Early Thoughts on the 2020 Outlook for Distribution¹

“In speaking with more than a dozen distributors and manufacturers who recently took MDM’s Trends survey, we touched on important topics of the moment that will continue to be issues heading into 2020. Chief areas of discussion that have the potential to define success or trigger a slump next year included recruiting and retaining talent, effectively managing technology and the state of the economy as it weathers the impact of America’s ongoing tariff dispute with China.

While talk of a possible downturn is common these days, John O’Brien, director of distribution sales for the electric motor and variable frequency drive division of Toshiba, says he’s not buying it. His sales group is close to 100% of last year’s numbers—and 2018 was a huge year for business with 22% growth, he says. Responsible for all distribution in North and South America, O’Brien says, ‘I feel pretty good. When I'm talking to my customers, they say the same thing. … So, I don't know if people are talking us into recession, but I haven't seen it yet.’”

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The Path to Distribution Growth Has Changed¹

“Some years back, a distributor was as good as their worst salesperson. Customers bought from representatives they trusted and had served them well in the past. If we’re honest, the company itself had little to do with the bulk of the transactions and the key driver was the sales rep, not the company. 

Fast forward to today and the landscape has shifted. The role of distributor trade associations, buying groups, geographic branch expansion, the rise of central distribution centers, specialized sales roles and technology have fundamentally changed customer expectations. The sales rep still holds a prominent role, but customers are holding companies to much higher standards. 

If distributors want to compete, they need to start asking themselves some hard questions and then change what isn’t working. Do you have higher profits and growth than your competitors, and, if you don’t, what are you going to do about it?

Michael Porter, Harvard professor and well-known strategy guru, called this ‘competitive advantage.’ Successful distributors adapt to the market. This ability to pivot to changing demands allows them to experience fewer sales and profit declines in recessions than their competitors, capture share when the economy recovers, and create more profit and experience higher growth during economic expansions.”

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The Flaws in Using Gross Margin as a Business Performance Benchmark¹

“In a presentation at MDM’s Pricing & Profitability Summit earlier this year, Randy MacLean, president of WayPoint Analytics, questioned distributors’ broad use of gross margin as a business performance benchmark. His premise: Widespread misuse of gross margin is the most common dysfunction in wholesale distribution. ‘Gross margin isn’t enough to understand what’s going on,’ MacLean said.

Many distributors are still stuck in the gross margin mindset, but leading companies are realizing they would be better off shifting their focus to their bottom line, he said.

‘Understanding where you’re making and losing money makes all the difference in the world. Because then you can focus on the things that are making money and you can get away from the things that are losing you money,’ MacLean said during the session, How New Analytics Are Producing Super-Profitable Companies. ‘That differential is huge.’”

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Distribution Trends

LTM EBITDA as of January 8, 2020

M&A Trends

Recent M&A and Private Equity Trends³

• US private equity deal activity topped 5,000 deals at ~$633B of total transaction value in 2019
• US private equity fundraising hit record highs in 2019, with over $300B raised despite a reduction in fund count
• Purchase multiples remained elevated at a 10.9x median for the year (a decrease from a 11.5x median in 2018)

A Snapshot of Key Economic Indicators

As of January 8, 2020

Note: A Manufacturing Inventory Index figure greater than 50 indicates expansion;
A Backlog Index figure greater than 50 indicates expansion.

1. Modern Distribution Management

2. CapIQ

3. PitchBook

4. United States Census

5. U.S. Federal Reserve

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