Key trends for the industrial distribution sector and recommendations on how distributors can gain a competitive edge in a complicated economic environment were the topics addressed during a recent webinar hosted by Modern Distribution Management.
David Manthey, senior research analyst at Baird, began the presentation with an overview on the current state of the economy as revealed by Baird’s Fourth Quarter 2016 survey of distributors. He pointed out that, even though there are many positive indicators—including record-breaking highs on the stock market, low interest rates and high employment rates—the U.S. economy has only been able to achieve single-digit growth. However, the election of Donald Trump has changed the atmosphere somewhat toward a pro-growth inflationary environment with less regulation and infrastructure investment.
More than 500 companies across 20 aggregates of distribution with over $100 billion in sales participated in survey. The distribution categories covered are industrial supply, gases, building materials and electrical.
The Baird survey showed there has been a slight uptick in the industrial space with some small signs of inflection, including Emerson, showing growth, but U.S. industrial production and heavy manufacturing sales remain anemic.
Non-residential construction continues strong with growth, but the lack of construction labor may be an issue in the future. If the federal government accelerates infrastructure spending, there could be growth in the commercial construction sector, but some projects could be delayed pending the details of what the incoming administration has to offer for those projects.
Regarding revenue growth, 2016 was flat overall, and an overall revenue decline in the 4th quarter was short of expectations from the last survey. Pricing remains flat and inventory trends are basically the same as the past year.
Respondents to this survey, however, were more positive than in the past. After the election, the average was an expectation of 3.6% growth. But Manthey did caution that in past years, growth projections typically have been higher than actual growth.
Aggregate growth in industrial supply turned slightly positive for the first time in more than a year. Metalworking came in 0.9% down, but that is the best reading in about 2 years. The 2017 forecast for the group calls for 3% growth.
Average industrial pricing basically stayed flat although general industrial and safety both deteriorated this past year. However, metalworking and OEM fasteners were positive, reflecting increasing steel prices. In early 2017, respondents were reporting an uptick in price increase letters, but the increases were elective increases as opposed to broad-based. The issue is whether the slight price increases will be maintained with the relatively flat demand. While some industry participants are beginning to act on optimism and are purchasing some CAPEX materials, the question is whether the optimism is going to last.
There was also an uptick in demand for and the price of industrial gases, which survey respondents considered an indicator of an uptick in the manufacturing sector. Capex in this market is on the rise, and distributor respondents noted that customers were freeing up capital and making equipment investments. This is one area in which optimism is on the rise for both pricing and marg:n building for 2017.
Conclusion: “What a difference an election makes,” said Manthey. Distribution stocks have rallied, and the higher the “industrial beta” the better. There is plenty of optimism right now, but will it translate to stronger growth?
KEY TRENDS IN DISTRIBUTION
Tom Gale, publisher of MDM, addressed the key trends in distribution. “A good argument could be made that 2017 is the wholesale distribution tipping point, both economically and strategically,” he said. “The current disruption was born a decade ago when the housing market bubble led into the great recession and the technology bubble erupted. These two major market trends together are driving the market driver trends that distributors are dealing with at this time.”
Gale asserted that 2017 is the year of the mid-market, which is defined as companies of 10 or more employees to 100. “This is the sweet spot that is driving most of the competitive activity in distribution channels right now.” Technology is shaping even the nature of what a productive workplace looks like. Customers are changing, and the impact of digital is foremost.
In Real Results Marketing’s 2016 Distributor Customer Buying & Shopping Survey, 3,500 business customers of distributors responded to a question about how they would be shopping in the future. While customers will still purchase from direct contact and through print, many more will be shopping digitally. Thus, top distributors are concentrating their efforts online; while this has traditionally been the bailiwick of consumer-focused businesses, distributors in the industrial space are focusing on ways to capitalize on this outlet, especially when focusing on mid-market customers.
Jenel Stelton Holtmeier, editor at MDM, stressed that technology is permeating and changing every aspect of distribution today. The 2016 Industrial Outlook Survey done with NetSuite affirmed that keeping up with the technology is one of the biggest challenges distributors face.
Distributors responding to this survey said they are going to be investing in e-commerce, customer relationship management, mobile sales, pricing and cloud computing. While distributors are already investing in technology, now they are focusing more on how to get the ROI in each of these investments. This takes some work on the part of the people implementing the technology. To do that, they must:
- Know what they want from the technology, and identify areas for improvement and focus.
- Ask how the technology platform will help—and be specific.
- Implement processes to address the challenges. It’s important not to just rely on what other people are advising, or just on the technology. This requires work to ensure an ROI.
Ranga Bodla, head of industry marketing for NetSuite, shared that one way to ensure a return on investment in technology is to use a phased approach. “Take individual steps and build on the technology, one bite at a time, to prove the success before you move to the next piece of technology.”
It’s also important to know exactly what you will measure to determine if the technology is providing a ROI. What will you use as KPIs? Decide whether it is one or a combination of financial gain, time savings, reduced errors or higher customer satisfaction. “You have to think about all of this before integrating technology into your business,” said Bodla.
The Human Factor
Eric Smith, associate editor of MDM, predicted that in 2017 human capital will factor significantly in wholesale distribution’s tipping point. HR-related issues emerged as a big concern for 56% of the distributors in the survey.
To deal with this issue, survey respondents cited increased training as the most popular way to achieve talent retention, followed by career development and better pay. “In distribution, as in many businesses, you’re only as good as your people and if you’re not getting good people and keeping them, you will fall behind,” said Smith.
Smith suggested that improving the human factor can be achieved by making human resources a strategic role in the organization and getting that person or team to find ways to rethink the approach to talent. Non-compete and confidentiality clauses are increasingly important, but the multi-generational workforce and adapting to millennials’ expectations came up a lot in the survey and will remain important factors.
While there are some positive indicators of growth in the industrial distribution sector, a variety of challenges arising from technology and a changing digital landscape continue to have an impact on distributors that do not make a concerted effort to stay on top of them. Also, while the new administration in the U.S. may support a more pro-growth, anti-regulatory environment, market fundamentals, such as the price of oil and metals, will continue to shape the outlook for industrial distribution.