2008 Economic Growth and You

Last Tuesday, the Federal Reserve released the minutes of its October 30-31 Open Market Committee meeting, which for the first time included the projections for economic growth, unemployment, and inflation through 2010. I don’t recommend that you read the full report unless you are an economics geek like your friendly neighborhood blogger.

Here are the primary forecasts for 2008 made by Federal Reserve Governors and Reserve Bank Presidents:

• Real U.S. Gross Domestic Product (GDP) will grow between 1.8% and 2.5%
• The overall inflation rate will moderate somewhat between 1.8% and 2.1%
• The inflation rate excluding food and energy will range from 1.7% to 1.9%
• Unemployment will remain below 5%

These forecasts made me wonder: How is the growth of individual wholesale distribution sectors related to overall U.S. economic growth?

Wholesale distribution and GDP

To find out, I statistically correlated year-over-year growth in U.S. GDP to growth in the overall wholesale distribution industry. I used real, inflation-adjusted figures to compute growth rates.

The overall relationship shown in the chart below is very strong over time, although growth in wholesale distribution is more volatile than overall economic growth. (Click the charge to enlarge it.) The correlation of growth rates is 78%.

As I highlighted in 2007 Growth and the 2008 Economic Outlook, the wholesale distribution industry has been growing faster than the U.S. economy during the past three years.

GDP and Your Industry

Yet this overall correlation masks substantial variability between different sectors of the industry. So I statistically correlated year-over-year growth in U.S. GDP with growth in each of the nineteen sectors covered in 2007 Wholesale Distribution Economic Reports. Again, all data are adjusted for price changes.

As the table below illustrates, industrial sectors are more closely tied to the overall economic cycle, while staples such as food and drugs have little relationship to U.S. GDP. Surprisingly, revenue growth in the chemical and oil & gas sectors have little correlation to GDP growth due in part to the unusually close relationship between underlying commodity prices and revenues.

What’s Ahead for 2008?

To learn more about the 2008 economic outlook for wholesale distribution and its primary sectors, please join me on my Wholesale Distribution Economic Outlook audio conference on Thursday, December 6.

You’ll be able to ask me real-time questions during this live event. You can also email me your 2008 economic questions in advance.

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IN MEMORIUM: Erin Anderson

I am sad to report that Erin Anderson, a leading academic authority on distribution channels and co-author of the MBA textbook Marketing Channels, passed away tragically last week. You can view the memorial page at INSEAD.

Erin was the intellectual and professional mentor who sparked my interest in wholesale distribution while I was a PhD student at Wharton. We also co-authored an academic paper on channel management and taught together in the Executive Education program at the Kellogg School. I would not be working in the industry, conducting research, or even writing this blog if not for Erin’s counsel, encouragement, and intellectual enthusiasm.

The Erin Anderson Excellence in PhD Education Fund has been established in recognition of her many contributions to student education. Please consider a tax-deductible contribution to this fund as a way to ensure support for high-quality academic research on distribution channels.

• Donation Form for the Erin Anderson PhD Fund
• Instructions for US-based donors

2007 Growth and the 2008 Economic Outlook

As we start to get ready for 2008, it’s a good time to check in the state of wholesale distribution in 2007 so far.

The overall news is very good. Total sales of wholesale distribution companies are on track to exceed $4 trillion dollars based on the first three quarters of the year (January through September). Once again, the wholesale distribution industry is growing faster than the overall U.S. economy’s Gross Domestic Product (GDP). (See chart below. Click to enlarge.)
Growth varies widely between the 19 major sectors. The table below (click to enlarge) compares 2006 to 2007 using the sectors covered in my 2007 Wholesale Distribution Economic Reports, which are available from the NAW Institute for Distribution Excellence.
Wholesale distributors of building materials and construction supplies had the biggest decline in revenues due to the residential real estate downturn. Other sectors continue to benefit from commodity price inflation, including agricultural products and finished food products. Industrial distributors continue to enjoy healthy growth due to strength in U.S. manufacturing, which is enjoying the export-driven benefits of a weaker dollar.

Getting Ready for 2008

As you start planning for 2008, I want to let you know about my Wholesale Distribution Economic Outlook audio conference on December 6, 2007.

During this call, I’ll give you my exclusive first look analysis at how U.S. economic trends are shaping up for wholesaler-distributors in 2008. I’m partnering with Modern Distribution Management to provide this cost-effective planning tool for wholesale distribution companies. We arranged the conference so that there is only one fee per dial-in number, so an entire management team can listen for just one price.

This will be a live event, so you’ll be able to ask me real-time questions. As always, I welcome your feedback and questions on macro-economic trends and their impact for wholesale distribution. Please be sure to email me your 2008 economic question at least one week prior to December 6. I’ll try to answer as many as possible during the event.

An Ice Cold Bottle of Pay-for-Performance Forecasting

Chapter Three in Facing the Forces of Change®: Lead the Way in the Supply Chain predicts that manufacturers will use pay-for-performance programs to get more from their distributors.

I just read a great story about how a planning manager at beer-maker Heineken created a pay-for-performance plan that could be readily adopted by other manufacturers.

The original article was published in the Journal of Forecasting, but is not online. Supply Chain Digest published a good summary called Using Incentives to Drive Forecast Collaboration.

Beer Goggles

Heineken’s European-made beer is shipped to the U.S. based on orders from either its own distribution centers or orders from independent distributors. Unfortunately, Heineken was getting inaccurate and incomplete forecasts from its distributors in the Southeast of the U.S. (No, distributors did not create their forecasts after sampling products from the warehouse!)

This supply chain is fairly typical in many lines of trade. The manufacturer only sees orders from distributors. Distributors, in turn, only sees orders from their customers. There is no real-time visibility into the actual purchase or usage rate of the product by consumers, so this structure can create inefficiencies for both manufacturers and distributors. (See pages 32-33 of Lead the Way. One solution is to create a more demand-driven supply chain by sharing point-of-sale information.

Beer Games

A creative planning manager at Heineken developed a competitive contest for the individual forecasters at each distributor who created the most accurate forecast. Prizes included $500 gift certificates for the best two and four month forecasts. The best annual forecast won a $2000 gift certificate.

Guess what? Overall monthly forecast accuracy improved by 10% in one year. Another interesting dynamic was some friendly competition among distributors, although, although some distributors turned out to be better at forecasting than others. In other words, this program exposed previously hidden performance differences between distributors.

The benefits of improved forecasting to Heineken are not discussed in the article, but I’d guess that Heineken saw improved costs from better production planning and more stable production runs. They subsequently expanded the program to include other information, such as inventory reporting. If Heineken used the improved forecasts, then the program probably paid for itself.

Based on this story, here are two questions for manufacturers and distributors to ponder:

• What incentives (intended or not) are manufacturers creating for distributors with current discount and rebate program?


• How could a manufacturers use discounts/rebates/fees/marketing funds/prizes to get the attention of wholesaler-distributors and reward results?

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On a related note, beer and scotch guru Michael Jackson (a.k.a The Beer Hunter) recently passed away. I had the privilege of meeting Mr. Jackson in May, discussing a memorable bottle of scotch with him (The Macallan Gran Reserva from 1982), and getting him to sign my copy of Complete Guide to Single Malt Scotch. Check out his books and then raise a glass to Mr. Jackson's unique legacy.