Delivering for Best-in-Class Wholesaler-Distributors

This article is written by Alan Beaulieu, President of ITR Economics. Alan also serves as NAW Senior Economic Advisor.

OVERVIEW

Generally speaking, wholesaler-distributors probably experienced good growth in their top lines and some growth in profits in 2018. Most segments of the industry experienced record-high levels of activity. Wholesale distribution in total reached a record-high $6.01 trillion for 2018, up 7.5% from 2017. Our industry is a truly impressive 29% of GDP.

But before we get carried away with the good news, it is important to note that slowing growth is now occurring in the industry and will characterize all of 2019, extending into early 2020. The current 12-month growth rate (12/12 rate-of-change) is 7.5%, but the quarterly growth rate is a smaller 4.7%, confirming that the industry is on the back side of the business cycle.

Distributors need to be very cautious in their sales-growth expectations for 2019; it will not be a repeat of 2018. In general, expect a smaller year-over-year growth rate with all the attendant implications for inventory management and cash flow.

Wholesale Trade of Durable Goods, which accounts for 48.4% of the industry, has been in Phase C (slowing rate of rise) since a July 2018 business-cycle peak. That deceleration in the rate of rise will be the defining characteristic through the near term, with increased negative pressures likely later this year and in early 2020.

Relative to the 7.9% year-over-year growth in the Durable Goods segment, Wholesale Trade of Nondurable Goods is a slightly smaller 7.0% above this time last year (12/12 basis). The Nondurable segment experienced a rate-of-growth peak in October, and the growth rate is falling quickly. The Nondurable Goods 12MMT stands at $3.102 trillion, 51.6% of Total Wholesale Trade, but the Nondurable Goods dollar trend stopped rising in November 2018 and pulled back slightly in December. More downward business-cycle pressure for the Nondurable Goods segment is indicated in 2019 and into 2020.

MARKET SEGMENTS

Figure 1 provides a more detailed look at the industry. Please note that eight of the 13 industry segments shown are in Phase C, Slowing Growth. That means these eight segments’ 12/12 rates-of-change are moving lower, and sales growth at the company level will be harder to achieve.

Figure 1: Industry Segments

Motor Vehicles, Parts, and Supplies; Hardware, Plumbing, Heating Equipment and Supplies; and Chemicals and Allied Products have slipped lower off November record-high levels. Lumber and Construction Materials began to descend off an August 2018 record high. More downside pressure is anticipated for 2019.

The slowdown in the wholesale distribution industry is occurring in conjunction with the general economic slowdown as shown in Figure 2. The fact that the slowdown was coming was clearly signaled by our ITR Leading IndicatorTM, which leads the Total Wholesale Trade 12/12 through highs and lows by eight months. The fact that our leading indicator is still declining means that distributors should expect the Wholesale Trade rate-of-change to move lower into at least late this year.

Figure 2

THREE FACTORS TO CONSIDER

There are three factors driving the slowdown in the economy and in our industry.

1. RETAIL SALES

Retail Sales have shifted to the back side of the business cycle (Phase C) as shown in Figure 3. The Retail Sales 12/12 has started to move lower, and the ongoing descent in our ITR Consumer Activity Leading Indicator™ shows that Retail Sales will continue in Phase C into at least the third quarter of 2019.

Figure 3

2. NONDEFENSE CAPITAL GOODS NEW ORDERS

Nondefense Capital Goods New Orders (excluding aircraft) have also moved into Phase C, as shown in Figure 4. A look at Copper Futures Prices, also shown on the chart, shows that the downward pressure on capex spending will likely last until at least late 2019.

Figure 4

3. EXPORTS

Many clients of distributors participate in exports in one form or another. Figure 5 shows that growth in U.S. Exports, currently at 7.6% year over year, is slowing. What you cannot see is that the 12MMT (not shown) stopped rising in November and edged lower in December. Distributors will find growth through exports to be extremely difficult. The downward pressure on exports is coming from three sources: a stronger dollar (shown in Figure 5), weakening demand as the global economy cools, and reciprocal tariffs from other countries. This is especially true of exports to China, which saw fourth-quarter-2018 results come in 31.5% below the year-earlier quarter.

Figure 5

EMPLOYMENT

Employment in the wholesale distribution industry has reached a record high of 5.9 million people, up 51,000 from last year. The industry employs 4.6% of the total private workforce in the U.S. For comparison, Walmart employs 1.5 million people in the U.S. and Amazon employs 647,500 globally. Wholesaler-distributors are clearly a vital part of employment in this country.

The 12/12 shows a 0.9% rate of growth in employment in the industry over the last 12 months, which is the fastest we have seen in three years. The quarterly growth rate (3/12) is even higher at 1.5%. Expect the very tight labor market to continue through 2019 and for years to come.

Wage pressure may ease slightly in 2019, but the upward pressure will still be there (see the definition at the end of this article). Wages in this industry are 3.2% ahead of this time last year (3/12 basis) with a record-high 3MMA of $31.11 per hour. Distributors must plan on increased efficiencies to offset the higher labor content as it will be difficult to arbitrarily raise prices in 2019 unless tariff surcharges can be put in place. Wages are going up faster in the Nondurable Goods segment of the wholesale distribution industry (3/12 at 4.4% compared to 2.8% for Durable Goods). Annual average job openings in the industry are a record high 211,833, so competition — and upward pricing pressure on wages — will be with us for the foreseeable future.

CONCLUSION

Distributors should compute their own rates-of-change and compare them against industry trends to gauge internal performance. A comparison to leading indicators will also indicate when you are approaching the next low in the business cycle (or, if you have yet to reach your peak, the next high). You should be very aware by now of a slowing rate of inventory turn in C items, even as you balance concern regarding an inventory build-up against the need for quick delivery on A and B items. The ability to anticipate a slowdown in demand will enhance your bottom line and cash flow. This is also a great time to evaluate which products have sold best in previous Phase C situations, and then concentrate your marketing and sales messages on those items.

Definition for U.S. Average Hourly Earnings for Wholesale Trade: Average dollars per hours worked for employees in wholesale trade. The National Compensation Survey defines hourly earnings as the straight-time hourly wages or salaries paid to employees. They include incentive pay (commissions, piece rate payments, and production bonuses), cost-of-living adjustments, hazard pay, and payments for income deferred due to participation in a salary reduction plan. Excluded are premium pay for overtime, holidays, and weekends, shift differentials, draws, nonproduction bonuses, tips, and uniform and tool allowances. NAICS code: 42. Source: U.S. Bureau of Labor Statistics (BLS). Measured in dollars per hour, not seasonally adjusted (NSA).

Alan

Alan Beaulieu

NAW Senior Economic Advisor

President of ITR Economics

For additional information, please call 603-796-2500 or visit https://www.itreconomics.com

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