Despite two winter storms that wreaked havoc on travel plans, the 150-plus attendees at NAW's 2004 Executive Summit had a sunny disposition on the state of the wholesale-distribution industry.
Economists, consultants and politicians at the meeting, held by the National Association of Wholesaler-Distributors (NAW), Jan. 27-29 in Washington, D.C., painted an optimistic economic scene for 2004.
Adam Fein, president, Pembroke Consulting Inc., Philadelphia, and author of NAW's newest “Facing the Forces of Change: The Road to Opportunity,” said distributors are living in a “rock solid” sector of the U.S. economy.
“I think we are going to look back on 2004 and say this was a great year for the industry,” he said.
However, Fein cautioned distributors that the methods they rely on to make money are changing, and that they must provide customers with new services to provide future growth. He said distributors will have to consider charging for some services they now give away for free, such as some types of delivery and packaging.
“The traditional model is buy low, sell high and collect early, pay late,” he said. “That will not work in the future.”
Mark Zandi, the president of Economy.com, Westchester, Pa., said financial stimulus from tax cuts and low interest rates were pumping money back into the U.S. economy and that manufacturers are now rebuilding their inventories. But he was concerned about another driver of the U.S. economy — consumer spending, and how much longer consumers can continue to buy new cars and homes at the current blistering pace.
Still, his overall assessment of the business outlook was a positive one. “This will be a good year for the wholesale distribution industry by any measure,” said Zandi. “The one soft spot is job growth, and it is better than it was six months ago.”
Zandi and Fein said another positive economic factor that will help distributors is obsolescence in the MIS and telecommunications industries. Because the average life of a personal computer in a business application is only two years, companies will soon reinvest in their computer systems, a trend the industry has not seen since the Y2K build up four years ago.
The telecommunications market will also start to improve, said Zandi, because its obsolescence cycle for new equipment is four years, and the last buildup was during the Web craze of the late 1990s.
Fein said despite an improving economic outlook, distributors could not rest easy because some powerful agents of change will transform many industries within the distribution channel. The trends, which he discusses in depth in the new study are customer self-service, strategic sourcing, fee-based services and pricing, and logistics and fulfillment.
He said an interesting development on the strategic sourcing front are the labor-only subcontracts now used by some home builders to lower procurement costs. In these contracts, builders buy their own supplies and contractors bid the jobs only on their labor costs. Fein said while wiring accounted for 7 percent of labor-only subcontracts by home builders in 2003, installers of doors and windows saw labor-only subcontracts the most at 57 percent, followed by drywall (27 percent), bathrooms (18 percent), and painting (17 percent).
Fein also said some distribution industries could expect competition from logistics companies such as FedEx Logistics and UPS Logistics because they want to take over some of the functions of a typical distributor, such as shipping and warehousing. He said these companies have a philosophy of, “I don't care what's in the box. We can move it.”
Because of its reputation as an effective lobbying group, NAW always brings a full roster of pro-business politicians to its annual conferences. Politicians who spoke at this year's meeting included Senator Rick Santorum (R-Penn.); Representative Richard Burr (R-N.C.); and Karl Rove, President Bush's political advisor and friend for over 30 years.
Rove said, “Sometimes you live in quiet times and water is just bubbling over the rocks. Other times it's a turbulent stream. We are living during one of those times.”
Burr, winner of NAW's 2004 Leadership Award and a former distributor, said the two biggest concerns he sees in the U.S. economy for the short-term are jobs and energy costs.
Senator Santorum didn't expect the energy bill to pass this year, but he said elements of it could be grafted onto a highway bill now under discussion. Two elements of the bill of interest to the electrical industry are the reconstruction of the nation's electrical grid and new efficiency standards for commercial buildings.
While most speakers at the meeting were optimistic about the future for the wholesale-distribution industry, Andre Lacey, 2003 NAW chairman and president of LDI Ltd., Indianapolis, sees challenges ahead for NAW members.
“The biggest threat I see in this industry is complacency,” he said. “If you keep doing things the way you always have, you will always get the same results. Distributors should be so good at what they do that no one else will do it.”