If 2006 seems to have gone by at a breakneck pace, it’s because it was a momentous year for our industry. One big story after another flitted across these pages last year. The industry is undergoing profound changes faster than ever. Which leads to our first noteworthy item:
Customers want it NOW!The National Association of Electrical Distributors Education & Research Foundation recently published a research report: “Value-Added: Assessing Service Offerings of Electrical Distributors.” According to NAED, the highest ranked new services customers would most like to see were:
- Same-day delivery, 86%.
- Emergency delivery within two hours, 73%.
- Immediate credit on warranties/returns, 71%.
- Early-morning delivery, 70%.
“Same day…two hours…immediate…early morning” - customers don’t seem to regard patience as much of a virtue nowadays. Seems that any distributor not looking at ways to speed up services is in danger of being lapped by the swiftest competitors.
Getting out while the getting's goodBlockbuster acquisitions became almost routine last year. Most stunning was the Hughes Supply purchase by Home Depot. According to acquisitions specialist Brent Grover of Evergreen Consulting, distribution has been the fifth most active industry for deals during 2006.
In an ASA convention seminar last September, Grover said there are more than 80 private equity funds chasing distributors, and they are offering previously unheard of prices - an outlandish 12 times ebitda in the Hughes deal, up to eight times ebitda in many others. Financial buyers - those looking to make money on the turnover - are paying as much as strategic buyers, i.e., distributors looking for operational growth or improvement (such as Wolseley/Ferguson). This hasn’t been the case in the past.
Some of the PHCP wholesalers acquired during 2006 had no intention of selling at this time last year. Sales and profits were booming and they had no reason to be scared about competing against the big boys.
Then well-heeled investors started waving megabucks in their faces. The wholesalers knew the last few years were among the greatest in our industry's history and hard to sustain much longer. Who can blame them for taking the money and running?
Get out the umbrellasThe bad part about booming business is that it becomes the benchmark for all subsequent performance. Housing starts have been in the 2-million range the last couple of years, and have now fallen to about a 1.5-million pace. That used to be considered respectable. Now it’s disastrous. I recall the fanfare only a couple of years ago when annual new home sales topped the 6-million mark for the first time ever. Now they’ve fallen back to around that level and the real estate pages are filled with headlines about housing’s “collapse.”
When will people learn that windfalls are to be enjoyed, but they are abnormal? And whatever happened to the concept of saving for a rainy day?
Humans err constantlyThe U.S. Chemical Safety and Hazard Investigation Board has released its report on a July 2005 fire at the BP Texas City refinery that caused one minor injury and $30 million in property damage. (An unrelated explosion at the same refinery four months earlier killed 15 workers and injured 180.)
This later accident was attributed to a maintenance contractor replacing an 8-inch alloy steel elbow with a carbon steel elbow in a high-pressure, high-temperature hydrogen line. The carbon steel elbow failed after only three months, leading to an escape of hydrogen gas that ignited. The BP refinery had positive material identification (PMI) procedures that required alloy steel components to be tested when shipped and received, but didn’t require PMI during maintenance. Chalk this accident up to human errors.
Think about how many mistakes you encounter both by your people and customers in the course of routine transactions. Now consider how many opportunities arise for catastrophic accidents in PVF installations supplied by your company.
No wonderSupply House Times’ 2006 “Wholesaler of the Year,” Red Man Pipe & Supply, pays so much attention to quality assurance of the products it distributes. (See December 2006Supply House Times.) Any PVF distributor that doesn’t make quality assurance a priority is betting the company on perpetual luck..
Anyone that lucky would have more fun earning his living at a casino than running a complex distribution business.