In mid-2003, electrical distributors are still mired in the throes of a recession that doesn't want to quit. The economy overall is moving along at a snail's pace, with growth in the first quarter of 2003 up 1.9 percent (an annual rate) from the fourth quarter of 2002.

But it's not much consolation for vendors, reps and distributors to know the overall economy is growing while electrical distributor industry sales continue to fall. Industry sales tumbled from a peak of $76 billion three years ago when sales grew 11 percent, to an expected $65 billion for this year (down 2.5 percent from the 2002 level). This is a cumulative decrease of close to 15 percent.

I don't know anyone who has correctly and consistently picked the cyclical turning points for this industry or for the overall economy. Having said that, if we define a turning point as the change from negative to positive growth, electrical distribution hasn't yet turned the corner. And we won't witness that blessed event until the fourth quarter of this year, at the earliest. Technically, this is the standard definition of a turning point. However, if you narrowly define a turning point as a change from the greatest negative percent change to an improving negative percentage change, we appear to have passed that point in the first quarter of this year.

While total industry sales for most vendors and distributors are important, we must really focus on the major segments the industry serves. It's these segments that we find significant differentials that either pose problems or present opportunities. The problems are obvious. Negative growth means reducing head count, reducing marketing expenditures, and cutting back on other resources in order to protect your bottom line.

But opportunities exist, too. Industry sales have not gone to zero — they are lower than they were a year ago. If you can serve different segments, then you have an opportunity to move resources from the weaker growth segment to the stronger growth segment, even though both may be experiencing negative growth. If you are doing a good job of “operational planning,” you already know your weakest and strongest competitors, so you know your targets.

Take a look at the chart at the top of this page. It highlights contractor and industrial sales to illustrate differential growth and turning points for distributors. Businesses serving the contractor segment clearly have not experienced a turning point through the fourth quarter of 2002, and I do not see a turn anytime in the near future, in fact not at all during this year.

For the distributor-served industrial market, we have already turned the corner on one definition. Growth — although continuing negative — has been steadily improving since the first quarter of last year. It has been nice steady improvement. On that track, we expect distributor sales to industrials to break into positive growth territory by the end of the second quarter of this year. The second quarter is the true turning point if my company's call is correct.

Two things to keep in mind. First, my forecast is for all companies industry wide. I track the behavior of all distributors combined, not any individual business. Second, unlike you as an individual business, my company does not get actual data within a few days of the closing of the quarter. I am dealing with industry-wide data, and it lags by a quarter.

The message in the chart is simple. To the extent that you can, try to concentrate on serving the stronger growth segment. (These two segments combined comprise around three-fourths of total industry sales). Secondly, the worst may be over, but we've got several more quarters of negative growth before we can comfortably say this recession is behind us, when total distributor sales are firmly in plus-growth territory.

With this as background, let's take a look at our best point forecast for this year and a preliminary look at 2004. Basically, this year cannot be a growth year for the industry. There's no chance of that happening, because too many important economic drivers are not in position to impact distributor sales in a positive way.

The distributor-served contractor market continues to take a beating, mainly due to large project construction reflecting the downturn in commercial and industrial building construction. At the same time, we are burdened by considerable excess capacity. Manufacturing capacity now stands at about 72 percent — the lowest utilization rate in more than 15 years. In fact, in the 1991 recession that rate was a good six points higher than it is currently (78 percent).

Look for industry sales to decrease this year by around 2 percent to 3 percent in total. The big losers will be the contractor and industrial markets — contractor sales will be down 8 percent to 9 percent, the strength in the residential market notwithstanding. The excess capacity in the nonresidential sector simply overwhelms the residential side.

We could see low single-digit growth in the industrial market if the fourth quarter performs as expected. We are starting to see a glimmer in business investment plans to begin modernizing of equipment, and that should help our industry.

At this point the outlook for 2004 is problematic. We are seeing rosy reports on the expected impact of the recently enacted tax bill calling for tax cuts of $350 billion. The big question is what will it do for economic growth overall and secondly what will it do for the business sector. It looks like the greatest impact initially will be on the consumer sector and a later impact on the business sector. For electrical distributors, the rubber obviously meets the road in the business sector.

My outlook for next year is for industry sales to grow in the 5 percent to 6 percent range with zero inflation. That means physical volume growth in that same range. My company's models still say the greater strength is in the distributor served industrial market followed by the contractor market.

In early July, I will crank our economic models with the latest analysis of the expected impact of the tax cut on distributor industry sales. I will have an updated read on 2004, and we'll keep you posted.


The author is president of DISC Corp., Orange, Conn. You can contact him by phone at (203) 799-3673 or by e-mail at sales@disccorp.com.