What lies ahead for the distribution market? A recent webcast, hosted by Modern Distribution Management (MDM), provided insight into this important market. While the presentation covered distribution of all wholesale products, the information shared in this article is geared specifically to distributors and manufacturers of valves, actuators and controls, and their suppliers.
The information presented was based on data collected from a quarterly survey of 500 distributors across the full spectrum of wholesale distribution, and includes the outlook for 2015 from MDM and the Robert W. Baird & Co., which conducted the survey.
Trends and Forecasts
According to survey results, more than half the distributor respondents expected growth between 5 and 10% in 2015 and 27% expect more than 10% growth in 2015. The less-than-2% of respondents who felt their business would contract reported it would be less than a 2% loss.
Outside the oil and gas sector, construction spending is growing and commercial real estate loan demand is also solid. MDM expects this to extend through 2015. Non residential construction is particularly strong, and products including cutting tools, hoses, pipes, valves and fittings, safety products and electrical products are among the strongest categories.
The negative in this outlook is that, across the board, pricing remains challenging. Analysts feel that this challenge will continue through 2015, with exceptions in the industrial gas categories and HVAC.
Pipes, Valves and Fittings
According to the Baird report, the markets for pipes, valves and fittings continue to remain strong. At this time, oil and gas activity continues to drive this industry, though prices are under pressure. Increased domestic shale drilling has led to strong demand for PVF products (Figure 1).
However, Baird expects that the collapse in crude oil prices will lead to an uncertain demand environment in 2015 as companies adjust to falling upstream capital budgets. Activity in the midstream and downstream markets are expected to remain more resilient.
Survey respondents reported the energy sector is not as negative as analysts expected, but they feel it may be because some projects are wrapping up, and they won’t be stopped mid-stream. It is a wait-and-see attitude for 2015 because the U.S. rig count is expected to be down by one-third or more.
However, lower prices at the pump represent, effectively, a tax cut of $100 billion to the U.S. consumer. Since consumer spending makes up two-thirds of the U.S. economy, there could be more growth in other market sectors.
Based on survey responses, the analysts pointed out five areas that will change and drive the distribution business in 2015.
1. Mergers and Acquisitions Will Accelerate
According to the webcast presenters, we are at the beginning of a renewed period of consolidation. One of the biggest consolidations in 2014 was Sonepar’s acquisition of IDG (Industrial Distribution Group), which fed Sonepar’s desire to expand both geographically and through product and service offerings, including pipes, valves and fittings.
Because of low interest rates, money at this time is considered “cheap,” and it is estimated there are about $450 billion in private equity buyout funds available at this time. There is unprecedented competition for good companies, with more buyers looking to enter into new sectors. It is considered a sellers’ market right now, but interest rates are expected to rise beyond 2017 to about 4%, so that will make mergers and acquisitions more challenging within 18 months to two years.
Currently, the firms sought after in distribution are generally those companies that offer service solutions and integrated supply. They must have a capability or technology in which the buyer is interested.
2. Talent Management a Top Priority
Employee training was at the top of investment priorities for many respondents of this survey. Getting, keeping and developing top talent were among the top three business-specific concerns, as has been the case for many years. The difference now is that businesses seem more willing to invest in development of good talent and, while they still want someone who is trained at least to a specific skill set, they are also concerned that candidates fit within the company culture. On the employee side, millennials place considerable importance on joining companies that give back to the community and employers are more willing to invest in them to ensure they have a long-term place in the company.
Training is also a big challenge to most distributor employers, who in addition to being concerned about technical training are also keen on professionalization of the sales force. This is an area that is particularly challenging in terms of skills development, especially technical sales like valves, actuators and controls.
Technology itself has also created a set of problems for distributor employers. They see a skills gap in terms of the different aspects of technology, not just the adaptation for the digital world but also how to use the information created by this data. Retaining top employees and replacing the many baby boomers who are about to retire is of paramount concern.
3. A Digital Strategy is Imperative
Technology investment is a continuing priority for most of the respondents in this quarter’s survey; fewer than 10% of the respondents said they had no strategy. Customer relationship management was the main reason for this, followed by the need to capitalize on e-commerce. In fact, distributor companies who indicated they had not adapted earlier are saying they’re struggling to catch up. Also, more companies recognize they are working with outdated systems and they must invest in these platforms. The problem is that there are so many options for software that choosing the right one is a big challenge. Additionally, the data must be analyzed to make it usable, and many companies are struggling with that side of the data equation.
In this most recent survey, the concerns distributors previously had about online distributor AmazonSupply dropped off dramatically because it is no longer the unknown. It is now considered a non-factor. Ninety-five percent of survey respondents indicated they aw no impact to their business from Amazon.
At this time, another online distribution site, Alibaba, is not a concern to most respondents because it is not yet a real player in the U.S. and Europe. Alibaba created an online marketplace for small unknown manufacturers to get exposure, allegedly to level the playing field. They also provide consultative services to lend credibility and to get unknown companies in front of new buyers, particularly in rural areas. Some call it the “dating site” for buyers and sellers. The company is targeting for growth in the U.S. and Europe, and the webcast analysts considered it something for distributors to simply keep an eye on at this time.
This kind of e-commerce highlights the need to not just have an online presence; exceptional customer service must accompany it in order for companies to remain competitive.
4. Operational Excellence
Over 65% of respondents said that improving employee productivity was a huge concern, and many were concerned with cutting costs, especially in transportation. Another concern is the driver shortage for long-haul trucking, and the West Coast port dispute is continuing to put a drag on commerce.
There is also much more demand from customers for vendor management of the supply chain, not just physical inventory. More purchasers are looking for distributors with this capability. This dovetails with the trend toward analytics and helps reduce costs and inefficiencies.
5. Regulatory Noise
There are, according to this webcast, a number of issues of which distributors and manufacturers must take note.
The primary unknown at this time is what the new Congress will do and if there will be new regulations. Also, a number of regulations are already in place but have not yet been implemented, so their effect is unknown at this time. These include:
- Implementation of chemical labeling changes. Distributors will have to sell through old labels by Dec. 1, 2015.
- Expansion of overtime eligibility could have a big impact on many businesses.
- Business crowd-funding regulations could impact angel investment.
- The effect of streamlined union elections on distribution.
Most distributors answering the fourth-quarter 2014 survey conducted by Robert W. Baird and Modern Distribution Management are optimistic about 2015, and expect modest growth. However, due to the plunging price of oil, some sectors will see no growth or some retraction because of the falling rig count in the U.S. and Canada.
Mergers and acquisitions will be more common and profitable in the next two years but will become less attractive when interest rates climb. One of the biggest issues to effect industry generally is the lack of skilled workers, and the difficulty hiring and keeping good employees. This is especially important for distributors as more and more customers are expecting much more than just inventory from their relationship. They also look for service, technical expertise and supply chain management. Those companies that are able to deliver will ultimately be the most profitable.