If we sum up distributor sentiment in 2025, it would be uncertain, volatile, dynamic and shifting. Distributors navigated tariffs, price increases from manufacturers, flat sales, weak housing starts, high interest rates, new regulations and labor shortages — most of which we don’t control. Distributors are facing intense margin pressure, evolving customer expectations, asymmetric competition, rapid technological advancement and private equity consolidation. The fundamentals of the distribution business are shifting faster, and profitable growth remains challenging or even elusive. Describing distribution as going through a transformation is an understatement; it’s being fundamentally reinvented.

One of the critical roles of distribution leaders is to understand broader trends, industry shifts and customer expectations, and to develop growth strategies. Brad Jacobs, chairperson of QXO (a top five building materials distributor) and founder of eight billion-dollar companies, writes in his book, How to Make a Few Billion Dollars, that spotting major trends is critical to long-term success. Getting long-term trends right allows for numerous smaller errors while still succeeding. This article discusses six major trends that are already shaping the future of distribution. The meta-pattern is that distribution is bifurcating into high-value specialists and low-cost logistics players. The middle is being eliminated, or at least sidelined.

Six Trends in Distribution: Adapt or Be Left Behind

1. Value-Add Services Drive Premium Margins

Distributors providing service-wrapped products are beating pure distribution. Value-added services also make the customer sticky. Services include design, kitting, light assembly, repair, rental and job-site services. Distributors who excel at service innovation are beating pure logistics players, especially in mature markets.

2. Digital Leaders Are Pulling Away

This trend has been underway for many years. Early adopters of e-commerce and integrated digital platforms were able to lower cost-to-serve, increase wallet share and gain operational efficiencies. Better systems lead to better data, better automation, better decision-making and better profits. Operational excellence is not optional. Now, AI has the potential to transform distribution. While hype is running ahead of value, I believe AI will become one of the differentiators. Also, younger buyers prefer digital platforms and engagement.

3. Scale Advantages in Low-Margin Businesses

The “scale or fail” pattern is becoming a critical success factor, especially in low-margin, commodity distribution. Large national and regional distributors continue to expand geography and product offerings and are expanding into adjacencies (for example, an HVAC distributor selling plumbing). Private equity-backed companies are rolling up and trying to achieve scale. Independent, ESOP and smaller distributors try to join forces via buying groups to get better costs. Distributors that achieve scale through purchasing power, logistics networks and working capital efficiency (the hidden profit driver) will succeed.

4. Mitigating Vertical Integration by Manufacturers and Contractors

Distributors are not just competing with other distributors. Manufacturers are seeking to serve large customers with direct-to-jobsite models or manage national accounts where product fulfillment is through distribution at predetermined margins. Large contractors or private equity-backed rollup groups seek to go directly to manufacturers for cost advantage, cutting out distributors. Distributors should build a moat by being local, responsive, service-oriented and relationship-driven — not just intermediaries for products. Differentiate on speed, support and problem-solving, not just brand and inventory.

5. The Great Consolidation: Disciplined M&A in Fragmented Markets

Many contractor-serving channels such as HVAC, plumbing and building materials are highly fragmented. Mergers and acquisitions have accelerated with the infusion of private equity capital, low interest rates and demonstrated returns in distribution. EBITDA multiples have grown from the 3-6x range to more than 10-15x based on size, geography, profitability and fit for the acquirer. However, many acquisitions fail to deliver perceived value due to poor integration, costly technology integration, salesforce dissatisfaction and cultural mismatch. While companies try to fix these issues, competitors are taking away market share. Distributors that execute better M&A and integrate well — both operationally and culturally — will succeed.

6. Workforce Shortage and Skill Gap Widens

There are more jobs and less talent in the marketplace — that is a fact. If you think it’s hard to find skilled talent now, it is only going to get more difficult. The U.S. has entered an inverted population pyramid (more older people, fewer young people). The Bureau of Labor Statistics predicts fewer people will enter the workforce in the next decade than in the previous decade. Employers no longer have the power. Also, the needs, wants and aspirations of the next generation of talent are very different from previous generations. Distributors that focus on recruiting, developing and retaining top talent will succeed. Invest in frontline capability. The frontline is where strategies are executed or fail. People drive performance — period.

The Way Forward

As you navigate industry-specific trends such as electrification, refrigerant transition and regulatory hurdles, as well as rollup activities on all sides (contractors, distributors and even some manufacturers), seek to understand broader distribution industry trends and prepare for them. As the philosopher Seneca said, “Luck is a matter of preparation meeting opportunity.”  

Dr. Bharani Nagarathnam is the direc tor of the Master of Industrial Distribution program and an associate professor of instruction in the industrial distribution program at Texas A&M University. He has more than 25 years of distribution experience in teaching and applied research. He is the co-founder of the Talent Development Council and works with distributors on talent acquisition, management, development and retention practices. Dr. Nagarathnam holds a Ph.D. in educational human resource development and a Master of Science in industrial engineering from Texas A&M University.