On average, businesses reported year-over-year revenue growth at +2.4% in the third quarter of 2019, which is below the forecasted +3.1% level, according to the latest Baird Industrial Distribution Survey, conducted in partnership with Modern Distribution Management. Growth decelerated 80 basis points compared to last quarter’s survey, marking the third consecutive quarter of slowing growth. This trend reflects weaker momentum in the industrial sector.
Industry leaders anticipate seeing more growth, but at a slower rate, in the future. Survey respondents predict their revenue will grow by +1.9% in the fourth quarter, which means an additional 0.5% moderation in growth is expected in the near term. The outlook for next year is moderately optimistic, at +2.6% revenue growth, which is below the average year-to-date growth of +3.3% for 2019.
Pricing Stays Steady
For the last two years, industry prices have increased each quarter, but the rate is slowing down gradually. Prices rose an average of +1.2% in the third quarter of this year, marking the fifth straight quarter of moderation. This trend reflects a mixed experience with some categories facing softening demand and decelerating price gains.
In the third quarter, the highest price increases came in the gases and cylinder rental (+2.6%), HVAC (+2.5%) and plumbing (+2.3%) categories. By contrast, the biggest price drops came in the wallboard/gypsum (-1.8%) and OEM fasteners (-1.5%) categories.
A survey respondent in the industrial category said, “There is much more pricing pressure in the market as the economy slows.”
However, a survey respondent in the HVAC category experienced the opposite: “The different rounds of price increases the industry put through from sometime in 2018 all seem to be sticking. There’s been very little pushback on any of them.”
As before, there wasn’t much regional variation in pricing in the United States in the third quarter of this year. Prices in the Midwest and the West were 0.3% above the survey average, while the Northeast and South were 0.2% above the survey average.
In the last 10 years, distributors and manufacturers have been facing a skills gap and struggling to recruit younger workers, as their most experienced employees retire. Recruiting challenges continue to be a major concern for industry leaders.
Businesses are using these strategies to recruit younger workers:
- better employee benefits,
- higher starting salaries,
- nicer work environments,
- emphasizing continuing education,
- partnering with local colleges and technical schools,
- using social media like LinkedIn to connect with groups that attract younger workers,
- highlighting career advancement and inclusion,
- offering telework,
- getting more involved in high school job programs, and
- attending more college job fairs.
One survey respondent said, “We continue to emphasize our culture and focus on our mission of helping those around us do more than they ever thought possible.”
When asked about their average employee tenure, 32% of survey respondents said 5-10 years, while another 32% said 10-15 years, and 20% said 15-20 years.
E-commerce vs. Value-Added Services
Industry leaders are divided on the right business strategy for future success. Some distributors are aggressively investing in e-commerce, while others are doubling down on value-added services. When asked which strategy they favored, 67% of survey respondents said value-added services, while 33% said e-commerce.
Those who preferred the e-commerce strategy noted that it saves money, and it’s what their customers are demanding now. “Our content needs to be complete and quickly accessible for the new generation of tech savvy people in our industry,” said one survey respondent.
Those who preferred value-added services said it builds customer loyalty. “We do not see ROI on investment in e-commerce. Seems like big guys already own the e-space, but can’t provide value-added services,” said one survey respondent.
A number of industry leaders see value in combining the two strategies right now. A survey respondent commented, “Ideally, you would do both. Purely focusing on e-commerce sets you up to compete with Amazon, and they have a tremendous advantage in e-commerce platforms.”
Another survey respondent said, “While we are investing in both, we believe we must provide value-added services as the first step in driving business to e-commerce as the ordering platform. Most middle-market customers want to have a go-to person to work with as they go through the decision-making process.”
Now let’s dive deeper into each sector to examine the third-quarter results.
Revenues were slightly lower in the industrial sector in the third quarter. As a result, many distributors are destocking their inventory. “I do think there’s been an effort by distributors to destock. There’s been an emphasis to have less working capital in general, and that continues to accelerate with recession thoughts,” said one survey respondent.
Within this sector, the strongest growth came from the safety (+1.9%) and facilities MRO and San-Jan (+1.3%) categories. The mechanical/power transmission (-2.1%) and OEM fasteners (-3.9%) categories reported revenue drops.
“We’re seeing an overall softening of the market. It’s primarily due to automotive and oil and gas. Aerospace is doing very well,” said one survey respondent.
Recent economic troubles for manufacturers are affecting the distributors in this sector. “Falling demand in manufacturing impacted our customers. [Customers] are buying smaller quantity orders to not bring in inventory,” a survey respondent said.
This sector gave a fairly modest forecast, with some categories outperforming others. The safety category is predicting revenue growth of +3.0% for the fourth quarter of this year and +2.9% for next year. The mechanical/power transmission category anticipates a decline (-1.7%) in revenue for the fourth quarter, but better performance (at +1.7% revenue growth) in 2020.
In this sector, third-quarter trends were somewhat mixed, with construction growth slowing down. But revenue growth remained robust with the electrical category reporting +3.3% and datacomm reporting +5.0% in the third quarter. For next year, both categories predict +2.8% revenue growth.
“The last couple months were a little lighter than our forecast. Nothing to panic about, but not quite as robust as we were earlier in the year,” one survey respondent observed.
Tariffs are causing difficulties for distributors in this sector. “Tariffs continue to apply pressure on pricing and margins. It is a huge problem,” a survey respondent said.
Independent companies haven’t seen e-commerce fully take off in this sector, and they are relying on value-added services to remain competitive.
The HVAC/plumbing sector has been performing very well recently. The HVAC category reported +4.1% revenue growth, while the plumbing category reported +4.3% revenue growth.
Their outlook remains positive. The HVAC category is predicting +3.3% revenue growth for the fourth quarter and +4.8% revenue growth for 2020, while the plumbing category is anticipating +2.3% in the fourth quarter and +3.1% in 2020.
There’s been a lot of discussion about competitive pressures from big online retailers. “Pricing has been hard to maintain due to competition,” one survey respondent noted.
“The entire industry has questions about pricing. Effects of import tariffs and the infusion of large, non-sector-specific e-commerce providers continue to redefine what pricing and availability are acceptable to maintain a competitive advantage,” another survey respondent explained.
Building Products Sector
This was one of the stronger sectors in the third quarter. The roofing category reported strong revenue growth at +6.8% in the third quarter, and it’s predicting +8.9% in the fourth quarter and +4.5% in 2020. The building materials category also showed good momentum, reporting +3.8% revenue growth in the third quarter and anticipating +3.1% in the fourth quarter and +2.9% in 2020.
“Sales continue to meet or exceed plan, but are very unpredictable month-to-month,” said one survey respondent.
Demand has been good in most of the categories, but sluggish in the wallboard gypsum category, which reported a decline in revenue (-3.0%) in the third quarter. In the lumber and building materials category, one survey respondent noted, “Reduced consumer borrowing costs have created greater demand for residential investments.”
The ongoing worldwide helium shortage continues to impact the gases/welding category. Despite facing that challenge, the gases/welding category performed very well, reporting +4.3% revenue growth in the fourth quarter and predicting +1.6% in the fourth quarter and +3.0% in 2020.
The welding hardgoods category is expecting upward momentum for next year. After reporting +2.3% revenue growth in the third quarter, it anticipates +1.4% in the fourth quarter and +3.9% in 2020.
“Business remains steady, but seeing slower growth. Most customers have a decent pipeline of work, and the medical/research customers are consistent,” said one survey respondent.
“Business in Northeast should hold at least through the first half of 2020. It then depends on construction holding through 2020 and into 2021. Manufacturing will depend on if tariffs hold or are stopped,” said another survey respondent.
Pipes, Valves and Fittings Sector
In this sector, the waterworks products category showed robust revenue growth at +5.4% in the third quarter, and it expects to reach revenue growth of +3.2% in the fourth quarter and +3.4% in 2020.
Meanwhile, volatility in the energy market is holding back growth in the industrial/energy PVF category, which achieved +0.8% revenue growth in the third quarter. It’s predicting to have +1.6% revenue growth in the fourth quarter and +1.0% in 2020.
“We expect slow growth over the next six months and downward pressure on gross margin. We are seeing customers shop projects harder and delay spend,” said one survey respondent.
President Donald Trump’s trade war with China continues, and various presidential candidates are ramping up for next year’s election, so businesses are facing quite a bit of uncertainty. “Continued political uncertainty and governmental intervention in the marketplace (tariffs) are disruptive in all areas,” a survey respondent explained.
International business results were somewhat mixed in the third quarter. Revenue growth in Canada was slightly above the survey average and nearly all U.S. regions, but revenue growth in other countries was about 2.5% below the survey average.
Pricing in Canada was just below the survey average in the third quarter, while prices in other countries trailed the average by about 1%. That’s the same as the previous quarter’s results.
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The average annualized sales growth for the 12 months through January 2019 is 5.5%.