PVF RECOVERY Documented By Biennial Survey
For the last decade, SUPPLY HOUSE TIMES has undertaken a detailed “PVF Purchasing Habits” survey every other year probing PVF distributors about their business practices and performance. We skipped 2001, when new ownership of the magazine took over, but resumed the extensive survey in 2003, conducted by the top-notch market research department of our corporate parent, BNP Media Co. They did so again for this year's study, conducted via direct mail throughout most of the month of July.
Our return rate of 18% was exceptional for a detailed survey of this nature, and significantly increased from 13% returns in 2003. This reporter will venture an educated guess that the spurt in response rate is itself a sign of better times in the PVF marketplace. My experience over many years of doing editorial surveys has been that business owners are more likely to take time to respond when business conditions are good than when in a slump. Basic human psychology comes into play. People like to draw attention to the good things happening in their lives much more than the bad.
This year's survey tallied responses from 360 firms involved in PVF distribution, of which 52.8% said they derived at least half of their sales volume from industrial PVF. Thirty-four of the respondents, 10% of those who filled out the volume portion of the questionnaire, said they did more than $100 million a year in sales, while another 19.2% reported at least $20 million in annual sales. Our market research staff informs us that in accordance with statistical math, this survey is supposed to be accurate to within plus or minus 5%.
Looked at in retrospect, our biennial surveys have shed considerable light on market trends. For instance, PVF distributors were upbeat in our 1999 survey, which took place in a perky PVF marketplace that was at the end of its rope, although nobody knew it at the time. PVF wholesalers thus responded with pie-eyed optimism as a whopping 69% looked forward to further sales increases in 2000. Instead, shortly after the survey took place, there began a steep decline in industrial production and capital spending that sent the PVF sector reeling for most of the ensuing years.
Signs of an upturn started to appear in 2003, and were captured by some of the data in our 2003 PVF Purchasing Habits survey. The most basic question asked whether sales increased, stayed the same or decreased in the first half of 2003 vs. the same period of 2002. Results were fairly evenly split, with 35.2% saying they increased, 36.9% answering “stayed the same” and 27.9% admitting to a sales decline. As noted, we didn't do a 2001 survey, but if we had, I suspect the decliners would have substantially outnumbered those saying they enjoyed a sales increase.
This year, 60.8% of respondents said that sales increased during the first six months of 2005 compared with last year's first half. Only 11.8% reported a sales decline, while the remaining 27.4% said first-half sales stayed about the same with last year's.
For the most part, they enjoyed large sales increases. Among those firms reporting increased sales, 44.6% said they went up 11% or more. More than one out of eight respondents, 13.2%, said their sales increased more than 25%.
Why Is Business Good?A chart on page 48 shows the findings of a survey question asking PVF distributors to identify the two most important factors behind their firm's increased sales growth. The most prevalent response, as is almost always the case, was “increase in orders and/or contracts,” named by 57.8% of respondents. However, there was some shifting around of secondary responses compared with prior surveys.
The second most prevalent explanation was “increase in new construction or major renovation,” rising from 23% in 2003 to 33.7% in this year's survey. Tellingly, the third highest response this year was the “higher prices” category, named by 30.5% of survey respondents. In our 2003 survey, this factor barely registered, accounting for only 5% of responses.
Seeming to decline in importance was the category labeled “additional business due to your firm's 'quality partnering' efforts with customers,” which went down from 39% in 2003 to 29.9% this year.
Among those firms suffering a decline in sales during the first half, by far the largest explanation was “decrease in new construction or major renovation,” cited by 58.5%. The next highest category was “new competition entering the market, 29.3%, followed by a tie between “lower prices” and an “other” category that included a mish-mash of excuses ranging from “cold weather” to “cost credit issues” to “end of large project.”
The role of pricing in this category also differed significantly from the 2003 survey. Back then, 27% of respondents who reported declining sales blamed it on lower prices. This year, only 19.5% weren't able to get the pricing they needed.
2006 OutlookWhen asked to predict next year's sales, 68.9% of respondents said they expect a sales increase, while only 2.4% predict a decline, and 28.7% anticipate sales to remain about the same next year. Of those who said sales would be up, 24.1% anticipate a 0-5% increase, while 43.4% expect to see sales rise between 6-10%, and 27.2% predict hefty increases in the 11% to 25% range. Another 5.3% went out on a limb to say sales would go up by 25% or more.
Another query asked PVF wholesalers to identify the two most significant areas of sales growth for their firms over the next few years. The most prevalent responses went, in order (adding up to more than 100% by nature of the question):
The diversification response traditionally has topped the list in this survey. In 2003, 52.8% of respondents cited it as the main source of sales growth, and in the 1999 survey it was cited by 63.9% of respondents. The remaining order of responses was also unchanged, and largely within the survey's margin of error.
Results from 2003 were:
Who Do Wholesalers Buy From?Another major question was, “What percentage of your annual purchases comes from each of the following categories?” There were four categories listed, as follows:
There was little change here from the 2003 survey, where results tallied:
These responses follow the general pattern found in previous SUPPLY HOUSE TIMES PVF surveys through the years. Beginning in 2003, we added one question not asked on previous ones. It was suggested by a member of ASA's IPD Council, asking: “What percent of your customers would prefer that you ship them a product marked 'Made in USA' vs. receiving a product that was marked with a foreign country of origin?” Responses in 2005 were:
In our 2003 survey, 54.2% of those responding expressed a “made in USA” preference. The decline of more than 7% suggests a further deterioration of “buy American” sentiment in the country.
Then we asked, “Of the customers that prefer 'Made in USA,' what percent above the current price would they pay for a product marked, 'Made in USA?'” Responses:
When you compare these numbers with the corresponding queries from our 2003 survey, here, too, can be discerned a bit of a trend showing people ever more disinclined to pay very much of a premium for American-made PVF goods. Results from 2003 were:
Market ActivitiesWe asked PVF wholesalers to identify markets and activities in which they were involved, listing a variety of prompted responses. This question is most interesting when comparing responses to those of previous surveys, shown in the chart on page 43.
Variations in most categories were within the margin of error when comparing 2005 to 2003 results. Somewhat surprising to me is a continued fall-off in e-commerce. This may be due to a hazy explanation of what constitutes e-commerce. Most people take it to mean buying goods over the Internet, and it's clear that this is still a minor part of most PVF distributors' sales efforts.
The “instrumentation, gauges and controls” category realized a solid upward boost to 38% of respondents this year, after dropping precipitously to only 29% in the 2003 survey. I suspect market conditions had a lot to do with this. Valve actuation gained 8.7% compared with the last survey, probably for the same reasons.
The continuing decline of export sales is no doubt due to the continued domination of exports from China and other low-cost nations. U.S. distributors simply have trouble competing in the global marketplace, even with the vast amount of outsourcing taking place by U.S. factories.
Why Do You Buy?A staple of this survey, and perhaps the most important question of all, asks PVF wholesalers to rate the importance of various factors in their purchasing decisions. The responses are weighted on a 5 (extremely important) to 1 (not at all important) scale. Average responses are noted in the table on page 44. No eye-popping differences stand out compared with the 2003 survey.
We traditionally have aimed to track a variety of other issues pertinent to PVF wholesalers. “Does your company have an active program of vendor consolidation?” is a question asked on previous surveys as well as this year's. The 30.9% “yes” response rate is down by more than the margin of error from the 39.6% yes response we found in 2003, as well as from the 34.2% we found in the 1999 survey. It may be a sign that many PVF firms have already gone through vendor consolidation programs and have winnowed down their sources to a more manageable number. Or, it may just be a statistical fluke.
Also, we asked: “Is your company involved in vendor-managed inventory with any customers?” to which 24.3% responded affirmatively, compared with 23.1% in 2003 and 30.2% in 1999. Once again, more than 90% of respondents indicated a level of satisfaction (“very” or “somewhat”) with their VMI programs, also in line with previous findings.
“Communication” once again topped the list when PVF wholesalers were asked to name the biggest obstacle to the success of VMI. The other factors cited were in line with previous surveys (see chart on page 44).
The number of wholesalers being registered to ISO-9000 standards dropped to 13.6% in this year's survey, compared with 19.6% in 2003 and 10.7% in 1999. We also asked if customers request that their vendors be ISO-certified, and 12.9% said yes, compared with 14.5% two years ago. Also, we asked if a first-class Quality Manual would be acceptable to customers in lieu of ISO certification, and 62.5% responded affirmatively, compared with 70.8% two years ago.
Sole SourcingThis year's survey revealed a slight decline to 25.4% of PVF wholesalers reporting coveted sole-source contracts with any customers. This compares with 30.3% who answered affirmatively in 2003 and 25.3% who said yes in 1999.
Looking at it from the flip side, we added a query asking if the wholesalers perceive any advantages in sole sourcing from a vendor, and more than half, 55.8%, said yes. That was in line with 2003 when 52.7% said yes.
Those involved with integrated supply agreements (providing non-PVF products to industrial customers) remained about the same as in the 2003 and 1999 surveys. This year's survey showed 23.4% responding yes, compared with 26.6% in 2003 and 25.6% in 1999.
TechnologyAnother standard question on the PVF survey deals with electronic automation. This year's survey shows 27.8% of PVF wholesalers saying they use bar coding, compared with 36% who said yes in 2003. That compares with only 17.6% in the 1999 survey. More than half of PVF distributors, 58.5%, said they had no plans to implement bar coding by 2006. That compares with 49% who in 2003 responded that they have no foreseeable plans to use bar coding. It seems a regression toward the 64.4% who responded in the negative during 1999. I can think of no logical reason for the decline.
Nowadays, 64.5% of PVF wholesalers say they communicate electronically with vendors. That's a slight increase from 57% in 2003, and significantly higher than the 47.6% in 1999. Another 13% said they plan to do so by 2006.
We found 57.4% of PVF wholesalers saying they communicate electronically with customers, about the same as the 56% who responded that way in our 2003 survey. Only 41.1% did so in 1999. Another 13.2% say they plan to do so by next year.
All in all, this year's PVF trends survey was an encouraging one that points to better business now and in the foreseeable future. Let's keep it that way.