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COVID-19: Distributors Take Hit in Late March, Move to Weather Q2

The coronavirus hit distribution hard in the second half of March, according to a first look at the latest MDM-Baird quarterly survey. And distributors are acting quickly to protect the balance sheet and cash flow. Heres a recap of Fridays MDM LIVE program, where panelists shared the latest numbers on how quickly distributor revenue is declining, as well as what distributors are doing now to stem losses and conserve cash.
Stock market graph global crisis couased by corona virus SARS-C

Amid the swirl of uncertainty surrounding the economy as the COVID-19 crisis continues to unfold, distributors are looking for a foothold from which to build a plan for business moving forward in this new reality. In the second installment of MDM’s weekly MDM Live webcast discussion of the evolving impacts of the global pandemic, we heard some of the first solid data about how the coronavirus is affecting distributors. One distributor described how her company is handling the fallout from the majority of her customers suddenly closing their businesses, and industry veterans shared time-tested advice on managing cash flow in difficult times. 

Stepping into a Hole

David Manthey, senior research analyst covering industrial distribution and commercial services and supplies at investment banking firm Baird, shared early results of the quarterly distribution survey MDM and Baird have partnered on for more than a decade. (Full results analysis in the April 25 issue of MDM Premium. Subscribe here.) While first quarter results were relatively good for most distributors — plus or minus a few percentage points and consistent with the end of 2019 — of 18 product categories surveyed, nearly all of them are projecting downturns for the second quarter, Manthey noted. Only safety products have a growth outlook, with Jan-San expected to be slightly negative. The others are looking at a 15% to 20% or greater decline. 

“Every single company that we cover is going to step in a hole in the second quarter,” Manthey said. “The question is, how deep is the hole, how do they get out of it and can they make it to the other side?”

Also see: “A Three-Part Plan to Grow Business During the Coronavirus Crisis.”

To gain an idea of how precipitous the decline was in March, Baird asked respondents for a weekly breakdown of their year-to-year change in sales. The progression went: March 1, +1; March 8, flat; March 16, -2; March 27, -7. With the market “clearly in a recession now,” Manthey predicted it will likely be the first half of 2021 before things start to recover. 

Cash Is Indeed King

MDM’s John Gunderson, VP of analytics and e-business, drew on his decades of experience in distribution to share five ways distributors can attempt to improve cash flow. “You've got end-user customers under stress, you've got manufacturers under stress, a lot of the levers that you negotiated on your contracts with your manufacturers need readjusting,” Gunderson said.

1) If you have cash to work with, consider asking for a cash discount on manufacturer payments, such as 2% on net 10, 3% on net 10 or 2% for 30 days.

2) Look at your customer base to see where it would be advantageous to work out special terms, starting with your biggest customer and working your way down to assess risk and exposure.

3) Open up a rebate discussion with manufacturers. For example, can you take a prorated portion of year-end rebates?

4) Look at incentives to bring in stock, particularly on items you know you're going to sell over the next six months. There many be an opportunity to rework direct terms with manufacturers.

5) Manage backorders aggressively, knowing it is difficult to bill a partial order when a product – perhaps a $5 line item – is on backorder. 

Quick Action to Combat Losses

It’s been “an unbelievably difficult couple of weeks,” said Julia Klein, chairwoman and CEO of specialty building products distributor C.H. Briggs Co. Most of the Pennsylvania-based distributor’s customers are in Pennsylvania, New York, New Jersey and Delaware — states particularly hard-hit by the coronavirus and where mandated stay-at-home orders led to an immediate near 50% drop in business for C.H. Briggs. 

However, the company learned a lesson from the Great Recession, and is acting decisively to stem the fallout, Klein said. “We did take some big action this week, unfortunately, to furlough and to cut back to four days and [implement] pay cuts just to be able to get through it,” she said.

Also see: “5 Rules for Growing Customer Loyalty in the Time of Coronavirus.”

The next step is to look at C.H. Briggs’ top 250 customers to prioritize support and strategize how best to help them through the shutdown. Klein would also like to see manufacturers deliver a clearer plan for how they intend to operate under these new conditions. Some are “hanging on to absolutely impossible-to-achieve revenue plans,” she said. “They haven't let go of it yet and they're probably going to end up hurting themselves as well.”

A Long Road to Stabilization 

Two members of Baird’s distribution M&A advisory team, Jason Kliewer and Nick Troyer, described the changes in the M&A market in just the last two weeks as profound. As executives try to navigate the coming weeks, one question that will impact performance is the level of access businesses will have to customers and what that means for how sales teams and the organization as a whole will need to adapt. As time goes by, they expect to see more end-market differentiation, with areas like healthcare and Jan-San likely continuing to outperform others, such as consumer-oriented and retail businesses.

Looking ahead, the public health crisis needs to be under control before the global market stabilizes, Kliewer noted, and he predicts it will be a while before M&A activity returns to where it was a few months ago. Added Troyer, “It’s hard to predict how long it will take valuations to get back to where they were. I think it's fair to expect the higher-quality companies will come back around first. There's a delay between how quickly the public markets rebound, the lag time between that and the private valuations coming back. It's just going to be dependent on how long we’re all in this.”

Join MDM this Friday, April 10, for the third installment of MDM Live, our interactive webcast discussion on the distribution-specific ongoing impacts of the COVID-19 pandemic. Click here to register. To view our previous two MDM Live sessions, from March 27 and April 4, click here.

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