Industrial distributors entered 2020 already in a tough spot. During the second half of last year, a notable slowdown in demand for industrial products carried into early 2020. And with no sign that considerable recovery was on the way — especially given that it’s a presidential election year — many firms were likely expecting to weather a less-than-stellar financial year.
And then COVID-19 arrived.
The pandemic upended industrial buying habits and put many industrial distributors in an unfamiliar and uncomfortable position of suddenly being relied on as providers of crucial personal protective equipment. For those distributors that already sold heavy into product lines of respirator masks, face shields, single-use gloves and jansan supplies, they began the pandemic in much better position than those without.
Meanwhile, with local governments enacting business shutdowns — almost nationwide in the second half of March through all of April and then a hodgepodge of closures and reopenings since — all kinds of industrial buyers from heavy manufacturing factories to schools and restaurants drastically reduced their capital spending.
“For example, our hospital system has been heroic in dealing with the pandemic and saving lives, and their pandemic product demand has been enormous,” Grainger chairman and CEO DG Macpherson explained in the company’s July 23 Q2 earnings call. “But many of their normal facilities maintenance projects have been put on hold through this time to focus on COVID, which means that even hospitals had lower non-pandemic sales through the last four months. There’s a backlog of work that will need to be done in the future. But for now, customers in all industries are focusing on keeping people safe and recovery.”
In the MRO sector, its biggest North American distributor shed light on just how hard the market has been hit. In its Q2 earnings release and conference call, Grainger said it estimated that the US MRO market declined between 14 and 15 percent year-over-year during Q2.
This came after metalworking products distributor MSC Industrial Supply (No. 8 on ID’s 2020 Big 50 List) on July 8 reported a 3.6 percent decline in year-over-year sales in its March-May period, with that figure including boosted sales from safety and janitorial products. MSC said weakness in industrial demand was essentially across the board, with sustained and acute softness in metalworking-centric end markets that include automotive, aerospace and oil & gas.
Fastenal then reported its Q2 financials on July 14, showing that its sales actually jumped 10.3 percent YoY, but that was largely due to the benefit of surge sales of PPE products. Fastenal’s Q2 fastener sales were down 22.5 percent in April, down 15.3 percent in May and down 11.4 percent in June.
Grainger’s total Q2 sales were down 1.9 percent year-over-year (YoY) despite a continued surge in business from pandemic-related products. Daily sales of pandemic products were up 62 percent YoY in April, up 86 percent in May and up 67 percent in June. But it wasn’t enough to offset weakened demand in Grainger’s core MRO business, as non-pandemic sales were down 21 percent in April, down 17 percent in May and down 13 percent in June.
MRO Green Shoots
But at the same time, Grainger and Fastenal’s non-pandemic sales figures provide some optimism. After bottoming out in April, when US pandemic conditions were at their worst, Grainger’s core sales have improved. And they’ve continued to improve in July, as the company said that July 1-July 20 sales of non-pandemic sales improved to down 11 percent YoY.
“The good news is that we have seen a steady improvement in non-pandemic revenue across all customer types,” Macpherson said. “It’s still below pre-pandemic levels, but it has improved. While we don’t know how this will progress, we do feel good about our ability to help customers weather the storm regardless of how the pandemic evolves.”
Grainger said it was able to gain roughly 1,200 basis points of MRO market share growth during its Q2, up 70 percent since Q1. But again, that includes pandemic-related sales.
“We think we gained share throughout all product categories,” Grainger CFO Thomas Okray said on the earnings call. “Whether we gained more or less share with non-pandemic is really, really hard to do. My guess is it’s less, but still very strong.”
iStockIn our weekly Industrial Buyers Breakdown video series, Cortera CEO Jim Swift showed us last week that his company’s COVID-19 Economic Impact Tracker found that spending has considerably improved across a handful of industrial buying sectors — though is still very subdued compared pre-pandemic levels — since bottoming out between April and May.
The data included:
- Transportation equipment manufacturers’ spending improved by 41 percent from May to June, ending June down -42.4 percent YoY, led by end markets of rail, transportation supplies, metals and industrial equipment. Buyers’ purchasing of industrial supplies also increased 6 percent.
- For machinery manufacturers, their June spending increased 4 percent from May to June, ending June down -20.5 percent. Buyers’ spending on industrial supplies increased 13 percent, tied for second-most of all categories.
- Cortera’s data showed that chemical manufacturers have had the biggest uptick in industrial supplies buying, followed by machinery manufactures, fabricated metal product manufacturers and transportation equipment manufacturers.
Again, these increases include spending on safety and jansan products tied to negating the spread of COVID-19, but higher industrial spending is a good thing for all industrial distributors.
Of course, the million-dollar question right now is “how long with this pandemic last?” And unfortunately, just like it was in March, no one really knows the answer. With daily cases of COVID-19 and recorded deaths rising again through most of July in the US, it appears America is still a ways away from resuming any form of business as usual. It’s looking more and more like large-scale vaccine distribution is the US’ only way out of this, and the estimated time of arrival for that is also unknown.
Regardless, it appears that for MRO products distributors, the worst may be over. But I knock on wood as I type that. The good news is that data since the start of July shows that industrial spending continues to improve as businesses continue to find organized means of operating safely amid the pandemic.
And while most of the MRO distribution market is comprised of firms much smaller than Grainger, I hope that most of the market shares the same sentiment that Macpherson relayed on July 23 when asked if 2021 could be a significant inflection year.
“It’s a reasonable assumption. I think pandemic aside, how it evolves,” he said. “But yes, we felt like this year was going to be significant improvement. We started to see that in the first couple of months and then, of course, the world stopped. So we feel like we’re well positioned when things do come back for it to be an inflection.”