As distributors and manufacturers continue to post strong financial numbers through the third quarter of 2022, the threat of an economic downturn for many still looms on the horizon. Guessing what a recession could look like — and when it might arrive — could depend on the source. But regardless of whether a major slowdown does happen, distribution leaders who plan for more potential industry changes will be well-positioned. Coming up with a solid backup plan and reacting fluidly to market alterations could be vital. In fact, some companies might come out leaner and better-suited than before, MDM CEO Tom Gale and Indian River Consulting Group founding partner Mike Marks said in the last Quicktake podcast.
Ways distributors can prepare for a potential downturn include watching inventory exposure, creating deeper customer relationships and conducting scenario planning, Gale and Marks agreed. Another tip, Marks says, is to not pay too much attention to current events. “The answers for what you need to do with your business, you’re not going to get them from mass media,” he says. “A lot of times we create a self-fulfilling prophecy.”
If the economic slowdown does turn into a recession, inventory backlogs could “vaporize” some distributors that aren’t calculating their exposure now, Marks said. “If you go back and look at the Great Recession, most distributors got slammed because, all of a sudden, all this backlog showed up in their dock and they had to pay for it,” he said. “So, now they’re loaded in inventory with a high purchase price. And then the manufacturers are trying to get volume or lowering the purchase price because they’ve got to move the inventory.”
Marks said companies can succeed in this area by talking to their customers about pipeline inventory to ensure better fill rates and by reacting as quickly as possible to market changes. “How do I get light on my feet?” he said.
In terms of scenario planning, distributors can imagine worst-case scenarios during a recession, such as their biggest supplier going upside down and being acquired by a competitor. This also can allow companies to recognize change and react faster and avoid a “deer in the headlights look,” Marks said.
“So, you want to be able to build a better Plan B,” Gale said.
“And have one, and maybe even a Plan C,” Marks replied.
If the economy does go into a downturn, there’s likely to be a slowdown in demand and greater competition around pricing, the two acknowledged. However, B2B industries such as wholesale distribution are less likely to be hurt by the economic climate than those in the B2C sector, Marks said. “I think it’s not going to be an equal recession,” he said. “The B2C people I think are going to take a much bigger hit than the B2B people, because inflation in a weak supply chain increases margin. It’s the law of supply and demand.”
In fact, the distribution industry might come out stronger on the other end once a recession passes, Gale and Marks agreed.
“Every cycle, it always looks different,” Gale said. “The model gets a little bit leaner. Value propositions get a little bit sharper. It absolutely creates a healthier industry.”
“Distribution always comes out stronger,” Marks replied. “And I think that’s part of the reason that we continue to grow faster than GDP.”
Listen to more of this discussion in the podcast player at the top of this article or by visiting MDM’s podcasts page.