Despite the economic downturn that led to plant closings, furloughed workers, layoffs and pressure on margins, distributors who responded to Industrial Distribution's56th Annual Survey of Distributor Operations are, for the most part, optimistic about the future. Or maybe they simply agree with this comment from a distributor: "It has to get better. It can't get any worse."

Our findings are based on the returns of nearly 600 owners and executives of distributorships across the country. It is one of the largest studies of distributors that is undertaken in our industry.

While the survey reveals a number of trends occurring in the industry, it is apparent that the economy was, and continues to be, an overwhelming concern for distributors who were forced to take a number of steps to deal with the downturn. These respondents said they reduced their inventory (57 percent), initiated a hiring freeze (37 percent), reduced travel budgets (37 percent), and froze salaries (33 percent) during 2001.

Many other distributors implemented layoffs, eliminated open positions, reduced benefits and salaries, and furloughed workers.

Distributors said the biggest effects from the downturn were pressure on margins, customers closing facilities, fewer orders and suppliers consolidating. Other distributors told us that more and more competitors moved into their territories to try and take market share. There were also a number of new start-ups in some regions of the country.

"Let's face it," one distributor said. "Customers just aren't ordering so everyone is fighting for what little piece of business still exists."

Other distributors complained that customers have been looking for extended payment terms and, at the same time, are demanding more services. Not surprisingly, nearly two-thirds of respondents also said their customers continue to slash their distributor base, a trend that has been occurring for a number of years.

"I just don't think there is as much loyalty out there as there used to be," one distributor said.

In past surveys, distributors said mergers and acquisitions were top concerns. Not anymore. Today, in light of the cooling economy, that trend barely registers on the radar screen.

The survey shows that only about four percent of the companies have been merged or acquired in the past six months. Particularly significant is that only 36 percent of distributors overall would even welcome such an offer. About 45 percent of smaller distributors (sales of less than $5 million) would be open to such an offer.

Only 18 percent of distributors said they are actively looking to acquire another distributor. The most active group on the acquisition trail is distributors with more than $20 million in sales.

Another surprising statistic: Despite the growth of large national distributors and past mergers and acquisitions, distribution continues to be a family business. Seventy-seven percent of the respondents, most in the small distributor category, are still family-owned. However, even 55 percent of distributors with sales of more than $20 million identified themselves as family-owned businesses.

One other point about ownership in the distribution business: Longevity counts. Nearly 40 percent of the responding distributors said they have been in business more than 40 years; about three percent said their companies have been in existence for more than 100 years.

Remember disintermediation? And comments from some experts who predicted the end of the outside sales force because of the Internet ?

None of those predictions have come to pass. Distribution has adjusted to the Internet and e-business nicely. In fact, most respondents to the survey said the Internet and e-business are part of their strategic plan to grow sales. About 73 percent of the respondents said their company now has a Web site. Half of those are selling products from their sites. Still, most distributors said only a small percentage of their sales has come via the Internet, though they said that percentage will increase in the future.

There's also little doubt that salespeople are considered a vital force in returning to profitability. More than half the respondents intend to hire more salespeople in the next two years. Several distributors who had an increase in sales last year said the reason was due to hiring more salespeople, especially those with a technical background who helped solve application problems for customers.

Obviously, when distributors were asked why sales decreased in 2001, they listed the economy and 9/11 as the main reasons. Several distributors said business had started to improve in September just prior to the terrorist attacks in New York and at the Pentagon. Distributors also mentioned other reasons, such as manufacturers moving offshore. One distributor said 15 percent of his customers moved out of the country last year. Plant closings, cutbacks in capital expenditures, and a declining OEM demand also were cited for the continuing slowdown.

But while most distributors experienced a decrease in sales, about 30 percent reported a sales increase last year. Why the growth? Some distributors said certain market sectors continued to do well, especially the construction market. Others said they grew their businesses by focusing on new market opportunities, eliminating unprofitable customers and raising their service levels.

"We focused on some of our smaller accounts," one distributor said, while another noted his increase was due to more sales to the government sector. Several distributors said they saw increased sales of safety and security supplies after 9/11.

Distributors also are optimistic about sales in 2002. About 57 percent of the respondents said they expect their sales to rise this year. The optimism was even higher among larger distributors (64 percent). It should be noted, however, that the survey was conducted in March and early April of this year and that the economy has yet to turn around. Follow-up interviews with several distributors show that some still believe the economy will recover, although not robustly, in the last quarter of this year or early in 2003. Construction distributors, safety distributors and niche distributors, in particular, especially seem optimistic.

Many distributors said they believe the economy is bottoming out. Interestingly, distributors said the economic slowdown caused them to refocus their company and put their energies into servicing more profitable customers. Others said they had picked up additional sales because their competitors had gone out of business, resulting in increased market share. They were particularly optimistic about the OEM market as capital expenditures (finally) take hold.

How do distributors intend to grow their business? Seventy-eight percent will add to their customer base, 44 percent will add to their lines and sell more to existing customers, while 29 percent will further specialize.

The survey also shows that there have been changes in the prime industrial markets distributors sell to. At the top of the list is general industry (79 percent) followed by construction (61 percent), machine/job shops (53 percent), government (51 percent) and the food industry (47 percent). The automotive industry (47 percent) and the aerospace industry (47 percent) have dropped significantly from the top-selling sectors. Some distributors say they have chosen not to sell into the automotive market because of poor margins; others said the automakers had dropped them as suppliers.

Distributors also identified other areas of end-market growth such as institutions/hospitals, electronics, and the medical, hotel, pharmaceutical, telecom, appliance and marine sectors.

In addition, the survey shows that distributors are still pretty much an independent bunch. Only 15 percent of the respondents are members of a buying or marketing group. The percentage was highest among the larger distributors (24 percent). Another 11 percent indicated that they are contemplating joining such a group.

Of those who are members of such a group, more than 90 percent said membership has had a positive impact on their businesses.

Some of the benefits include: access to product lines, rebates, cost savings, employee education, pricing benefits, and better access to certain customers. Others noted that buying groups have opened the doors to national contracts.

Also, there has been no substantial growth in alliances among independent distributors. Only 10 percent have joined an alliance.

The top concern for distributors is price competition (58 percent), according to the survey. That concern is followed by economic conditions (52 percent), manufacturers selling direct (42 percent), distributor competition (33 percent), finding more qualified people (23 percent), manufacturers selling to non-authorized integrated suppliers (20 percent) and keeping qualified employees (19 percent).