Specialty distribution is a business most investors treat as a commodity. The reality is that margin is set by a small number of decisions made in the first hundred days after close: which customers get a discount, which products carry list price, which branches have authority to quote, and how quickly cost increases flow through to the catalog.
Across the five specialty distribution platforms we have invested in since 2017, we have moved average gross margin by 280 basis points in the first hundred days after close. The playbook is the same in every case. It is just rarely executed because it requires the new owner to override the incumbent sales team in the first quarter of ownership, which most new owners will not do.
The first step is a price-waterfall audit. We map every discount, rebate, and override that sits between list price and pocket margin, by customer and by product line. In every platform we have audited, between fifteen and twenty-five percent of gross profit leaks through discounts that no one can explain. The audit takes three weeks and is the first thing our operating partners do after close.
The second step is a re-tiering of the customer base. We move the bottom quartile of customers, by margin, to list price or to a competitor. In every platform we have re-tiered, the bottom quartile of customers represents less than eight percent of revenue and a negative share of gross profit. Losing them does not lose money.
The third step is to give branch managers a single lever: a discount cap of two percent off list price. Anything above two percent requires regional approval. In every platform where we have installed the cap, average discount as a percentage of list price has fallen by between 150 and 220 basis points within two quarters.
The fourth step is to flow cost increases through to the catalog on a fixed monthly cadence. Most distributors hold the catalog for twelve months and absorb cost increases in gross margin. A monthly catalog cycle moves cost increases to the customer in twenty-eight days instead of three hundred and sixty-five.
None of this is novel. The reason it works is that we are willing to do it in the first hundred days, while the previous owner was not willing to do it at all.