Distribution Trends: 2007 Year in Review

Believe it or not, it’s time for my final post for 2007. In the spirit of the season, I take a quick look back at this year’s posts to highlight the major themes of Distribution Trends.

As you may know, I started writing this blog to help people get the most out of Facing the Forces of Change®: Lead the Way in the Supply Chain, a research study sponsored by the NAW Institute for Distribution Excellence. Many posts have been organized around the four major trends identified in the report, although other themes – economic trends and consolidation activity – generated very high levels of readership, too.

Here is a brief rundown of the year’s posts.

Trend 1: Private Label Products – The impact of private labels on channel relationships turned out to be an especially controversial topic. As I discussed in Brand Killers, private labels will continue to grow in categories where the manufacturer's brand does not add enough value to the customer. The debate in the electrical industry was particularly open because Graybar took a public stance against private labels. (See Private Label Static from Electrical Products.) I still think that private label products can be a way to strengthen manufacturer-distributor relationships by enabling the creation of jointly developed products.

Many private label products come from Asia, a fact that hit home over the summer with the recall of Chinese toys. Personally, I believe that The Risks of Chinese Sourcing have been overblown for political reasons, although private labels offer both Opportunity and Risk to a wholesaler-distributor. Perhaps we will even see a counter-trend toward Near-Shoring Private Labels from Canada and Mexico.

Trend 2: Demand-Driven Channels – The trend toward more data sharing between channel partners challenges many preconceptions about the wholesale distribution industry. I highlighted examples on the blog in channels as diverse as construction equipment and beer distribution. (I do not recommend combining the products from those industries!) Nevertheless, I believe that wholesaler-distributors should only share point-of-sale data with supplier organizations that have rigorous internal security policies for data management. (See Trust and Channel Data Sharing.)

Trend 3: New Profit Models – As I point out in Chapter Three of Lead the Way, many wholesaler-distributors are now successfully selling fee-based services and positioning themselves as suppliers of products with related services instead of only reliably providing goods. I highlighted examples from electronics distribution and industrial distribution. The new profit models trend also refers to the fact channel compensation is becoming more data-based and performance-oriented, as examples from John Deere and Coca-Cola demonstrated. I was also impressed with pay-for-performance forecasting in the beer industry.

Trend 4: Connected Customers – This trend was perfect for a blog because it refers to the growing interconnectedness of manufacturers, customers, and distributors. I advised wholesaler-distributors to Be Found Online, pay attention to Online Customer Communities, and recognize the power of Leads Searching for You. The Future is Already Here was one of the top posts this year on Distribution Trends.

Other Trends – Loyal readers know that I’ve strayed beyond the confines of the four major trends to look at other major issues.

My most popular posts (based on number of web hits) were analyses of economic trends, especially 2008 Economic Growth and You and 2007 Growth and the 2008 Economic Outlook.

As always, consolidation was a hot topic, especially as we all watched the twists and turns of HD Supply this year in Is M&A Peaking? (June), The Fallout from HD Supply (September), and HD Supply Begins to Unroll-Up (December).

Two posts on strategic planning also had very high readership. In Why Strategy Matters, I reminded wholesale distribution executives to pay attention to long-term economic trends when building a long-term vision for your company. In Building Future Leaders, I described how one CEO uses Facing the Forces of Change®: Lead the Way in the Supply Chain as a leadership development tool for managers.

What’s ahead for 2008?

I'm grateful for the positive response to this blog and very much appreciate the many positive emails and comments that I have received since launching 8 months ago.

As I told you in my 2008 Wholesale Distribution Economic Outlook, many wholesaler-distributors will face the toughest economy in nearly five years. Therefore, I plan to cover broader macro-economic developments throughout 2008 while continuing to interpret the news for wholesale distribution executives and their suppliers. Please feel free to email me if you have suggestions for topics or articles.

I'll wrap-up the year with some homegrown supply chain humor, straight from the pages of The Wall Street Jovial:

Santa's Supply Chain Keeps Pace, Despite Changes

I will be back during the week of January 8. Until then, I wish you a healthly and happy new year!

All the best,
Adam

Why You Should Care About the Mortgage Crisis

In my Wholesale Distribution Economic Outlook 2008 webcast last Thursday, I described how the current state of housing and residential construction markets will ripple throughout the wholesale distribution industry. (Click here to order the audio CD, handouts, and transcript of this event from Modern Distribution Management.)

Historically, the housing market was a symptom rather than a cause of economic conditions. Something different is happening today, which why you hear so much in the news about the sub-prime mortgage situation. Right now, the residential housing market is a leading indicator of economic activity.

Wholesale distribution executives who don’t spend time in construction markets may not fully appreciate the degree of interconnectedness or how housing will affect their markets.

I suggest you read yesterday’s excellent front page article from The Wall Street Journal entitled U.S. Mortgage Crisis Rivals S&L Meltdown. The article implies that the ultimate extent of the crisis will depend largely on how steeply the price of the average American home falls. So, here’s some data that I presented on the webcast showing the national index of home prices.

Yikes!

As I described on the webcast, I expect residential housing conditions – both home sales and construction activity – will worsen and are unlikely to rebound in 2008. Residential remodeling activity will also trend down in 2008.

Unfortunately, it will take years to blow off the excesses from the speculative bubble in housing. The wholesale distribution industry will face some major changes during this adjustment period.
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Next week, I’ll cover another hot topic from the webcast: how the U.S. dollar's devaluation will affect prospects for private label products from wholesaler-distributors.

HD Supply Begins to Unroll-Up

HD Supply has reportedly begun the un-roll-up (roll-down?) process.

The Home Channel News is reporting that HD Supply has agreed to sell its Lumber and Building Materials (LBM) unit to Pro-Build Holdings Inc. Modern Distribution Management estimates that the two largest companies in the division had combined sales of almost $800 million when they were acquired in 2005 and 2006. Total revenues in HD Supply’s LBM are surely lower today given the pressures that I highlighted a few months ago in The Fallout from HD Supply.

I’m sure HD Supply (and its new owners) are feeling the pressure of an especially sharp cyclical downturn. Last Friday’s construction data showed an unexpected monthly decline in non-residential construction from September to October. Read the complete release from the Census Bureau. Both public and private nonresidential construction activity has been partially offsetting the residential downturn this year.

The monthly data are notoriously volatile and often subject to substantial revision. I’m more heartened by the fact that commercial construction was up 17.5% versus October 2006 compared to a year-over-year decline of 16.2% in residential construction. Nonetheless, tightening credit standards and growing vacancy rates suggest that 2008 will be weaker for non-residential construction. Unfortunately, I don’t think we’ve hit the bottom on the residential side.

Be sure to join me this Thursday for my Wholesale Distribution Economic Outlook webcast. I’ll give you more details on the 2008 forecast and its implications for wholesaler-distributors.