The 2020 Mid-Year Economic Update_long

Market Continues to Show Signs of Slowdown

Growth decelerated 80 basis points versus last quarters Baird survey.
Investing and stock market concept gain and profits with faded c

Words such as “softening demand,” “sluggish,” and “margin pressure” peppered the most recent Baird Industrial Distribution Survey results, conducted quarterly in partnership with MDM. While revenue is still growing (2.4% year-over-year in Q3), distributors have, for months, been reflecting their concerns about the potential for an economic slowdown at the end of this year or into 2020. Indeed, growth decelerated 80 basis points versus last quarter’s survey, and fell below respondents’ 3.1% forecast. 

Broken down by industry, key themes in the industrial sector include slightly lower revenue year-over-year, the flattening of pricing trends and a growing drive to destock inventory. One respondent intends to cut 10% out of inventory by year’s end. Another captured the market sentiment expressed by a number of respondents: “It’s not as hot as it was.”

While the electrical sector showed a mix of growth and decline, there was general agreement from respondents that tariffs are continuing to cause margin issues. Both the gases and welding, and pipe, valves and fittings sectors mentioned uncertainty around tariffs. The Trump administration’s ongoing tariff dispute with China is having an impact on margin concerns and their ability to forecast growth levels.

Meanwhile, demand is solid with accelerating growth for much of the building products sector — with the exception of wallboard/gypsum distributors, who are seeing a decline in both revenue growth and selling prices. However, there is some optimism there, with one respondent noting, “Pricing has eroded but seems to be leveled off.” 

Pricing is still holding firm for the HVAC and plumbing market, but growing competitive pressures are top of mind for these respondents. Between the effects of import tariffs and growth of e-commerce entrants, HVAC and plumbing distributors are evaluating the best path to maintain competitive pricing.

Overall, given the choice between a growth strategy focused on e-commerce or value-added services, two-thirds of respondents are pursuing the value-added services path (67%) versus e-commerce-based growth (33%). Some of those electing to prioritize e-commerce admit to doing it reluctantly, but say the increasingly digital global economy and the need to accomplish more with limited resources give them no choice. “Like it or not, it is the wave we need to ride right now,” said one respondent. “Our content needs to be complete and quickly accessible for the new generation of tech-savvy people in our industry.”

Speaking of the next generation, just 12% of respondents report an average employee tenure of five years or less. Low turnover can be a positive indication of a solid workplace with satisfied employees. But keep in mind that longer employee tenure, such as those with an average of 10-15 years’ service (32%) or even 15-20 years (20%), can create issues for distributors looking to implement e-commerce and other growth-driving practices with an employee base that may be reluctant to change. 

For those invested in developing the next generation of talent, we are now taking submissions for MDM’s Future Leaders awards. We’re on the lookout for rising stars, age 40 and younger. 

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