and close. A spokesman for New Mountain was not immediately available.”
Employment Policies. Avantor and Fisher have little problem spending large sums of money to recruit top quality people. But once they are on board, their value shifts entirely to short term results. Salespeople typically must post big-time sales within the first six months or they are shown the door, even though the ramp-up time to understand the business can take as long as two years. Even long-term employees in other positions may be given the boot when one program or another is no longer in favor, rather than finding them other company positions for which they may be better suited. In an interest to promote higher-performing people, a relentless cycle of expanding and contracting layers of middle management takes place, with incredibly talented people being tossed overboard. The only protected group of employees within these organizations seems to be the people staffing the distribution centers. CEO’s and Presidents aren’t immune from the hire-‘em-and-fire-‘em mentality. Paradoxically, these companies may win “Best Place to Work” and “Worst Place to Work” awards in the same year depending on department. If you go to work here expecting to retire in 30 years, good luck. Many of these “rejects” went out and started businesses and took the Avantor and Fisher customers along with them.
Federal Government. The many laws requiring that large companies who do business with the U.S. Government should give preference to small and minority-owned businesses has made it necessary for Fisher and Avantor to support resellers and small distributors. In selling to companies who then sold to the Feds, it wasn’t an all-or-nothing proposition. You just had to have some suppliers who were minorities. But for government run labs, like Sandia, Savannah River, Oak Ridge, and Laurence-Livermore, business had to go through a minority supplier. There was no shortage of entrepreneurs to take advantage of this rule. What this rule did accomplish was to get a whole lot of small, regional businesses into the marketplace. Some of these companies have grown to become major players that Fisher and Avantor can’t easily dislodge without seeming like the schoolyard bully.
DNA. As labs changed their focus to manipulation of DNA, RNA and proteins, both Avantor and Fisher invested resources to be a “one-stop-shop” for this type research. Thermo spent $13.6B to purchase Life Technologies.
“Genetic sequencing is an area that will become increasingly important over the years in terms of specialty diagnostics, and Thermo needs to compete in that market because they have a number of products in that area that ultimately could get displaced by sequencing applications,” said Macquarie Capital analyst Jonathan Groberg.
Thermo Chief Executive Marc Casper said advanced genetic testing would be an important field going forward, and his company wanted to get into it as an industry leader. Life Tech is considered second to Illumina Inc in the race to produce faster and less expensive gene sequencing technology.
“We didn’t want to be a more distant participant, and this transaction facilitated us having a stronger position there,” Casper said in a telephone interview.
Illumina last year rebuffed a $6.8 billion hostile takeover bid by Swiss drugmaker Roche Holding AG. Shares of Illumina, which will now have to compete with a far larger rival with much greater resources, were down nearly 3 percent.
This purchase was a direct torpedo hit to Avantor. Big Pharma, Avantor’s lifeblood, could no longer avoid giving serious attention to a contract offer by Thermo Fisher. And since this purchase, a string of large pharmaceutical contracts such as Pfizer have switched from Avantor to Fisher.
Simply put, neither Fisher nor Avantor have ever come close to the goal of being a one-stop-shop for life science researchers. And it’s not for a lack of trying! Even with the acquisition of Life Technologies, Thermo has made their products available through Fisher but kept the entire Life Technologies structure intact and isolated, as though if Fisher got too close, it would upset the apple cart. And that’s a wise decision.
There are still acquisition targets out there – Qiagen and Illumina, for example. This story isn’t over. But as it stands now, the door is wide open for niche companies to enter this life science market. No research organization that I am aware of would try to force a researcher to select from the Fisher or Avantor portfolios as the currently exist.
Fisher and Avantor will continue to dominate large labs, but will increasingly lose business to small and mid-sized labs who will turn to independent and regional distributors as their capabilities continue to grow.
Amazon.com will be an increasingly bigger force in this market, but will soon realize that their platform needs modifications to make it easier to compete. A partnership with someone like SciQuest or Quartzy.com is likely.
More “direct only” sellers will relax their policies and allow specific independent and regional distributors access to their product line on a customer-by-customer basis at first, and then to a larger audience later. Long term, this losing, expensive strategy will inevitably be bypassed by entrepreneurs.
Fisher and Avantor will turn again to the independent and resellers to help boost their revenues. When this move succeeds, they will pull back and abandon this channel in a continuing cycle.
Second-tier distributors such as Thomas and Midland Scientific, who stock product, and who partner with the independent distributors, will experience rapid growth. However, they will be hampered by their inability to service accounts within 3 – 5 days ground service from their shipping points, forcing them to invest in new warehouses.
Customers will continue to adopt and utilize procurement outsourcing companies and embrace the idea of lowering their P2P (Procure-to-Pay) cycle. A personal relationship with a highly skilled customer service person will once again become a “must have.” These relationships will augment and enhance the best B2B platforms, which will also continue to be refined and improved.
Manufacturers will eventually be the dominant players in the market, and the major distributors – including Amazon – will be their support apparatus.
There will be new entrants (with very deep pockets) into this market space. A good example is the combined capabilities of EMD, Millipore and Sigma-Aldrich, now Millipore-Sigma. Another example is Danaher Corporation, who now own Beckman Coulter, Hach, Pall, Leica, Phenomenex and Tektronix, and which will continue to grow using acquisition as their main strategy.
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