Adam Fein's Outlook for Distributors - Modern Distribution Management

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Adam Fein’s Outlook for Distributors

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Adam J. Fein, Ph.D., of Pembroke Consulting, recently reported his outlook for 2010 in an MDM Webcast. He provided an overview of macroeconomic conditions, data on sales and inventory trends for distributors, and major end market and sector trends. Here’s a summary of that Webcast.

The good news: We are in the midst of a recovery. Bad news: The aftereffects of the recession will last for a number of years. That was part of Adam Fein’s message in a recent MDM Webcast, “Growth Planning for 2010: Economic Update with Adam Fein.” (The Webcast is still available for free download at www.mdm.com/webcast-downloads.)

“It’s not going to feel as robust as previous recoveries because of some of the overhang, but it is going to be a recovery,” Fein said. “It is going to be growth.”

Download Adam Fein's 2010 Wholesale Distribution Economic Reports – PTDA members get a 10% discount – use the Promo Code PTDA

Double Dip?
But will we see a double-dip recession? Fein says the chances are much lower of that now than they were six months ago. “Given the way things are going right now I’d say there’s still a chance, but I would say maybe it’s only about a 20 percent chance we’ll have a double-dip recession – that this recovery isn’t self-sustaining. I think we’re on the right path.”

The wholesale distribution industry did show year-over-year growth for the first quarter 2010. That growth has been from a much-smaller base because 2009 was one of the worst years on record for wholesaler-distributors, Fein said. Total revenues of wholesale distributors shrunk by 14.8 percent to $3.8 trillion in 2009, the first year of negative growth since the more mild decline of 1 percent in 2001.

After adjusting for price changes, revenues fell by 9.1 percent in 2009. And all but one of the 19 major industry sectors registered negative revenue growth. But Fein says that most distribution sectors are going to be feeling growth in 2010.

And inflation should remain tame in the near-term, based on signs from the Federal Reserve, despite government spending. “And we are seeing bank lending and credit demand increase. The world is slowly getting back to normal,” he said, “but we’re going to be in this very low interest rate environment for at least until the end of 2010.”

Employment Impact
Fein said that despite the recession being “technically over,” there remains an “enormous overhang of unemployed and under-employed discouraged workers.”

“To give you some context, just before the recession began at the end of 2007, total employment in the U.S. was about 138 million people. Today it’s a little less than 130 million people. That’s about 8 million jobs lost,” Fein said. But during that time, he said, the population has continued to grow; he says it looks like the U.S. may not reach 138 million jobs again until 2013 or 2014. “The aftereffects of this recession are going to last for a number of years,” he said. In other words, recovery will be slow.

In wholesale distribution, employment dropped by more than 250,000 jobs in 2009, the second consecutive annual decline.  The industry now employs about 4.8 million people. Job losses were widespread across most distribution sectors. Building materials, metals and computer equipment all registered double-digit declines in 2009.

Inventory Destocking
Another key shift in the past year is inventory. In 2009, as sales fell sharply, distributors and their suppliers cut back on inventory. According to Fein, the total value of inventory sitting at wholesale distributors dropped from almost $425 billion to about $350 billion.

Distributors are starting to rebuild inventories now, which is aiding in industry and economy-wide growth.

“There was a massive destocking everywhere in the supply chain in 2009,” Fein said. “Cash became tight, sales were dropping, and now we’re seeing a restocking effect. Distributors are going to benefit from that.”

The inventory-to-sales ratio, measuring how much inventory distributors have relative to sales in a particular month, is now hovering again at its historical level, Fein said.

Manufacturing & Construction Market Trends
On the manufacturing front, capacity utilization is starting to increase again. “Right now we’re in the 65-70 percent capacity utilization range, and that’s been growing,” Fein said.

For context, Fein said that in the 2005 to 2008 period, manufacturing was running at an 80 percent capacity utilization. “It’s going to take quite awhile for us to get back to 80 percent,” Fein said. “I think we’re going to be hovering in that 72 to 75 percent level in 2011.” He said that manufacturing is experiencing a “jobless recovery.”

“We’ve seen productivity increase, so if you’re selling industrial parts to plants you’re probably seeing a big uptake in activity.” But if you’re selling personal protection equipment and safety products, he said, you’ll see sales grow much more slowly because there aren’t as many people being employed.

“We haven’t seen the big surge in manufacturing employment that corresponds with the surge in profitability or sales at manufacturers,” Fein said. “That should be happening in the next quarter or two. … It will be a credible signal for manufacturing recovery.”

In construction markets, overall construction spending was at a $700 billion annualized rate in 2006, and has crashed to about $225 billion. Commercial construction is expected to be negative through 2010, but residential construction is growing. “We’re going to see housing starts increasing to 600,000 to 700,000 units per year in 2010,” Fein said. That’s compared with 2.1 million units in 2006 and 2007. “You have to set your expectations,” he said. “We’re going to have many years of depressed activity.” Of course, activity will vary by geography.

A New Era
Fein said distributors need to reset their expectations as they plan for the next few years. “The preceding five or 10 years are probably not a good roadmap to what the next five or 10 years are going to be looking like,” he said.

As distributors think about strategy, he advised to consider where growth will come from. “Which part of these markets are you attached to, and where are those opportunities going to emerge? Not just the near-term opportunities and the customer you’ve always been selling to to the extent they’re still around,” he said. “But what are the new markets that are opening up?”

It’s a dynamic time for the U.S. economy, he said. “It’s going to be very unsettling. It’s going to be what I call a choppy recovery. “But it is definitely without a doubt a recovery.”

To download the full Webcast, click here.  Order Fein’s 2010 Wholesale Distribution Economic Reports at www.mdm.com/wder. Reports are available for 18 distribution sectors.

PTDA members get a 10% discount – use the Promo Code PTDA

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