The economic downturn is challenging wholesalers to find new strategies for success.



It’s not all bad. Canadian wholesalers had another record year of sales in 2008. The total PHCP wholesale market in the United States and Canada was estimated at $62 billion   for 2008, down nearly 8% compared with the $67 billion estimated for 2007, which also was about 8% down from 2006.

The continuing decline in housing starts spurred wholesalers into looking more closely at their operations to see where greater efficiencies can be achieved. Some are expanding into new product categories that have better sales potential or higher margins, or they are focusing more on the commercial vs. residential market. Some are consolidating operations, some are going up for sale.

Wolseley plc, Reading, United Kingdom, parent of Ferguson, Wolseley Canada and Stock Building Supply, reported combined sales of about $12.6 billion for Ferguson and Wolseley Canada. This was the first time the two reported combined sales.

Wolseley shared a “comprehensive package of measures to strengthen the group’s balance sheet and position it strongly for the future” including plans to dispose of or exit Stock Building Supply by August 1, 2009. The company said that a number of third parties have expressed interest in exploring the possible acquisition of all or part of the Stock business.

The wholesaler also announced its intention to focus on its core businesses of North American Plumbing and Heating (Ferguson and Wolseley Canada), UK and Ireland, Nordic and France, where it has built sufficient scale and can deliver appropriate financial return.

Wolseley closed branches and reduced its labor force during fiscal 2008. Ferguson’s labor force was reduced by about 18% over the 18 months ended Jan. 31, 2009.

When appropriate, Ferguson’s directors intend to grow the business through selective bolt-on acquisitions as well as through using new formats and routes to market such as e-commerce and expanding the product range. Wolseley Canada is now being integrated into the Ferguson business with opportunities identified to increase trading profit through access to infrastructure, sourcing and pricing matrix management.

Atlanta-based HD Supply sold its wholly residential lumber and building materials business in 2008.

“We were No. 6 in the market, but No. 1 only in two states,” said Joe DeAngelo, CEO of HD Supply. “We like to be in the No. 1 or 2 position so we elected to divest ourselves of that business.”

See link below for pdf version of the Sales Trends.

Sales Trends

“The difference between the 2007 and 2008 figures (for the total PHCP wholesale market) is surprisingly small,” said an industry observer. “Of course we know that the recession hit in 2008, but its impact on the wholesale industry did not really kick in until very near the end of 2008. Combined sales volume of November and December was down 11% from 2007 to 2008. In the other 10 months, the net difference between the two years was less than 1%.”

The sharp variation in housing starts between 2007, when starts totaled 1,353,700 dwelling units, and 2008, when the total was 940,300 units, is not reflected in the wholesaler sales figures, the observer noted.

“This anomaly is even more striking when we look at 2006 housing starts: 1,800,700,” he added.

We calculated how many of the top 25 wholesalers in each segment reported sales increases and decreases in 2008. Among the top 25 wholesalers in the HVACR segment, 12 said sales were down and 13 saw a sales increase; among the top 25 in Plumbing & Hydronics, 11 had a sales decline, 12 had a sales increase and two reported flat sales; among the top 25 PVF wholesalers, eight saw a decrease in sales, 15 enjoyed a sales increase and one reported flat sales.

The Canadian Institute of Plumbing & Heating said December 2008 was the best month in more than five years, based on results of the December Wholesalers’ Sales Report produced by the Profit Planning Group. Total product sales were up 13.8% vs. December 2007 and year-to-date total product sales were up 2.6%, bringing total sales to a new industry record, the report said.

In the United States, a select group of wholesalers in Indiana, Michigan, Ohio, West Virginia and western Pennsylvania reported a range in performance for the year 2008 spanning a sales increase of more than 15% to a sales decrease of more than 30%. The average was a 6.43% drop in sales for the companies responding to the survey.

One top 25 wholesaler that does the bulk of its business in plumbing and hydronics saw a 9% dip in sales in 2008. Another top 25 wholesaler that is mostly in HVACR also reported a sales decrease, but another, in the bottom 25 of the top 150 wholesalers and also mostly in HVACR, had flat sales in 2008 and projected a sales increase for 2009.

Combined 2008 sales for the companies listed in the 2009 Premier 150 were about $41.7 billion (including estimated sales and reflecting currency conversion to U.S. dollars). We adjusted some of the figures in an attempt to delete non-PHCP wholesale sales.

Combined Sales (in billions of dollars)

Rising Stars

Twelve wholesalers moved up 10 or more spots in the top 150 ranking for 2009 vs. 2008  (comparing sales for fiscal 2008 vs. 2007). They include, in alphabetical order: All-Tex Pipe & Supply, Dallas, TX; American Metals Supply (Fenton, MO and Springfield, IL); Ameripipe Supply, Dallas, TX; APR Supply, Lebanon, PA; Central States Industrial Supply, Omaha, NE; City Pipe & Supply, Odessa, TX; C&L Supply, Vinita, OK; Independent Pipe & Supply, Canton, MA; Industrial Piping Specialists, Tulsa, OK; J.H. Larson, Plymouth, MN; Mountain States Pipe, Colorado Springs, CO and Security Supply, Selkirk, NY. Of these companies, seven do a large portion of their business in PVF; one is mostly in plumbing & hydronics and one is mostly in HVACR. The others’ sales are mixed among two or more of the segments.

New to the Premier 150 list this year are Edgen Murray, Baton Rouge, LA; PACE Supply Corp., Santa Rosa, CA; ProSource LLC, Greenville, SC; Rampart Supply, Colorado Springs, CO; and Shore Distributors, Salisbury, MD.

Other Changes

Four companies that were listed in the 2008 Premier 150 are absent this year: Davidson Pipe & Supply, Brooklyn, NY; Edward B. Ward, South San Francisco, CA; Excelsior Manufacturing & Supply, Itasca, IL; and R.V. Cloud/Fresno, Campbell, CA.

Davidson was acquired by Ferguson Enterprises in 2007. Edward B. Ward was acquired by Carrier Corp. in 2007. Excelsior was acquired by Temperature Equipment Corp., Lansing, IL, in September 2008.

We were unable to obtain reliable information on R.V. Cloud/Fresno and had estimated for them for the past two years, so left them off this year’s report.

Market Share: U.S. and Canada

Acquisitions

R. E. Michel, Glen Burnie, MD, acquired Atlas Supply Co., Indianapolis, an HVAC wholesaler. Atlas was to continue to do business as Atlas Supply, affiliate of R.E. Michel Co., from its three locations.

Canadian wholesaler CE Franklin, based in Calgary and operating 42 locations, acquired JEN Supply, Alberta, with four stores.

RONA, a Canadian distributor and retailer, acquired Best Mar Plumbing & Heating Supply.

Westwater Supply, Columbus, OH, purchased the inventory assets of Probst Supply, Marion, OH.

Schmidt’s Wholesale, Monticello, NY, acquired Smith Supply, Newburgh, NY.

M.A. Stewart & Sons, a PVF distributor based in Surrey, BC (Canada), acquired B.K. Thorpe Co., Long Beach, CA, an oilfield PVF and equipment distributor.

The Century Cos., based in Houston, TX, added Johnson Air Conditioning Supply (Dallas) to its family of companies. Johnson has two locations.

Interline Brands, Jacksonville, FL, acquired Eagle Maintenance Supply, a distributor of janitorial and sanitary supplies to the institutional market.

McJunkin Red Man, Charleston, WV, acquired LaBarge Pipe & Steel Co., St. Louis, a distributor of large diameter carbon steel pipe.

The ownership of Central States Distributors, Omaha, NE, was acquired by seven key associates.

See below for pdf version of the Consolidation Update.

Outlook

When we called 10 wholesalers, each with sales of $150 million or higher, and asked for their sales projection for 2009, three predicted a sales increase; two expected flat sales; and five said sales would be down.

CIPH noted that early reports indicated that the Canadian wholesale industry was starting to see a slowdown in January 2009.

The 2009 Construction Outlook Spring Update from McGraw-Hill Construction, part of The McGraw-Hill Companies, reported that this year’s new construction starts are estimated at $463.1 billion, down 15%, but cushioned by the recent American Recovery and Reinvestment Act of 2009. Public works will see the most immediate benefit from the stimulus act, with construction starts climbing 10%, including a 15% rise for highways and bridges.

Ferguson is expected to be an early beneficiary from the U.S. recovery, according to Wolseley. The directors of the company believe that a number of its competitors will exit the industry, creating opportunity to increase market share without significantly increasing its footprint.

Joe DeAngelo, CEO of HD Supply, projected a long-term, sustained downturn.

“This is a dangerous environment where demand can be destroyed because of inflation,” he said in an interview with Supply House Times in September 2008. “We expect to see a continued pinch because of higher fuel costs and commodity prices. Maybe by the end of next year we will have a better view. For now, demand will continue to constrict.”

An executive for one of the top 25 wholesalers said that 2009 will be the toughest year of his career.

“The worst is yet to come,” he said. “We expect real softness in the second half. Commercial and mechanical sales may come down 20 to 30 points.”

Equal percentages of wholesalers responding to the Premier 150 survey projected either sales increases or flat sales for 2009 vs. wholesalers projecting a sales decrease. While 46% said they expected sales to decline, 20% predicted a sales increase and 26% projected flat sales.

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