Vending ‘Explodes’ as a Service INSIDE

I N S I D E

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VOL. 42, NO. 13JULY 10, 2012

continued on page 3

Commentary: Strong M&A Activity Sign of a Healthy IndustryIndustrial distribution is outperforming other sectors, as highlighted in a recent MDM webcast.Page 2

Interview: Service Drives ValinQ&A with Valin CEO on the strategic ap-proach the distributor has taken to profi t from services.Page 5-7

2012 MDM Market Mover: MSCO Inc.MSCO takes investments in growth to the next level.Page 8

Vending ‘Explodes’ as a ServiceNational distributors’ focus on vending challenges smaller distributors

Vending is now making a signifi cant contribution to many national distributors’ top lines. The trend is most prominent in the industrial MRO sector. MSC Industrial Supply and The Fastenal Company in par-ticular expect vending to play a key role in their growth this year and going forward.

MSC President and COO Erik Gersh-wind told MDM this year that vending for the distributor is “exploding.”

Fastenal has been among the most ag-gressive. In mid-2011, it revealed it wanted to sign up 2,500+ machines per quarter (10,000 machines annually). It seems to have exceeded that goal. In the fi rst quarter of 2012, Fastenal signed up 4,568 vending machines. The distributor says it believes its vending solutions program – called FAST Solutions – could be “transformative in industrial distribution.”

Nearly 18 percent of total sales for Fastenal in the fi rst quarter were with customers using a vending solution. A year ago, just 8.9 percent of total sales could be attributed to these customers.

Some of the more common products vended include safety supplies, fasten-ers, and cutting tools and accessories, the latter because they are more susceptible to pilferage. “We’ve had a huge problem with technicians accurately reporting their usage,” says Jon Schreibfeder of Effective Inventory Management Inc.

Part of the attraction is that vending of-fers both the distributor and the customer more information about usage and prod-uct lifecycles, and vending can be more effi cient than a traditional tool crib, says David Panitch, partner with The Distribu-tor Board.

Manufacturers and other customers prefer to outsource inventory management for what they consider “nuisance items,” says Schriebfeder. “They are not strategic purchases, but they are necessary,” he says.

In the June 25 and July 10 issues, we take our annual look at the state of the distribution industry. The four trends we are covering this year include vend-ing as a growth driver; challenges and opportunities in human resources; the increase in distributors taking action on-line; and consolidation, which appeared in the June 25 issue.

This annual report – the 2012 Dis-tribution Trends Report – accompanies the annual MDM Market Leaders lists, which provide the top distributors.

We also present MDM Market Mov-ers, distribution companies who are innovative in their markets. The second, MSCO, Inc., is profi led in this issue.

Access all articles and lists in this issue and the prior online in a single downloadable pdf at mdm.com/mar-ketleaders.

Questions? Call us at 303-443-5060. - Lindsay Konzak & Jenel Stelton-Holtmeier

2012 MDM Market Leaders & Distribution Trends Report

“… But the lack of the products could cost them a lot” in downtime. “Manufactur-ers want to get lean. They want to keep production lines running and be sure they have the parts to do that.”

Implementing vending at a customer’s location also makes it harder for a custom-er to walk away from an account.

Smaller local and regional distribu-tors are watching the trend closely. “Our distributors are seeing increased demand due to Fastenal and MSC making it part of their offering and doing it for free,” a re-spondent to the 2012 MDM Market Trends Survey wrote.

The increased focus national distribu-

MODERN DISTRIBUTION MANAGEMENT / VOL. 42, NO. 13 / JULY 10, 2012

2

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Merger and acquisition activity in wholesale distribution has rebounded strongly from the 2008-2009 meltdown of fi nancial markets and recession, based on the data and perspectives of our panelists in MDM’s industry M&A update webcast at the end of June. In spite of signs of economic turbulence in the second quarter, overall conditions are favorable for strong M&A activity through 2012.

There may be increased consolidation activ-ity, but we still have a highly fragmented and competitive balance between independent and national distribution alternatives. That makes for a healthy marketplace from my perspective.

This 90-minute program provides perspec-tive on current market conditions and get great perspectives from Dave Hawkins, partner in pri-vate equity fi rm CHS Capital, and Charley Hale, co-president of FcX Performance, a specialty fl ow control products distributor that has grown aggressively through acquisition and also has experience in private equity partnerships.

It’s a competitive environment between strategic buyers (distributor acquirers) and fi nancial buyers (private equity fi rms investing in distribution sectors). That’s borne out by data presented by Jason Kliewer, director of invest-ment banking fi rm Robert W. Baird’s distribu-tion group, which closely tracks the industry

and co-produces a quarterly survey of condi-tions with MDM.

This year is on pace for the most deals, with 33 to date, valued over $10 million since 2006, the last time M&A activity in distribution reached a peak in valuations and intense compe-tition.

But one of the key messages panelists had for potential sellers is to not expect the same level of frenzy that characterized those times, when sales were reported at EBITDA multiples of 12-13x. Baird’s charting of valuations since 2000 shows that the median EBIDTA multiple for industrial distribution M&A has been 5.4x for companies with an enterprise value of up to $50 million.

Baird’s Distribution Financial Metrics and Trading Multiples, published quarterly in MDM, is an index of publicly traded distribution companies. It has posted a 15 percent compound annual growth rate (CAGR) or a total increase of 378 percent since 2000. The index outperformed the S&P 500 by 388 percent since 2000 and 8 per-cent in the last 12 months. As our webcast ad-dresses, there are good reasons to be optimistic about the competitive balance and opportunities to create value in wholeale distribution.

Access the 2012 Wholesale Distribution M&A Update at mdm.com/2012-MA-update.

M&A Markets for Industrial Distribution Strengthen

P E R S P E C T I V E Commentary by Thomas P. Gale

Contact InformationQuestions, comments, article proposals, address changes or subscription service to:

Gale Media, Inc.3100 Arapahoe Avenue, Ste 201, Boulder, CO 80303Tel: 303-443-5060 Fax: 303-443-5059Website: http://www.mdm.com

Subscription RatesTo subscribe to Modern Distribution Management, please call 303-443-5060, email [email protected] or http://www.mdm.com/subscribe.

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Copyright © 2012 by Gale Media, Inc. All rights reserved. Modern Distribution Management® and mdm® are registered trademarks of Gale Media, Inc. Material may not be reproduced in whole or in part in any form whatsoever without permission from the publisher. To request permission to copy, republish, or quote material, please call 303-443-5060.

ISSN 0544-6538

MODERN DISTRIBUTION MANAGEMENTFounded in 1967 by J. Van Ness Philip

PublisherThomas P. [email protected]

EditorLindsay [email protected]

Associate PublisherCraig [email protected]

Associate EditorJenel [email protected]

John AllenbachSVP, Professional Sales, Apex Tool Group

Kevin BoylePresident of Industrial Distribution Consulting LLC

Ted CowieExecutive Vice President, Elvex

Larry DavisPresident, ORS Nasco

Larry GoodePresident of Goode Advisors Inc.

Julia KleinChairwoman and CEO, C.H. Briggs Company

Stuart MechlinIndustrial distribution industry

Doug SavagePresident and CEO, Bearing Service Inc.

Burt SchragaCEO, Bell Electrical Supply

MDM Editorial Advisory Board


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3


tors are putting on the service has put some pressure on small and regional distributors to be more proactive in offering vending, even if their original plans to do so were still a few years out.

“Our distributors are seeing increased de-mand due to Fastenal and MSC making it part of their offering and doing it for free,” a respon-dent to the 2012 MDM Market Trends Survey wrote. Another survey respondent wrote: “Over the past few years, the national distributors have entered the market, and as is usually the case when they enter a market, they do so on price because they have not accumulated any exper-tise. Example: offering ‘free’ vending machines, which of course are not ‘free’ – it just looks that way. And when it looks free, the demand will naturally increase.”

Some distributors say they aren’t interested in competing with vending. “We’ve taken some hits in vending, but overall every distributor has to ask the customer: ‘What problem does vend-ing solve?’ There are a lot of factors that go into vending being a proper solution for a company,” says Pete Biocini, president and COO of indus-trial distributor RS Hughes.

Smaller distributors can hold an advantage,

VendingContinued from page 1

Schreibfeder says. “Where I see a huge advan-tage is that they understand the needs of major customers and can stock according to their needs,” he says.

The vending trend brings with it a few chal-lenges for smaller competitors:

The capital investment needed to purchase the vending machines to compete effectively on this front with larger distributors can be prohibitive. Eventually, the cost may fall, eve-ning the playing fi eld more. “You have to have a signifi cant amount of sales to justify this,” Schriebfeder says. He says that in many cases, a vending machine is a better choice than simple consigned inventory, despite the cost, because of the control distributors will have over usage.

Some distributors say that vending ser-vices are not for every customer. Because of this distributors are fi nding themselves educating customers on the pros and cons to this approach.

Not every product line is profi table through vending. Vending works best with higher-priced small items, says Jason Bader of The Distribution Team. Sales should offset the cost of the machinery and the technology associ-ated with installing a vending machine.

In the 2012 MDM Market Trends Survey, about a third of respondents said they are seeing increased demand from customers for inven-tory management services compared with past years’. About 50 percent said they are seeing the same demand.

Grainger is homing in on customer inter-est in inventory management with its program KeepStock. Mike Pulick, formerly Grainger U.S. president, told MDM this year that the distribu-tor’s KeepStock program continues to grow rapidly. “If we look at the number of customers that use one of our KeepStock solutions, what we fi nd is they’re growing twice as fast as our normal business.”

Eric Max, vice president of sales and market-ing for the Genie Group, an electronics distribu-tion marketing group, says that electronics dis-tributors are also seeing an increase in demand for vendor managed inventory.

In the MDM survey, one respondent said: “It seems like customers want more of just-in-time deliveries, using more of our inventory instead of stocking for themselves.”

That’s partly driven by concern over infl a-tion. Customers want dedicated and protected

supplier inventory to hedge against extremes.Internally, distributors also are increasingly

strategic about how they are stocking their ware-houses. Jason Bader of The Distribution Team says executives are working harder to make sure their companies are structured to meet the growing demand many are seeing right now. They are wringing as much functionality out of their software that they can, he says. Or they are upgrading their systems or adding bolt-ons to improve how they manage inventory. “They want to be sure they are not selling out of an empty wagon,” Bader says.

Jon Schreibfeder of Effective Inventory Man-agement Inc. agrees. “I see a lot of business own-ers looking at metrics they have never looked at before,” he says.

Schreibfeder says that another driver this year is that companies are still apprehensive about the economy. They continue to run lean because of that. “People are not anxious to buy large quantities. They want to increase inventory turns,” he says. While he saw optimism earlier in 2012, distributors are pulling back again. “They want to meet the customers’ needs with the least amount of inventory possible,” he says.

Distributors, Customers Put Inventory Under the Microscope


4


As the economy improves and sales increase, distributors are fi nding themselves in the posi-tion of needing to hire more people. But even with a high overall unemployment rate across the country, fi nding the right people to fi ll open positions remains a challenge.

“Everybody wants to have someone who ‘plugs-and-plays,’ someone who already knows the industry,” says one building materials dis-tributor in the Midwest. “But there just aren’t that many of those people out there, and they’re hard to fi nd.”

Part of the problem is generational. “The 24-year-old coming out of college today is look-ing for something very different than when I was 24 coming out of college,” Wurth North America CEO Robert Stolz says. “You really have to adapt to the culture of the generation that you’re recruiting.” That translates to chang-ing everything from how you train new workers to how you allow them to communicate with customers and other employees.

It’s a challenge distributors across sectors are facing. “In a very electronic, very connected age, what do we need to do to attract the best people to work for us?” asks Brad Greene, vice president of human resources and communica-tions for Rexel Holdings USA.

It helps that more schools are offering dis-tribution-focused programs. Several distributors try to hire students from these programs. But even with a robust college recruiting program, Greene says it can still be a challenge to con-nect with the next generation. “In general, the distribution business has not been a fascinating area young people think about building a career around,” says Richard Harrison, president and CEO at GHX Industrial, LLC.

“It’s a job to them versus a career opportu-nity; they’ll leave if they’re offered a nickel more per hour from someone else,” says one building materials distributor. Distributors need to sell their industry as a long-term opportunity, which can be challenging. “Distribution has lost a lot of its luster,” says David Panitch, a partner at The Distributor Board. “Young people are more interested in careers in tech or social marketing.”

And it’s becoming more diffi cult to fi nd people who want to do sales at all, says Ted Stark, president of Dalco Enterprises, a janitorial supplies distributor. For example, they had a position open in the Upper Peninsula in Michi-

gan – the offi ce is two blocks from a university. “I thought for sure a college student or recent college graduate would be interested in sales, but we’ve gotten no response whatsoever,” he says. “It surprised me.”

Even in the larger metro areas, such as the Twin Cities, Stark says that most of the people they are considering for jobs have already been in the industry. “We’re not seeing a lot of young people coming out of college trained to be a salesperson or with desire to be a salesperson.”

As a result, competition for the qualifi ed and interested pool has become fi erce in some markets. “The challenge is recognizing that the market has turned to a more candidate-driven market,” Ted Konnerth, president of Egret Con-sulting Group, says. “And compensation is go-ing to start refl ecting that.” Egret is an executive search fi rm operating in the electrical sector.

That prospect has some distributors hesitat-ing about hiring new people. There’s still a lot of uncertainty about the economy. “Many compa-nies are leaning to hiring temporary or part-time help because there is no confi dence that this is a permanent uptick,” says Ruth Kellick-Grubbs, president of Kellick and Associates.

Perhaps one positive sign for the industry is that it appears people are “job-hopping” less than they have in the past, according to Stolz. People who have been in the industry and feel connected to the industry are looking for ways to continue to grow and develop in the industry.

There are limits to that dedication; reloca-tion is not an option for many people anymore, Greene says, a challenge for a company that ap-proaches hiring with a national vision. A person recruited in Chicago may be expected to work in Southern California where the opening actually is. “More people are expressing unwillingness to make that move, for whatever reason,” he says.

Not all distributors are seeing hiring the right people as a challenge. Joe Llewellyn of Mayer Electric says it’s no more challenging than it was fi ve or 10 years ago, but more people may be talking about it now. A piece of the hir-ing puzzle for Mayer is creating an environment where people want to work. The company has been recognized in several markets – Atlanta, Birmingham, South Carolina and Nashville are some of the most recent – as a “Best Place to

2012 Distribution Trends Report

Hiring, Retention Pose ChallengesAs economy improves, fi nding trained and interested workers proves diffi cult


www.mdm.com

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Services Drive Growth for ValinMDM Interview with Valin CEO Joseph Nettemeyer

Services make up more than a third of Sunnyvale, CA-based industrial distributor Valin’s revenue, up from just 5 percent fi ve years ago. That growth has been no accident. Valin CEO Joseph Nettemeyer spoke with MDM Editor Lindsay Konzak about the distributor’s strategic approach to fee-based services and the culture shift that has gone along with that.

MDM: How are things going for you this year?

Joseph Nettemeyer: We were up 19 percent in the fi rst quarter. I’m trying to get my hands around where we’re going to end up this quar-ter. I expect us to be up double-digit year-over-year.

MDM: What’s driving growth?

Nettemeyer: There are two things. One is we design and build custody transfer measure-ment systems for the oil and gas industry, and that business is going very strong this year. It’s doubling in size. They are one of our pleasant problems because we’re running hard to keep up with the growth in that group. And the other thing that’s contributing to the growth was at the end of last year we made an acquisition in the Northwest and those revenues on a year-over-year basis are contributing to the growth.

MDM: You have worked to build a more inte-

2012 MDM Market Leader Profi le

grated relationship with your customers, with a primary focus on services. How did that strat-egy originally develop?

Nettemeyer: We decided about 2007 that we were going to focus on acquiring businesses that would give us design-and-build capability on a selective basis. We’re not trying to pro-duce the products that our suppliers supply to us, but we’re designing and integrating them into systems or subsystems that can be used by our customers and add more value. There isn’t a whole lot of value in product feature and benefi t selling now; it’s about engineering and integration and software support, and those are the things that we’ve been investing in. We’ve bought a couple of small services businesses where we’re providing fi eld service to custom-ers on a contractual basis. That’s up to about 35 percent of our revenue now. And fi ve years ago, it was less than 5 percent.

MDM: Were you surprised how quickly that grew?

Nettemeyer: No, we did it by design, and we had businesses we were targeting. We felt there was an opportunity there. We built that into our

Work,” something Llewellyn attributes to the family-focused nature of the business.

With all the challenges involved in recruiting new employees, the focus for many distributors has turned toward encouraging development of existing employees. Today’s products require a higher level of technical knowledge, and sales people need to keep evolving, as well, according to M. Jay Heilbrunn, a partner at The Distributor Board.

But the percent of sales allocated to training is “negligible” at most companies, according to David Gordon, president of Channel Market-ing Group. “It’s unfortunate because they really have to train new employees in the way the in-dustry does things,” he says. It’s not knowledge they’d be able to get elsewhere.

Several distributor respondents to a recent MDM survey indicated that fi nding the time and resources to train new people is a struggle. But

they also view it as essential. Some distributors appear to be investing

more in the employees they already have, ac-cording to Mike McGuire, editor and publisher of American Fastener Journal. For example, the Fastener Training Institute – part of the Pac-West Fastener Association – has been selling out industry training sessions as never before and sales of a “study guide” created by Ameri-can Fastener Journal have picked up in recent months.

For one industrial distributor, the answer was simple: “There are always challenges in these areas. The answers are always the same: treat your people right, honor your commit-ments to them, create opportunities for growth. … When we create a good work environment for current employees, they spread the word far better than we can.”

View the Top 40 Industrial Distributors & largest distributors in 13 other sectors at www.mdm.com/marketleaders.

Online Resources


6


fi ve-year plan, and then we made our fi rst small acquisition at the end of 2007. We made fi ve ac-quisitions in 2009, including a major acquisition of an automation business in 2009. In 2010, we got into the oil and gas industry.

Then last year we bought a fl uid power distributor with about 25 percent of their busi-ness in value-added in either on-site service or assembly of subsystems. They have a program that they have had success with at Boeing, in the Northwest, and we were pretty confi dent that we could grow that business in the other geo-graphic areas we’re in because it’s a niche thing.

MDM: Do you have any more plans for acquisi-tions going forward?

Nettemeyer: We try to target acquisitions of about $15 million in sales a year. Some years we do a little more, some years we do a little less.

MDM: Defi nitely a critical piece of your growth strategy right now.

Nettemeyer: Absolutely. The industry has to consolidate, and we’re a consolidator. Since I came here in 2001, we’ve made 26 acquisitions.

MDM: Another service you offer is inventory management. What are you doing in this area? How does inventory management play into your services strategy?

Nettemeyer: Well, we’re doing a couple of dif-ferent things. With some of our large customers, we will maintain on-site inventory. For example, with one of our customers, we have an embed-ded employee who actually works in the build-ing and reviews their demands every day and triggers to us that we have to bring product in. It’s a cost reduction for them because they don’t have to have somebody to do it, and for us it’s a competitive advantage because we’re providing a service. They’re essentially outsourcing man-aging our portfolio of products to us.

For some of our customers that are sig-nifi cant users, we have service trucks that go out and inventory the products, and we do it with wireless devices and transmit replenish-ment orders. We call that bid management. In a couple of cases, we’ve pushed our inventory to our customer’s facility and will manage it on-site for them, which they like. We do different things. We’ve been tinkering with the vending machines, but it doesn’t lend itself to a product that’s a little more diverse. Not all of it fi ts into a vending machine very well. We haven’t had

much success there yet, but we’re testing a few with key customers, and we’d have to fi gure out how to make it work for us.

MDM: Another service you offer is fee-based educational programs. Could you outline what that is and how successful that has been?

Nettemeyer: We originally started that with a fee-based program on how to program PLCs and caliper sensors. It was a two-day school. We do pretty well with that because the engineers require that training. We just published a book on control valve theory written by one of our employees, and we’re starting to fl esh out a number of programs. We hired a director of edu-cation two years ago with a Ph.D. in education, who spent most of her career in private sector education. She’s developing online programs, and we’ll be rolling those out here in the next 12 months. They are certifi cate programs. We plan in the next few years to have a series in our key product portfolios where for a fee, somebody can come on, take the course, and get certifi ed. I think training provides us with a couple of things: It gives us access to customers, and it gives us the opportunity to be thought leaders.

MDM: How long have you been doing that?

Nettemeyer: We started experimenting with it about four years ago, and that’s what led us to make the decision to hire someone who knows how to put these programs together. She is also charged with developing internal training programs. The real challenge that we have when we make acquisitions is getting the new employ-ees oriented with our business approach and culture, and she’s been putting a lot of time into that because by acquisition, we’re probably add-ing anywhere from 25 to 40 employees a year.

MDM: A lot of people say “we provide solu-tions,” but it sounds like you have actually taken a very strategic approach to making sure that’s what you’re actually providing.

Nettemeyer: That is a key part of our strategy. It’s one thing to talk about it, but you have to ex-ecute on it, and the good news is, as we continue to advance and the more engaged we get in each of these initiatives, our understanding of the op-portunity expands. We just have to contain our-selves and say, “Okay, let’s stay on our schedule. Get this thing done, and then we’ll move to the next opportunity.” The biggest challenge for me is to make sure that the organization stays


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7


focused and we don’t start chasing things – that we just keep addressing the opportunities in a orderly fashion.

MDM: You have succeeded in being able to charge for services and grow that part of your business. This can be a challenge. What kind of advice or lessons learned can you offer other distributors? Why is it so diffi cult, and what are some thoughts for distributors who want to move toward a more strategic approach to services?

Nettemeyer: Don’t confuse market management with market communication. Spend the time to break the market down into targeted niches. We’ve made a big shift in that approach. Now there has got to be justifi cation, and we have to understand what the opportunity is before we will put capital into it. So we’re becoming more market management-focused, and we’re trying to take macro-market segments and break them down into niches. And then work at ascertain-ing which niches we can create a competitive advantage in. You’re migrating a culture from a proverbial shotgun approach to one of marks-men and snipers. We need to really understand what we want to go after. And then build a port-folio of products and services around that that gives us a highly defendable position.

Many companies pride themselves on cus-tomer relationships, but if your relationship is based on your products, your differentiation, at some point, becomes price. You’ve got to bring other values into that, such as engineering or manufacturing assistance. Or it could be inven-tory management assistance or educational. You have to bring people into your organization that are good at identifying opportunity and carving out those niches. I don’t want to chase a billion-dollar market. I want to fi nd the most profi table opportunities within that and see if I can build a business model that gives us an opportunity to have a dominant position.

I think people confuse marketing with advertising and literature. You have to do the analysis. You have to become more data-orient-ed. That’s the biggest challenge.

MDM: Do you struggle to fi nd the right people to fi t into that culture or do you have a strategy to ensure that you get the right people in place? It seems that would be a huge part of making sure that this approach works.

Nettemeyer: Three years ago we were really struggling with that. We were struggling be-

cause we needed a larger company approach to identifying and recruiting talent, and we were still kind of mom-and-popping it. We went out, and we benchmarked best practices. And we put a whole new hiring process in place. It’s taking us longer to fi ll jobs, but I think we’re doing a better job of getting the right people. In the past, we were hiring quickly, and we just weren’t rigorous enough in our hiring process.

MDM: What role does e-commerce play for Valin given your approach to the market?

Nettemeyer: We view our website as an impor-tant communication tool for us. We’re loading it with a lot of technical content that’s important to engineers, but at the same time, we are putting all the transactional capability in that. As one of our services, we’ve been providing custom-ers with a personalized page, and all they have to do is go on and populate the quantities they want to buy. If they want it right now, it’s in the warehouse to be picked up in 10 minutes. We think service is going to be a big part of going forward. We’re fi nding as the newer college graduates are coming in, more of them want to get their information via the Internet. So we have to be content-rich. We’re up to about 17 percent of our transactions coming through now electronically. We’d like to get it to 35 percent in the next fi ve years. You have to keep making people want to use your site, so we will continue to spend money in that area.

MDM: In addition to current customers, you also get exposure to new customers through your website?

Nettemeyer: Yes. We’re spending a lot of time on search engine optimization and search engine marketing. We have a customer newsletter that goes out that talks about our products and ser-vices that we’re featuring, and we put links in to drive them back to our website.

What’s happening is customers want you to be able to communicate with them in some other way than having a salesperson visit. Investing in more salespeople isn’t going to give us the same results.

My children are all in their 20s and early 30s now, and they don’t want a salesman coming over. They want to get online and fi nd out what they need and get it done. That’s a big change, and I think we’ve been fortunate to recognize that. It’s paying dividends for us. I think we’re on the right path, but we’ve got a lot to learn yet.



8

2012 MDM Market Mover

Distributor: MSCO Inc.Headquarters: Sheffi eld, ALLeadership: Gordon, Doug and David RugglesDetails: Industrial distributor MSCO invested during the downturn and has seen double-digit growth as a result of its new safety division, acquisitions and ongoing integrated supply success.

MSCO Profi ts from Investment in DownturnDistributor sees growth in new safety division, acquisitions, integrated supplyIn 2012, MDM is recognizing distributors that are innovative in their approach to their markets. Indus-trial distributor MSCO is the second of two featured as an MDM Market Mover this year.

By Lindsay Konzak

Industrial distributor MSCO Inc.’s growth has been driven in recent years by its investments during the downturn and ongoing focus on diversifi cation. The Alabama-based distributor, with $80 million in annual sales, grew more than 10 percent from 2010 to 2011.

“During uncertain economic times, we were aggressive in acquiring companies, starting a new division, and we were successful in landing new integrated accounts,” says David Ruggles, one of three brothers that run the company. “We saw the downturn as an opportunity. Short-term it was tough on us like everybody else. But we saw an opportunity to grow market share and grow into new markets.”

The distributor has been proactive in its ap-proach to growth through its divisions, Martin Industrial Supply, Martin Plant Services, Mar-tin Fastening, Townsend Door Hardware and Townsend Systems. It launched a new safety division, Martin Safety Solutions, in 2011. While many distributors have tacked on safety prod-ucts as a complementary offering, MSCO has taken the strategy to another level.

Customers wanted a safety company with expertise. When a potential acquisition of a safe-ty specialist did not go through, MSCO decided to launch a safety division organically.

“We saw it as a natural progression for our company,” David Ruggles says. “But to be in it, you can’t be halfway there. You have to be in the business and be a total safety company.” It hired a group of specialists, and over the past 12 months they are ahead of schedule in terms of where they expected sales to be. This success has contributed to the distributor’s double-digit rate of growth so far in 2012.

Acquisitions and integrated supply have also contributed to the distributor’s growth.

While many family-owned companies have sought an exit post-recession, the brothers that run MSCO are committed to staying and be-coming another option for family businesses that want to sell. Acquisitions will remain an important part of the distributor’s growth, Doug Ruggles says. Atlanta, GA-based Ziegler Tools is

the latest company to join MSCO’s fold.“One of the advantages we offer is that

we’re a privately owned business with a lot of the same culture they are looking to maintain,” he says. MSCO considers companies with one to three branches, and up to $30 million in sales. The priority: fi nding a good cultural fi t.

One way the company fi nds acquisition candidates is through networking. MSCO is an active member of several groups in distribution, including the Industrial Supply Association and SupplyForce, a network of distributors that deliver MRO programs to national customers. “Our latest acquisition came through a relation-ship we had for 30 years,” Doug Ruggles says.

Geographic expansion beyond the Southeast U.S. is another driver for MSCO. “We always have and continue to have the belief that grow-ing the geographic footprint is important to the future of the company,” Doug Ruggles says. But any physical expansion will be driven by a customer need, he says. The distributor serves customers nationwide and in Canada, Mexico and China.

Ultimately, the customer is what drives MSCO in all its expansion decisions, the broth-ers say. That’s why they have succeeded over decades of offering integrated supply services, for example, where some have struggled to pro-duce an ROI. “When you approach it with the customer working together to solve the problem, typically you can fi nd a way to have a fair return on investment and they can have a lower total cost,” Doug Ruggles says.

MSCO recognizes the challenge in keeping a focus on the customer as it grows. Culture is a big part of that, he says. “That’s a big challenge for us going forward. We’re looking every day for talented people to help us grow the business. That’s probably the No. 1 thing we’re focused on is protecting that culture and communicating and emulating that to the rest of our team.”

Read about C.H. Briggs, also a 2012 MDM Market Mover for its use of technology to better understand and engage customers, at www.mdm.com/marketleaders.

Online Resources


VOL. 42, NO. 13 | JULY 10, 2012

Industrial & Construction Markets Update

Distributor NewsChicago-based Lawson Products Inc. will eliminate 100 positions (11 per-cent of its workforce) as part of a strategic restructuring. The restructuring includes initiatives that will reduce its cost structure, improve operating effi ciency, enhance revenues and improve its liquidity position.

MSC Industrial Direct Co., Inc., Melville, NY, reported sales for the third quarter ended May 26, 2012, were $612 million, up 15 percent over the same period a year ago. Profi t increased 13.1 percent to $70.2 million. For the fi rst nine months of fi scal 2012, sales were $1.72 billion, a year-over-year increase of 15.6 percent. Profi t grew 19.3 percent to $159.3 million.

Motion Canada, Burnaby, BC, a division of Birmingham-based Motion Industries, Inc., has opened a new branch in Cranbrook, British Columbia.

Kaman Industrial Technologies Corp., a subsidiary of Kaman Corp., Bloomfi eld, CT, has acquired Florida Bearings Inc., Miami, FL. Florida Bearings has annual sales of $20 million.

Singer Equities, Glen Burnie, MD, has acquired Hanna Rubber Com-pany, Kansas City, MO. Hanna is Singer’s seventh platform company, and its fi rst in the Midwest.

Praxair Canada Inc., a subsidiary of Danbury, CT-based Praxair, Inc., has acquired Canadian Cylinder & Gases Inc., an independent distributor of industrial and specialty gases and welding equipment.

Avnet, Inc., Phoenix, AZ, has acquired Altron GmbH & Co. KG, Lehrte Germany. Altron had 2011 sales of US$30 million.

Avnet has agreed to acquire the Magirus Group, a pan-European distribu-tor of data center solutions and services.

Beacon Roofi ng Supply Inc., Peabody, MA, has acquired Structural Mate-rials Co., a Santa Ana, CA-based distributor of residential and commercial roofi ng products and related accessories.

Beacon Roofi ng Supply opened its 200th branch in Myrtle Beach, SC.

Alamo Iron Works, San Antonio, TX, a subsidiary of Industrial Distribu-tion Group, has acquired SGS Industrial Supplies Inc., a distributor of steel and industrial products in the Rio Grande Valley.

International distributor and outsourcing group Bunzl plc has acquired Service Paper Company, Sumner, WA. Sales in 2011 were $61 million.

Acuity Brands, Inc., Atlanta, GA, reported sales for its third quarter ended May 31, 2012, of $487.5 million, a 6.4 percent increase over the same period a year ago. Profi t increased 23.9 percent to $33.6 million. For the fi rst nine months, sales were $1.4 billion, a 9 percent increase year-over-year. Profi t increased 16.5 percent to $83.1 million.

Outlook: Manufacturing Will Continue to Grow in 2012

continued on p.2 of this section

U.S. manufacturing will leverage solid fi rst-quarter momentum to a signifi cant growth increase in 2012, according to the Manufacturers Alliance for Productivity and Innovation (MAPI) U.S. Industrial Outlook, a quarterly report that analyzes 27 major industries.

Manufacturing will continue to grow at a faster pace than the general economy in 2012, thanks in part to a 10 percent an-nual rate in the fi rst quarter of the year; it will decelerate to an average of 3 percent the remainder of the year.

“There is pent-up demand for consumer durable goods, particularly for motor vehicles, fi rms are profi table and have pent-up demand of their own for replacing traditional and high-tech business equipment, and there is strong growth from emerging economies for equipment to build their infrastructure,” said Daniel J. Meckstroth, Ph.D., MAPI chief economist and author of the analy-sis. “One negative is that the recession in Europe will have the effect of canceling out any net benefi t from trade this year.”

The positive news for manufactur-ing is also tempered by anticipated slow growth in the overall economy.

“We forecast that GDP growth will increase at annual rates of 2.1 percent over the next fi ve quarters,” Meckstroth said. “These growth rates are categorized as a relatively modest pace and well below what would be considered normal for an expansion following a severe re-cession. Consumers are deleveraging and are reducing debt and therefore can only increase spending commensurate with employment and wage growth.”

The report offers economic forecasts for 24 of the 27 industries. MAPI antici-pates that 18 of these will show gains in 2012, 3 will remain fl at, and 3 will decline. The engine, turbine, and power transmission equipment sector will grow by 32 percent and housing starts will see a 22 percent increase. Broad-based ad-

continued on p.4 of this section



MARKETSUPDATESUPPLEMENTP. 2

Economic NewsNew orders for manufactured goods in May increased $3.3 billion or 0.7 percent to $469 bil-lion, the U.S. Census Bureau reported. Excluding transportation, new orders increased 0.4 percent.

New orders for manufactured durable goods in May increased $2.3 billion or 1.1 percent to $217.2 billion, the U.S. Census Bureau reported. This increase, up following two consecutive monthly decreases, followed a 0.2 percent April decrease.

Construction spending during May 2012 was estimated at a seasonally adjusted annual rate of $830 billion, 0.9 percent above the revised April estimate of $822.5 billion, according to the U.S. Census Bureau. The May fi gure is 7 percent above the May 2011 estimate of $775.8 billion.

The Purchasing Managers Index (PMI) regis-tered 49.7 percent in June, 3.8 percentage points lower than May’s reading of 53.5 percent, ac-cording to the latest Manufacturing Institute for Supply Management Report on Business. The reading indicates that the manufacturing sector contracted in June.

In May, the Industrial Product Price Index (IPPI) was unchanged from April. The Raw Ma-terials Price Index (RMPI) fell 1 percent, largely because of lower prices for crude oil.

U.S. HVACR average distributor sales for May 2012 were up 17.9 percent, Heating, Aircondi-tioning and Refrigeration Distributors Interna-tional (HARDI) announced.

The Chicago Fed National Activity Index (CFNAI) decreased to -0.45 in May from +0.08 in April, led by declines in production-related indi-cators. Of the four broad categories of indicators that make up the index, three deteriorated from the previous month and two made negative contributions in May. The index’s three-month moving average, CFNAI-MA3, ticked down from -0.13 in April to -0.34 in May, its lowest value since June 2011.

The Chicago Fed Midwest Manufacturing Index (CFMMI) decreased 1 percent in May, to a seasonally adjusted level of 93.4 (2007 = 100). Revised data show the index was up 2.5 percent in April. The Federal Reserve Board’s industrial production index for manufacturing (IPMFG) decreased 0.4 percent in May.

News DigestContinued from p. 1 of this section

Brazil, Argentina Manufacturing Slows; Mexico Output Grows

Brazil and Argentina are suffering from dimin-ishing competitiveness in the industrial sector and lower demand for exports, but Mexico is benefi ting from a strong, resilient domestic con-sumer and robust export demand, according to the Manufacturers Alliance for Productivity and Innovation (MAPI) Latin America Manufactur-ing Outlook, a semiannual analysis that exam-ines the latest trends and provides a near-term forecast for 16 major industries.

The report, authored by Fernando Sedano, Ph.D., MAPI Economic Consultant, focuses on Latin America’s three largest economies – Bra-zil, Argentina and Mexico – as these countries are responsible for more than 80 percent of the manufacturing output in the region.

MAPI forecasts that overall manufacturing output in Latin America will grow 3.1 percent in 2012, lower than the 4.4 percent growth pre-dicted in its December 2011 report. Output is anticipated to increase by 4 percent in 2013.

In developing its forecast, MAPI utilizes data from national statistical agencies, assigning weighted average annual production indexes for each industry. The weights are determined by a country’s value-added in U.S. dollar terms in each sector, using MAPI’s proprietary econo-metric model.

Brazil’s manufacturing activity stopped growing a year ago and has been contracting during the past six months. The ongoing manu-facturing recession will be followed by a mod-erate recovery driven by government-induced incentives that will stimulate demand in the second half of 2012.

Mexico’s manufacturers continue growing on the heels of strong exports to the U.S. and a resilient domestic market. Growth is origi-nating in the automotive and machinery and equipment sectors and is fi ltering through their supplying industries. MAPI expects that the ongoing solid performance of Mexico’s manu-



2011 2012 (F) 2013 (F)Food and beverages 3.0 4.3 3.5Wood products (excluding furniture) 2.3 5.4 1.7Paper and paper products 2.1 4.0 4.3Coke, refi ned petroleum products, nuclear fuel -2.0 3.1 3.3Chemicals and chemical products 1.2 3.7 3.9Rubber and plastics products 3.8 2.8 4.5Nonmetallic mineral products 4.2 4.0 3.6Basic metals 2.4 3.6 5.5Fabricated metal products 6.0 4.8 7.4Machinery and equipment n.e.c. 3.2 8.8 8.0Offi ce, accounting, and computing machinery -1.4 2.2 6.8Electrical machinery and apparatus -1.5 3.2 7.8Radio, television, and communication equipment 4.8 -3.8 10.4Medical, precision, and optical instruments 10.3 7.7 1.9Motor vehicles, trailers, semi-trailers 12.8 2.9 6.4Other transport equipment 6.5 9.4 14.2Latin America Manufacturing Index 3.0 3.1 4.0

MAPI Forecast for Latin America Manufacturing Production (annual percent change)

facturing will continue in the next few quarters, as all leading indicators are at levels associated with an expansion.

Argentina’s manufacturing is decelerating considerably, however, as protectionist measures affect supply chains and as the authorities’ inter-ventionist stance intensifi es, leading to a nega-tive confi dence shock.

“Our outlook for 2012 in this report is tempered as the result of an ongoing recession in Brazilian factories and a major slowdown in Argentina,” Sedano said. “Manufacturing activity in these two countries is suffering from infl ation-adjusted exchange rate appreciations that are hurting competitiveness. On the con-trary, Mexico’s manufacturers are in relatively

better shape.”The report sees growth in 15 of the 16 in-

dustries in 2012 and in all 16 industries in 2013. Three industries – food and beverages, motor vehicles, and machinery and equipment – ac-count for roughly 45 percent of the region’s manufacturing and are therefore most important to the forecast.

Food and beverages production, the larg-est industry in the region and one of the most stable, should grow by 4.3 percent in 2012 and by 3.5 percent in 2013. The automotive sector is forecast to improve by 2.9 percent in 2012 and accelerate to 6.4 percent in 2012. Machinery and equipment is forecast to see 8.8 percent growth in 2012 and an 8 percent advance in 2013.

The Conference Board Measure of CEO Confi -dence, which had improved in the fi rst quarter of this year, decreased in the second quarter. The Measure now reads 47, down from 63 last quarter (a reading of more than 50 points refl ects more positive than negative responses).

Lynn Franco, director of Economic Indica-tors at The Conference Board, said: “CEOs began the year quite upbeat, but the lackluster perfor-mance of the economy so far, and expectations of more of the same, have clearly impacted at-titudes. On a positive note, CEOs remain con-fi dent profi ts will continue to increase, driven primarily by market/demand growth.”

Survey: CEO Confi dence Declines, But Profi t Expectations Remain StrongCEOs’ assessment of current economic con-

ditions has turned considerably negative. Only 17 percent claim conditions have improved compared to six months ago, down from 67 percent last quarter. A more negative attitude was also expressed regarding their appraisal of their own industries. Now, just 22 percent of business leaders say conditions have improved, compared with 42 percent in the fi rst quarter of this year.

CEOs’ optimism about the short-term out-look has also declined from last quarter. Cur-rently, only 20 percent of business leaders expect economic conditions to improve over the next



MARKETSUPDATESUPPLEMENTP. 4

MAPI Industrial OutlookContinued from p.1 of this section

2012 2013Manufacturing 5.2 3.3Computer & Electronic Products 5.3 7.7Non-High-Tech Manufacturing 5.5 3.2

MAPI Forecast for Manufacturing Production(annual percent change)

vances should occur in 2013 with growth likely in 23 of 24 industries, led by housing starts at 35 percent. Public works construction is the lone in-dustry expected to decline in 2013, by 2 percent.

MAPI forecasts that industrial production will increase 5.2 percent in 2012, up from 4 per-cent in the March report, and 3.3 percent in 2013, down from 3.5 percent in the previous forecast. Manufacturing production should outperform GDP (gross domestic product) growth, which MAPI estimates will be 2.2 percent in both 2012 and 2013.

According to the report, non-high-tech manufacturing production (which accounts for 90 percent of the total) is anticipated to increase

5.5 percent in 2012 and 3.2 percent in 2013. High-tech industrial production (computers and electronic products) is projected to expand by 5.3 percent in 2012 and show 7.7 percent growth in 2013.

Eighteen of the 27 industries MAPI monitors had infl ation-adjusted new orders or produc-tion above the level of one year ago (the same as reported in MAPI’s March 2012 report), eight declined, and one was fl at. Engine, turbine, and power transmission equipment grew by 36 percent in the three months ending April 2012 compared to the same period one year earlier, while housing starts improved by 28 percent in the same time frame. The largest drop came in domestic electronic computers, which declined by 12 percent.

Meckstroth reported that eight industries are in the accelerating growth (recovery) phase of the business cycle; 10 are in the decelerating growth (expansion) phase; seven are in the ac-celerating decline (either early recession or mid-recession) phase; and two are in the decelerating decline (late recession or very mild recession) phase of the cycle.

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six months, down from 59 percent in the fi rst quarter.

Expectations for their own industries have also turned pessimistic, with just 25 percent of CEOs anticipating an improvement in condi-tions in the months ahead, down from approxi-mately 44 percent last quarter.

Regarding profi t expectations over the next 12 months, 64 percent of CEOs expect increases. Executives in the durable and non-durable in-dustries are the most optimistic, with 71 percent expecting profi ts to rise. About 62 percent of CEOs in the service industry expect an increase in profi ts.

Among CEOs who expect profi ts to rise, 46 percent say market/demand growth will be the primary driving force, while 29 percent cite cost reductions and an additional 15 percent say new technology will serve as the main source of im-

provement. The remaining 10 percent cite price increases as the primary driver.

Another recent survey from the Conference Board found that though more Americans have a higher satisfaction with work since the begin-ning of the Great Recession, the majority con-tinue to be unhappy at work.

The report, based on a Fall 2011 survey of U.S. households, fi nds 47.2 percent of Americans are satisfi ed with their jobs.

Though a slight improvement from 2010 and 2009, job satisfaction remains below the 48.8 percent recorded in 2008. According to the re-port, 2005 was the last year in which a majority of Americans was happy at work (52.1 percent), but compared to the 1980s and ‘90s, widespread dissatisfaction has been entrenched since the turn of the century.

CEO Confi denceContinued from p.3 of this section

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