Cleveland—A new report analyzing the distribution sector underscores the air of cautious optimism that's pervaded the industry since late last year.

In its "Distribution—2003 Review," Brown Gibbons Lang & Co. said that while the U.S. economic recovery began in early 2003, the effects weren't felt until late 2003, and that today, the overall economic outlook in 2004 bodes well. The study analyzed the distribution sector, with input from senior executives at distribution companies worldwide.

According to the review, almost all the economic indicators, except job growth, support the thought that 2004 will be the turnaround year for which everyone in distribution has been waiting. As to problems that will remain for distribution, BGL listed a shrinking customer base, the need to do more with less, slowed but continued distributor consolidation, rising health care and litigation costs, squeezed margins, highly competitive markets, constantly changing customer dynamics, channel confusion and asset management issues.

In summarizing those problems, and in the context of the competitive environment of the distribution industry, the review stated, "Distributors need to demonstrate in order to survive in the long run that their involvement in their customers' supply chain reduces their customers' costs of doing business. Without this characteristic, distributors are ultimately exposed to highly competitive forces, either now or in the near future."

Also, BGL said its Distributor Index of 24 publicly traded distributors finished 2003 up 30 percent, outperforming both the Dow Jones and the S&P 500. As examples, BGL lists DXP Enterprises, Inc. and WESCO International, Inc.'s 278 percent and 219 percent rise, respectively, and Hughes Supply, Inc., Industrial Distribution Group, Inc., and Park-Ohio Holdings Corp.'s gains of more than 100 percent each.

Excluding Strategic Distribution, Inc., which saw revenues plummet 32 percent due to some service contract termination, revenues in the BGL Distributor Index grew an average 1.6 percent in '03, up from last year's 3 percent decline.

Also in the review, BGL showed an increased level of acquisition in the distribution arena from 2002 to '03, citing that while three dozen distributors were acquired in '02, four dozen were acquired in 2003. BGL stated that the data should not be interpreted as definitive evidence that the strategic buyers' market is back to full force in the industry.

BGL said consolidation activity will be relatively slow in the early to middle part of '04, before increasing in the latter portion of the year and thereafter.

The two factors contributing to this, according to the review, are that there should be fewer distributors that are forced to sell in this economy, and that distributors who were prepared to sell prior to the economic downturn instead spent the last years streamlining their processes.

According to BGL, this adds to an outlook for the distribution industry that is cautiously optimistic with identifiable hurdles.

"While the general economy improves and the customer trends of outsourcing and channel management persist, distributors will continue to face significant issues and competitive dynamics. Given the mixed bag of news, distributors are likely to continue to focus on improving gross margins, cost containment, asset management, and growth through acquisitions and consolidations," according to the report.

If you want to get a copy of the report, please contact Jim Miller at Brown Gibbons Lang & Company, jmiller@bglco.com.