Last week I visited a client in support of their strategic planning and marketing initiatives. As usual the question arose, “what are you seeing in the market?” And my answer this time was a little difference. I summarized the market in one word … conflicted.
Now I know it seems strange, but hear me out.
- The first couple of months were challenging for many distributors given the weather this winter. Large geographic areas were affected; more so than in normal years. This has further slowed construction in many markets and many distributors lost a week, or more, of sales.
- Industrially-oriented distributors, and those serving the institutional markets, seem to be making some progress. A number of A-D distributors are poised to grow their government business through a recent SupplyForce GSA contract.
- Distributors who are active in energy-efficiency and have dedicated personnel are gaining some traction. Unfortuantely this is a small percentage of distributors (3-5% would mean 90-150 distributors are committed to this market). Most distributors prefer to wait and “bid the opportunities, essentially driving margins down for all.
- We see, and hear, many small distributors (<$20 million) struggling, with a number funding their business out of personal savings (or forgiving themselves rent). Larger distributors who focused on operational issues and cash flow last year are positioning to increase sales by taking share, diversifying and investing to pursue market niches.
- We continue to hear of some national distributors that are closing small branches, and some are further reducing their C and D inventories (while contractors, in our 2010 Contractor Insights report cited inventory availability as a reason to buy from a distributor.)
- Many of the larger distributors are hiring salespeople (inside and outside).
- There is limited new commercial construction going on, due to funding issues. And the stimulus package has nominally impacted the electrical industry as “highway repaving projects don’t use much copper.”
- We’ve talked to manufacturers who talk about wanting to reduce the number of distributors they sell to, or at least differentiate between supportive and transactional distributors, but for the most part it remains “talk”.
- Distributors and manufacturers talk about lack of business drivers and too much distributor capacity.
So, as you can see, there are diverse views of the market, hence the word “conflicted”. Essentially there isn’t anything nationally to drive business (specific distributors do have success stories), distribution is becoming split with “haves” and “have nots” (but the have nots seem to rule as many are focused on obtaining business at low margins – essentially buying cash flow to pay bills / maintain a lifestyle / pay employees) and the horizon is challenging for distributors that are not diversified.
As an aside, the question of industry consolidation was also asked. Remember, we have an industry of about 3000 distributors. While 60 acquisitions may seem like a lot, and in fact would be unprecedented), that would represent only 2% of the industry. So don’t expect much, especially since so many small companies have no EBITDA, hence no value. Many of these companies will continue to stay in business to provide owner income / salary until retirement – then businesses will close or sell for pennies on the dollar. Additionally, aside from regional distributors, there are limited potential acquirers.
How would you describe today’s business climate? Will there be much consolidation?
5 Comments
No comments. For a long time. The market is dead. Doesn’t matter what you post. They gave up. Get it?
The editorial seems to support the “big guys” while alienating the smaller players.
Opinion: the market is too consolidated and lopsided.. Critical scale in ED is easily achieved and optimized between 20 mil. – 900mil. Larger than a bil., costs actually go up, vendor relations go down and customer service declines due to cash flow pressure.
The “big guys” have a lot of headcount to cut to survive, the smaller players do not.
The smaller players also have a right to survive the recession and use their own sustaining techniques such cutting their own rent, lifestyle changes, or margin concessions..
Entreprenure spirit will always prevail in a capital system as long as we remains capitalistic.
With 60 acquisitions there will be 60 more newco’s that will preform as well or maybe better than the big guys.
The answer for success is simple: good people, good inventory and good service not necessarily consolidation.
Our market has had 2 startups in the last 18 months that are further eroding margin levels because initially that is all they have to provide.
It also seems as though some branches tied to major chains are doing everything possible to write orders at low margins and convince the marketplace that they are the “Walmart” of ED. This trend continues to encourage customers to shop to 5 or 6 distributors for the “cheapest price”. Very few customers have loyalties as in the past. Everyone wants a “deal”.
I am waiting for the other shoe to drop. Continuing to sell below what it reasonably takes to fund your business is a disaster waiting to happen as the market continues to not produce enough opportunites for all to survive profitably.
The simple truth is that the deck is increasingly stacked against the mom and pop operation. Customers and suppliers both are increasingly more demanding of the distributor and expect a level of professionalism and sophistication that is hard for a mom and pop to attain.
The glory days of the mom and pop were during the post World War II economic boom, where demand was high and supply was low. A lot lifestyles and personal wealth were created during that period. That period is over. WWII was almost 70 years ago and times have changed.
The future will most likely favor strong regionals, “super regionals” and the nationals. They will have the capital and profitability to invest in technology, people and capabilities that only a certain critical mass of revenue can support.
The mom and pops are an endangered species. They will continue to survive in smaller markets and in niche markets, but they are pretty much dinosaurs.
In the meantime, the stupidity of the players in the market from a pricing and margin standpoint reflects why this industry so desperately needs fewer and far more professional players. There will always be idiots in any industry, but is sure would be nice to see the number in distribution decline significantly.
I have had a real terrible end(starting from July 2009) of the year to the existing time frame, and I see guys under bid these jobs just to say that they have work, and I also think this is a disaster waiting to happen. If we all keep our good sense of mind maybe we can crawl threw this and get out with parts of our shirts, but our backs would still be covered united.
Everyone must make changes big and small guys I agree, but do NOT kill this industry. It has work for the past 100year without failure. I hope everyone gets the picture.
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