To read some of the reports in the trade magazines, one would think distributors are approaching nirvana after a string of negative growth years. Everything is coming up roses, or so it seems. For some, sales are up at double-digit rates. Some distributors are picking up share, and profits are the best ever. How can that be? Clearly, it can't be happening to everyone. Why are some distributors doing so well in a year that hasn't taken off yet for the industry overall?
A couple of reasons come to mind. First, it's a big market out there. With annual industry sales at more than $65 billion, obviously someone has to be selling $65 billion of supplies and apparatus — even though growth has been negative for the past three years. So, some electrical distributors are doing a good job of marketing in a soft environment.
Opportunities still exist to stay ahead of the overall market, which is made up of many niches. A highly visible example is the distributor-served residential market. Some distributors have capitalized on small-project construction and found ways to grow sales during this sluggish period for electrical distribution.
True, many distributors and vendors have had to cut resources, but others have found niche opportunities and managed to increase, or at least maintain, service capabilities. As a result, those electrical distributors have held or even gained share. At the same time, other distributors have pushed ahead with acquisitions, the recession notwithstanding.
For some distributors, increasing sales through acquisition is a perfectly valid way to measure performance. Although I would not disagree with that performance measure, I do think it's important to analyze other performance measures as well. If one wants to measure how well operational resources are managed, same-store sales would be a good yardstick.
If your business has not grown over the past few quarters or so, you are not in the minority; you are very much in the majority. Here's why.
The single most important driver of distributor sales, nonresidential construction, has been negative for the past three years. For the first half of 2004, it's down almost a point and a half from a year earlier. Nonresidential construction covers lots of territory: office buildings, shopping centers and factory buildings, as well as mining and exploration spending. In the aggregate, these components of nonresidential building have witnessed negative growth, so on this basis industry performance is going to be weak.
Within each component, however, incremental opportunities exist. Many distributors will find and draw on those opportunities. The point is, your business may focus on one segment or sub-segment of the overall market drivers and your company's performance could easily diverge from the total industry performance.
Although DISC Corp. forecasts the distributor-served contractor market off about 1.5 percent in the first quarter, your contractor business could behave quite differently. Why? Not only because you may be tapping into the strong residential market but also because you may be capitalizing on other nonresidential construction projects. Construction has not gone to zero!
Any recovery is marked by incremental business. Projects come online slowly at first and then grow in increasingly larger increments. That is what we are seeing now, particularly in the distributor-served contractor market.
At the same time, evidence clearly shows the distributor-served industrial market turned the corner the middle of last year. Distributor industry sales have increased for the past three quarters, albeit at low single-digit rates. But there is consistency.
DISC Corp. expects distributor industrial sales to trend up from about 4.5 percent growth in this year's first quarter to about 8 percent growth in next year's 3rd quarter. From there, we expect it to begin trending down every quarter throughout our forecast horizon, which goes to the end of 2008. This is DISC's method of estimating what the current business cycle for electrical distributors will look like. (No, we are not predicting a recession at the end of 2008).
This year, the overall economy in the 2nd quarter was a little softer than expected. Nevertheless, the indicators that drive the electrical industry have performed a bit better than we were expecting in April. As a result, DISC Corp. has boosted its 2004 forecast to 3.6 percent overall, up from April's 2.4 percent. It's not much of a boost, but the message is the electrical industry's recovery has finally arrived.
For the distributor-served industrial market, DISC now also expects greater growth than predicted in April. DISC Corp. now forecasts a 5.9 percent industrial-market increase for 2004.
DISC was a little low on inflation expectation and has raised that to nearly 5 percent for 2004 overall. We are well aware of the same rising prices that you are seeing. The difference is that we are able to fold those price changes into the direct impact on the electrical distribution industry.
Getting back to performance measures, one measure of performance frequently used by some vendors and distributors is quarter-to-quarter growth. All DISC Corp.'s numbers are adjusted to take into account seasonal differences. This way, DISC Corp. can measure quarter-to-quarter growth just as accurately as year-over-year growth. The comparative numbers are quite different, of course.
For example, measuring 2nd quarter growth this year for total sales over first quarter growth is 7.3 percent. But if you measure the same total sales from the same quarter a year earlier the change is 3.3 percent. The reason? The base is different. If you are measuring your quarterly growth number and comparing it to ours, be sure it's the same time frame. If it's quarter-to-quarter, be sure you adjust for seasonal differences in your own sales numbers.
I wanted to emphasize two things in this article. First, the recovery in the electrical industry is clearly underway — already some distributors and vendors are experiencing increasing business and in some cases even double-digit increases. This is a normal pattern in any recovery. It is another piece of evidence that the worst is over and we are on the upswing in the current cycle.
Second, although the electrical industry is in a solid recovery, we are not looking for any double-digit industry growth in the foreseeable future. More to the point, looking at DISC's long-range outlook for the next five years, I do not see any quarterly changes in any of the four major segments that predict double-digit growth. This is not a high-growth recovery, but it is one that has some legs. So now is the time to get aggressive and think growth — at least in the short term.
Herm Isenstein is president of DISC Corp., Orange, Conn., the market analysis and forecasting firm specializing in the electrical wholesale industry. Contact Isenstein at [email protected] or at (203) 799-3673.