This article, based on interviews with distributors and manufacturers and the 2011 MDM Reader Survey outlines and analyzes key trends and issues affecting how distributors will do business in 2012.
Looking back at the headlines of 2011, there’s little doubt the economy is still front of mind for most distributors and manufacturers. The difference this year is that attention has turned from the U.S. to the ongoing sovereign debt crisis in Europe and its potential impact on the rest of the world.
However, the economy is no longer the primary concern. MDM readers ranked human resources issues – particularly those around recruiting and retaining the right people – at the same level as economic issues in MDM’s 2011 Reader Survey.
All signs point to continued economic uncertainty as we move into 2012, but it seem that many distributors have shifted their focus to building not just the leanest team – but also the best team.
Here are the top trends and issues that emerged in 2011 and their potential impact on business in 2012.
1. Global Economic Conditions Fueling Uncertainty in North America
Certain sectors in Europe, such as the housing and construction market in Ireland, have been struggling for some time, but economic troubles rose to a new level in 2011 with threats of default from several countries, most notably Greece and Italy. While the European Union has been trying to work out a solution, uncertainty continues to dominate the landscape, as Jean-Marie Fink, managing director of JMF Consulting, Mougins, France, told MDM in November.
The biggest concern is not that an individual country will default, he says, but rather that a chain reaction will occur in other countries. “These new factors added to the already slowing economic expectations in 2012,” he says
Daniel J. Meckstroth, chief economist for the Manufacturers Alliance for Productivity and Innovation, classified the European crisis as a primary risk for the U.S. going forward in MDM’s monthly economic update podcast.
The concern isn’t solely for companies that do business in Europe; a European recession could have a ripple effect on the rest of the world. In the latest MDM Reader Survey, nearly half regarded the economy as one of the top three issues facing distributors as we move into 2012. A large number of those respondents specifically pointed to Europe.
In addition, the housing and construction market in the U.S. continues to be a drag on the domestic economy. While key indicators in 2011 were up over 2010, they are nowhere near what most economists consider to be normal or sustainable. And most construction markets are expected to remain weak in 2012, according to Ken Simonson, chief economist for The Associated General Contractors of America in MDM’s recent 2012 Economic Outlook webcast.
2. Growing Focus on Recruiting and Retaining the Right People
One key difference between 2010 and 2011 was the focus on recruitment and retention. As MDM Editor Lindsay Konzak wrote a year ago, some distributors were starting to rebuild but many were still taking a “wait-and-see” approach. This year that focus was sharpened as recruitment and retention became one of the top issues for distributors. Human resources issues – particularly questions of recruitment and retention – tied the economy as the top issue in the latest MDM Reader Survey.
“The No. 1 issue continues to be finding and retaining top talent with the experience and disciplines that distribution needs to compete in the future,” said Ted Cowie, executive vice president at safety products manufacturer and importer Elvex, Bethel, CT.
Hiring is becoming more strategic, and more attention is being paid to skills that may not have been as important five or 10 years ago, such as the ability to effectively use business analytics.
But as Julia Klein, CEO of specialty hardware distributor C.H. Briggs, Reading PA, said, hiring managers don’t want to put just anybody into those positions.
“Because there are still so many job seekers, I wonder if hiring managers have expectations that really just can’t be met regardless of how great a skill set is,” she said in MDM’s December 2011 Executive Briefing. “I wonder if people are holding out for the perfect candidate, who really doesn’t exist, thinking there are so many candidates there must be someone perfect to find in the haystack.”
Retention of talent has always been a key challenge for distributors, and in 2011 it became an even bigger part of the recruitment process. “Companies want to know that if they invest in talent they’re going to be able to retain the talent,” says Brenda Jochum, internship coordinator for the industrial distribution program at the University of Nebraska at Kearney. The ID program at UNK was featured in the May 10, 2011, issue of MDM.
Perhaps one of the most telling comments this year about the retention challenge came from Mike Baker, vice president of marketing and vendor relations at Independent Electric Supply in San Carlos, CA: “We’ve probably lost some good people because we didn’t have a defined way of moving up through the company,” Baker says. (IES was acquired by Sonepar in August.) Other distributors have expressed similar sentiments.
Young people want more than a job; they want to belong, says Gerlinde Hermann, president of The Herrmann Group Ltd., a human resources management firm based in Toronto, Ontario. But at the same time, they expect to change careers six or seven times. The key is finding a way to balance those needs and those expectations.
3. Diversification Takes a Front Seat
Diversification has become a key strategy for survival and growth for many distributors, as Mike Rowlett of industrial distributor Womack Machine Supply, Farmers Branch, TX, told MDM in June. “We don’t want to follow the price of oil and the price of copper and the price of coal and natural gas,” he said. “We don’t want to build a big company that follows the prices of commodities.”
Several industrial distributors announced the addition of complementary product lines, such as safety or jan-san. MSC Industrial Direct Co., Inc., Melville, NY, is also exploring expansion into hand and power tools, material handling products and fasteners, among others.
Another example: In 2011, Canadian Bearings, Mississauga, Ontario, changed its name and branding to CB to move past its traditional product areas in the minds of its customers.
Distributors are also looking to different end-markets to offset sales losses during the Great Recession. “Diversification has been our ticket out of this rotten economy,” C.H. Briggs’ Klein says. Her company, which serves primarily construction markets, shifted from a focus on residential construction to nonresidential and institutional markets.
4. Keeping Up With Technology
One of the biggest drivers of change in the distribution industry in 2011 was technology. Emerging technologies – including cloud, e-commerce, social media and mobile – have changed how distributors interact with customers and vice versa, while business intelligence tools and pricing analytics have changed how they approach decision-making in their own businesses.
While many of these technologies have been around for quite some time, 2011 was the year we saw many of them really gain traction in the distribution industry.
Cloud computing, often referred to Software as a Service or SaaS, is expected to grow 20 percent this year, according to IT research company Gartner, and nearly double by 2015. And with the expansion of smart phone capabilities and the proliferation of tablets such as the iPad in business, demand for mobile applications from customers and salespeople has exploded.
In the past, many distributors have been hesitant to be the early adopters of technology. “Distributors are much more pragmatic than other industries about making these investments; it has to make sense in the financial equation,” says Roman Bukary, head of manufacturing and distribution industries at NetSuite, a Web-based business software provider.
Technology developers have embraced that, creating affordable solutions with rapid returns on investment. And development continues at breakneck speeds, creating another challenge.
“Certainly one of the biggest challenges we face is keeping up with technology,” says Chris Hartmann, executive vice president and CEO of Rexel Holdings USA. “I’m not just referring to our products, but keeping our employees trained and informed is always a challenge we face.”
Technology has also become a key part of the recruitment process, as the younger generation has higher expectations. Business communications is one of the most obvious examples of this. “The Y Generation and the 20-somethings are communicating in a whole different way,” says Burt Schraga, CEO of Bell Electrical Supply, Santa Clara, CA.
Young people are more adept at communicating through texting and instant messaging and are used to the instant connection, says Hermann. “Make sure you’re engaging them how they want to be engaged. And don’t allow IT restrictions to limit the learning opportunities.”
Other Key Trends
The distribution landscape saw some significant shifts in 2011, and while the prior four trends rose to the top of the list in conversations and through MDM’s annual reader survey, several other topics were noted by readers.
5. Distributors continue to pay close attention to inventory levels and improved inventory management.
6. Pricing is also an area that continues to attract attention, with more distributors looking for ways to optimize pricing for profitability.
7. Consolidation of markets picked up speed in 2011, with fewer deals focused on distressed companies – a trend that was noted for 2010.
8. Distributors also are looking for ways to collaborate more with their channel partners. Or they’re exploring partnerships with noncompeting distributors to meet more needs of their customers. In some cases this option is better than diversification because it may provide better technical support for non-core lines.
9. Competition for existing business is growing as more nontraditional competitors, such as Amazon.com, enter the marketplace. Manufacturers’ going direct – in part thanks to e-commerce tools – also continues to be a threat to independent distributors in some markets. And global companies, such as ERIKS and Sonepar, are growing their presence in the U.S. market.
10. And no “Trends for 2012” article would be complete without mentioning the ongoing battles in the government and the 2012 presidential election. Both of these add to the uncertainty that will continue to dominate the business sector for 2012.
Watch or download the December 2011 MDM Executive Briefing webcast, featuring discussion of these trends, here.