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January 10, 2005

Distribution revenue growth should return to historical levels in 2005

By Douglas Chandler

Wholesale distributors should expect solid growth in 2005 as the economy continues its recovery, though the rate of growth will be slower than last year, according to one wholesale distribution consultant.

Adam Fein of Pembroke Consulting, Cambridge, Mass., gave distribution executives his take on what the coming year holds in his report, “Wholesale Distribution in 2005,” presented in a web conference last month.

The growth of wholesale distribution revenues seen in 2004, which outstripped many expectations, will slow somewhat in the coming year, said Fein, but he predicted it would still be a good year. Wholesale distribution as a whole reported revenues of $3.2 trillion in the year from the fourth quarter 2003 through the third quarter 2004.

Revenue growth for wholesale distributors will continue to outpace the growth of the economy overall, growing an estimated 7.7 percent on GDP growth of 3.5 percent, he said. That’s down compared with the surprising 13.1 percent growth seen in 2004 when the GDP grew 4.5 percent.

Some of the revenue growth over the past year can be attributed to inflation and distributors taking advantage of situational arbitrage opportunities it creates. Several industries, led by metals, oil and gas and building materials, saw huge gains in revenues last year, driven largely by inflationary shifts in supply and demand. Distributors reaped benefits from seeing the value of their inventories rise. The oil price increase that caused so much alarm last year didn’t have as much impact on the service sector as the manufacturing sector, Fein said.

Distributors have been a driving factor in boosting productivity in the overall economy, and there more gains to be made, Fein said. Distribution accounted in 2004 for 7 percent of the nation’s gross domestic product (GDP), but 25 percent of the increase in productivity.

The productivity gains are reflected in the lag time between the return of revenue growth, which moved back into positive territory in the third quarter of 2002, and growth in employment, which didn’t turn positive until the third quarter of 2004.

Distributors of computers, commercial and medical equipment showed the greatest gains in productivity over the period from 1997 to 2003, boosting output per hour by 13.1 percent. This group was followed by electrical distributors, whose productivity rose 8.8 percent over the same period.

The downturn seen in 2001 through 2003 forced distributors to confront some inefficiencies that had been masked by the prosperity of the late 1990s. In the downturn electrical wholesalers, for example, began reaping the benefits of consolidation that were waiting to be squeezed out, Fein said. He expects future productivity gains to come more from the sales side than operations.

Wholesale inventories have been running very lean. Fein attributes inventory-to-sales ratios of 1.2 months in part to slow price increases that inhibited arbitrage gains. He expects pricing pressures to ease in 2005. But the measure of inventory-to-sales ratios is not as good an indicator of efficiency as it’s often thought to be, Fein said, and the adoption of new technologies is not driving inventory reduction as much as expected.

In the rise of China’s manufacturing sector, which is a major source of concern on the manufacturing side, Fein sees what may be a once-in-a-generation opportunity for distributors to shift the balance of power with their manufacturers. Competition from China is driving down costs, he said, but the flipside is an opportunity for distributors to find sources in China for private-label branded products to round out their offerings to customers.

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