During the recent National Association of Wholesale Distributors Annual Executive Summit in Washington, D.C., I was fortunate enough to hear the outlooks given by economists Alan Beaulieu and Steve Moore. Unfortunately their economic outlooks were not particularly positive in nature. These presentations seemed to set the tone for the rest of the summit. Most conversations I had with distribution business owners surrounded the softening economy and the status of the M&A environment relating to the economic slowdown and stressed capital markets.

Given the softer economic environment and accompanying feelings of uncertainty plaguing distribution firms and their employees, we would like to share key thoughts and observations about trends possibly impacting distributors over the coming months and years ahead. We will also provide some food for thought and ideas on how to manage through the downturn.

Based on recent conversations with distribution executives, current investment banking engagements with distribution businesses and discussions with private equity firms active in distribution space, the following observations provide a pulse of market conditions:

  • On the whole, distributors are feeling the effect of a recessionary environment. While certain sectors within the distribution industry have weathered this environment quite well (MRO and Industrial for example), even the best performers appear pessimistic about the coming 12 to 24 months.

  • Headcount reductions and branch rationalizations are active and will continue for the foreseeable future. This is a very painful process for most involved, but one that has become necessary for many distributors.

  • M&A activity and related valuations have softened across the broader distribution industry. While certain sectors remain active with stable pricing, the number and valuations of transactions seen in 2006 and early 2007 have declined meaningfully and will take some time to recover.

  • The capital available to both acquire and grow businesses has become very selective. For the best companies, capital is still available at less favorable terms than 12 months ago. But for those companies with performance, profitability, management or other issues, capital is largely unavailable at this time.

While the aforementioned may not appear particularly positive, they do create certain opportunities for those distributors focused on long-term growth and value creation. The following are thoughts on how to successfully manage through the current economic downturn:

  • Down markets present great opportunities to take market share. For distribution businesses that have the courage to invest in a down market, now is a good time to acquire market share from wounded competitors.

  • There is a compelling opportunity for strategic buyers to consider acquisitions.

  • Competition and pricing for transactions has decreased (both from strategic and financial buyers), and buyers who have cash available to close a transaction, versus relying on outside funding, have a significant advantage.

  • The tough markets provide leading distributors with an opportunity to shine while weaker operators are being exposed. This is important in attracting both customers and talented employees.

In summary, the market headwinds will continue to hinder distributors in the months ahead. But there are a host of compelling opportunities to create value for those who successfully tack through these winds and outpace competitors.