In the disruptive second quarter of 2020, even distributors that managed to stay open because their local governments deemed them “essential” saw declining revenue as purchasing activity dried up and customer projects were shelved.
Not surprisingly, wholesale distribution revenues fell sharply in 2Q, though not as bad as many had feared at the start of the quarter, according to the most recent quarterly MDM-Baird Distribution Survey. Distributors, as a whole, posted average revenue of -9.8% in 2Q (April through June), but the decline was 1.5% better than forecasted heading into the quarter.
Only two sectors — landscape supplies and safety — posted revenue growth in the quarter at 3.5% and 0.6%, respectively. Even facilities maintenance/JanSan, which was considered one of the standout categories once the pandemic took hold, dipped into the red at -4.4% in 2Q.
Meanwhile, nine categories saw declines in the double digits — general industrial/MRO (-12.1%), industrial/energy PVF (-13.5%), datacomm (-14.8%), wallboard/gypsum (-14.8%), electrical (-15.7%), metalworking/cutting tools (-17.9%), mechanical/power transmission (-19.1%), OEM fasteners (-19.9%) and hoses & accessories (-22.7%).
The pandemic revealed a lot about the soundness of distributors’ operations — though with liquidity weathered the storm better than cash-strapped companies — but it also raised even more concerns about how businesses navigate the pandemic from this point forward. Here are four lingering questions that companies are beginning to answer as we enter the next phase of the coronavirus crisis:
1. How Are Distributors Managing Talent Differently as They Rebuild?
How to manage talent became a hot topic during the second quarter as the coronavirus ravaged businesses and forced some distributors to enact furloughs or even layoffs. As business contracted, they had to examine their payrolls and make some tough decisions about who to keep and who to let go. They also had to weigh hiring freezes, pay cuts and reduced work hours.
In one of the MDM-Baird survey questions, distributors were asked about how they were managing talent during this crisis. Most companies emphasized the nationwide shift to working from home and doing almost all calls over video conferencing programs like Zoom, Skype, Webex or Teams.
With this in mind, sales calls have a new look and feel, and some distributors said they have shifted to a “greater focus on inside sales,” which has been a key theme of MDM’s Sales GPS and Sales Transformation Network campaigns.
Other responses to this topic:
- “Communication of assignments and regular check-in on progress. Recognition for creativity and accomplishments.”
- “Ask talent to document contact points internally & externally, log calls, and any virtual meetings into Salesforce. Record discussions.”
- “Must keep top performers: add additional incentives, more flexible schedules.”
- “Identifying and attracting digital talent in all areas of the business.”
- “Stronger social media and e-commerce.”
- “How to keep the good people engaged and happy in a difficult environment (both professionally and personally). Taking immediate actions to reduce ‘B’ and ‘C’ team members.”
- “We’ve learned that you don’t need to fly everywhere to meet, not everyone needs to be in the office five days a week, and some roles may not be needed.”
2. How Severe is the Construction Slowdown?
A common theme across sectors was how the slowdown in construction projects led to fewer orders of building materials and electrical, HVAC and plumbing products. “May was the worst of it for us,” said one survey respondent. “It was just really soft, especially residential construction in April and May. June has been a little bit better than April and May.”
The non-residential construction market is likely to face challenges in late 2020 and early 2021, and one building products distributor said, “We have done OK through the pandemic but feel non-res construction will fall off a cliff later this year.”
Here are a few more comments regarding the impact from construction activity:
- “I don’t think capital deployment goes back to normal in the construction market. Nature of education is changed post-COVID, banking is almost purely digital, and office space gets re-thought.”
- “We are hearing that a lot of those construction projects that were completely shut down are at least opening in some respects. There are some opportunities just within the last 30 days that we hadn’t seen in April and May, so that’s a positive.”
- “When the economy shut down we closed all our branches to customers and furloughed all field sales personnel. Now slowly getting back to (new) normal.”
- “Being in states that shut down construction, volume was hit the hardest in April; it was better in May (still negative), very busy in June.”
- “I think market demand will stay strong through the third quarter and possibly the fourth. There does not seem to be a lot of new construction bidding going on for 2021 yet. I’m told some projects have been put on hold.”
3. Has Oil and Gas Hit Bottom?
The oil and gas collapse hit some sectors — namely industrial/energy PVF — harder than others, but even industrial distributors said they were feeling the effects of this market’s softness. Here are the comments from the hardest-hit category, showing the slowdown severity:
- “The collapse of the energy business and shocking demand decline of the pandemic have undermined our customer base.”
- “Revenues were significantly impacted by the rapid decline in the oil & gas market. Prices and product gross margins remained consistent, while overall margins were slightly impacted by a change in mix driven by the oil & gas decline.”
- “Revenue down 20% with slight growth in the back half of the year. Military and niche COVID-19 opportunities helped in Q2 but did not offset declines in oil & gas and infrastructure projects.”
4. What Will the Recovery Look Like?
Distributors’ performance varied in the second quarter, as do their expectations for the third quarter and full-year 2020. Only five sectors forecast growth in 3Q — landscape supplies (3.8%), pool & spa (2.3%), lumber & building materials (1.6%), safety (1.2%) and plumbing (0.3%), with HVAC projecting a flat quarter.
And only two are forecasting growth for full-year 2020 — landscape supplies (6.3%) and safety (0.3%). Here is what respondents said:
- “I don’t see our business getting much better the rest of this year. One account we work with is at 20% capacity and some machine shops have seen orders cut 20%-40%.”
- “Pro market had huge hit, decreasing by double-digit number. It will be a slow recovery. There was unexpected demand from the DIY sector (retails) with more home projects to be done while people spend more time inside of their homes.”
- “The municipal market saw a significant drop in purchasing. We are seeing a recovery in project and MRO procurement. Industrial segment sales have been affected by COVID-19 plant shut-downs. MRO occurs during these shutdowns.”
For a deeper analysis of how wholesale distribution and individual sectors are expected to perform in the coming quarters and years, see our new report, Markets Forecast.
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