Delivering for Best-in-Class Wholesaler-Distributors

This article is written by Alan Beaulieu, NAW Senior Economic Advisor, and President of ITR Economics. Data in this article is accurate as of March 31, 2020.

OVERVIEW

PRELUDE

What follows is how the Wholesale Distribution industry stood at the end of 2019. Those were seemingly the days when our troubles seemed smaller. We will return to such days in a few months — everyday hassles and decision-making will replace today’s crisis management.

COVID-19 is likely to peak in terms of infections and deaths in April or May and at much lower levels than have been proffered by the media. The aftereffects will last through the rest of the year. The problems in the oil industry are ultimately more troublesome. Our forecast for 2020 assumes that the Saudi–Russia market share war, including what appears to be an assault on the U.S. fracking industry by Russia, will also be over with by mid–2020. That would align with the historic duration for previous OPEC-related oil disputes. A prolonged pricing action by either or both countries could lead to significant issues for some wholesaler-distributors and for segments of the U.S. economy.

The CARES Act of 2020 is available to help with payroll and daily operations. We encourage you to avail yourself of the lifeline if you need it. A major concern is that the money will take too long to get to the individual consumers who are the backbone of the economy. Business-to-business spending will be impacted depending on the industry segment in which you participate. 2020 will be a difficult year for most distributors. However, the worst should be over with by mid–2020.

We are projecting that GDP will experience a recession in the first half of 2020, but it will not be as severe as the Great Recession. Expect a rebound in GDP in the latter half of the year. U.S. Industrial Production, a key metric for many distributors, is expected to be in recession into the first quarter of 2021. It is key that firms in Wholesale Distribution know whether their own rates-of-change align with GDP or with U.S. Industrial Production.

REVENUES

Generally speaking, the Wholesale Distribution industry experienced a fairly lackluster 2019 as far as revenue is concerned, with growth for the year coming in at a slim 0.6% above 2018. The latter half of 2019 contained the most disappointment with a steeper-than-normal third-quarter decline in the three-month-moving total and a fourth-quarter rise that was barely within the parameters of normal. Total Wholesale Distribution revenue ended the year at $5.970 trillion, just slightly below the April 2019 record high. GDP for the year totaled a record high $21.734 trillion with a growth rate of 4.0%. The Wholesale Distribution industry is 27.5% of U.S. GDP.

PROFITS 

The NAW 2020 Executive Summit in Washington reminded attendees to “Innovate to Dominate.” It would seem many distributors are in tune with that theme, as the industry posted significant profits in 2019. Presumably, distributors embraced productivity improvements that more than offset increased labor costs, resulting in healthy profit gains even as revenues produced a slim increase over 2018. U.S. Corporate Profits for Domestic Wholesale Trade Industries came in a stellar 17.5% above the same time last year (12MMA basis). Profits rose to $120.1 billion for the 12 months ending in September 2019 (latest-available data) but the 12MMA rate of rise was the mildest since the early 1990s. In addition, further slowing in the growth rate is anticipated into at least early 2020.

Profits in the industry outperformed the manufacturing industry through the same time period (September 2019), as Exhibit 1 shows. Manufacturers saw third-quarter profits come in 8.1% below the year-earlier level with further cyclical decline indicated. The manufacturers profit 12MMA has been in a generally declining trend since a March 2015 record high.

INVENTORY

Wholesaler-distributors of durable goods reigned in inventory growth in the last quarter of 2019. The increase was a thin 0.74% from the annual average in September 2019 to the annual average in December, substantially milder than normal. Nondurable inventories moved higher in the fourth quarter at a normal pace. Wholesaler-distributors of nondurable goods should be careful given the economic difficulties projected through June. Supply chain issues are an issue in many industries. Alternate sourcing and customer conversations will be key when customer demand increases later in 2020 or in early 2021, depending on which market segments distributors serve.

OUTLOOK

The ITR Leading Indicator™, shown in Exhibit 2, is one reason distributors should actively plan for a recovery later in 2020 or in early 2021, depending on your relationship to our premier leading indicator. Cash planning will be extremely important, as wholesaler-distributors must plan on trimming inventory and payrolls if necessary. Capital expenditures may be a good idea right now, as the fear and shock to the economy can produce some great bargains.

Wholesale Trade of Durable Goods accounts for 48.0% of the industry while Nondurable Goods are 52% of the total (up from 51.6% last year). The two segments of the industry are in very different positions, as Exhibit 3 shows. The Nondurable Goods 12/12 is rising off a tentative November 2019 low. Durable Goods are 0.1% below the year-earlier level (12/12) and the rates-of-change are signaling further mild decline for the 12MMT as we move into 2020. However, the economic outlook suggests 12MMT decline for both Durable and Nondurable Goods in 2020, depending on market segment.

MARKET SEGMENTS

Exhibit 4 provides a more detailed look at the industry by industry segments. Please note that sales growth at the company level will be harder to achieve.

TWO FACTORS TO CONSIDER

RETAIL SALES

Retail Sales are one of the keys to general economic expansion in the U.S. and, therefore, key to the Wholesale Distribution industry. There is a positive signal emanating from Retail Sales in that the rates-of-change are moving higher. However, we are projecting that the 12/12 rate-of-change will decline through 2020. Distributors serving the consumer goods market should expect a significant reduction in demand.

The recent dip in DPI growth and people’s concern(s) regarding the coronavirus could tie into the fading momentum we are forecasting for late 2020. Significant layoffs have occurred, and we can expect Retail Sales to be severely curtailed with the closure of stores in many states. Expect the Retail Sales 12MMT to move lower in 2020.

LABOR

Labor concerns are ubiquitous in the U.S., both in terms of availability and cost. The layoffs and reductions in force as of March 2020 should not lull you into thinking that labor will not be an issue going forward. The virus- and oil-fed problems of the first half of 2020 will disappear, and the available labor force will be gone.

The number of people working in this industry as of the end of 2019 was up to 5.938 million, the highest level of Wholesale Distrubtion employment in 11 years. Companies in this industry were having a hard time finding qualified labor, as demonstrated by the 214.1 thousand job openings. The current job openings were 1.4% above the same time last year, but down slightly from the June 2019 record high of 223.0 thousand. The slower growth in the industry took off some of the pressure to hire — thus, the easing in the job openings figures for the latter half of 2019. Employee retention in the industry is improving as evidenced by the quit level. The fourth-quarter-2019 quit level came in 14.9% below the year-earlier quarter.

The current situation (as of March 31, 2020) should be viewed as temporary. Leaders need to deal with the present crisis without losing track of the fact that the long-term view is still viable and worthy of attention and planning.

Alan

This article is written by Alan Beaulieu, NAW Senior Economic Advisor, and President of ITR Economics. For more information, call (603) 796-2500 or visit https://www.itreconomics.com.

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