Robert W. Baird & Co., in partnership with Modern Distribution Management, conducted a survey of about 500 distributors and manufacturers to gauge business trends and the outlook for the distribution industry in diverse sectors. Here is a summary of second-quarter results and distributor and manufacturer expectations for 2014.
Moderate growth in revenues was reported by respondents to the second-quarter MDM/Baird Distribution Survey. Excluding acquisitions, revenue growth was up 3.5 percent year-over-year, up from 2.2 percent year-over-year in the first quarter but still lower than the 4.3 percent growth forecast in the fourth-quarter survey.
But the lower-than-expected half-year growth has not lessened anticipation for the remainder of the year. Respondents expect revenues to grow 4.7 percent in the third quarter of 2014 and 2.9 percent for the full year.
Hoses & accessories posted the strongest revenue growth in the quarter at 6.7 percent, and forecasted the second-highest growth of all sectors at 7 percent expected growth. Mechanical/power transmission forecasted the highest growth at 7.5 percent for the third quarter.
The fastener and roofing segments again reported declines in the second quarter, after falling 1.1 and 0.6 percent respectively in the first quarter. Fasteners fell 0.1 percent, with price increases expected overseas for the third quarter. Roofing fell 1.2 percent, some of which was attributed to high inventories driving prices down and a weak re-roofing market.
Eighty percent of respondents indicated that they plan to increase their inventories in 3Q, up moderately year-over-year. Thirty-six percent of respondents reported their companies had increased inventory levels in 2Q, down one percent from 1Q. Eighteen percent of respondents indicated they had decreased inventory levels.
Industrial supply companies reported revenue growth in two-thirds of its product categories: general industrial (MRO), cutting tools, mechanical/power transmission and hoses & accessories. Revenues were down for safety products, which had the strongest growth in the first quarter, and fasteners. The two product categories had projected growth of 6.2 and 3 percent, respectively.
Trends in capital equipment showed increases, especially in the upper Midwest. Companies revealed that obtaining business with national accounts is especially difficult, for multiple reasons.
“There’s a high correlation between incumbency and winning [national account] bids,” one respondent noted. “And once the bidding is done, it’s like giving a purchaser a toy without assembly instructions.”
Others noted that the “hoopla” around AmazonSupply isn’t taking business away from independents the way some threatened it would. One respondent stated that a similar, unrealized hype about big box stores circulated markets in the late 1990s.
Industrial supply companies held a generally optimistic outlook for the second half of 2014 in the U.S., but trends in Canada are weaker and expected to remain weak for the remainder of the year. The mechanical/power transmission category forecasted growth of 7.5 percent for the third quarter and 4.9 percent for the year, the highest of all product categories. Cutting tools predicted the next highest growth rate for the rest of the year at 4.2 percent.
Revenue growth for welding hardgoods outpaced gases’ revenue growth for the first time in eight quarters in the industrial gases sector, but barely. Revenue growth for hardgoods was up 3.6 percent while gases’
growth was 3.5 percent.
Pricing increased 1.9 percent for industrial gases, holding steady with previous quarters. Surcharges, some due to the past winter weather and higher natural gas prices, were reported by some respondents.
Expectations for revenue growth in the second half of 2014 are in line with the overall average. Gases companies expect revenue to grow 4 percent; hardgoods companies are forecasting growth of 3.8 percent, down from a previously projected 5.6 percent in the first quarter.
Previous issues with helium supply have improved at least temporarily for many respondents, and pricing on R22 refrigerant continues to decline. But, a new supply shortage of argon is anticipated by some companies.
“We’re hearing that big argon shortages are coming up because of a lack of new steel mills,” one respondent said.
In building products, HVAC revenues declined from 5.6 percent in the first quarter to 3.3 percent, level with the same period one year ago. Roofing and building materials companies also saw little growth in the second quarter. Roofing declined for the fourth quarter in a row to -1.2 percent, and building materials grew ever-so-slightly to 1.8 percent. Non-manufacturing MRO saw a 5.2 percent revenue growth and plumbing revenues grew 4.3 percent.
HVAC companies reported their planned transitions to 13-SEER product are moving forward smoothly, and inventories are expected to remain low through the rest of the year.
“The risk of stocking a lot of 13-SEER product is that someone comes out with a low-priced 14-SEER product,” one respondent said.
For 2014, all segments except roofing are forecasting modest growth. HVAC companies are forecasting average annual growth of 4.8 percent, non-manufacturing MRO anticipates 2.9 percent growth and plumbing at 6.2 percent. Pool & spa companies expect growth of 2.8 percent, down from the previous quarter’s forecast of 7.2 percent. Building materials forecast growth of 1 percent for the remainder of 2014 and roofing companies are forecasting a further decline of -2.1 percent.
Wire & cable companies reported an increase in revenue growths after a slowing in the first quarter. Revenue growth for electrical companies was up 3.3 percent, again outpacing datacomm, up 2 percent, a 1.5 percent increase over the first quarter.
Some recovery was seen for nonresidential construction, and industrial investment was noted to be supporting strong growth. But, trends for publicly-owned utilities versus investor-owned may differ.
“When you look at investor-owned utilities, that market is probably flat-to-down. Public power, however, appears to be strong,” one respondent said.
The outlook for 2014 was reduced from 4 percent to 6 percent growth to 2 percent to 4 percent.
The Unchanging Face of Competition
While much attention has been paid to the growing influence of online competitors, respondents to the second-quarter survey indicated that they still view traditional competitors as a more significant competitive threat.
Respondents were asked a special question about who they consider to be the most significant competitive threat to their businesses. Online-only competitors were identified by most respondents – more than 60 percent – as the least significant threat.
Only one segment, hardgoods, ranked online-only competitors as the most significant threat.
On the other hand, most respondents identified local/regional competitors and national companies as the most significant threats in the second-quarter survey.