Industrial distributors across several verticals are beginning to report pressure on margins as competition ramps up amid a softer demand.

In our 2Q24 Baird-MDM Distribution Survey — which polled more than 500 respondents with an aggregate annual revenue of about $100 billion — 20% of them indicated they consider “aggressive competitive behavior/losing market share” as the biggest risk to their outlook forecasts in the second half of the year.

Approximately 60% of respondents identified as representing a distributor, 30% as a manufacturer and 10% as other.

Commentary by respondents indicated challenging margins and steeper competition. Here’s just a handful of examples:

• “Market has become much more competitive and the economy is slowing in multiple sectors.”
• “Market is slowing down, our customers are using less product, more competition smaller cake.”
• “We have been emphasizing [gross profit percentage] increase in the business. However, pressure from desperate competition exists.”
• “Receiving price resistance from customers as supply chain lead times have normalized. Holding margin may be more challenging in the second half of the year.”
• “Continued hesitancy regarding overall economy resulting in cautious spending while competition buys business with price cuts.”

More than half of the respondents said they considered the second quarter’s business environment as more competitive than a year earlier and compared to the recent past.

About 64% of respondents indicated they characterized 2Q24 as either slightly more competitive (38%) or much more competitive (26%) than a year earlier, while 36% say the competitive environment was similar compared to 2023. Virtually no one (1%) considered the current business environment less competitive than a year ago.

When asked to compare 2Q24’s competitive environment with typical (or “normal”) levels in the recent past, 58% of respondents considered the competitive environment to be slightly more competitive (43%) or much more competitive (15%). About 37% consider the competitive environment 2Q24 similar to “normal” levels, and 4% consider it slightly less competitive than the normal.

When analyzing the respondents’ general comments, some common threads emerge in reference to competitive margin pressures driven by price cuts and customer demand. See below selected comments, broken down by industry vertical, which seem to support this sentiment.

Electrical — Respondents say competitive margin pressures are evident.

• “Margin pressure by more competitive market affecting overall revenue and profitability.”
• “Demand feels stable, margins are still under pressure due to raw material inflation and higher labor costs in Mexico.”

Plumbing/HVAC — Respondents say the market is very competitive.

• “Still pressure on margins but [not] nearly what it was last year, we should see some recover in the second half. Competitive pressures are felt but not big impact on margins…yet.”

Building products — Key takeaways from respondents indicate competitive pricing and notable margin erosion.

• Wallboard/gypsum: “Prices deflate as everyone grabs at the customers base with price-focused selling.”
• Pool & Spa/Landscape Supplies: “July-August are historically slower but more so this year than last year. We are offering discounts to encourage spending. We are competing against luxury cruises, vacations and Disney this year — much more than in recent (3-4) years.”
• Pool & Spa/Landscape Supplies: “No pricing changes from 2023 resulting in some gross margin erosion.”

Pipes, Valves & Fittings — Respondents characterize demand as “hesitant.”

• “Continued hesitancy regarding overall economy resulting in cautious spending while competition buys business with price cuts.”
• “Revenue and margins are flat. Activities related to new opportunities are down.”
• “Pricing is under some pressure, but not much more than 2H23. That said, we expect margin to improve (2H24 vs. 2H23) as a result of more price increases in 2024, but more importantly suppliers are much more hungry for business and willing to discount to get it.”
• “Sales revenue is basically flat with additional margin pressure.”