“Recession Risk Not High” But Electrical Sales Projected to Decline

With Q1 coming to an end, market (as in industry, not Wall Street), watchers are projecting a continuing, and slightly accelerated, sales decline, at the national level, especially for those in the industrial segment.  (But do read down to the bottom for a sliver lining.)

Today’s MDM shared insights from a forecast from the Manufacturers Alliance for Productivity and Innovation Foundation’s quarterly Economic and Manufacturing Outlook.  Some highlights (or should we say “lowlights”):

• “more downside than upside”
• lowered GDP and manufacturing forecasts
• GDP lowered to 2.2% for 2016
• manufacturing forecast lowered to 1.1% for 2016

Key reasons:

• Inventory correction
• strong dollar
• net export drag
• falling commodity prices
• manufacturing price deflation
• energy sector continuing to cut spending

The good news? “Recession risk is not high … but you can’t rule it out” (as “any of the risk could tip the factors could tip the scales.”

And this follows on the heels of DISC’s March Electrical Distribution Flash Update:

With the March analysis in the FLASH Update Forecast, we have a 2016 electrical industry sales forecast that dips further into negative territory.

The March monthly outlook forecasts 2016 sales to decrease 1.5% from a year ago or another 0.2 of a point from the February forecast.

At this juncture it is hard to imagine that total 2016 industry sales will wind up in positive growth territory.

The March analysis drops the 2016 distributor served contractor market another 0.3% from the February forecast to negative 0.7%.

February and March forecasts of the distributor served industrial market show that the needle hasn’t moved much, both monthly forecasts indicate sales this year to be off nearly 3% with about an 8½% growth next year. But moving from minus 3% this year to 8.5% next year is a strong turnaround, better than an 11 point swing.

The take-off year in this cycle will be 2017. We do not see anything resembling a turnaround this year, although we will continue to track 2016 performance every month. Our primary focus on a monthly basis will be 2017, especially watching prices and the economic factors impacting the distributor served industrial market.

Currently DISC is looking for about 8% total sales growth but we are tracking this every month and will zero in as we approach 3^rd and 4^th quarters of this year.

Herm also shared:

• Distributor prices down about 4% this year vs. 2015.
  • Check out our posting on declining sales and margins in the industrial space
  • We’re also hearing of projects going for lower margins as distributors battle for share and cash flow
  • Copper pricing, while it has stabilized, is still below same time last year and will probably average lower than 2015
  • We’ve heard from many distributors about their interest in increasing their SPAs as they see this as a competitive advantage (the challenge for many is administratively having a good system for managing these to ensure they get compensated)
  • And none of these four bullets point to an overall more profitable market!
• Not all distributors’ sales are down and some are even up at a decent growth because of their ability to compete and serve a good construction market.
• There are some opportunities that are lost in the big picture. Commercial and healthcare construction are showing solid gains this year and next year.

Some observations … and yes, this is the silver lining:

1. As Herm mentioned, there are distributors that are up.  We have clients and have spoken to distributors who are up mid to high single digits. There keys are being proactive, strong sales management, gap analysis, marketing and focusing on lighting (and yes, some are in the right metropolitan areas).  These distributors are taking share.
2. The above data is national data. It can be effective for national chains and manufacturers to benchmark but, for most distributors, their market is a local market (and DISC’s other tools can provide a better snapshot of the local market.). Understanding those local dynamics is the key to success.
3. National benchmarks can be a blessing and a curse for publicly traded companies.  If they perform better than the average, Wall Street analysts recommend. If worse than / below …operational changes typically occur (which can hinder the ability for a turnaround.)
4. As Herm highlighted, healthcare and commercial construction are growth segments. Your local area may have other segments. Also consider looking at local “social” trends? The aging of your marketplace, The urbanization trend. Is there an effort in your area to recruit new companies? Perhaps part of your business development / marketing efforts should be participation on various councils / committees / organizations in your market to gain firsthand knowledge of some of the community dynamics?

And even though the market may be contracting, no ones sales goals are being revised down! They key is how to take share.

This may be a contraction that, since it is patchwork and segment-oriented, distributors can “opt-out” of through focus, penetration, activity and taking advantage of opportunities.  There are many who are innovating (and working) their way to growth.

What are you experiencing for yourself and in your market? How is your sales performance and what segments represent opportunity?

As an aside … does your project data collection methodology inhibit you from understanding the types of projects your bidding? Could this represent an opportunity to gain market insights?