Guarded optimism is their theme of the times.

Photo taken at Kelly Pipe by Jim Olsztynski.

Master distribution - comprised of distributors who sell only or mainly to wholesaler-distributors - has arisen as an increasingly distinct third step in our industry’s traditional “two-step” distribution channel. In recognition of their growing importance,Supply House Timeshas made it a point to devote at least one major article each year to focus on this part of the channel.

For this edition we sought input from more than a dozen leading master distributors representing a cross section of our industry’s major product groups - plumbing, industrial PVF, waterworks, fire protection and HVAC. Nine of them accepted or returned our phone calls and agreed to speak for the record about their experiences. Here is how they responded to a few simple questions put to them about their business fortunes and other pertinent topics.

Mike Hogenmiller

What's your impression of business conditions during 2010, and what do you see coming in 2011?

Mike Hogenmiller, Your “other” Warehouse (YOW):For Your “other” Warehouse, it’s been another interesting year. Between the stimulus package in early 2010 creating some early promising signs in the market, and the lack thereof mid- to late-2010 creating challenges again, the wholesale trade business continues to be an uncomfortable roller coaster ride at best.

All of the economic indicators and government reporting we have seen have basically painted a market devoid of significant commercial building activity and home foreclosures making up the majority of the housing market activity. Neither are good conduits for a wholesale plumbing and bath business dependent on heavy remodel and new construction.

Fortunately, YOW continues to develop its business to support the consumer Internet activity growing at a double-digit rate, which is offsetting a large portion of the traditional trade decline. We will focus on both, continually adjusting the business to manage trade and e-commerce while the market settles and looks to growth again sometime in the future.

In regards to 2011, we’ll enter next year with very guarded optimism.

Ranson Roussel, The Distribution Point (TDP):Our business overall was pretty solid in 2010, certainly better than 2009. We were a little late getting into the recession, and as a result have been riding the tide of wholesalers cutting their inventory. We’ve seen some softening in the wholesale market but other markets are doing well and picking up some of the slack.

I wish I knew what was coming in 2011. The tax relief passed in late 2010 will probably relieve some tension in the market. There’s a lot of money on the sidelines, but I don’t think we will see anything moving with real speed until we have something more than a 12-month horizon.

Did you see Ben Bernanke on “60 Minutes”? He did not seem very rosy. He talked about how we’re putting three million people into the job market per year, and you have to create a lot of jobs to turn unemployment around. In order for that to happen we will need more than a 12-month mandate. Typically election years tend to turn things around, so if we can get through 2011, maybe the economy will really get moving in 2012.

Charlie Roche, NAPAC:We work with three different industries, selling to fire protection, industrial PVF and waterworks distributors, and we’ve grown 10% in each of the last two years. On the industrial side it seems that some distributors are doing well, others not so well. It could have to do with being in certain markets, like energy, and some areas are doing better than others. On the waterworks side, some areas did well attracting stimulus money while others did not. The fire protection sector was hit the worst. That’s because it’s so reliant on new construction, and that part of the business was the worst we’ve seen in the 20 years we’ve been in business, though we had a great run for most of those 20 years.

In 2011, I feel we’re going to have a similar year to 2010, a little growth but not a lot. Everyone is still scared. Our prices have gone up but nobody wants to charge the customers more. We see some growth on the industrial side, because companies are investing to make plants cheaper, greener and more efficient.

Ernie Coutermarsh

Dale Landy,  Kolson:I think we are definitely in a recovery mode because we’ve done better than last year, but we’re in a very slow recovery. People are cautious in what they want to spend. In the showroom part of our business, I see people come in two, three times before they give us the deposit. They want to make sure they’re getting good value. In our wholesale division, we’re seeing the same thing.

I think we’ll see more recovery in 2011, though I don’t think we’ll ever get back to where we were four years ago when people were spending money like they didn’t care. It will take time for people to have confidence in the economy again. It’s like climbing up a steep hill slowly to get back to the top.

Ernie Coutermarsh, CD Sales:We’re finishing up 2010 pretty well, better than expected, especially with our valve-related product lines. A lot of that had to do with the fact that we have a very large inventory at a time when many wholesalers were cutting inventory levels. This enhances our value proposition. Many manufacturers also are not doing great in inventory either.

For 2011 we’re projecting another 10% in real growth, simply because we are diversified and have more product to sell.

Tim Hagan, Kessler Sales & Distribution (KSD):The bulk of our business is dependent on distribution of copper tubing and steel pipe, and both products were relatively healthy in the second half of the year. Copper has been moving steadily upward, and I read recently in theWall Street Journalwhere Chase Bank is buying up copper stocks, and Goldman Sachs is predicting $5 a pound. So there are a lot of stories out there that bode well for our business.

(Editor’s Note:At this point in our conversation, I asked Hagan how much of copper’s upward price climb is due to speculation as opposed to supply and demand. His response:) It’s my understanding that 10 years ago the market was 90% driven by supply and demand; today I think it’s the opposite, 90% speculation, 10% supply and demand. We had a decent ending to 2010, and expect a strong first quarter or third of 2011. Beyond that it’s hard for me to project. The housing and industrial/commercial markets do not show a lot of viability.

However, we’re hearing from our wholesaler customers that they’re quoting more than a few months ago, so that’s encouraging. It appears that there’s some work in the pipeline, but how soon that comes to fruition I don’t know. If there’s any good news in today’s environment it’s that wholesalers are starting to feel more comfortable about putting inventory back in. Not back to 2007 or early 2008 levels, but they’re certainly more comfortable than a year ago.

On the steel side there’s a general consensus that the first half of 2011 will see strengthening of pricing. But again, it’s not driven by supply and demand but rather by raw material and scrap supply side increases.

I feel like we’ve turned the corner. I don’t think we’re headed for a double dip, but think we’ll drag along the bottom for awhile.

Rob Raban

Bryan Cosentino, Metropac:This year (2010) has been better than last year. It wasn’t as good as 2008, which was a great year for Metropac, but things are starting to head in the right direction. We’re mostly on the heating side, so our winter has started off very well for us. (Editor’s Note:As everyone in a heating business understands, a “good winter” is one that John Q. Citizen finds miserable!) As for 2011, let’s be honest, a lot of wholesalers still do not want to carry large amounts of inventory, and as a master distributor, that’s perfect for us.  I am very positive and expect a great 2011.

Our Internet business is growing year over year. These are sales from our customers who place orders online with an ID and password It’s now close to 50% of our business. Dollars are still higher on traditional orders, but the number of orders placed via the Internet is growing daily.

Rob Raban, Industrial Valco:It seems like for us the first half of 2010 was more of 2009, then beginning in May through the present it has been a very good year. November is typically our slowest month, but in 2010 it was better than any other month of the year. It’s only one month and maybe just a blip, but December is also starting out strong so maybe momentum is building. (Editor’s Note:Our conversation took place in mid-December.)

For us, we kind of felt the bottom occurred in December ’09 through February of 2010 on the industrial PVF side. It seems to be slowly creeping up, not necessarily to ’08 levels but encouraging nonetheless. I think we’ll trend about 10% higher in 2011, which will get us pretty close to our 2008 highs.

(“What’s driving it?” I asked.) Not common sense, I don’t think!

Oil is at $88 a barrel and has been consistently up for a long time. Gas prices have been low but are starting to go up, and there’s been a tremendous amount of activity with the discovery of the fracturing method and dollars chasing it. Oil and gas rig counts have been going up, to around 1,700 now after getting down to the 900 range in ’09. That gives a sense of what’s going on in the energy sector.

On the industrial side, people still have to maintain their plants, so maintenance work is always pretty consistent. But projects on the gas side seem to be driving growth in 2011.

Steve Livingston, Kelly Pipe:(Editor’s Note:Based in Santa Fe Springs, CA, Kelly Pipe Co. has been in the distribution business since 1898 but in recent years has transitioned from selling to a wide base of customers into a full-fledged master distributor selling only to PVF wholesale-distributors - with the exception of its headquarters location, which various local clientele has come to depend upon for many decades. My conversation with Kelly’s Central Region Vice President Steve Livingston took place within the context of that transition, which was the subject of our August 2007 cover story, “Kelly Pipe Evolves Into Master Distribution.”)

For us 2010 started off like everybody else’s, as a big question mark. What we found was it was the most effective year for us in the master distribution business because many of our customers were financially unable to stock product the way they used to. So 2010 was a profitable year for us, and really entrenched us as a master distributor. After a number of years of saying to our wholesale customers that we will not sell to their customers, we proved it and they began to trust us.

For 2011, I think the economy is picking up and our business plan is pretty aggressive. The West Coast may be a little flat but we think the rest of the country will be up quite a bit revenue-wise. What concerns us is how much of that will be due to pricing issues in the steel industry and how much from units.

Steve Livingston

The economy aside, what are the biggest business challenges you face these days?

Steve Livingston, Kelly Pipe:Probably the biggest challenge for us is that trust factor I referred to earlier. We have about 240 employees, and a trusting relationship can be screwed up by only one of those people. It is important to train people to really realize that the customer is what makes payday and that it doesn’t matter how big the company is or what it says, in the customer’s eyes whoever he or she is dealing with at the moment IS the company. This is a big challenge for everybody in business.

(Editor’s Note:I also spoke with Kelly Pipe PresidentLen Gross, who added “unsettled pricing” as among the biggest challenges. “I’ve been in business many years, but have never seen prices go up and down so fast. It’s a big issue for master distributors,” said Gross.)

Rob Raban, Industrial Valco:For us, the biggest challenge is properly structuring and incentivizing our workforce.

Bryan Cosentino, Metropac:One of the biggest challenges for us is keeping up with technology, making sure all our systems are working and functioning properly to provide our customers with the high quality service they expect and deserve.  Also, battling the rising cost of health insurance is becoming more and more of a challenge every year.

Tim Hagan, KSD:Supply chain interruptions are a big deal. The mills have all done an exceptional job of managing production but left not a lot of room for error. When there’s a sudden spike in business or a disruption at the mill, it sends ripples throughout your inventory position. It’s just a matter of making sure you have good sources of supply, including backups in case something goes wrong.

Another concern is the financial stability of our customer base. We’re dealing with many wholesalers who we’ve been doing business with for decades. We have to be responsive to what might be happening with their business while at the same time being reasonable with them as principals and people. That’s a challenge.

Ernie Coutermarsh, CD Sales:The biggest challenge is whatever affects big companies that provide sizable employment. When the economy acts up they tend to beat their suppliers over the head because they are under pressure to cut costs rather than lay off people, and they tend to look to the supply chain to realize those cost savings. So when they’re under stress, we feel it.

Ranson Roussel

Dale Landy, Kolson:Nothing compares to the economy as most challenging. One other issue is that some vendors are not stocking like they used to, so orders take longer, especially from importers. This means longer lead times. But we get around that. It’s just a matter of being up front about it and telling your customer what to expect.

Charlie Roche, NAPAC:Pricing is a big challenge. People are willing to give stuff away. It stems from the bigger companies that have lost market share and are trying to get it back any way they can. Material prices are going up, but we can’t enjoy the normal margins.

Ranson Roussel, TDP:For us the biggest challenge is a function of the unknowns out there. So much was clearly driven by the housing market, and since that’s fallen off, we’ve noticed a shift in the product mix we’re selling, which has been interesting. For instance, we’re selling a lot of polished brass now, which we hadn’t seen much of in the last five years. This reflects a change from new construction to repair and remodel.

Also, the market has become far more competitive, but that always happens in bad times when people just try to keep the phones ringing.

Mike Hogenmiller, YOW:I’m not sure you can set the economy aside. It’s driving difficulty in the market in regards to planning and forecasting to support future capital spending. When this happens, we have to look inside the organization to grow without sacrificing head count or customer service. We have managed this extremely well and it will continue to challenge us daily for the near term.

Editor’s Note:One other question asked of all the master distributors concerned an issue raised in the roundtable discussion with ASA distributors. (See “Distributors Speak Out! – Part 2”) There, someone expressed surprise that relatively few PHCP distributors have gone belly up amid the Great Recession. So I asked them to comment on this phenomenon, which gleaned the following insights:

Are you surprised that more distributors haven't gone out of business?

Mike Hogenmiller, YOW:I agree that the economy could have driven a higher rate of business failures, but I believe we uncovered an industry with more resilience than we gave it credit for.  I believe after we get through the “ditch” we are in, businesses will run at a higher success level than in the past due to the level of intelligence that’s been installed in the management to survive.  

Ranson Roussel, TDP:We certainly saw some smaller wholesalers get wobbly, but think that was anticipated and not as many as I anticipated. We were sort of bracing ourselves for a rash of bankruptcies and closures and we really haven’t seen that materialize. Everybody seems to have right-sized their businesses and stabilized themselves in drawing down to the reality of where they are.

We’ll see what happens as market structures rebound. With banks tightening up with credit we’ll have to see if smaller wholesalers can get funding for growth.

Dale Landy, Kolson:One or two customers went out of business earlier this year, but we’ve been pretty diligent in our receivables, as every company should be. We cut expenses when we saw the recession coming. It’s just common sense that if you see business turning down you have to take action and watch what you spend, and most of our customers did the same thing.

Ernie Coutermarsh, CD Sales:I can only talk about our region, where there were a lot of companies that for whatever reason in recent years looked to sell their company or be acquired. At F.W. Webb we bought several traditional old PVF supply houses like W.L. Blake; Braman Dow in Boston; Kennebec Supply in Maine; International Supply in Rhode Island; Babbitt Steam in New Bedford, MA; the PVF component of Burns Supply in Syracuse; and so on.

Tim Hagan, KSD:Our region saw a rather big distributor go under. I don’t think we’ve turned this corner yet. We had a very strong air conditioning season last summer, which helped a lot of distributors through. Some of their fortunes may depend on how strong the heating season is in the north.

Bryan Cosentino,  Metropac:We’ve seen some smaller companies bought up by larger distributors over the last couple of years, but not a drastic amount which some might expect during these economic conditions.

Rob Raban, Industrial Valco:I haven’t seen any more or less than normal. That doesn’t surprise me, because the typical small business owner runs his business the way I wish our government would run theirs. They’re very conservative, and when business slows they can clamp down on expenses easily. The family takes a cut in pay if needed and they don’t extend themselves.

Business banks love family businesses. Everyone talks about how tight money is, but it’s pretty easy to get money for closely held businesses. Banks are not making any money on their deposits, so they are looking to make deals. They’re not getting defaults on owner-occupied buildings, but on developers speculating with office projects or strip centers. Those deals and housing projects are dead, but if you’re owner-occupied and looking to build a building, banks have a ton of cash available. They know that risk is very small.

Steve Livingston, Kelly Pipe:Generally when the economy takes a big hit we would see a tremendous number of bankruptcies. However, we are in an industry with a lot of old timers. Their companies did real well from 2004-2008, but they’ve been through a lot and remembered the 1980s and ’90s and kept pennies saved.