Is Worst Still Yet to Come for the Contractor End-Market?

For the latest issue of MDM Premium, I wrote an article on two companies that recently restructured through Ch. 11 bankruptcy protection. The owners of distributor Western Tool Supply, Salem, OR, and Washington-based fastener importer STO Industries shared their stories about the difficulty in going through the process and emerging with a plan to rebuild their businesses.

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Their stories are illustrative of the challenges many distributors and manufacturers are facing right now.

Both companies sell to the contractor end-market – for Western Tool Supply, a distributor of tools and fasteners, that was a key end-market pre-bankruptcy. Kevin Kiker, president and founder of the distributor, has since diversified the business' exposure as many of his customers are no longer in business or they just don't have money to spend, he says.

Unfortunately, according to industry experts, the worst may still be to come for the contractor segment. Ken Simonson, chief economist for The Associated General Contractors of America, tells me that AGC's membership has held nearly level despite the turmoil in the markets. But, he says, "this year, hard times have hit."

"I think what's happened with contractors is that 2008 was a record year for many of them even though a lot of projects were canceled in the fall of 2009. Most things that had broken ground continued to be built out so contractors still had revenue stream in 2009. And in some cases they were able to sell equipment or pare staff. This year the hard times have really hit – but they may still have reserves.

"Increasingly looking at this, most companies will be able to hang on until 2011. But so far, there seems to be little sign of an upturn. So we could have much worse times in 2011 than we have so far."

Driving Simonson's report: the August 2010 construction spending statistics (available at www.mdm.com/databank), which showed double-digit declines year-over-year in nonresidential construction spending in office, commercial, education and lodging categories.

"Those are the bread and butter for many contractors," he says. "They have all been declining at double-digit rates for in most cases two or even three years."

Federal and stimulus-related construction work is providing some relief. "The timing couldn't be better, not just for contractors but for agencies or owners who want to buy services. Bidding among contractors has been fierce," he says. But while Simonson says there is more stimulus money coming in than many people believe, it may not be enough to keep the market busy.

And Ruth Kellick-Grubbs, a consultant to the building supply industry, says risk remains high. “I think unfortunately we’re going to see the biggest group of companies exit in the next nine months,” says Kellick-Grubbs, president of Kellick & Associates. “It’s been tough to manage the cash up to this point, and I don’t see it getting any easier over the next nine months. … We will have some markets rebound faster than others. But nobody is rebounding fast.”

Read The Perfect Storm: Distributor Western Tool Supply and importer STO Industries share their stories of going into – and coming out of – bankruptcy.