Chicago, IL — For the second year in a row, managers at member firms of the Power Transmission Distributors Association (PTDA) see no downside to sales in the coming year. That’s based on responses to the most recent annual member survey conducted by PTDA.
Just as they did heading into 2005, nearly all respondents (92.1%) to the association’s 2006 Member Forecast Survey project overall sales volume increases for their companies this year. The remaining 7.9% predict flat sales in 2006 for their firms.
Among distributors, 87.8% expect sales increases in 2006, while 95% of manufacturers anticipate additional volume. None of the 45 distributor and 60 manufacturer members who answered the survey believe their companies’ sales will slip in 2006.
The 2006 forecast results are virtually identical to those for 2005 when it comes to overall sales direction. Last year, 92.3% of all survey respondents expected sales increases and the remaining 7.7% predicted sales would remain constant.
“We’ve had a huge upswing in business,” said Dan Woodward, vice-president of Tech Industrial Sales, a distribution firm based in Danville, Ill. “2005 was a record year for us and we’ve just added two new salesmen to be able to reach out and be seen by customers. You’re forgotten if you’re not in customers’ faces.”
Sales aren’t just rolling in the door for most power transmission/motion control (PT/MC) distributors and manufacturers. Many PT/MC firms are boosting dollar volume because they’re grinding away, while adjusting to changing economic and market landscapes, said Tom Volk, president of Ohio Belting and Transmission Co. of Toledo, Ohio.
“It’s not easy, because for a lot of firms, the traditional customer base is shrinking faster than anyone can adjust,” Volk said. “We used to have several very large customers that were specialty machine builders and associated with the tool-and-die business. There are hardly any of those left. [Now] we’re dealing with a larger, more diverse customer base.”
A lot can depend on the kinds of products offered, types of customers and industries served. For distributors, location and reach can be huge.
“Our economy in Canada has been growing the last two or three years and so has our business,” said Fern Garcia, president of MEP Drives Ltd., a distribution firm based in Oakville, Ont. “But we’re mainly growing by taking away market share, rather than just benefiting from an expanding market.”
To some extent, though, PTDA members’ upbeat sales hopes would seem to be fuelled by positive views of overall economic conditions. Among all survey respondents, 85.4% believe the economy is in a period of growth. That view is evenly shared by distributors (84.1%) and manufacturers (86.4%). Most managers who answered the survey question (59% of distributor respondents and 71% of manufacturer respondents) see growth continuing until 2007 or later.
Some industries that rely heavily on PT/MC products-such as construction, natural resources, packaging and shipping-are booming and buying new and replacement machines and parts.
“We’re optimistic about 2006 and we’re enjoying this strong economy right now,” said Tom Armold, vice-president, product management and marketing of Cleveland, Ohio-based Applied Industrial Technologies (AIT). “We participate in some strong industry segments such as mining, energy management and construction. For example, the aggregate and cement industries are very busy due to continued home and infrastructure building.”
Distributor and manufacturer respondents to the 2006 survey share similar sales gain expectations. The largest segment of each group — 43.9% of distributors and 41.6% of manufacturers — believe their firms’ sales will grow between 5% and 9.9% in 2006.
Manufacturing member executives, such as Took Coder, vice-president of sales of TB Wood’s Inc., Chambersburg, Penn., also see industries that use traditional PT products as keys to strong sales in North America.
“I think sales will be good next year and follow the same trend, mostly being driven by oil and gas, gravel and sand, and food and beverage,” Coder said. “Those are good industries for most companies that manufacture and distribute PT products.”
Many distributor respondents said their firms experienced encouraging sales patterns in Fourth Quarter 2005. Of those firms that responded to the question, half said they had gained new customers in the quarter, while 45.5% said they had both gained and lost accounts. No firm said it had only lost customers.
One key to sales growth in the current market is “finding a niche other than customer service and pricing,” said Tamara Gilbert, owner of S.C. Bearing and Industrial Supply Co. Inc., a distribution firm based in Long Beach, Calif.
“Our niche is our people,” Gilbert said. “They’re really trained and are available to customers around the clock, even if that’s just a voice calling the customer back to say you’re going to be there the next day.”
GROSS MARGINS FLAT
Improving gross margins to fuel profitability remains far more challenging than increasing sales volume for most PTDA member firms, but there is a bright side. A few years ago, both distributor and manufacturer members expressed concerns over gross margin erosion. However, only four respondents to the 2005 survey — one distribution firm and three manufacturing companies — expect margins to slip in 2006.
Even last year, 15.6% of distributor survey respondents and 13% of the manufacturers predicted margin shrinkage.
Still in 2006, a majority (54.8%) of all respondents thinks margins will remain flat. Nearly two-thirds (63.6%) of distributors and almost one-half (48.3%) of all manufacturers fall into this group.
On the plus side, one-third (34%) of distributors and 46% of manufacturers forecast margin increases in 2006. Specifically:
— A noticeable segment of distributors (18.2%) and manufacturers (15%) think margins will grow by 5.0% or more.
— Only one distributor respondent expects margin increases in the 2.0% to 4.9% range, but more than a quarter of the manufacturer respondents (26.7%) anticipate this in 2006.
— 13.6% of distributors and 5% of manufacturers forecast margin growth at under 2%.
One reason for a slightly more positive margin outlook is that some manufacturers and distributors seem to be finding ways to pass along increased costs to customers. Major drivers for these price hikes have been higher costs of steel, fuel, transportation and employee health care benefits.
“We always pass supplier costs increases along to customers automatically,” said Mike Weil, president of Power Transmission Systems, a distribution firm based in Baltimore, Md. “That doesn’t mean I don’t hear gripes or lose some sales, but eventually everyone has to play the same game. As prices creep up, it puts more pressure on us to buy better and carry items that offer better margins.”
According to Mike Pelehach, president of Renold Jeffrey, the reasons for cost increases that impact manufacturing firms like his now are understood better by distributors and, in turn, end users.
“The costs of materials and manufacturing are going up faster than productivity improvements can offset them,” Pelehach said. “Manufacturers don’t have any option other than to raise prices to distributors, who get caught in squeeze if they can’t pass costs along to the user.”
Meanwhile, distribution firms continue to adjust the ways they serve and charge their customers:
— Nearly half (45.5%) of distributors said that customer requirement for local inventory had increased in 2005. Only a handful (6.8%) reported that the need for local inventory had decreased.
— Just under a quarter of distributors (22.7%) said they had increased the number of free services provided to customers in 2005. Most (63.6%) kept the number the same, while 13.6% decreased free services.
— Despite talk of charging customers for servic
es, many PTDA members aren’t taking this route. In 2005, roughly 30% of distributor survey respondents added paid services, while 70% didn’t change their menu of paid services. No responding firms cut the number of paid services they offer.
EMPLOYMENT, SALARIES UP SLIGHTLY
Nearly half (47.6%) of all firms that responded to the PTDA 2006 Member Forecast Survey plan to add employees in 2006, even if the increases will be nominal.
Manufacturers are slightly more bullish, with 51.7% planning to boost employment levels. Only 41.6% of distributors plan to do so.
Of those distributors who plan to increase employment levels, roughly three-fourths say the growth will be under 5%. Among manufacturers who expect to add workers, about 60% say employment level growth will be under 5%. Among the other 40%, half plan employment level increases of 5.0 to 7.9%.
Half of all survey respondents (49.5%) say they intend to keep their employee numbers constant in the coming year. This group includes 56.1% of distributors and 45% of the manufacturers who replied.
Only three firms — one distributor and two manufacturers — that responded to the 2006 member survey plan to decrease employment levels in 2006.
For the most part, salary increases at both distribution and manufacturing firm respondents will be modest. The most popular range for pay hikes is 3.0% to 3.9% with 39.4% of all respondents (34.1% of distributors, 43.3% of manufacturers) anticipating this level.
Some companies plan to be more generous, however:
— One-fourth of the distributor respondents said they’ll increase salaries by an average of 4% to 4.9% and 13.6% said they’ll hand out average increases of 5% or more.
— Just over one-fifth (21.7%) of manufacturers plan salary hikes of 4% to 4.9% and 11.7% said pay increases will average over 5%.
No responding firms said they planed to cut salaries in 2006, but a few — 11.4% of distributors and 3.3% of manufacturers — said they didn’t plan salary increases in the coming year.
According to survey respondents, both PT/MC distributors and manufacturers depended on each other more heavily in 2005.
Most distributors (63.6%) added supplier lines in the past year, while only 29.5% kept the number constant and 6.8% trimmed lines. Most manufacturers (57.6%) increased the number of distributor partners who carry their products, while 33.9% kept their distributor roster constant and just 8.5% cut their distributor base.
In line with this, most manufacturers (58.6%) hope to increase their percentage of sales through distribution in 2006, while 31% expect distribution sales levels remain steady. Only 10.3% anticipate fewer sales through distribution partners.
“We want to use distribution to expand our customer base and hope it exposes us to a steady stream of new business,” said Brian Richey, distribution sales manager for Orthman Conveying Systems, Columbia, MO, a new PTDA manufacturer member.
As always, however, some stress points exist in the PT/MC industry channel relationships.
“I think distribution tends to put emphasis and resources on the logistical side and as a manufacturer, we’d like more put into sales, marketing, application and technical sales side,” said Stan Owens, operations manager of South Beloit, Ill.-based Warner Electric, a division of Altra Industrial Motion Inc.
Founded in 1960, the Power Transmission Distributors Association (PTDA) is a U.S.-based trade association for the industrial power transmission/motion control (PT/MC) distribution channel. PTDA represents 222 power transmission/motion control distributor firms with almost 3,000 locations throughout North America and 13 other countries, as well as over 190 manufacturers that supply the PT/MC industry. For more information, visit www.ptda.org.