MDM’s quarterly survey in partnership with investment banking firm Baird reveals distributor revenues, though still shy of pre-pandemic levels, rebounded sharply in 3Q to form the beginning of a V-shaped recovery. Can the industry’s economic fortunes continue at that same pace?
Will the third quarter of 2020 prove to be the turning point wholesale distribution had been hoping for since the pandemic hit U.S. businesses last spring? According to the most recent quarterly MDM-Baird Distribution Survey, that answer is a resounding “yes.”
The latest data show that wholesale trade’s coronavirus trough wasn’t as low as many feared and that it has begun the upward climb of a V-shaped recovery that shouldn’t take as long as many predicted.
Distributors, as a whole, posted average revenue of -3.2% in 3Q (July through September). The decline was 80 basis points above the forecasted revenue dip in the quarter and about 260 bps below 1Q, the last pre-pandemic quarter (though even the tail end of that period was affected).
Unlike last quarter, when only two sectors posted revenue growth, 3Q saw eight categories in the black: Pool & Spa (4%), Safety (3.5%), Roofing (2.9%), Lumber & Building Materials (2.7%), Landscape Supplies (2.4%), HVAC (1.4%), OEM Fasteners (1.1%) and Gases & Cylinder Rentals (0.1%).
The remaining 12 sectors posted revenue declines, though most moderated their losses compared with 2Q and only four saw decreases in the double-digits: Facilities Maintenance (-11.5%), hoses & accessories (-11.6%), mechanical/power transmission (-11.6%) and wallboard/gypsum (-11.9%).
The improvement from 2Q to 3Q hinged on distributors adapting to lockdowns and quarantines and finding ways to do business safely, according to Dave Manthey of Baird, the bank that has partnered with MDM on these quarterly reports since 2008. “The second quarter was really tough,” Manthey says. “Offices were closed, manufacturing facilities were shut down, commercial construction job sites were shuttered. We saw the aggregate revenue down about 10%, in the second quarter, across all of the distribution categories combined. In the third quarter, every category improved. Many of them still negative, but one of these ‘less bad’ situations. That was driven by offices starting to open and people starting to go back to work.”
This earlier-than-expected rebound is an apt reward for an industry that found myriad ways to navigate COVID-19 over the past seven months. As MDM has reported since the pandemic forced lockdowns and stifled economic growth, distributors adapted to economic turmoil by pivoting their product offerings, adjusting how they handle sales calls, enhancing their customer service efforts and more.
That’s not to say all is well in the state of distribution, however. The industry, like many, continues to reel from COVID-19 and has yet to return to pre-pandemic economic prosperity. And there will be plenty of bumps in the road in the current quarter and into 2021. But 3Q is a strong start for what the industry hopes will indeed be a prolonged V-shaped recovery.
Here are three key takeaways from the latest survey, which saw around 500 respondents representing companies with more than $100 billion in aggregate revenue:
1. The Trough Wasn’t as low as Many Feared
The big question heading into the heart of COVID-19 in the second quarter (especially April and May) was about how far would wholesale distribution fall. But the industry performed 1.5% better in 2Q than they had forecasted.
The same goes for 3Q which performed almost 1% better than expected. The tide began turning for distributors in the final month of the quarter, September, with companies across most verticals — but especially in construction — seeing their fortunes rise. “September was the first positive [growth] comp we’ve had in a while,” said one respondent to the MDM/Baird survey. “We now don’t have a single construction project shut down today.”
Indeed, the following sectors saw huge gains in September compared to July and August: Mechanical/PT (16.3%); Facilities Maintenance/JanSan (5.2%); Electrical (4.1%), OEM Fasteners (3.1%), Cutting Tools (2.9%), Hoses & Accessories (2.9%), General MRO (2.6%), and Datacomm (2.3%).
2. The Recovery Began Quicker
That September bump gave distributors some buoyancy entering the fourth quarter, says Baird analyst Quinn Fredrickson, who spotlighted a comment highlighting the general vibe of the survey audience. “Our weekly sales are in a fairly normal range. We’re not walking around saying we’re fully recovered, but things have certainly gotten better.”
Fredrickson adds: “Early on in this pandemic, day to day or week to week things were just so crazy and unpredictable. That particular respondent was saying that usually, their quarters have a normal cadence to it: maybe they start slow but finish strong at the end of the quarter. At the bottom of the pandemic, it was hard to predict, but as the quarter came to a close, things started to feel a lot more normal for people. That’s the tone out there: We’ve settled into a little bit more of a predictable environment. Still down, but more predictable.”
Here are a few more comments regarding respondents’ expectations for the fourth quarter following a strong end to 3Q:
• “We feel a little more confident that the worst is behind us, but some end markets will be slow to recover.”
• “Will hunker down.”
• “It appears the market demand has stabilized at the 85% to 90% rate of pre-COVID.”
• “It moderates our projection.”
• “Remains the same. We expected momentum to build into September.”
• “Indicates the need for caution.”
• “Strong outlook. Incoming orders have been growing rapidly for the past two months.”
• “We are very cautiously optimistic – if this momentum continues, we expect to end 2020 flat despite the challenging March, April and May.”
3. Recruiting Tactics Have Changed
MDM asked companies how their recruiting tactics have been altered by COVID-19 and the response was mixed. Some are focused on replenishing their ranks: “We are back to full staff,” according to one distributor. “The last person was recalled in August.”
Others said they weren’t focused on hiring at the moment after they had to enact some layoffs: “We have had layoffs in areas where business has truly softened — machining and assembly,” a respondent said. “There are not any plans for adding staff through 2021.”
Others still said that business had returned, and they needed the staff to accommodate it: “Hiring was on hold but the increase in business has required us to fill open positions,” this respondent said.
Here are a few more comments on this topic:
• “We are still looking for great talent.”
• “We still have a hiring freeze.”
• “We have resumed activities, with distribution centers at full capacity. Office staff working remotely.”
• “Replacing departed personnel only as necessary.”
• “Hiring has slowed. We have increased our digital activities.”
• “Digital talent continues to be in high demand. Looking to consultants and agencies for implementation and operations support.”
• “Hiring for key, revenue-generating roles has resumed.”
• “Hiring a few for service support, but overall, not hiring and recruiting much at this time.”
• “We hire to fill openings; we are not adding heads otherwise.”
• “We have resumed hiring assembly workers with our value-add increasing. Difficult finding people wanting to come back to work though.”
• “We have put new hires on hold and evaluated the need to replace on a case-by-case basis as turnover has happened.”
• “Hiring freeze implemented in April, hiring resumed in August.”
• “We have hired where it has been necessary. Overall, we have been a little more cautious with our hiring needs.”
MDM will have the 4Q recap and revised distributor expectations for 2021 in January. For deeper analysis of how wholesale distribution and individual sectors are expected to perform in the coming quarters and years, see our new report, Markets Forecast.