This is a part of the 2015 Distribution Trends Special Issue. The annual feature was researched and written by MDM editors based on interviews with dozens of distributors, as well as industry experts and manufacturers. MDM also conducted a survey of its readers to uncover the trends outlined in this issue.
2015 Distribution Trends Special Issue
Halfway through 2015, the U.S. economy is once again in a “good news, bad news” situation. The country can’t seem to break free from the turbulence and uncertainty that has defined the years since the great recession. At the same time, wholesale distribution continues to outperform the overall economy on a year-to-year basis.
The industry was cautiously optimistic coming out of the fourth quarter, but a variety of factors resulted in unmet expectations. As one respondent in the first quarter MDM-Baird Distribution Survey noted: “It’s been surprisingly flat. This was unanticipated, we thought the economic barometers were more promising entering the year.”
And yet, many distributors remain optimistic about the second half – although they’re maintaining the “cautious” qualifier. Expectations are for moderate growth in most sectors, the glaring exception being distributors and manufacturers with exposure to oil and gas.
The sharp decline in oil prices earlier this year had a steeper impact than many expected, and a rebound to the days of $100 a barrel doesn’t appear to be in the cards. The U.S. Energy Information Administration forecasts that the price for West Texas Intermediate crude will average around $62 in 2016; Moody’s is more bullish, but keeps the average WTI price below $80.
This, too, is a good news/bad news scenario.
“Low oil or low energy costs are going to be a net positive to the U.S. economy,” says David Parks, president of Hydradyne LLC, Fort Worth, TX. “But, unfortunately, with so many of our larger operations in Texas, Louisiana and Oklahoma, for us we like $4 a gallon gas. We have a saying around here, we say we can afford $4 a gallon gas, its $2 a gallon gas we can’t afford.”
Outside of oil and gas, things are a bit brighter, albeit not as robust as many had hoped. Average revenue growth for MDM’s Top 40 Industrial Distributors was 11.3 percent in 2014 – and much of that was driven by acquisition.
Merger and acquisition activity is on an upward trajectory right now, and there is more competition for good companies. Burt Schraga, CEO, Bell Electrical Supply, Santa Clara, CA, says acquirers contact him all the time about selling, an indication of how the industry is changing – yet also a reminder of how the same sound business principles apply, even during a period of consolidation.
“The ones that want to stay independent better be nimble and be on their toes and be able to see upcoming trends,” Schraga says. “And CEOs better be working on the business, not in the business.”
The acquisitions have also trended toward more transformational acquisitions, says Guy Blissett, wholesale distribution specialist leader for Deloitte Consulting LLP. It’s not just about getting into new geographies of product lines. Acquirers are also considering the IT platforms or other unique service offerings that a company brings with it.
“At the end of the day it’s all about diversification,” says Don Fritzinger, president of Singer Equities, Pearland, TX. “If you’re diversified geographically, you’re diversified with your product mix, you’re diversified with your services, you can generally steer around some of those icebergs.”