The 2020 Mid-Year Economic Update_long

7 Predictions for Distributors on Near-Term COVID-19 Economic Consequences

Industry consultants Mike Marks and Brent Grover shared accounts of distributors who are acting quickly to adjust their business models to reflect new coronavirus realities during MDMs weekly MDM Live COVID-19 impacts webcast. They described why transparency is paramount in making the most of employee, bank and supplier relationships during the pandemic.
100 Dollar Bills with Face Mask Falling From Stormy Cloudy Sky.

Friday’s MDM Live addressed a key issue stemming from the coronavirus crisis: How to handle the resulting uncertainty in the market. To answer the question of job security that is on every employee’s mind as the nation deals with the fallout of the COVID-19 pandemic — one distributor — after introducing an across-the-board pay cut for upper management and everyone not on the front lines — laid out a specific plan that employees can count on before a reduction in force would be implemented. Mike Marks, MDM Live co-host and partner at Indian River Consulting Group, shared the company’s four action steps communicated to employees:

  1. If the work is still there, stay active and highly engaged in current roles.
  2. Should work slow, workers will be assigned productivity improvement activities by managers, with each department having their own specific list.
  3. If the situation develops that there is no additional work in an employee’s current role, management will reassign people to temporarily work in another department — assuming they will be able to meet the expectations and required tasks of the job.
  4. If/when reassigned efficiency tasks are exhausted, employees will be paid any vacation/sick/holiday/floating hours they may have.

“The key thing here is trying to let people know what's going on,” said Marks. “Transparency the word of the day.”

Register here for this week’s MDM Live Webcast, taking place Friday, April 17 at 2 p.m. EDT.

For employees who are furloughed, one way Marks suggested keeping the communication lines open is to have HR and/or management check in with them on a weekly basis, keep an index of business to let them know how close the company is to being able to rehire them. For example, “We’re at 72% and we can bring you back when we reach 100%,” but also communicating that neither the employer nor the employee is under an obligation to return to the previous work arrangement. It is simply a statement of intention, Marks noted.

Indian River has been working with distribution companies on cost reduction. The prevailing intelligence for now is that if a significant reduction is needed, the evolving mix of cost reduction levers has turned into 65% payroll, 10% margin and 25% non-payroll cost reductions, he said.

Distributors Act

Brent Grover, president of consultancy Brent Grover & Co., talked of his experience on several wholesale distribution company boards. Frank conversations taking place over Zoom among CEOs, CFOs and outside directors have included a series of questions — many revolving around cash flow. Grover predicted many will be disappointed with the Paycheck Protection Program (PPP) and the CARES Act Small Business Administration loan program that passed at the end of March, in contrast with companies that reached out to their banks early on to draw down on their lines of credit. 

Other levers to pull beyond government funding and loans, Grover said, include the typical levers distributors are used to working with: inventory, receivables and payables. 

He is hearing from a core group of CEOs and CFOs of 500-plus employee privately owned distributors about significant destocking — “maybe the biggest destocking in the last 10 years, depending on the industry,” he said.

Also see: “Data Security, Privacy and Remote Work in the Age of COVID-19.”

For receivables, he expects a significant slowdown on money coming in from customers. Some distributors report that they have stopped paying their suppliers, Grover added. Instead, he encouraged trying to negotiate an exchange in terms, such as going from 2% 60-day to 1.5% 90-day. “Not paying means not getting cash discounts that are needed for profit and also risking not getting rebates,” he said. 

Grover sees an indication that some suppliers are loosening restrictions on who they're willing to sell to, opening up their doors to new distributors as high inventory levels “freak out” some suppliers. 

Near-Term Impacts on Distribution 

CFOs have the most important position in distribution right now, Grover said, as they have the overall view of cash flow and need to bring other C-suite positions like chief sales officer, chief marketing officer and chief operations officer into alignment on things such as 401(k) contributions, capital expenditures and the like. “A strong, strategic CFO right now is the most valuable player on the team,” he said.

Grover made several predictions on the near-term impacts of the COVID-19 economic fallout:

  1. Deterioration of the weakest firms; “lifestyle businesses” that were intending to hang on for a few more years will compress that timeline.
  2. The transition of sales teams where employees who should have retired a long time ago will exit. 
  3. Acceleration of the adoption of e-commerce.
  4. The streamlining of businesses getting rid of redundant branches and non-performing people. 
  5. Deceleration of M&A at premium prices, coupled with a deceleration of interest of PE firms investing in the distribution industry. 
  6. Deceleration in capital expenditure projects. 
  7. Deceleration of cashflow.

“I think a lot of companies are going to reduce their number of branches and realize that they don't have to have as many physical locations to take care of their customers as they always thought they needed,” Grover said. 

Listen to the full playback of last week’s MDM Live here, where you’ll hear more from Grover on distributors’ M&A prospects, bank relationships and why vending is “custom-made” for today’s distancing practices. Tomorrow’s update will include more from the information-packed session, including first-hand reports from distributors in the field, such as Motion & Control Enterprises, Bearing Service and Singer Equities. 

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