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Stock Strategist Industry Reports

The Nuts and Bolts of Industrial Distributor Moats

Cost advantages and network effects work in their favor.

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We believe the industrial distributors we cover have wide or narrow economic moats thanks to cost advantages and network effects. Distributors play a crucial role by connecting thousands of suppliers to millions of customers. Despite the common desire to eliminate middlemen, it would be highly inefficient for customers and suppliers to contract with one another directly. We estimate that sales by the industrial distribution industry have grown around 5.2% annually over the past 20 years--60 basis points faster than U.S. gross domestic product growth.

Highly Fragmented Market
The industrial distribution industry is highly fragmented. According to the U.S. Census Bureau, the average wholesale distributor has only 15 employees and less than $3 million of revenue. MSC Industrial estimates that the domestic industrial maintenance, repair, and operations market generates $140 billion of annual revenue. If we include original-equipment manufacturers, we believe the addressable market is much larger--on the order of $1 trillion in the United States, with an additional $1.3 trillion in Europe.

Kwame Webb does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.

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