With a slowing economy and the possibility of a recession increasing, corporate profits could be under pressure.

However, many industrial distributors view economic slowdowns as a time to pick up market share from competitors with limited financial resources. Although the market opportunity for distributors is extremely large, it is highly fragmented and mostly characterized by thousands of smaller firms servicing a specific regional market. That leaves ample room for market share gains.

Distributors can gain market share during economic slowdowns be-cause collection periods are stretched as purchasing managers look for suppliers who can extend credit that will help them free up much-needed cash.

However, many distributors don't have the financial capacity necessary to extend the credit customers are looking for, which leads to fewer customers and lost market share.

On the other hand, distributors with vast financial resources will be able to extend the credit customers require, allowing them to retain customers and accumulate new ones.

A good example of this philosophy is Fastenal's strategy to aggressively build its branch network in the first half of 2001. This will position Fastenal to take advantage of higher sales volumes when the economy improves, while taking market share from weaker competitors whose sales are dramatically slowing.

MSC is aggressively attacking the market during this economic slowdown, as well, by building out its sales force, which will be used to penetrate existing accounts rather than prospect for new ones. The effort will help prepare MSC to take market share from ailing competitors and establish better long-term relations with customers by becoming their total MRO solution.

Although top- and bottom-line growth rates will be under pressure during economic slowdowns, quality industrial distributors with sufficient financial resources usually emerge with greater market share.

David J. Manthey, CFA, is a research analyst with R.W. Baird & Co., Milwaukee, Wis. He can be reached at (414) 765-3774 or via e-mail at dmanthey@rwbaird.com.