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I’ve been using a saying attributed to Warren Buffet this spring in presentations to groups about current markets: “It’s only when the tide goes out that you learn who’s been swimming naked.” At this point, the more appropriate saying might be: “You can drown when the tide rises above your head.” The Ch. 11 bankruptcy protection filing by Alamo Iron Works on April 5 was triggered by what the company alleges was non-payment of $1 million for work by a large customer.

This is not likely to be an isolated incident. Increased sales are great, but I’m hearing about difficulties with supplier lead times, financing inventory and cash flow.

MDM lost a long-time contributor and friend last fall. Bill Hodgdon, a consultant with a strong manufacturing operations and marketing background, died from complications with cancer. Over 18 years, Bill wrote many articles for MDM and spoke for many distribution associations. He consulted with international manufacturers who sold through distribution and helped them with channel strategy and tactics. Bill had a unique perspective.
Nearly every distributor took a beating in 2009. A few are still getting kicked while they're down. If you're a competitor to Airgas or HD Supply, that turmoil couldn't come at a better time.

Case 1: Airgas is in a fight for its life. In February, Air Products made a hostile bid for Airgas. It has been getting more hostile since. The investor analysis by Air Products is at And here are the documents Airgas has produced for its investors to fight the offer.

Indicators the past month have largely been positive across most distribution sectors. And at industry meetings, executives are looking forward instead of down. That's a great change from a very tough year. At the same time, I have not heard anyone say we are out of the woods.

From our surveys, we found that many distributors were forced to use layoffs to stay viable, and many more did everything in their power to avoid layoffs or use them as creatively as possible.

Grainger's investments into e-commerce 10 to 15 years ago don't look like large gambles today, but as our lead article by associate editor Jenel Stelton-Holtmeier illustrates, it was in fact a large dollar amount for what the adoption rate was at the time and also the company's culture. I was publicly skeptical at the time, questioning whether it was bleeding edge rather than leading edge. How smart was I?

As the timeline illustrates, Grainger's online sales took off with the dot-com era by 1999. It has continued to scale up along with the Internet.

Tenney Campbell, the well-known owner of a fluid power distributor, died in mid-January. He was ahead of his time in many ways. He will be remembered as a person who had an impact in this world beyond so many friends among fluid power distributors and manufacturers. He sold his California business to Berendsen Fluid Power in the mid-1990s. He continued to work for the company a few years in the capacity of corporate curmudgeon.
His role in those few years was to “create heat, smoke and discontent” among the company’s management, according to distribution consultant Mike Workman, who called Tenney a longtime friend and mentor.
Eight years ago, we were in the thick of the last industrial recession. Most distributors enjoyed a good run during the last half of the 1990s; sales were strong. Then the bottom fell out, and the channel compressed.
Distributors focused on profitability survived and were well-positioned for the several years of strong growth. It’s interesting to note that many economists (as well as General Electric’s CEO at the time, Jeffrey Immelt) predicted a long-term low- or even no-growth environment in 2002. And then most distributors enjoyed the best stretch of growth in their history.

Recovery from the recession, if indeed that’s the proper term for what’s going on today, has turned out to be almost as dangerous and difficult as the recession itself. The traditional down-and-up cycle which distributors by time honored tradition have been programmed to expect just hasn’t happened this time around. Instead of the neat, sharp snap-back of pent-up demand, the re-hirings, the gearing up we’ve been conditioned to look for, there has been little, if any perceptible shift away from the cautious, tight-fisted buying policies evolved in the depths of the recession.
The first few days of 2010 have already produced a number of announcements regarding deals in distribution and manufacturing sectors. There are a relatively high percentage of distressed sales, but some healthy companies are in play, as well. There are some excellent opportunities to build value in this part of the cycle. It's a fundamentally different M&A landscape than just a few years ago when valuations were sky high, and distribution markets were the hot ticket for investment funds.
Oliver H. Van Horn Company, New Orleans, LA, saw its headquarters wiped out with Hurricane Katrina in 2005. The 100-year-old fourth-generation family company's traditional market literally disappeared that day. The company reshaped itself to deal with the reality of its circumstances, and found new ways to add value in the wake of disaster. They have been rebuilding since, only to encounter a financial hurricane a few short years later. This publication has worked consistently to avoid hyperbole since its founding 1967. But this has been a hyperbolic year.
Where previous recoveries were marked by a "bounce," this one is forecast to be flat. Topline growth alone won't hide weaknesses this time. But there are many well-run distribution companies that positioned for profitability even before the downturn. Today they have healthy balance sheets. They have more flexibility (and cash) to respond to market opportunities and pick up share this year. An MDM survey in November examines what distributors and their suppliers are doing to improve profitability as we enter this slow-growth recovery over the next 12 months.
In MDM's 2010 Economic Forecast for Wholesale Distribution Webcast, Adam Fein painted a not-so-rosy picture of what this recovery is likely to look like. For a number of reasons, not many distributors will feel much of a bounce. It will be more like a grind to find growth in new areas as we emerge from the worst recession since World War II. While he agrees with many other economists that technically the third quarter will probably be the official end of the recession, 2010 is still going to be a slow-growth year for many distributors.

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The new normal is anything but. In spite of recent positive news, the economy is still brittle. Distributors have little flexibility to manage growth over the next six to 12 months – tighter credit, weaker asset positions, sluggish cash flow, fewer people/less talent. To get back on the offensive, companies have to re-evaluate and redefine how they operate across nearly every aspect of the operation. In many cases they have to change longstanding processes to adapt to these new market conditions.
Overall news is much more positive, as Adam Fein points out in his blog at Fein is raising his forecasts for industrial distribution with "slightly positive" year-over-year growth in the first quarter of 2010. The weakening dollar also is helping exports. All good. But few distributors expect a straight-line rebound like the good old days.
I'm finally hearing a few themes emerging for this recovery as I attend meetings and talk with wholesale distribution and manufacturing executives. Consensus: At least until third quarter next year, businesses will be grinding for growth. Companies are still focused internally on cost reduction, but they are looking ahead more than they were two months ago and adjusting to this "new normal." Six months ago slightly down looked OK. At least for now "flat" is the new up. There are a lot of mixed signals.
More good financial news keeps strengthening the outlook for distributors. A big surprise to many in August was the flipping of the purchasing manager index to the positive side of 50 (52.9 from 48.9 in July). That reinforces much of what we at MDM have been hearing about production and corresponding orders in August being more positive than expected. That said, this is not shaping up to be your grandfather's recovery from previous sharp economic cycles.
The outflow of manufacturing to "low-cost" countries keeps resonating lately as I envision how this next growth cycle takes shape. Before the heady days of the dot-com era distracted many businesses from their core focus and presented others with opportunity, industry change centered on the dramatic shift many North American manufacturers were making to offshore production.

Today there are a number of indicators that manufacturing might migrate back to a regional or at least continental scale.

We are adding powerful new tools to provide you with the best and most user-friendly information and research resource in wholesale distribution. When you arrive on our new Web site in September, take our quick site tour (look for the graphic above). Our tour will show you where to find key features on the new Web site.

As difficult as it may be in current conditions, scenario planning has to be given more time in distribution executive team meetings, as well as distributor-manufacturer planning meetings. The worst reaction today is to say there is too much uncertainty to plan, so let's just focus on the next three months. The vast majority of conversations I've had with executives have often included the observation that revenues dropped by more than double what the company was using as its worst-case scenario. Based on second-quarter results, distributors are hoping the trough is behind them.


Here at MDM we are in the midst of implementing some positive changes in how we do business. We are especially excited about one in particular, which we will be revealing to you in the next couple of months.

Our operations are different from a distributor's - MDM is a part of Gale Media, which is a specialized publishing and research business - but through our work, we are reminded of the challenges that come with change. Undoubtedly, these challenges transcend industry lines.

While we hope the ROI will be positive, there is only so much a business can control. And that's the fear factor in change.

But it's also exciting and provides a great opportunity for the company. We recognize the only way to continue growing is to make this investment of time and energy. We feel like ...

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