The 65th Annual Survey: Challenges, Trends & The Economy

This article originally appeared in the May/June 2012 issue of Industrial Distribution. To view it in its original format, click here.

As industrial distributors continue to weather the fluctuations in the marketplace, economic concerns will linger. It’s clear that the worst years of the recession have left an indelible mark on business owners. As the economy has improved steadily, we still haven’t seen the mass “exhale” that many thought we’d see as access to cash improved and orders increased. Last year, 58 percent of survey respondents cited economic conditions as their primary concern. This year’s respondents came in close to the same number, with an increase of one percentage point.
 
The reasons for this slight increase in economic concern likely include several issues:

  • Political grandstanding between disparate agendas in the House and Senate, as well as an impending presidential election, have caused many businesses and consumers to adopt a wait-and-see approach, continuing to hold onto cash reserves and hesitate before making big investments.
  • Despite improving indices in market reports (the latest ISM Manufacturing Report on Business economic activity in the manufacturing sector expanded in March for the 32nd consecutive month), job creation has lagged. A February 2012 statement by chairman of the Federal Reserve, Ben Bernanke, warned that, despite bright spots in recent U.S. economic reports, unemployment probably would stay high and the nation’s recovery would remain slow for the next several years.
  • Residential construction markets have failed to bounce back despite improvements in other economic sectors.
  • The European financial crisis has tempered the U.S. recovery by creating instability in markets worldwide.

Figure 1: What is your primary growth strategy?

Besides the economy, high on the list of distributor concerns is also price competition, cited by 45 percent, and increased operating costs (34 percent). Low on their list of concerns were the environment, distribution termination, mass merchants, and manufacturer consolidation. E-Commerce being cited as a “concern” increased three percentage points, suggesting some distributors may be becoming anxious over their own lack of web procurement offerings. For more who answered in the write-in category, government policy issues dominated the feedback — most notably concerns over potential changes in health care — as well as issues of procurement and lead time. One respondent said “cutting inventories to adequate levels” was a cause for concern for his/her company.

While there are some things outside of a businesses’ control, there are also many ways distributors are taking the reins for proactive growth. Of their strategies, to grow sales among existing customers was the primary intention for 80 percent of our survey respondents. Seventy percent said they plan to add to their customer base, and nearly 40 percent have a specific competitor in their crosshairs, saying their strategy is to eke market share from another organization in their space. Other popular methods for growth include focusing on growing industries, internet sales, and by training existing salespeople. Initiatives that are not a focal point for most include diversification into non-distribution activities/businesses, charging fees for services, and attending more conventions or trade shows.

Figure 2: In the past, have mergers and acquisitions affected your business?

Figure 3: Compared to 2011, how do you see M&A affecting other distributors?

Speaking of market share, the distribution space did not shy away from mergers and acquisitions as a growth and diversification strategy once again in 2011. “One thing is certain: the last year has seen a broad resurgence in middle market M&A activity generally and specifically within the distribution industry,” explained Curt Tatham of Lincoln International in an exclusive M&A analysis for Industrial Distribution in December. “There are currently a healthy number of industrial distribution deals in the market and the pipeline of pending deals shows no signs of slowing.”

So, with 2012 half over, what do our readers have to say about 2012 thus far? When we asked how survey respondents had seen mergers and acquisitions affecting their own businesses over the last 12 months, the majority (75.6 percent) said their company was not approached in regards to M&A activity. A touch over 19 percent said they were approached but a merger/acquisition was not successful, and 5.4 percent said their company merged/was acquired. The shifts from 2011 show that M&A activity, at least so far, has been less overall.Last year, nearly nine percent of respondents said their company had merged or was acquired in the previous 12 months.

These statistics have increased steadily since 2004, when only three percent said their company merged/was acquired in the year previous. It will be interesting to see if this trend continues to increase incrementally in the upcoming years.

When asked their viewpoints on how M&A activity was affecting other distributors, 31 percent said they thought more distributors would consolidate compared to 2011. This is a full seven percentage points less than the size of the group who thought the same last year. 16 percent think fewer distributors will consolidate. This falls in line with a shift we saw throughout the last decade, when those being approached for mergers spiked from 2007-2009. Perhaps the worst of the recession years encouraged those with strong cash flow to assess industry competition and attempt to take advantage of a weak market through consolidation.

Figure 4: Would you be agreeable to a buyout?

Figure 5: Are you actively looking to purchase another distributor?

In terms of our survey respondents level of interest in M&A as a growth strategy:

  • Seventy-seven percent said they would not be agreeable to a buy-out, meaning nearly a quarter would. This group shows a distinct change over years past: Of our 2008 respondents, 35 percent said they’d welcome an acquisition offer; 34 percent said the same in 2009, and 26 percent in 2011.
  • More than 30 percent said they are actively looking to purchase another distributor. This statistic has fluctuated somewhat over time but the last decade has, ultimately, shown marked growth in this area. For example, in 2002 and 2003 only 18 and 16 percent (respectively) said they were on the hunt for new acquisition targets. This number reached a relative peak in the latter part of the first decade of the 2000s (spiking as high as 37 percent in 2007), but has since maintained around 30 percent this year and last. It’s possible that the business case for consolidation became greater and the shift in thinking patterns among distributors as to how they might grow their market share has since rigidified.

Interestingly, survey respondents also see M&A activity driving the objectives of their manufacturer-suppliers, with 25 percent saying they think more of their suppliers will consolidate in the coming year. This number is down from 30 percent who said the same last year. Still, only six percent cited manufacturer consolidation as a primary concern (Table 1, page 16), so it’s unlikely this prediction carries much weight with the ID reader.

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