After a year of slow, uneven recovery in 2013, distributors should focus on meeting the challenges posed in 2014, as well as positioning for growth in 2015 and beyond, according to Alan Beaulieu, president of ITR Economics. Beaulieu was featured in the recent MDM Webcast, The Path to Profitability in 2014. This article is an exclusive summary of the webcast, which is available on-demand and on DVD at mdm.com.
While 2014 was off to a stronger start than 2013, distributors still face challenges, according to Alan Beaulieu, president of ITR Economics. Beaulieu was featured in the recent MDM Webcast, The Path to Profitability in 2014.
Beaulieu outlined hurdles to economic progress in 2014:
The first hurdle will be a correction to the S&P 500 and Dow Jones Industrial. Beaulieu believes there will be a 15 to 30 percent correction in the S&P 500 sometime within the next few months. He was speaking in mid-April.
“With the stock market correction, (companies will) see their equity has fallen, and that’s going to cause a collective sucking in of the breath and a lot of people responding with ‘no’ when faced with requests. And that’s going to be part of the slowdown that happens later this year,” Beaulieu said.
The second hurdle he outlined was a slowing of automobile sales. This will have a negative impact on the overall economy, Beaulieu said.
One of the biggest hurdles in 2014 will be employment. Both high unemployment rates, as well as a lack of skilled, qualified workers will continue to be a problem in 2014, he said. Wage inflation will also be an issue, as competition for qualified workers grows.
“The best way to beat margin pressure caused by wage inflation is to get the most out of your business through other efficiency gains, and the most out of your people through efficiency gains,” Beaulieu said. “The longer-term approach is to make sure you carefully monitor your headcount, because in an inflationary period, that is one of the most expensive and volatile areas of your business and you want to be very careful with it as you move forward.”
One of the ways to increase efficiency and decrease margin pressure is to effectively manage inventory. By paying attention to where the market is heading, you can make smarter decisions regarding inventory levels, Beaulieu said.
“When we start talking about A, B and C inventory items, knowing the change in the business cycle three to six months in advance gives you a real advantage over the competition, in that what it does to your cash as you go into the future really changes that future,” Beaulieu said.
Pete Billson, corporate technology director for electrical and industrial distributor Turtle & Hughes, Linden, NJ, agreed. “It’s really important these days to make sure your inventories are rising when you need it to be, and you’re downsizing when you need it to be,” Billson said during the webcast.
Another concern for distributors in 2014 will be the effect of the Affordable Care Act, or what’s typically referred to as Obamacare. The uncertainty around the legislation will continue to make it difficult for businesses during the year, Beaulieu said.
“These are higher premiums for a lot of folks, and we’re also going to find it’s sapping businesses,” he said. “And the uncertainty created by the Act and by the constant delays and postponement of segments creates more uncertainty, and uncertainty is the enemy of business. So overall, this is going to be a drag – a sea anchor, if you will – on economic growth.”
The final major hurdle to economic progress in 2014 is the deceleration of corporate profits. That’s not to say that profits will decline, but rather that they will be increasing at a slower rate, Beaulieu said. This will cause a lot of companies to begin to restrict investment, something that should be avoided, he said.
“The deceleration of corporate profits means that people in the C-suites across America are going to look at their bottom line and see that’s not growing as fast,” he said. “You need to develop growth strategies. Not survival strategies, not wait-on-the-sideline strategies. There’ll be a lot of that in the second half of this year; don’t participate in that. You have to be looking toward a bright future.”
With interest rates at an all-time low, now is the time to make investments in your business for the stronger growth forecast in 2015 and beyond, Beaulieu said.
“Interest rates are going to be going up,” he said. “The Federal Open Market Committee has said that they will be going up to the historical mean, which is 400 basis points higher than today. Borrowing now, for all the participants today, means that you’ll be borrowing at very nice interest rates. Integrate all the services – all the help – that you need now because it’s less expensive now.”
Along with low interest rates, banks are also lending again. “I would encourage you to take advantage of that. Borrow some money to get ready for the future, invest in yourselves.” Invest for challenges that will come with growth, he said.
“Anything you do now, and finance now, is more affordable now, and you get to pay it back with inflated dollars. It’s a real win-win situation for people who act now.”