As the new year matures, businesses have their 2018 marketing plans and budgets in place. But markets change quickly, so it’s important to keep an eye out for factors that can impact business over the next 12 to 18 months.
One business that is changing rapidly is that of industrial distribution. “It’s tough being a distributor today,” said George Swartz, president of Fortna Sales, during a recent webinar held in conjunction with Industrial Distribution. “Warehousing networks, procurement issues, retaining customers, transportation… all of these impact the business day in and day out.”
The Current Economy
In the results of a survey just published, respondents to Modern Distribution Management’s (MDM’s) annual Industry Outlook Survey overwhelmingly expect healthy sales growth this year, with 92.1% projecting at least some revenue growth for their businesses. Respondent described the economy as “solid,” “strong,” “robust” and “healthy.”
But, according to many respondents, those fortunes could change in the second half of 2018 and into 2019 as tailwinds subside. This sentiment has been propagated at recent industry events, including during a webinar when Mike Hockett, editor of Industrial Distribution, shared in his introduction what he had learned during a recent presentation by ITR’s Alan Beaulieau. “He is predicting U.S. industrial production to continue its current growth through 2018, but sees a mild economic recession in 2019,” reported Hockett.
The U.S. industrial production index is expected to peak in the second month of 2018 but then the economy will slow down gradually the rest of the year before turning more sharply downward in 2019, according to Beaulieu, who also speaks often at VMA events. He advised distributors to enjoy the good times, but use whatever slowdown is coming to invest in your business. He reiterated his oft-told advise at the NIBA/PTDA Joint Industry Summit in Hollywood, FL, in September. “Lead your company with confidence. Don’t hunker down in the slowdown because that’s when it’s time to be aggressive.”
In addition to the anticipated slowdown, there are several trends that continue to impact industrial distributors.
Six Trends Affecting Industrial Distributors
1. Labor: According to data from the U.S. Bureau of Labor Statistics, the warehouse industry employed 960,400 Americans in October 2017, up 42% over the past decade, and the industry is struggling to find the workers it needs. In September, 219,000 employees were hired, but 246,000 jobs remained unfilled.
According to Andrew Lange, an account executive with Fortna who also presented during the Industrial Distribution webinar, labor continues to be a critical driver to cost and risk in the design and operations of distributors. The unemployment rate is the lowest it has been in 17 years, and the quality of the labor pool is shrinking. “There is extreme competition in distribution center labor,” he warned. “Companies lose staff as they go across the street for a 50-cent increase in pay. As a result, more companies are depending on temporary labor and that adds to cost and effects quality of workers.”
Additionally, many states are moving to increase minimum wages; average cost of wages increased almost 2.5% this past year—and health costs are increasing. Also, there is a demographic shift to millennials who don’t think the distribution center is a “job.” They want something more stimulating as well as more technological. There are extra recruiting, hiring and training costs in addition to the cost from reduced productivity. With turnover is a loss of experience and the loss of tribal knowledge. These are all impacting the labor landscape.
As a result, distributors who might never have considered automated material handling solutions are doing so. Improved technology can improve productivity by 50% or more, so more distributors are turning toward technology to solve the labor shortage.
According to Lange, the most effective way to insert technology and automation in distribution centers is for non-value-added activities by staff. Automating routine tasks frees up human labor to do more highly skilled jobs, increasing accuracy and productivity.
The concern about labor was reflected in MDM’s survey results as well, where many respondents indicated concern about the lack of qualified candidates and a growing talent gap. Labor issues will only get worse as older employees retire and human resources managers try to figure out ways to recruit younger and skilled employees.
Find ways to decrease dependence on people—invest in technology and investigate how automation can address the labor trend.
2. Digital Technology and Warehouse Execution Systems (WES): Swartz suggested the time has come for wholesalers and distributors to embrace technology and update their systems. “We’ve waited for a long time, but now is the time to embrace technology,” he said. “This will be very important [in 2018]. Many distributors have deferred investing in warehouse technology, but continuing to wait may cost you your business. The technology is increasingly important.”
The MDM survey results confirmed that industrial distribution is an industry where a gap is widening between distributors waiting on the sidelines of digital development and those building capability. For most respondents, there are compelling signals coming from every part of the business and their markets to act sooner rather than later.
One survey respondent said that, “A monthly sales report is at least 29 days too late.” This is the perfect demonstration of the importance of ramping up investments in digital capability. Sooner rather than later, adopting digital technology is essential to remain competitive.
3. The Amazon Effect: Amazon continues to expand and create additional business disruption, causing many business segments to transform and innovate business operating models. They must compete with what may be considered an “unfair competitor.”
“Amazon is making moves quickly. In the wholesale industrial arena, Amazon Business is growing by leaps and bounds. Amazon Supply failed, but they learned from that and as part of the program, business-only pricing, purchasing system integration, business-ready purchasing analytics have been installed.” Lange noted that Amazon has hundreds of millions of products and purchasing approval workflow support. They also have free two-day shipping and palette shipping for consolidated order delivery.
According to respondents in the MDM survey, Amazon was one of the most consistent common denominators in the top-three industry-wide concerns. A chief concern was summed up by one respondent: “Amazon (and other web catalog companies) are picking off the high-margin, low-technical-expertise products and decimating our profitability.”
It’s expected that the industry will get a clearer picture of Amazon Business’s impact on distribution in 2018. So far, it seems that the clearest impact is that distributors, even in the industrial space, must learn to compete with, combat and work with this company that sold 7 billion items last year, serving 70% of U.S. households. The company has a massive network being used for retail and business to business, with 500,000 commercial customers through Amazon Business already.
But competition is not just from Amazon; there are many other internet competitors causing concern, according to the MDM survey. They include larger competitors trying to “dive in to our niche market and disrupt pricing when they can’t meet their sales goals, which leads to price/margin erosion,” according to one respondent; and competition from China, which is “undercutting prices based on their government ownership,” according to another. This trend crosses over into others, not just Amazon, as one respondent asked: “Will we be able to acquire/train the talent needed to compete?”
One way to differentiate your company from Amazon is to highlight your deep product knowledge and expertise.
4. Mergers and Acquisitions: The pace continues as more wholesale and industrial distributors consolidate their businesses reacting to market forces, and private equity firms continue investing in distribution holdings. Over the last 6 months, there have been many acquisitions (more than 50) to improve position against competitors. There is a lot of potential for cost savings and service improvements, but it is essential to have good systems and locations to work well.
For those not involved in mergers and acquisitions, this trend creates tougher competitors, according to one MDM survey respondent.
One bit of advice from the webinar: If this is the path you choose, be sure to get rid of inefficient and redundant operation networks. Everything must be focused on improved business return.
5. Customer Expectations: Customer employees are private consumers as well. As consumers, they continue to bring increased expectations from their experiences at home, into the workplace. This is having a big impact on what industrial distributors need to do to get their business.
Leading wholesalers are meeting the expectations that employees of their customers are bringing with them. The customer is in the power position; the way the business is transacted will continue to evolve in a consumer-oriented process. You must provide more services and solutions and an ever-broader selection of products.
6. Blurring the Lines between wholesale/industrial distributors and what retailers and branches do: The distribution landscape is becoming more complex and wholesalers and distributors are being asked to perform services that were historically done by branch and retail operations.
Evolving to a value-added distributor is key; that will be your defense against commoditization.
In the near term, distributors can leverage and improve the components of their service model that others can’t duplicate. Expand and improve technical services; provide question and answer space on your website, add chat rooms. By learning everything you can about your customers, you build relationships and provide valued services that can overcome the “Amazon effect”.
Presenters at the Industrial Distribution yearly forecast webinar:
Mike Hockett, Editor, Industrial Distribution
George Swartz, President, Fortna Sales Team - www.fortna.com
Andrew Lange, Account Executive, Fortna - www.fortna.com
Learn More about MDM’s Annual Distribution Survey HERE.