The year ahead: 2017
It’s that time of year again as Martin Varley, CEO of Customer Focus, shares his take on the year ahead, and we look back at how his 2016 predictions fared.
The ‘traditional’ distributor revenue will grow by 5% in 2017 – almost double the 2.7% overall market in 2016, driven by a wash through of supplier price increases in a £1.00 = $1.25 world. With the full impact of increased landed cost price being around 14% and an assumed 50% post manufacture GP at the supplier level with 33% for distributors, this would seem to indicate that some of the increased costs are being absorbed in the channel which will lead to lower net returns.
Longer term supply contracts by mid-market distributors that have not added a currency ratchet into their agreements will be squeezed by as much as 10% which, in the case of some contracts, will be almost 50% of the agreed margin on an already challenging stock business.
For fixed margin agreements, the price increases from suppliers are good news for this same set of distributors so, with an assumed 75/25 split between special orders and stock, my calculation is that the overall gross profit impact will be limited.
Looking back slightly, initial estimates are that in 2016 UK online sellers enjoyed top line growth of c. 16% over the wider market at just less than 3%. A basket of mid-range distributors that we define to be in the £3-6m range are seeing flat to 1% growth, well behind inflation.
Net profit as a percentage of sales will be lower in a range of 6.5-8.5% due to increased costs overall, fixed margin corporate programs in the £100-250K band and a squeeze from the larger £10m+ distributors that have better operational gearing.
Looking forward again, further disruption is expected from newer sector entrants and corporate activity such as the recent acquisition of National Pen by Vistaprint for $218m in cash.
My 2016 prediction that a USA company will acquire a top tier UK distributor was wrong, I am doubling down though on that likelihood for 2017 based on the sheer volume of cash sat in PE and VC funds, combined with the global requirements of major brands that require a single source solution. Recent account wins by top and mid-tier UK distributors from large USA incumbents will encourage the dusting off of previous letters of intent. The cheap pound will help bridge the gap between the quantum of what sellers wanted and what they could get in 2015.
The reverse is likely for UK companies looking to acquire overseas; we are unlikely to see any meaningful activity in this area.
Suppliers costs continue to increase overall with compliance and product safety becoming even more of a focus in the supply chain. Cash is less of a challenge currently than in the 2012-15 period. As small business lending starts to move again, we see a further improvement in distributor cash flows for 2017 driven by a reduction of corporate stock programs in favour of low minimums on demand – thanks largely to investment in digital technology by suppliers with a long-term focus. There is an increasing benefit of credit and purchasing card payments for online orders providing a 65-day cash improvement versus open credit terms.
Overall, the distributors’ cashflow position (supplier credit risk) will favour the ‘up to £2m’ and the ‘bigger than £6m’ companies. In a positive move for the industry, we see a surge in the number of distributors that will break the £1m ceiling, led again by those with a solid online presence.
We are set to see a reduction in the number of suppliers being used by each distributor speeding up the trend of the last five years, again driven by technology and the need for instant data on order progress that lower resourced suppliers cannot support.
The definition of who is a distributor will become clearer as the market adopts ‘reseller’ as a term for the ‘commodity’ led distributor. Conversely, the push by the big five creative led companies “BaBDAD” (Brand Addition, BTC, Dowlis, Arcadia and Dukes) to grow based on design, brand management and global reach will confuse the line between advertising agencies and these solution led businesses.
Franchises and affiliates that make up half of the top ten distributors in the USA have not made the move into the UK as yet, due to a more challenging distributor acquisition environment.
Following a spike in exports from UK based suppliers in Q4 by as much as 20%, I predict a continuation of that trend due the lack of any data that the pound will strengthen in the medium term. Further underlining this positive effect is the lower cost of manufacture (primarily fully costed labour) in the UK versus French, German and Italian European production facilities.
Wage inflation in the industry will flatten out after a double digit increase over the last three years that was way ahead of inflation, helped by the drive of ‘forward thinking’ companies to train new talent rather than rely on the existing pool of experience, which has enabled job seekers to benefit from a 20% wage increase by moving to a competitor.
The line between B2B and B2C will get more blurry resulting in a further overall reduction in average quantity per order by as much as 7.5% and a need to focus more on delivering operational efficiency through technology to maintain sales per employee around the current levels.
Buyer and seller ages will continue to diverge albeit it at a slower rate due to the number of graduates being employed by newer companies.
The number one distributor in terms of sales will undoubtedly be Brand Addition. Dowlis and BTC must fend off a fast growing 4imprint UK for 3rd place, although that will likely be a 2018 story. SPS will easily take the crown from the supplier side thanks to their UK based manufacturing and growing exports.
There is no sign of any negative Brexit effect on the overall industry.
Martin’s 2016’s Predictions:
UK to leave EU
Vistaprint to buy a distributor
Top five distributor acquired by US
B2C and B2B lines get blurred
Wage inflation close to zero
Online sellers outpace the rest