• The sales environment is upbeat, with most verticals seeing growth for now into next year.
• M&A has accelerated, and consolidation should continue to alter wholesale distribution well after the pandemic ends.
• The workplace is forever changed — but in what ways and how much?
If 2020 was the year that everything changed due to COVID-19, then 2021 will go down as the year that companies girded themselves — or perhaps not — for post-pandemic realities that range from an upbeat sales environment to a dynamic M&A landscape to a changing workplace. And 2022 will be a year when we learn how well companies adapted to the new economy that emerges. For MDM’s 2022 Trends survey, we spoke with distributors about these operational issues and more. Here’s what they shared regarding those timely topics.
Sales growth for most
Distributors were deemed essential when COVID-19 began ravaging the global economy, and the channel has continued to play a critical role amid the economy’s mostly robust rally nearly three-fourths of the way through 2021. Granted, not all sectors are humming, but most industrial and construction verticals continue to see demand spike.
In the MDM-Baird quarterly survey for the second quarter, distributors posted, on average, 20.3% sales growth in the period. That was 7.7% above their forecasted growth and capped a two-year stacked growth rate of 10.5%. That positivity was echoed by the distributors who MDM spoke with regarding current trends shaping the industry. “I don’t think we’re any different than other distributors — we’re having a great year this year, whether it’s due to pent-up demand, stimulus money or stellar rebates,” says Mike Meier, president and CEO of Meier Supply Co. Inc., a Conklin, New York-based HVACR wholesaler. “A combination of all these things is adding to demand. Our growth is off the hook this year. Our revenue is up substantially, which is organic growth.”
The industry posted some gaudy revenue growth numbers in 2Q. Distributors of OEM Fasteners saw sales grow, on average, 32% to lead the space, while sectors like Pool & Spa (31.7%), Datacomm (26%), HVAC (23.5%), Lumber & Building Materials (22.6%), Electrical (22.5%), Plumbing (22.4%), General Industrial – MRO (21.9%), and Hoses & Accessories (21.6%) all exceeded the 20% mark.
While this upbeat environment has been a boon for distributors, the ongoing supply chain issues have been a minefield for companies to maneuver through. “We are still experiencing several manufacturers that cannot provide product or it’s severely delayed,” says Ted Stark, division general manager, Dalco, a division of Imperial Dade. “A lot of it has to do with raw materials for our manufacturers, so we have a pretty severe delay for equipment. But most of that is computer-chip related. It raises some concerns about what we’re going to do when everything opens up. For example, education is one of our biggest customer segments. As schools reopen, we expect increased demand with the students coming back. And that’s going to put even more strain on our supply chain.”
And some companies that serve verticals heavy on retail — like Motorola distributor Astra Communications — might have rallied once the lockdowns were lifted but now face an unsure final four months of the year as the Delta variant surges and a sketchy start to 2022 as supply chain issues likely persist.
“We took a serious hit during the pandemic because the major vertical markets that we sell into are retail, hospitality and restaurants,” says James Teat, division president for Astra. “Of course, all those were completely shut down from the middle of March until sometime in July or August. We rallied in August and got back to a slightly better than breaking position in September. When we moved into 2021, business took off. There was a lot of pent-up demand. We had a tremendous first quarter and a good second quarter, and the third quarter is still good but not quite as robust — because of that shortage of products.
“But I’m worried, as we go into the second year of the pandemic, that there’s going to be more shutdowns, and with our biggest vertical markets being retail, restaurants and hospitality, if they do shutdowns, we can kiss the year goodbye. It’s already been a great year — don’t get me wrong — but I’m worried about what’s going to happen in the next quarter.”
M&A opportunities abound
The booming sales environment is one of the drivers behind a rampant rise in M&A activity, distributors told us in the survey. And clearly, acquisition activity has been steadily increasing since the pandemic pause ended around the start of the third quarter of 2020.
Plenty of companies have pulled the trigger on deals, but one hallmark of many of those transactions was that their roots began taking hold long before COVID-19.
Take Stellar Industrial Supply’s recent acquisition of R.G. Brewton, the Lawrence, Pennsylvania-based industrial distribution and integrated supply firm.
Founder, president and CEO John Wiborg says the acquisition delayed the inevitable of both the buyer and seller enhancing their marketplace positions. That dynamic also portends more acquisitions happening well into 2022 as company owners look to exit before another COVID-19-sized event. “We were having conversations prior to COVID-19,” Wiborg says. “When COVID-19 hit, we put the pause button on everything. But I think it would have happened in any event. They have a great integrated supply model and we needed to develop an integrated supply model more robustly, while they needed a better approach to develop business in a traditional fashion. I think those two ultimately go together and complement one another. But there are other opportunities that have come up because of COVID-19. A lot of people are at a certain point where they might have been thinking down the road a bit, but maybe they don’t want to own a business if another crisis washes over them.”
One company that refused to slow its acquisition activity is Envoy Solutions (formerly known as NW Synergy), the Glenview, Illinois-based holding company that owns and operates North American, WAXIE Sanitary Supply, SWPlus, Southeastern Paper Group, Daycon Products Co. and Penn Jersey Paper Co. Much of that portfolio was built during COVID-19.
Another is SRS Distribution Inc., the McKinney, Texas-based, PE-backed, building materials distributor that found opportunities galore despite the pandemic’s grip on the economy. “We also were one of the only companies in our space to continue to do acquisitions even during COVID-19,” says President and CEO Dan Tinker. “We found safe and creative ways to onboard [acquired businesses], convert to our ERP, deploy people and keep them safe during COVID-19.”
Not only is the industry seeing more strategic deals, like what Envoy and others are doing, but private equity also continues to make a play in the space — further proof that distribution remains valuable in the eyes of investors. “Apparently, our industry is seen as a good place to invest your money through downturns like COVID-19, which has attracted many buyers in our market that we’ve not seen in the past,” Meier says. “And it sure looks like this will continue.”
The new workplace
Nowhere has a distributor’s operation been challenged more than in its workplace model, specifically how much a company would allow work-from-home to continue as vaccinations increased and COVID-19 cases within a company decreased.
Most people said they are migrating to some type of hybrid work environment for office staff — remote coupled with in-office — and safer measures in the warehouse and other locales where employees can’t do their job virtually. Look for this trend to continue to evolve into 2022. “I think virtual is here to stay to some extent,” says Dalco’s Stark. “But I think our industry is going to want to get back to in-person as much as possible. We need to keep getting better at that and figuring out how to adapt to that.”
Stellar Industrial Supply is seeing plenty of shifts, says Wiborg. “Prior to the pandemic, we had a hybrid model going anywhere because we’re pretty dispersed geographically and there are certain types of functions where you just want to have the talent. That put us in a good shape to work in a virtual model. During the pandemic, of course, we went more heavily to work from home. Now, we’re swinging back to more of a hybrid. I truly believe that the interaction that people have in person — that informal interaction, the water cooler stuff, that the spur of the moment, the engagement — there’s a lot of value in that. In this environment where employee retention is so critical, you want to be flexible, but you also want to have people feel like they’re part of something. So, we will remain as I call it, a ‘quasi-discipline hybrid model.’ We have to work together as a team, keep our people safe and be mindful of the need for flexibility.”
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