The Economic Outlook for Distribution: Preparing for Recovery

The Economic Outlook for Distribution: Preparing for Recoveryp g y

Adam J. Fein, Ph.D.Pembroke Consulting, Inc.

www PembrokeConsulting comwww.PembrokeConsulting.com

AFFLINK Summit 2009July 20, 2009

© 2009 Pembroke Consulting, Inc.

Key Points

The recession is not over, but we are at (or near) the bottom. Many sectors are either stabilizing or just getting worse at a slower rate.

• The 2009 outlook for AFFLINK’s core wholesale distribution sectors is poor, but they are on track for recovery in 2010.

Be prepared for significant economic volatility and channel risks during the coming economic recoverychannel risks during the coming economic recovery.

• Some of your distributors will not survive, but the winners will b t d d tibe stronger and more productive.

• Customers will increasingly adopt supply chain programs such ti l t d i t l b l d t


as national accounts and private label products.

2

Today’s Recession in Perspective

0

Total Change in Employment (Peak to Trough): Current Recession vs. 10 Postwar Recessions

1969

73

1980

1990

001-1

0

rece

ssio

n

1960 19

7

81

20

-2

m s

tart

of r

1953

957

198

(so

far)-3

eclin

e fro

m

1948

1 9

2007

-5

-4

Pea

k %

de

?-6

5P ?

© 2009 Pembroke Consulting, Inc.3

Employment situation is grim but improving

9 0%

10.0%

200

400 Monthly Change in Non-Farm Jobs, SA, 000s (Left scale)

8.0%

9.0%

0

200

7.0%-200

6.0%-400

N ti l U l t R t5.0%-600

National Unemployment Rate (Right scale)

4.0%-800

2006

2007

2008

2009


2 2 2 2

Ch i N b f J b ( illi )

Job losses in core AFFLINK End-Markets

Hotel and

Change in Number of Jobs (millions): December 2007 through June 2009

+0.6

Office-based* ManufacturingHotel and

Foodservice Health care

-0.3

-2.2-1.9

-7.4% +3.6%-2.4%-14.0%% Change


* Information, Financial, Professional, and Business Services

Employment losses are stabilizing

Initial Claims for Unemployment Insurance*

(SA thousands)National Unemployment Rate

10%

11%

650

700(SA, thousands)

7%

8%

9%

500

550

600

5%

6%

7%

350

400

450

3%

4%

5 6 7 8 9 0250

300

350

200

200

200

200

200

201

Jan-

08

Apr

-08

Jul-0

8

Oct

-08

Jan-

09

Apr

-09

Jul-0

9


* Through week of 7/11/09

Consumer confidence bouncing off historic lows

125

e

100

onfid

ence

75

sum

er C

o98

5=10

0)

25

50

ex o

f Con (1

9

0

25

Inde

2001

2002

2003

2004

2005

2006

2007

2008

2009


Source: The Conference Board

Horrible Results for Wholesale Distributors% change in revenues, 2006:Q1 to 2009:Q2% change in revenues, 2006:Q1 to 2009:Q2

Quarterly change

Industrial Distributors

Commercial Equipment and Supplies Wholesale Distributors

15%

20%

Quarterly change from year ago Office Product Wholesalers and Paper Merchants

5%

10%

15%

-5%

0%

-15%

-10%

-20%

006:

Q1

Q2

Q3

Q4

007:

Q1

Q2

Q3

Q4

008:

Q1

Q2

Q3

Q4

009:

Q1

Q2


20 20 20 20

8

Total Value of Wholesale Inventory

Interpreting Inventory Adjustments

$450

Total Value of Wholesale Inventory ($B, SA)

$425-$41.7B(-9.4%)

$400 Inventory-to-Sales Ratio for Wholesale Distribution

Nominal Real$375

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

1.30

1.40

1 10

1.20

1.00

1.1008 08 08 08 08 08 08 09 09 09 09 09


Jun-

0

Jul-0

Aug

-0

Sep

-0

Oct

-0

Nov

-0

Dec

-0

Jan-

0

Feb-

0

Mar

-0

Apr

-0

May

-0

Macroeconomic forecasts are stabilizing

U.S. Real GDP(Q4/Q4)

2.7%2.4% 2.3%

2.7%

(Q Q )2009 U.S. Real GDP (Q4/Q4),

by month of forecast3%

0%

1%

2%

-2%

-1%

0%

-0.8%-1.3%

2005 2006 2007 2008 2009F 2010F

2%

May

-08

Jun-

08

Jul-0

8

Aug

-08

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

2005 2006 2007 2008 2009F 2010F


Source: Wall Street Journal survey of economic forecasts

The Credit Crunch is Easing

Federal Reserve Quarterly Survey of Senior Loan Officers (Commercial & Industrial Loans to Businesses with Sales below $50 million)

75%

100%Increasing Spread over Bank Cost of Funds

50%

75%

Ban

ks

Tightening Loan Standards

25%

Net

% o

f B

-25%

0%

-50%

2007 Q

2

Q3

Q4

2008 Q

2

Q3

Q4

2009 Q

2


2 2 2

Signs of life in a depressed construction market

Value of Construction Put in Place(Seasonally adjusted at an annual rate)

$600

$700

2%

Monthly % Change in Value

$500

illio

ns

-1%

0%

1%

$300

$400

US

$ B

i

-3%

-2%

1%

$200

003

004

005

006

007

008

009

-4%

Sep

-08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

20 20 20 20 20 20 20

Private ResidentialPrivate Non-Residential


Public

Residential housing market is stabilizing

Vacant Non-Vacation Homes for Sale(millions)

New Home Sales(millions)

2.25

2.50

1.25

1.50

1 75

2.001.00

1.50

1.750.75

1.00

1.25

0.25

0.50

2004

2005

2006

2007

2008

2009

Number 4 Qtr Moving Average

2005

2006

2007

2008

2009

Number 3 per. Mov. Avg. (Number)3 month Moving Average


g gp g ( )g g

Residential construction recovery in early 2010?

New Housing Starts( i l & lti it)

2 00

2.25

lions

(single & multi-unit)

1 50

1.75

2.00

mill

1 00

1.25

1.50

0 50

0.75

1.00

0.50

2001

2002

2003

2004

2005

2006

2007

2008

2009

F

2010

F


Manufacturers face a global demand collapse…

Value of ShipmentsNondefense Capital Goods less Aircraft

(% Change from Year Ago)Global demand drove export-led manufacturing growthmanufacturing growth

• Computers

• Electrical equipment10%

15%

Electrical equipment

• Industrial machinery0%

5%

The first worldwide depression since 1930s -10%

-5%

Vehicle sales are at their lowest level since early 1980s

-20%

-15%

level since early 1980s-25%

2006

2007

2008

2009


Value 3 per. Mov. Avg. (Value)3 month Moving Average

… but new orders show signs of recovery.

5%

10%

55

60 New

Ord

-5%

0%

45

50

ders, Nonde

(leers Inde

x

-15%

-10%

35

40

efense capess aircraftM

New

Orde

-25%

-20%

25

30

pital goodst)

ISM

-30%20

2007

2008

2009

s orders

2 2 2

New Orders, Nondefense capital goods orders (less aircraft), % change from year ago (3 months moving avg)ISM New Orders Index


Core* Wholesale Distribution Revenue Growth, 2006:Q1 to 2010:Q12006:Q1 to 2010:Q1

Quarterly change from year ago

5%

10%Forecast

0%

5%

-5%

-10%

-15%

2006

2007

2008

2009

2010


* Core Revenues excludes (a) Oil and Gas and (b) Agricultural products

Who Will Win in Your Channel?

The skillto manage a business well despite a crisisto manage a business well despite a crisis

The willto invest when others are pulling back

Th tillThe tillto fund growth strategies


g g

Channel Survival and Recovery Strategies

Distributor Strategies Customer Strategies• Improve internal productivity

(by cutting)• Adopt self-service

technologies

• Improve internal productivity (by spending)

• Leverage strategic sourcing relationships

• Manage customer profitability

• Improve supply chain productivityp y

• Make strategic acquisitions of people and companies

p y

• Shift to private label productsof people and companies products


Our Thrifty Future?

12%

U.S. Personal Savings Rate (6 month moving average)

10%

6%

8%

4%

0%

2%

-2%

979

984

989

994

999

004

009


1 1 1 1 1 2 2

Additional Resources for Channel Data2009 Wh l l Di t ib ti2009 Wholesale Distribution

Economic Factbook

2009 Wholesale Distribution Economic Reportswww.naw.org/wderg

http://www.mdm.com/subscribe/factbook2009.html
