Nearly every distributor took a beating in 2009. A few are still getting kicked while they’re down. If you’re a competitor to Airgas or HD Supply, that turmoil couldn’t come at a better time.
Case 1: Airgas is in a fight for its life. In February, Air Products made a hostile bid for Airgas. It has been getting more hostile since. The investor analysis by Air Products is at www.airgasoffer.com. And here are the documents Airgas has produced for its investors to fight the offer.
Indicators the past month have largely been positive across most distribution sectors. And at industry meetings, executives are looking forward instead of down. That’s a great change from a very tough year. At the same time, I have not heard anyone say we are out of the woods.
From our surveys, we found that many distributors were forced to use layoffs to stay viable, and many more did everything in their power to avoid layoffs or use them as creatively as possible.
Grainger’s investments into e-commerce 10 to 15 years ago don’t look like large gambles today, but as our lead article by associate editor Jenel Stelton-Holtmeier illustrates, it was in fact a large dollar amount for what the adoption rate was at the time and also the company’s culture. I was publicly skeptical at the time, questioning whether it was bleeding edge rather than leading edge. How smart was I?
As the timeline illustrates, Grainger’s online sales took off with the dot-com era by 1999. It has continued to scale up along with the Internet.
The first few days of 2010 have already produced a number of announcements regarding deals in distribution and manufacturing sectors. There are a relatively high percentage of distressed sales, but some healthy companies are in play, as well. There are some excellent opportunities to build value in this part of the cycle. It’s a fundamentally different M&A landscape than just a few years ago when valuations were sky high, and distribution markets were the hot ticket for investment funds.
Oliver H. Van Horn Company, New Orleans, LA, saw its headquarters wiped out with Hurricane Katrina in 2005. The 100-year-old fourth-generation family company’s traditional market literally disappeared that day. The company reshaped itself to deal with the reality of its circumstances, and found new ways to add value in the wake of disaster. They have been rebuilding since, only to encounter a financial hurricane a few short years later. This publication has worked consistently to avoid hyperbole since its founding 1967. But this has been a hyperbolic year.
Where previous recoveries were marked by a “bounce,” this one is forecast to be flat. Topline growth alone won’t hide weaknesses this time. But there are many well-run distribution companies that positioned for profitability even before the downturn. Today they have healthy balance sheets. They have more flexibility (and cash) to respond to market opportunities and pick up share this year. An MDM survey in November examines what distributors and their suppliers are doing to improve profitability as we enter this slow-growth recovery over the next 12 months.
In MDM’s 2010 Economic Forecast for Wholesale Distribution Webcast, Adam Fein painted a not-so-rosy picture of what this recovery is likely to look like. For a number of reasons, not many distributors will feel much of a bounce. It will be more like a grind to find growth in new areas as we emerge from the worst recession since World War II. While he agrees with many other economists that technically the third quarter will probably be the official end of the recession, 2010 is still going to be a slow-growth year for many distributors.
The new normal is anything but. In spite of recent positive news, the economy is still brittle. Distributors have little flexibility to manage growth over the next six to 12 months – tighter credit, weaker asset positions, sluggish cash flow, fewer people/less talent. To get back on the offensive, companies have to re-evaluate and redefine how they operate across nearly every aspect of the operation. In many cases they have to change longstanding processes to adapt to these new market conditions.
Overall news is much more positive, as Adam Fein points out in his blog at distributiontrends.com. Fein is raising his forecasts for industrial distribution with “slightly positive” year-over-year growth in the first quarter of 2010. The weakening dollar also is helping exports. All good. But few distributors expect a straight-line rebound like the good old days.
I’m finally hearing a few themes emerging for this recovery as I attend meetings and talk with wholesale distribution and manufacturing executives. Consensus: At least until third quarter next year, businesses will be grinding for growth. Companies are still focused internally on cost reduction, but they are looking ahead more than they were two months ago and adjusting to this “new normal.” Six months ago slightly down looked OK. At least for now “flat” is the new up. There are a lot of mixed signals.
More good financial news keeps strengthening the outlook for distributors. A big surprise to many in August was the flipping of the purchasing manager index to the positive side of 50 (52.9 from 48.9 in July). That reinforces much of what we at MDM have been hearing about production and corresponding orders in August being more positive than expected. That said, this is not shaping up to be your grandfather’s recovery from previous sharp economic cycles.
The outflow of manufacturing to “low-cost” countries keeps resonating lately as I envision how this next growth cycle takes shape. Before the heady days of the dot-com era distracted many businesses from their core focus and presented others with opportunity, industry change centered on the dramatic shift many North American manufacturers were making to offshore production.
Today there are a number of indicators that manufacturing might migrate back to a regional or at least continental scale.
We are adding powerful new tools to provide you with the best and most user-friendly information and research resource in wholesale distribution. When you arrive on our new Web site in September, take our quick site tour (look for the graphic above). Our tour will show you where to find key features on the new Web site.
As difficult as it may be in current conditions, scenario planning has to be given more time in distribution executive team meetings, as well as distributor-manufacturer planning meetings. The worst reaction today is to say there is too much uncertainty to plan, so let’s just focus on the next three months. The vast majority of conversations I’ve had with executives have often included the observation that revenues dropped by more than double what the company was using as its worst-case scenario. Based on second-quarter results, distributors are hoping the trough is behind them.
Here at MDM we are in the midst of implementing some positive changes in how we do business. We are especially excited about one in particular, which we will be revealing to you in the next couple of months.
Our operations are different from a distributor’s – MDM is a part of Gale Media, which is a specialized publishing and research business – but through our work, we are reminded of the challenges that come with change. Undoubtedly, these challenges transcend industry lines.
While we hope the ROI will be positive, there is only so much a business can control. And that’s the fear factor in change.
But it’s also exciting and provides a great opportunity for the company. We recognize the only way to continue growing is to make this investment of time and energy. We feel like …
Michael Jackson's death has spurred nonstop coverage from CNN, the tabloids, and everything in between. The King of Pop is all over the Web. And it's rare to turn on a TV news program without Jackson at its center.
Since the launch of CNN and 24-hour news, we have been able to get our news whenever we want it. As the World Wide Web has grown, we've been able to get updates almost literally by the second – as we did earlier this week during the Los Angeles-based Jackson memorial service.
It really is incredible how we can garner information about an event halfway across the country close to real-time; it was not that long ago when we would have had to wait for the full report and pictures of the memorial service until the next morning's paper was delivered.
These days, we are …
In our latest Webcast on June 9, the "2009 Mid-Year Economic Update," Dr. Adam J. Fein examined the latest quarterly data and trending to give a clearer picture for what the remainder of this year and 2010 might hold for distributors. I recommend you listen and view the slides of this one-hour free event, by going to www.mdm.com/conferences.
Here are Dr. Fein’s key points, each of which he discussed along with outlooks on housing and construction markets, as well as other major wholesale distribution sectors:
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