This article, based on the 2016 MDM Industry Outlook Survey, outlines and analyzes key trends and issues affecting how distributors will do business in 2017.
Change has come to wholesale distribution. Much is driven by technology, which has changed how distributors connect with their customers, as well as their employees and their suppliers.
But technology isn’t the only driver of change. Each year, MDM conducts a survey of its audience members to identify key priorities and challenges for the coming year. This year, we received nearly 300 responses from distributors, manufacturers and service providers across sectors. While the specific concerns and focuses varied widely, there were some key issues that rose to the top of the list.
Here is a look at the top 10 trends to watch in 2017.
1. Growth expected in 2017, but at an uneven pace.
While the phrase “cautious optimism” continues to be bandied about, many view 2017 with “resigned optimism,” according to survey respondents in MDM’s annual Industry Outlook Survey. The overall expectation is that sales will grow in 2017, with 44 percent of respondents forecasting an increase of 5 percent to 10 percent, but much of that expectation is because of the 2016 reality.
2017 should be “better than this year,” noted one jan-san distributor. “Note: This (year was) not good.”
There’s a sense that conditions have to get better, but many respondents are guarding against too much optimism.
“Generally speaking, economists are saying that 2017 should hold modest growth for distribution and manufacturing,” noted a bearings manufacturer. “We’re skeptical though.”
While most of the major economic indicators point to a growing economy, growth in the industrial and manufacturing sectors has been more elusive. Industrial production in November was down 0.6 percent over November 2015, and the number of manufacturing jobs remained unchanged through most of 2016.
Building materials and construction, however, continued its pattern of growth and optimism. Nearly a third of respondents in this sector (32 percent) expect growth of more than 10 percent in 2017. Another 41 percent expect growth of 5 percent to 10 percent. Respondents noted “good tailwinds” and “excellent prospects” in response to a question about their overall outlook.
These uneven conditions are part of the “new industrial landscape,” noted one respondent who operates in the industrial and building materials sectors. Growth will require a keen focus on identifying and meeting the needs that aren’t currently being met, noted another distributor.
And uncertainty continues to have a dampening effect on overall outlook. “(2017 is) even less predictable than the recent past, which was unprecedented for its unpredictability,” noted one industrial and safety products distributor.
2. The election cycle is over, but the regulatory outlook remains cloudy.
Prior to the presidential election, small-business optimism was flat, according to the National Federation of Independent Business. After the election, optimism “rocketed higher as business owners expected much better conditions under new leadership in Washington.”
That same across-the-board optimism could not be found in responses to our annual Industry Outlook Survey. Instead, respondents were cautious and divided on what the results would actually mean for the industry. Some took it as a signal that companies would start spending again because of the expected shift to more business-positive policies.
But a number of respondents also highlighted questions about whether President-elect Donald Trump would follow through on his campaign promises, such as the infrastructure bill. Another concern raised is the potential for further “political turmoil.” One HVAC distributor even listed “President-elect Trump and curtailing his damage” as one of his top concerns for 2017.
There’s a sense that Trump will have a more business-centric regulatory approach, but, as one manufacturer noted, “uncertainty around economic, trade, labor and manufacturing policies of the new
president” is still cause for some concern.
Another challenge around the impact of regulations goes back to the shift in industry. Trump’s promises to reinvigorate the coal industry fails to take into account the market forces that have helped make coal an expensive fuel source when compared to natural gas, for example. The industry itself has changed, and simply repealing existing regulations may not have the desired impact.
The rising cost of health care continues to be a top concern for some, but more respondents identified the general regulatory climate this year than in the past.
Historically, change doesn’t come quickly to Washington. Even if Trump replaces the heads of regulatory agencies, the process for changing regulations can be slow. Many people (including MDM) will be paying close attention to the signals the new administration sends up during his first 100 days in office and how that may affect distribution and manufacturing.
3. As M&A ramps up, control what you can.
Consolidation continues to be top-of-mind for many respondents to the MDM Industry Outlook Survey, with 19.4 percent identifying it as a top industry-wide concern for 2017.
The sluggish U.S. economy in 2016 shifted the M&A landscape to one of more modestly sized transactions as companies pursued acquisitions in a slow-growth environment.
Only a handful of mergers or acquisitions this year reached blockbuster status – most notably ABC Supply Co. Inc.’s $670 million purchase of L&W Supply Corp. from USG Corp. Two other megadeals – both in the gases and welding equipment sector – were either finalized (Air Liquide and Airgas) or announced (Linde and Praxair) this year.
But plenty of large companies across most sectors were active in hopes of bolstering their top lines amid stagnant organic growth. “Companies … look to supplement organic growth with acquisition growth,” T.J. Monico, head of distribution, investment banking, KeyBanc Capital Markets, told MDM earlier this year. “It’s cheaper to buy growth than to wait for organic growth to return.”
Today’s M&A climate is about controlling what you can. It is imperative for distributors to get their own businesses in order before making any acquisition decisions – no matter which side of the deal they’re on – according to Dave Gabriel, president, Sonepar North America, Charleston, SC, who spoke on a panel at the National Association of Electrical Distributors national meeting last May in Washington, DC.
“If you have an alignment … then maybe (M&A) makes sense. Know yourself first,” he says. “Chasing volume for the sake of volume, or chasing geography for the sake of geography, I wouldn’t advise that for anyone.”
Besides knowing when to buy or sell and for how much, consolidation among customers and suppliers emerged as a chief concern for distributors, according to survey respondents. For example, if a supplier that works with another distributor gets bought, the acquiring company might keep its distribution relationship with a competitor.
“I worry about the things I can’t control,” Kevin Martin, vice president of operations, Pipeline Packaging, Fairfield, OH, told MDM this year after one of the company’s big suppliers had been purchased. “The mergers and acquisitions of our customers and our vendors can swing our business so much, and we can’t control that.”
4. Increased competition from more sources drives industry change.
Distribution has always been highly competitive, but the competition is taking on a new timbre and coming from more directions than ever before.
More big-box players are taking aim at B2B opportunities, placing even more pressure on traditional players. “Supplier favoritism toward big-box operations” was a top concern for one bearing distributor.
Amazon itself is no longer a new threat for industrial players, but it continues to be an industry concern for many. And it continues to launch new initiatives that may have a broader impact on the supply
chain, including Amazon Go and an Uber-like app to connect truck drivers and shippers across its network.
And distributors and manufacturers both note increasing pressure from international or multinational players.
The key fear of the increased competition, as noted by several respondents, is a race to the bottom on price. More visibility of price – thanks in large part to online sellers – allows for easier base price comparisons. It’s becoming more challenging to “maintain current levels of margin,” noted one distributor, as customers challenge distributors’ pricing.
Distributors want to avoid that race to the bottom, but they find it difficult to make inroads on how to challenge the price perception. “Customers are buying online because we are not properly explaining our value,” noted one industrial distributor.
As customer expectations continue to evolve, they’re looking to distributors to provide more than just product, and that changes how they interact with distributors.
“The selling process is less relationship-, more data-driven,” noted one respondent.
5. Aim to increase ROI from technology.
While distributors and manufacturers have made strides on investing in technology in recent years, measuring a return on those investments remains a challenge for respondents to our annual Industry Outlook Survey.
The reasons for this are varied and often self-imposed. One respondent to the survey admitted to using only about “10 percent of functionality” of new system the company implemented, while others are hoping to see payoff in 2107 from increasing their tech functionality.
But implementation is only the first step. To truly reap the benefits of new technology, distributors must develop a plan for how new systems can boost efficiency and drive growth. A successful technology strategy is based on improving customer experience, according to Mike Marks, Indian River Consulting Group. It also includes training for employees and customers. However, getting employee and customer buy-in for new systems can be an obstacle.
CRM and ERP systems may seem intrusive or threatening to some employees that have gotten comfortable with how things are. One survey respondent noted the struggle with an “aging workforce disinclined to adopt new technology.” Making adoption non-negotiable is important for getting the entire company on board.
With increased competition from companies of all sizes across the globe, distributors also feel pressure to provide a website that can meet ever-changing customer standards. The challenges come in many forms, from acquiring and providing good, clean data to choosing the right functionality for their customers.
Ease of implementation and use are critical for employee and customer adoption. Technology shouldn’t overwhelm your company’s talent and resources or require months and months of expensive training, says Ranga Bodla, head of industry marketing, NetSuite.
6. E-commerce again front of mind.
E-commerce is again a focal area for distributors, many of whom lack online and mobile ordering offerings for their customers.
In our annual Industry Outlook Survey, almost half of respondents – 48.3 percent – said e-commerce is a new technology they anticipate exploring in the next 12 months, while 41.1 percent of respondents said they plan to improve their e-commerce capabilities to build revenue in 2017.
Revenue leakage is a problem for distributors that lack e-commerce, says Bob Lewis of B2X Partners, who said distributor customers routinely tell him they like doing business with their local distributors and would buy more from them if they knew what else they offered.
“I would be willing to bet that the average distributor could do 3 to 4 percent more sales with their existing customer base just by having an online presence and a good digital marketing plan,” Lewis told MDM earlier this year. “That’s just putting it up there and making your current customers aware that you have it.”
Companies also are focused on moving into more mature stages of e-commerce. A plumbing and
heating distribution executive said that while the company is “already into e-commerce, developing that into an ‘Amazon-like experience’ for our customers is our goal, (along with) great products, great information with a great search function all available and optimized for all technology platforms from mobile to PC.”
More distributors are exploring mobile technologies, as well, with 32 percent of survey respondents listing it as a new tech they plan to pursue in 2017. Close to half (42 percent) of B2B buyers use mobile devices (smartphones and tablets) during the purchasing process, a 91 percent increase over the previous two years, according to “B2B Path to Purchase Study,” a 2014 report from Google/Millward Brown.
Mobile is especially critical for sectors that sell to customers who do their jobs away from the office, including electrical, building materials and HVACR (i.e., construction end markets where customers often order from job sites).
7. ‘You can’t cut your way to growth.’
In a highly competitive market, the best distributors and manufacturers are continually looking for ways to be more efficient. And a big part of that over the past year has been implementation of more standardization and automation throughout the business.
More than half of survey respondents identified streamlining/automating processes as a method to reduce costs in their organizations over the next 12 months. “Streamlining processes is far better than cuts,” one industrial distributor said.
Another respondent agreed: “You can’t cut your way to growth.”
Automation has played a critical role in streamlining manufacturing operations, but more distributors are identifying it as an opportunity for their companies, as well. New technologies are making it more accessible in more areas.
Paperwork reduction and automated order processing are two core areas being explored by many distributors looking to function more efficiently and accurately. Nearly one-fifth of respondents (19 percent) identified “reducing paperwork, data entry and redundant processes” as a key business priority in 2017.
And distributors are finding more opportunities to outsource positions, such as using virtual assistants to fulfill administrative functions.
The use of automation and additional methods to streamline operations is sure to grow over the next year, and the impact may be widely felt.
8. Distributors focus on boosting employee productivity.
Employee recruitment and retention continues to plague distributors. While industrial distribution programs like the University of Nebraska at Kearney’s are preparing students for a wide range of industry jobs, the competition for those graduates is fierce.
Additionally, with a high focus on cutting costs amid a sluggish economy, keeping employee morale up can be a struggle, especially if downsizing has taken place. This can lead to increased turnover, which is already a common problem at many companies.
Many distributors have increased their focus on training and productivity efforts to boost retention rates.
In our annual Industry Outlook Survey, 33.6 percent of respondents listed training as one of their top business priorities for 2017. A core challenge identified by many survey respondents is getting customers to look beyond the lowest price in an era of online visibility, and training may be a way to help overcome that struggle and gain a competitive advantage.
“Trained employees create a stronger workforce and customers appear willing to pay for knowledgeable salespeople,” said one respondent.
In addition to training, many distributors plan to focus on improving employee productivity in 2017, with 65.2 percent listing it as one of the top ways they plan to cut costs.
For one survey respondent, focusing on efficiency and process improvement means that “employees make the most of their time, work more comfortably and see results from their efforts.”
Providing employees with the support and training they need to be successful will increase
retention as well as customer satisfaction. However, creating a successful training program is an investment in time and money that needs to be well planned out. Training methods should reflect the work habits and preferences of the new generation of workers, which includes a strong focus on online learning and other innovative programs.
9. As customer needs change, time to realign your sales force.
As customer needs change and competition grows rapidly, companies must respond accordingly. Though many distributors have created an e-commerce site to meet customer needs and grow sales, they often still hold to the original sales model.
Even with a best-in-class website, a company’s sales team still needs to adjust how it interacts with customers who now want easy-to-use systems, transparent pricing and intuitive technology. Often, as one respondent to our annual Industry Outlook survey noted, technology is still outpacing the sales force.
Distributors say that loyalty is extremely low in this new price-sensitive environment. Customers are willing to switch to a competitor that better meets their needs without giving it too much thought because the cost to change has come down significantly.
While some respondents to the survey note “realignment of sales” and a “restructured sales organization” as priorities, many distributors struggle to accept and address this shift in customer behavior.
However, even the ones who have embraced it are still faced with the challenge of changing their company culture to align with customer desires. One survey respondent said that “sales turn their back as soon as (CRM) is discussed.”
But not having a record of customer interactions can be a recipe for disaster – especially if the sales rep in charge of that account leaves the company. As Brian Gardner mentions in his book ROI from CRM, a key part of getting buy-in revolves around providing consequences for non-participation. “If it isn’t in the CRM, it didn’t happen,” he writes as an example.
And, according to Mike Marks, Indian River Consulting Group, the field sales rep role is in danger of going away entirely if distributors don’t adjust to the changing market. “It will fade because it is costly and ineffective in the new market environment,” he says.
The sales rep needs to transition from being a “self-directed generalist to a management-directed specialist,” he says. They should be focused on creating demand instead of just serving existing customers – a task that can now be entirely automated.
10. Growing revenue with product expansion
While all companies remain hopeful of faster economic growth for themselves, their customers and the U.S. as a whole, many are taking action into their own hands by exploring the best ways to grow revenue and improve profitability in 2017.
One way is by adding new products or product categories, with 39 percent of respondents to our annual Industry Outlook Survey saying this is part of their plan to build revenue over the next 12 months. The answer was third behind only growing revenue from existing customers (60.2 percent) and improving e-commerce capabilities (40.7 percent).
Many distributors said they already explored product expansion in 2016 as part of a strategy to grow the top line and improve profitability. In addition to efforts to “standardize sales practices and sell more aggressively,” one industrial distribution executive said her company spent last year working to “bring on different products to service more diverse audiences.”
A plastics executive said his company is “aggressively adding new products,” and a fastener executive noted that introducing new product segments to sell in 2016 “led to sales growth.”
Product additions make sense only if your existing customers want them, and the best way to find out if they do is by asking them.
Mapping the customer experience from start to finish and identifying the gaps – in services as well as products – can be an eye-opening experience. They will provide a variety of responses, with any number of possibilities emerging: the need for an e-commerce site, a more robust e-commerce site, a previously unoffered product or something else.