This article, based on the 2014 MDM Industry Outlook Survey, outlines and analyzes key trends and issues affecting how distributors will do business in 2015.
2014 started slow, as harsh winter weather curbed activity across much of the United States. But as time marched on, prospects brightened, and many distributors ended the year with more optimism about what the future holds.
But with that optimism comes a renewed sense of caution. In the 2014 MDM Industry Outlook Survey, many distributors noted that there is still work to be done to be prepared for the new year. Many are turning a keener eye toward making sure they have the right talent and tools in place to take advantage of improving conditions and attitudes.
Here is a look at the top 10 trends to watch in 2015.
1. Mostly favorable economic climate presents opportunities for growth.
When the MDM Industrial Outlook Survey sought the top three industry-wide concerns for 2015, one respondent’s answer of “economy, economy, economy” perfectly summed up how distributors’ fortunes and fears revolve around the U.S. financial climate.
But while the economy will always keep company owners awake at night, optimism pervades wholesale distribution and manufacturing as 2014 draws to a close. Recent earnings reports show increased sales and substantial profit growth from companies across all sectors. Surveys show executive are bullish on both the nation’s and the industry’s economic well-being. And a flourishing M&A market points toward robust company valuations.
Though end-of-year data aren’t available, industrial distribution has plenty of momentum heading into 2015, as evidenced by results of the third-quarter MDM/Baird Distribution Survey. Excluding acquisitions, revenue growth was 4.4 percent year-over-year for the quarter, marking wholesale distribution’s best performance since 3Q12.
Although many said they expected business to cool slightly in the fourth quarter, with a projected growth of just 3.8 percent, most were cautiously optimistic for the longer term. Respondents forecasted an average of 4.1 percent revenue growth in 2015.
Also, a recent Deloitte poll revealed a strong level of optimism for the economy in 2015. A wide majority – 87.8 percent – of respondents said they expected the U.S. economy to grow, and 47.3 percent of them expected M&A activity to increase.
2. Talent gap widens as distributors struggle to find “qualified workers.”
One of distributors’ most critical industry-wide concerns for 2015 is finding qualified candidates to fill open positions. In the MDM Industry Outlook Survey, respondents repeatedly referred to the growing talent gap in wholesale distribution, using terms such as “labor shortage,” “shortage of qualified/skilled workers,” “access to affordable talent” or “shrinking talent pool” to describe their plight.
The struggle to recruit and retain millennials – the generation that will comprise 75 percent of the U.S. work force by 2025 – will continue to be a hot topic for wholesale distributors, as well as manufacturers, in the new year. Yet as baby boomers retire or plan to retire in the next decade, they aren’t actively seeking ways to bring them on board.
Attracting talent, especially young talent, requires a strategic approach. One tactic for distributors is to align with an institution – such as a college with an industrial distribution degree – and its students, to get an inside track to recruitment.
“The thing that I can’t underscore enough, if companies want to be successful in their recruiting efforts, is aligning themselves with institutions that fit culturally with their organization, and then taking the time and energy to increase the level of familiarity with the students, so they really know what they’re getting,” Kyle Buxton, area leader for WinWholesale, told MDM earlier this year.
Compensation, philanthropy and access to training (another trend to watch in 2015) are factors millennials consider when looking at an industry, something distributors must keep in mind when lamenting a lack of qualified candidates. Not only does the inability to find talented workers effect the short term, it could be disastrous for the industry as it looks go groom the next generation of leaders.
3. Companies that devote time and resources to training will continue to surge ahead.
Employee training remains top of mind for distributors and manufacturers, who ranked it as
the third key business priority for 2015 – behind only the perennial concerns of revenue growth and increasing profitability – in this year’s MDM Industry Outlook Survey.
Forty-two percent of respondents said training is a priority for their companies in the new year. They understand that providing access to the right training opportunities is critical for companies to remain relevant in a competitive market as well as recruit and retain top talent.
John Jacobsen, vice president of sales and marketing at DGI Supply, estimates that 80 percent of training in the wholesale distribution industry is focused on product and technical instruction, meaning distributors aren’t placing enough emphasis on improving the sales, leadership and general business skills of their employees to prepare them for C-level positions.
For companies whose 2015 resolutions include training, several associations, including the Industrial Supply Association and the National Association of Electrical Distributors, offer training programs to meet both the product/technical needs of companies as well as professional development options. In addition, industry events such as the University of Innovative Distribution could be a good resource for providing cost-effective training programs without having to develop them in house.
4. Companies that fail to plan are planning to fail.
If distributors are having problems finding talent to fill open positions, as detailed above, then they are in real trouble when it comes to succession planning.
Respondents to the MDM Industry Outlook Survey said they are dealing with the “continued loss of experienced people through retirement and lack of viable replacements,” and that they aren’t having much luck “finding that next level of talent to replace those leaving the work force.”
Like training, succession planning involves investment in technology. Bill Mansfield, senior vice president of sales and marketing for Graybar, St. Louis, MO, told MDM earlier this year the company uses its technology platforms to monitor employee training and notify employees when new training is available. The training system, however, is not only for onboarding new employees. Mansfield says it helps develop employees at all levels within the company.
“It really helps us track our goals, identify development needs and keep our leadership succession plans on track,” he says.
5. Need for a broader digital strategy emerges.
Concerns about Amazon and AmazonSupply.com appear to have faded, but the focus on e-commerce continues to grow for distributors. As Court Carruthers, senior vice president & group president, Americas for Grainger, says, Amazon has become “representative” of one of “a number” of players in a very competitive online space.
In the MDM Industry Outlook Survey, only customer relationship management (41 percent) topped e-commerce (40 percent) for technologies to explore in 2015. But the reasons behind the two selections were very similar – to serve the customer better. And that means being available 24/7, several respondents noted.
The way customers interact with businesses isn’t changing; it has changed, says Philippa Gamse, a professor at Hult International Business School.
But there’s still a barrier to doing it well, according to Linda Taddonio, co-founder and e-commerce strategy officer of InsiteCommerce, when she spoke in an MDM Webcast earlier this year. “Only one-third of executives believe that their (digital strategy) approach is correct, and just 21 percent believe that the right people are setting the strategy in the first place,” she says.
The goal for distributors going forward is creating a comprehensive digital strategy that includes e-commerce but focuses on providing the right information at the right time. “More and more customers are using e-com and the Web to research and sometimes buy products, although the research side is more important to us at this time,” one survey respondent noted.
And that may not look exactly like what the big players, such as Grainger or MSC Industrial Supply, are offering. Distributors have to “understand the digital body language” of their customers, Gerry Helbig, president of plastics distributor Curbell Plastics, told MDM. The Internet is increasingly transforming how business purchases are made, but that doesn’t seem to be killing traditional business in the way many people were predicting.
Distributors are also starting to recognize that having an efficient and functional e-commerce platform can have significant impact on their profitability in the long run – even if it requires
a bit more investment up front. “Technology CAN decrease operating costs,” one survey respondent noted. “It can also drive revenue growth.”
6. Staying up-to-date on technology more important, but more challenging than ever before.
E-commerce isn’t the only technology challenging distributors going into 2015. There are more options available seemingly every day to help with every aspect of business. But so many options can be a barrier in and of itself. As one distributor noted in the survey: “We need new software. Which one?”
There’s ready acknowledgement that much of the software and hardware distributors use today is outdated. In the MDM Industry Outlook Survey, 53 percent of respondents were already in the process of upgrading technology. In contrast, only 14 percent had no plans for upgrades in the next two years.
But knowing that today’s upgrades will be outdated in just a few years is frustrating. As one survey respondent noted, it’s difficult to “stay current at an affordable price.”
Many survey respondents also noted that integrating diverse systems is a big challenge going into 2015. Demand for better, more actionable data from computer systems means those systems need to be communicating with each other, whether it is synchronization between the CRM and the ERP to provide accurate information to a customer or even between the payment center and the store to ensure the right prices are being charged.
This requires having the right team in place to spearhead the initiatives and identify – and, in turn, overcome these barriers, Taddonio says. She recommends distributors create a digital innovation team composed of three or four stakeholders from inside the company, specifically from the technology, marketing, operations and finance departments. It also requires outside stakeholders – what she called “passionate experts” – in technology, marketing and operations.
This team can evaluate the company’s needs and identify a plan for making sure the critical systems can be integrated before huge capital outlays are made.
But even if a distributor has all the technology pieces in place, technology aversion is still a problem for many. As one distributor noted in the Industry Outlook Survey, they still have to “pull people that are technology zeroes along.”
As noted above, training will be more important than ever for success in the coming years.
7. Merger & acquisition activity, along with spinoffs, will continue to dominate headlines.
A host of wholesale distribution deals last year across all sectors and of varying size deepened the industry’s consolidation story, which should become even more compelling in 2015 thanks to a ripening merger and acquisition market nationally and abroad. Readers in the MDM Industry Outlook Survey frequently cited M&A and its impact as a top industry concern, and this past year presented some clues as to what might happen moving forward.
Sonepar’s purchase of Industrial Distribution Group and HD Supply’s sale of Hardware Solutions highlighted the banner year for M&A and divestiture, but the health of the industry – public companies reported solid quarters throughout the year as valuations stabilized and grew – portends similarly notable deals in 2015.
Multiple surveys and reports published in the fourth quarter also point to more activity next year. The M&A market for mid-sized, privately held companies is expected to be “improving” or “very aggressive” in the next 12 months, according to 43.8 percent of respondents to a Deloitte poll. And nearly half of them (46.4 percent) say their companies are prepared to entertain an offer immediately from a hypothetical “perfect buyer.”
And plenty of buyers seem prepared to pounce when the time is right. For example, MSC Industrial Direct President and CEO Erik Gershwind told analysts during the company’s fiscal year 2014 earnings call that he feels “very good about how MSC is positioned to succeed in the next decade as the consolidation story accelerates.”
8. Port slowdown, truck driver shortage causing inventory management disruptions.
Receiving and delivering shipments in a timely manner is an obvious priority for any company in the supply chain, and two problematic pain points that emerged this year have made shipping and logistics a key trend to watch in 2015. Seventeen percent of respondents in MDM’s Industry Outlook Survey said
better transportation/freight/logistics management is a business priority for next year – and that number could rise if a labor dispute on the West Coast and a national truck driver shortage endure.
The fourth quarter of 2014 began on a dour note when congestion at ports from Washington to California slowed the movement of cargo from container ships to freight trains and then to distributors and manufacturers. Because a labor deal could be struck at any time, which would eliminate the disruption, it might not rank as a long-term concern for companies the same way they fret over succession planning or overcoming the talent shortage. But until then, an ongoing delay in labor talks could mean rerouting shipments to Gulf or East coast ports or moving more freight via air, both of which add cost.
Andy Mitchell, director of supply chain and marketing at jan-san and safety equipment distributor CCP Industries, which imports 80 to 100 containers each month from China and Malaysia, said recently that his company has been experiencing delays of two to four weeks because of the slowdown.
“It has been very challenging on our supply chain, causing back orders and increased investment in inventory levels,” says Mitchell, who worries that the disruption could have a devastating and lasting effect nationally. “Shipping lines were expecting things to improve in October 2014 and they did not. And with an improved U.S. economy forecast for 2015 and continued tight capacity, there is no light at the end of the tunnel.”
Adding to shipping and logistics woes, the ongoing truck driver shortage will continue to disrupt distributors, with many respondents listing it as a top concern for 2015.
9. Channel blurring shows no sign of slowing.
Readers expressed anxiety over the blurring of sales channels on a variety of survey questions, claiming their top industry concerns for 2015 included “losing manufacturing lines,” “competition from outside the normal distribution channel” and “shifting channels by manufacturing from classic distribution.”
Fear of disintermediation – or manufacturers bypassing distributors to sell directly to end customers – has grown in recent years, with increased adoption of e-commerce making such a move appear more feasible than in the past. As a result, distributors are faced with an increased need to prove their value to both manufacturers and customers or risk being viewed as simply an added, superfluous cost in the chain.
Rod MacKenzie, owner of Green Building Resources, Atlanta, GA, said that speed is one of the best places to compete with disintermediators. For the customer that needs a tight turnaround, a well-connected distributor is often the best, fastest answer to the problem. But, he says, it’ll cost them.
In addition, distributors continue to expand their product lines in order to capture more of their customers’ spend. For example, Sonepar’s acquisition of IDG expanded the global electrical distributor’s presence in the industrial product space, in addition to growing its integrated supply opportunity. Kaman’s acquisition of B.W. Rogers is another good example, with the power transmission distributor building a fluid power platform on the acquired company.
10. Rampant regulations?
Survey respondents raised concerns about new regulations going into effect in the next year, as well as continued concerns about the rising costs of health care – often attributed to the Affordable Care Act, which continues to have features rolled out. Labor-related regulations and workplace safety rules also have the potential to significantly impact how business is done over the next year.
The November election returned the Senate to Republican control after eight years of a Democratic majority, which leaves both houses of Congress in opposition to the White House. But what that means for the regulatory environment remains to be seen.
In addition, many state legislatures flipped alignment in the November elections, meaning changes may be afoot at the state level. For example, in West Virginia, the new legislature is already discussing changes to tough environmental standards passed in the wake of last year’s chemical spill that impacted drinking water around Charleston.