Gross Margins in Distribution: Industry Benchmarks & Improvement Strategies
What "good" looks like for distributors and wholesalers—and how to improve margins in a thin-margin business.
Key Takeaways
- •Distribution gross margins typically range from 15-30%, with specialty distribution at the high end
- •Margin × inventory turns = GMROI—high turns can compensate for lower margins
- •Value-added services (kitting, technical support, VMI) justify premium margins
- •Private-label products can add 10-20 points of margin vs. branded alternatives
- •Freight and logistics optimization often yields the biggest quick-win savings
Distribution is a thin-margin business by nature. When you're moving products that others manufacture, there's a limit to the value you can capture. Yet within these constraints, some distributors consistently achieve margins 50-100% higher than their competitors.
The difference comes from focus on value-added services, strategic product mix, operational efficiency, and disciplined pricing. This guide provides benchmarks for different distribution sectors and actionable strategies for improving your margins.
Distribution Gross Margin Benchmarks
Distribution margins vary significantly by sector, reflecting the value-add and competitive dynamics of each market.
Commodity Distribution (Food, Basic Industrial, Janitorial)
Below Average
<15%
Average
18-22%
Best-in-Class
25%+
Why these margins: Products are largely interchangeable, driving price competition. Value comes from availability, delivery reliability, and convenience. High inventory turns (8-15x) compensate for thin margins.
Technical/Specialty Distribution (Industrial, Electronics, HVAC)
Below Average
<22%
Average
25-32%
Best-in-Class
35%+
Why these margins: Technical expertise adds value beyond logistics. Customers pay for application knowledge, product selection guidance, and problem-solving. Switching costs are higher when distributors are embedded in customer operations.
Value-Added Distribution (Kitting, Assembly, VMI)
Below Average
<28%
Average
30-40%
Best-in-Class
45%+
Why these margins: Value-added services transform distribution into a quasi-manufacturing business. Kitting, assembly, packaging, and vendor-managed inventory (VMI) create stickiness and command premium pricing. Customers pay for the service, not just the product.
Summary: Distribution Margins by Sector
| Sector | Below Avg | Average | Best-in-Class |
|---|---|---|---|
| Commodity Distribution | <15% | 18-22% | 25%+ |
| Technical/Specialty | <22% | 25-32% | 35%+ |
| Value-Added Distribution | <28% | 30-40% | 45%+ |
Key Margin Drivers in Distribution
Margin Builders
- • Value-added services
- • Technical expertise/application support
- • Private-label products
- • Exclusive supplier relationships
- • Logistics efficiency
- • Higher-margin product mix
- • Customer relationship stickiness
Margin Killers
- • Excessive small orders (high cost-to-serve)
- • Customer concentration
- • Inventory write-offs and obsolescence
- • Freight cost inefficiency
- • Low-margin product focus
- • Price transparency/commoditization
- • Slow-moving inventory
GMROI: The Distribution Metric That Matters
Gross Margin Return on Inventory Investment (GMROI) = Gross Margin % × Inventory Turns. A product with 20% margin turning 8x/year generates 160% GMROI—more profitable than a 30% margin product turning only 4x (120% GMROI). In distribution, margin alone doesn't tell the profitability story. Always consider the velocity dimension.
Strategies to Improve Distribution Margins
1. Add Value-Added Services
- Kitting and packaging: Combine products into ready-to-use kits. Customers pay for the convenience, and you capture assembly margin.
- Vendor-managed inventory (VMI): Manage inventory at customer locations. This creates stickiness and justifies premium pricing.
- Technical support: Invest in application expertise. Customers value problem-solving, not just product availability.
- Expedited/same-day delivery: Charge separately for premium delivery. Don't give away service that has real value.
2. Optimize Product Mix
- Analyze margin by product line: Many distributors are surprised to find wide margin variation. Focus on what's profitable.
- Develop private-label alternatives: Private-label can add 10-20 margin points. Start with high-volume commodity items.
- Prune unprofitable products: Slow-moving, low-margin items consume warehouse space and working capital. Rationalize the assortment.
- Steer sales toward higher-margin products: Align sales incentives with margin, not just revenue.
3. Improve Logistics Efficiency
- Optimize delivery routes: Route optimization software can reduce delivery costs 10-20% while maintaining service levels.
- Consolidate orders: Small orders are margin destroyers. Minimum order sizes and order consolidation improve cost-to-serve.
- Negotiate freight rates: Consolidate carriers and negotiate aggressively. Even 5% freight savings drops to the bottom line.
- Warehouse efficiency: Pick/pack efficiency, slotting optimization, and layout improvements reduce fulfillment costs.
4. Price Strategically
- Segment pricing by customer value: High-value customers with large orders and low cost-to-serve can receive better pricing than small, demanding customers.
- Charge for services separately: Unbundle services and charge for value. Free delivery, free technical support, and free returns have real costs.
- Implement minimum order charges: Small orders are unprofitable. Minimum charges or order minimums protect margins.
- Annual price increases: Don't let pricing drift behind costs. Systematic annual increases (with communication) are easier than catch-up increases.
Tracking Distribution Margins
| Metric | Frequency | Target |
|---|---|---|
| Overall gross margin | Monthly | At or above sector benchmark |
| Gross margin by product line | Monthly | No line below minimum |
| Gross margin by customer | Quarterly | Flag negative margin accounts |
| Inventory turns | Monthly | 6-12x depending on category |
| GMROI | Monthly | >150% |
| Freight as % of sales | Monthly | Declining or stable |
| Average order size | Monthly | Increasing |
Frequently Asked Questions
What is a good gross margin for a distribution company?
Distribution gross margins typically range from 15-30%, with significant variation by sector. Commodity distribution (food, basic industrial) averages 15-22%. Specialty distribution (technical products, value-added services) achieves 25-35%. Your target depends on the value you add beyond simply moving product.
Why are distribution margins so low compared to other industries?
Distributors primarily move products that others manufacture, limiting the value-add they can capture. Customers can often buy direct from manufacturers or through competitors. Margins reflect the service component—availability, delivery, credit, technical support—rather than product transformation.
How can distributors improve margins without losing volume?
Focus on value-added services (kitting, technical support, inventory management), optimize product mix toward higher-margin items, negotiate better supplier pricing through volume consolidation, reduce freight costs through logistics optimization, and develop private-label alternatives. These strategies add value without pure price increases.
What's the role of inventory turns in distribution profitability?
Inventory turns multiplied by gross margin percentage gives gross margin return on inventory (GMROI). A distributor with 20% margin turning inventory 6x/year generates 120% GMROI. Higher turns allow lower margins while maintaining profitability. Best distributors achieve 8-12 turns on fast-moving items.
How should I think about gross margin vs. net margin in distribution?
Distribution has low gross margins but also relatively low operating costs (compared to manufacturing or retail). A distributor with 22% gross margin might achieve 4-6% net margin, which is healthy for the industry. Focus on gross margin dollars per order and per delivery to understand true profitability.
Should distributors charge separately for services or bundle them?
Increasingly, successful distributors unbundle services and charge for value-adds like same-day delivery, technical support, custom packaging, or inventory management. This captures value that's otherwise given away and creates transparency about your true costs and value. Some customers prefer bundled pricing; offer both options.
How does customer concentration affect distribution margins?
Large customers have leverage to negotiate lower prices, compressing margins. If top customers account for significant revenue, their margin tends to be below average. Diversifying the customer base protects margins. However, large customers also reduce cost-to-serve through larger order sizes and more predictable demand.
What role do private-label products play in distribution margins?
Private-label or exclusive products can carry 10-20 percentage points higher margin than comparable branded products. They reduce price transparency and competition. However, they require investment in sourcing, quality control, and marketing. For distributors with strong customer relationships, private label is a powerful margin lever.
Need Help Improving Your Distribution Margins?
Eagle Rock CFO works with distributors to analyze product profitability, optimize pricing strategies, and improve working capital management. We bring CFO-level expertise to distribution companies ready to improve their bottom line.
Schedule a Consultation