VOL. 41, NO. 16 AUG 25, 2011 How to Analyze Your Marketing Claims INSIDE A methodology to gain insight into how distributors position online When it comes to positioning and messaging, the overwhelming majority of distributors in a recent MDM survey featured in the July 25 issue say they value similar things: product selection, training and technical support capabilities, among others. But when their websites are put to the test, online messaging on those important attributes often fails. In this article, part two of a two-part series, Jonathan Bein, Ph.D, and Rob Kelley, CFA, of Real Results Marketing explore the gap between the value and the message and how distributors can better align their online messaging with their values and capabilities. Part 1, Price vs. Value, appeared in the July 25, 2011, issue of MDM. By Jonathan Bein and Rob Kelley In a recent MDM survey, distributors ranked a list of attributes they believe are important in messaging (see Figure 2 on page 3). But when we analyzed content on websites of large and mid-sized distributors, there was something missing. We found little to no messaging on several attributes that were considered important in the survey including professional outside sales reps, onsite sales and service, warranties, speed of delivery and the sourcing of non-stock products. It may be that many distributors are just guessing when it comes to positioning and messaging. (In the survey, 70 percent of respondents said they used informal methods to develop messaging.) Their beliefs about what attributes are important to emphasize in messaging and positioning is based on scant market research. And even when they believe these attributes are important, only about half of these attributes become part of their messaging. For example, if you look at websites from many small and some mid-sized distributors, you will often see that they overemphasize how long they have been in business or focus too much on the history of the family business. To be sure, your customer wants to know that you have been around and that there is an interesting legacy. But the year of your incorporation should not make its way into the company tagline or slogan. The problem is most pronounced among mid-sized and small distributors, but it is by no means limited to them. This article oﬀers a systematic approach to describe and compare how distributors position and message. It relies on a semiquantitative technique that we call “message claims analysis.” We have used this message claims analysis successfully in marketing engagements and are currently using it to analyze more than 100 distributor websites. This process can also be applied to other marketing vehicles including print, social media, and mass media. Message Claims Analysis Example We start with a simple example to illustrate the concept of message claims analysis. The radar charts shown (Figure 1 on page 3) quantify messaging claims made by large public distributors MSC Industrial Supply and Applied Industrial Technologies on their respective websites. By comparing these charts, one can see that both MSC and Applied place a similarly large emphasis on product selection, solutions and cost reduction. MSC also places particular emphasis on easy web ordering and product availability, whereas Applied highlights its technical expertise, training and proximity Copying or reprinting all or parts of this newsletter without specific permission violates federal law! continued on page 3 Commentary: The Power of Data Channel partners should use market data to find opportunities for growth. Page 2 Jan-San Industry Sees Green in Green Environmentally friendly product demand continues to grow. Page 5 DXP’s Precision Acquisition is Target of Lawsuit Conflict arises between the Circos and DXP. Page 1 of the Industrial & Construction Markets Update MODERN DISTRIBUTION MANAGEMENT / VOL. 41, NO. 16 / AUG. 25, 2011 2 PERSPECTIVE  Commentary by Thomas P. Gale The Power of Data in Channel Partnerships A recent conversation about resistance to sharing point-of-sale data between distributors and manufacturers made me slap my forehead. If the past three years have taught us anything, it’s that partnerships and sharing of market information are critical to success. That’s not a new concept, but the volatile economy reinforces just how important partnerships are to staying lean, focused and profitable. What does it take to change behavior so out of sync with current markets? How many of the core relationships in your business are based on mistrust rather than partnership? What’s that cost in terms of managing those relationships defensively, rather than finding new growth opportunities together? Point-of-sale data sharing was a daring concept in the 1990s. Sellers in industrial markets could aﬀord mistrust when there were more customers and more vendors available. Today there are still distributors of all sizes that don’t trust their suppliers – including key ones – enough to share sales history and market planning information. As a result, the same marketing “plan” approach is still used, based mainly on a “trust but verify” approach or simply an arbitrary annual goal number. Of course, this data-free planning has an impact on the sales force. They are prodded by MODERN DISTRIBUTION MANAGEMENT Contact Information Questions, comments, article proposals, address changes or subscription service to: Founded in 1967 by J. Van Ness Philip Gale Media, Inc. 3100 Arapahoe Avenue, Ste 500A, Boulder, CO 80303 Tel: 303-443-5060 Fax: 303-443-5059 Website: http://www.mdm.com Publisher Thomas P. Gale [email protected] Editor Lindsay Konzak [email protected] Associate Publisher Craig Riley [email protected] Associate Editor Jenel Stelton-Holtmeier [email protected] Subscription Rates To subscribe to Modern Distribution Management, please call 303-443-5060, email [email protected] or http://www.mdm.com/ subscribe. Subscriptions are available by online delivery and/or first-class mail. Nine years of archives of MDM are available online to subscribers. Published twice monthly; $345/yr., $365 U.S. funds other countries; $169 each additional subscription to a company ($189 other countries). Six-month and two-year terms are now available. For group subscription rates and site licenses, please contact Hadley Fable at 303-443-5060. Copyright © 2011 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 management to meet a goal that’s often derived solely from last year’s results. But they aren’t given the support or focus that comes with a data-driven discussion that they need to fully target and exploit the potential from existing customers, much less prospects. Your competitors are delighted if that’s the case for your company. I’d suggest it’s a red flag; either change the relationship or change the vendor to one you can trust. The same applies for manufacturers that experience a brick wall when it comes to sharing market insight. You can’t sit on your hands and hope to maintain or gain market share. Distributors and their suppliers are gaining market share today by investing in market-planning activities based on data, not hope. As a result, the sales force is given a focused and clear plan on how to develop specific opportunities and segments with the best potential for profitable growth. Distributors align with manufacturers who engage and support their frontline marketing investments. Manufacturers align with distributors who commit to growth. It’s not rocket science. Yet this industry still continues to consolidate as more eﬃcient models based on data sharing between partners outperforms more traditional business models, and customers vote for where they find the most value. MDM Editorial Advisory Board John Allenbach SVP, Professional Sales, Apex Tool Group Kevin Boyle President of Industrial Distribution Consulting LLC Ted Cowie Safety distribution industry Larry Davis President, ORS Nasco Larry Goode President of Goode Advisors Inc. Julia Klein President and CEO, C.H. Briggs Company Stuart Mechlin SVP, Industrial Supply Division, Affiliated Distributors Doug Savage President and CEO, Bearing Service Inc. Burt Schraga CEO, Bell Electrical Supply Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com MODERN DISTRIBUTION MANAGEMENT / VOL. 41, NO. 16 / AUG 25, 2011 Marketing Claims Continued from page 1 Figure 1 - Example: Comparing Two Distributors MSC Industrial and Applied Industrial Technologies to customers. Neither company messages at all regarding customer account privileges. To determine the score for each attribute in the message claims analysis, we review the distributor website looking for prominence (placement, size of font, etc.) and frequency of claims related to the attribute. As an example, for the product selection attribute, we look for the following types of claims: Number of SKUs Breadth of product categories Number of manufacturers Leading brand manufacturers Individual Radar Charts For each attribute, Real Results Marketing uses a set of keywords and phrases that we look for to determine messaging emphasis. Claims that appear on the home page are weighted more heavily than claims on the company page and claims on the product or other pages. Of course, if the claim is in the company slogan or tagline or it is part of the company logo, it has the highest weight of all. Claims from all of the pages reviewed are combined into a total score. The analysis shows that Applied Industrial places greater emphasis on proximity to its cus- Applied Industrial Technologies MSC Industrial Supply Figure 2 - Elements that are very important or important to messaging Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com 3 MODERN DISTRIBUTION MANAGEMENT / VOL. 41, NO. 16 / AUG. 25, 2011 4 tomers than MSC as evidenced by the following quotations from their website: MSC (About page): Our network of 4 regional Customer Fulfillment Centers and over 90 branches nationwide assures you same day shipping, at no extra cost, no matter where you’re located. Applied Industrial (Company page): The Applied network of approximately 470 facilities, 4,600 employee-associates, seven strategic distribution centers, and more than 40 specialty repair and rebuild shops ensures that the products and support you need are always close by. With locations throughout the U.S., Puerto Rico, Mexico and Canada,….. Finding the White Space By using messaging claims analysis, companies can develop better positioning and messaging. There are limits to quantitative techniques, but this method provides useful directional guidance. The first step in the process is to analyze the message claims for each attribute. On the radar graph below (figure 3), we have overlaid message claims analyses for nine large distributors - Airgas, Anixter, Applied Industrial, Fastenal, Ferguson, Grainger, Graybar, MSC and Watsco on 10 diﬀerent attributes. The next step is to determine the customer and market requirements. Simple market research – both qualitative and quantitative – can be used to determine how important each attribute is to customers in the market. If the research shows the attribute has no importance to the marketplace, you may need to change your approach to how you message that attribute or abandon it all together. As in the example provided, if the market research reveals that product availability is very important to the market, it could become a compelling basis for diﬀerentiation because it is not heavily claimed by most distributors. By contrast, diﬀerentiating on product selection will be diﬃcult because most distributors identify that as a key attribute. The third step is to assess the capabilities of the competitors in the market. For example, it may turn out that one distributor is more effective at reducing cost for its customers than other distributors in the sector. So, even though several distributors are messaging on cost reduction, the one distributor who is superior at cost reduction can make a unique claim about its capability. Just claiming to be the superior provider of cost reduction solutions is not enough, however. Distributors who really wish to capitalize on superiority have to be able to quantify their claim as well; for example, “We reduce supply chain costs by 3 to 5 percent.” The objective is to find attributes with some combination of the following characteristics: Not heavily claimed by competitors Important to customers based on market research Unique or nearly unique capability of the distributor There are several possible outcomes from doing this process: From a high level perspective, it is clear that most of these distributors place medium to heavy emphasis on product selection, technical expertise, solutions and cost reduction attributes. There is relatively less emphasis on product availability, web ordering, core values, account privileges, and training attributes – the white space on the radar graph. This white space identifies areas of opportunity for distributors if they have the capabilities to take advantage of those opportunities and focus their messaging on those attributes. An attribute has all three characteristics – This is the best case and it rarely happens. When it does, it should be leveraged heavily for positioning and messaging. An attribute is not heavily claimed, and it is important, but not unique – In this case, it may be possible to combine the non-unique attribute with a unique attribute to form a new benefit. Or, it may point out a key capability that needs to be developed or improved to then have a dominant basis for positioning. Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com MODERN DISTRIBUTION MANAGEMENT / VOL. 41, NO. 16 / AUG 25, 2011 An attribute is not heavily claimed, and it is unique, but not important – If the attribute really should be important to customers, but is not perceived as important, then it may be necessary to invest in educating the market on its importance. On the other hand, it may point out an area where a capability is over-developed relative to what the market requires. Scaling back that capability will reduce the cost-to-serve. An attribute is unique and it is important, but also heavily claimed – This is a great opportunity for marketing to communicate the unique capability. Customer proof of the unique capability in the form of testimonials, customer satisfaction surveys, ratings, analyst endorsement, etc., is the key to exploiting this advantage. Distributors have enormous opportunity to improve messaging and positioning. The key to improving is to apply more formal techniques to understanding competitors’ messaging, market requirements and competitive capabilities. The process described in this paper is reliable in identifying the white space where it is possible to diﬀerentiate. Without investment in these techniques, many distributors will continue to suﬀer from “me-too” positioning and messaging. Jonathan Bein, Ph.D. is a senior partner at Real Results Marketing. Rob Kelley, CFA, is a partner at Real Results Marketing. Contact them at jonathan@ realresultsmarketing.com or visit www.realresultsmarketing.com. Jan-San Industry Sees Green in Green Demand for environmentally friendly products continues to grow Demand for environmentally friendly products has continued to grow over the past couple years, even as the general economy has remained stagnant. But in some sectors there is still hesitation when it comes to making the “philosophical change” necessary to take advantage of the opportunity and to build out the capability to profit from it. By Jenel Stelton-Holtmeier The focus on using more environmentally friendly products – particularly chemicals – has become more pronounced in recent years. While consumer interest drove much of the development early on, commercial and industrial interest has also risen in recent years, according to Bill Balek, director of environmental services at ISSA, the international association for the cleaning industry. “It’s a much more mature marketplace now than it was 10 years ago,” he says. “It’s still in the minority, but it’s an area where we’re seeing double-digit growth.” For WAXIE Sanitary Supply, a distributor of sanitary and related supplies based in San Diego, CA, sales of environmentally friendly products has been a bright spot in recent quarters. “Green is something that in a stagnant economic time, we’ve seen continued growth in the line,” says Keith Schneringer, marketing manager for WAXIE. State and local governments have helped to drive the growing demand in recent years by introducing green procurement policies for public facilities. Ten years ago, no state had a requirement to consider green products in purchasing janitorial supplies; today, 22 states have some kind of policy, including Illinois, which introduced a mandatory green procurement policy. But it’s not just about adding a product line to your catalog, even if you’re primarily a jan-san distributor, Balek warns. The biggest diﬀerence between “traditional” cleaning products and green cleaning products is the level of knowledge needed – and the ability to eﬀectively communicate that knowledge to customers. Green Cleaning Defined “When you’re talking about green cleaning, the answer is really about two things: the products and the processes,” Schneringer says. From a product standpoint, the products are designed to do the same things as traditional products, but with an additional focus on human health and the environment. “You’re applying a new philosophy and adding new considerations in the selection of the products,” Schneringer says. From a process standpoint, it’s about being more conscious of what you’re putting into the environment and how, Balek says. For example, the traditional way of cleaning a window would be to spray the chemical cleaner right onto the glass. With a green process, the cleaner is Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com 5 MODERN DISTRIBUTION MANAGEMENT / VOL. 41, NO. 16 / AUG. 25, 2011 6 sprayed onto the cleaning cloth, which keeps potentially harmful chemicals out of the air. And green cleaning programs can save money, Balek says. “You tend to use less of the chemical when it’s applied in a green way,” he says. Operational Savings with Green Cleaning is often viewed as something that simply needs to be done, not an area where savings can be found. It’s sometimes diﬃcult to communicate the potential savings of updating your cleaning program, Schneringer says, particularly when it comes to the tools used. “The mop and bucket has existed in the same basic configuration for over a hundred years, and people look at it and say ‘It’s worked for this long, why should we change now?’” he says. “They’re hesitant to look at new options because they don’t understand the impact it could have.” And that mentality applies across nearly every aspect of cleaning, from the chemicals used to the equipment on hand. Ninety to 95 percent of the cost of cleaning comes from labor, Balek says. Upgrading how you approach that and investing in better tools can lower labor investment significantly – and get the job done better. “It’s a natural process of having to educate those folks to these new technologies,” he says. But to do that, distributors of these products must also overcome persistent myths about green. Persistent Myths “Ten years ago, green products cost more and generally were less eﬀective than traditional products, so it really was a nonstarter for most people,” Schneringer says. “They really had to be committed for some other reason to even consider looking at green cleaning options.” But as demand has increased, so has the quality and quantity of what’s available. “For industrial companies, the first question is usually, ‘But is it strong enough to do what I need it to do?’” Schneringer says. “And the truth is that yes, there are products that are definitely strong enough to meet your needs, as long as you’re applying them correctly.” In the mid-90s, there were only about 50 green-certified products available in the marketplace; today, there are more than 2,500. And the price – another persistent myth about green products – often is comparable or even less than the traditional products. “There’s been a migration recently to customers looking for alternatives, and there have Other Distributors Continue Expansion Into Jan-San Market The janitorial and sanitation supply sector has become a popular target for distributors from other sectors looking to expand into adjacent markets. “It’s a natural extension of their product oﬀerings that allows these distributors – particularly MRO distributors – to penetrate their existing clients deeper,” says Bill Balek, director of environmental services for the ISSA, an international trade association for the cleaning industry. “They’re already providing maintenance supplies, and it could be a good strategy for growing sales.” But while it may seem like an easy addition to make, being successful in the jan-san sector requires more than just adding cleaning products to your existing product lines. “In our industry, in order to be successful, you need to have extensive product knowledge and be able to provide key value-added services,” Balek says. Distributors need to be able to provide their customers with training on the proper use and applications of diﬀerent products. And they need to keep up on the latest regulations governing chemical usage and disposal. Before making the decision to expand, talk with your customers and find out what they need from a jan-san distributor, Balek says. This will help you determine whether you have the resources to commit to making it a successful endeavor. If you don’t have the capabilities or resources in-house, consider partnering with a local jan-san distributor to provide additional services to your customer base. been enough customers expressing interest that there are now economies of scales that allow you to get good daily cleaning products at a comparable price, and sometimes at a better price, to traditional products,” Schneringer says. Greenwashing As with any industry expanding into green technologies, the jan-san sector is not immune to greenwashing – the practice of making unsubstantiated claims about the environmental impact of your products. “I don’t think it’s out of any actual malice,” Balek says. “Rather it’s a problem of not being able to eﬀectively identify and communicate the Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com MODERN DISTRIBUTION MANAGEMENT / VOL. 41, NO. 16 / AUG 25, 2011 real environmental attributes of a given product.” Third-party certifications, available from organizations such as Green Seal or the U.S. Green Building Council, help alleviate some confusion by providing verification that the products meet minimum standards. But they also fall short of providing an eﬀective scorecard for comparison, Balek says. “Essentially, these certifications are passfail,” he says. “They don’t provide a way to differentiate between products that go above and beyond those minimum requirements and those that barely meet the standards.” A new initiative being undertaken at ISSA is expected to help address this challenge. Branded Transpare, the web-based system will establish a set of common metrics for environmental preferability and provide information about products that can be compared across those metrics. “You’ll be able to see why something is green, and be able to really evaluate which characteristics are most important to you,” Balek says. Transpare is scheduled to launch at ISSA’s annual meeting in October. Survey: Salary Budgets Remain Tight Among U.S. Employers Reflecting uncertain economic conditions and a conservative cost-management environment, U.S. employers are projecting moderate pay raises for employees next year. Employers do expect to fully fund their annual bonuses for workers this year, as corporate profits have increased, according to new survey data by global professional services company Towers Watson. A survey of 773 U.S. companies conducted by Towers Watson Data Services found that companies are planning pay increases that will average 2.8 percent in 2012 for their salaried nonexecutive employees. This represents a moderate increase from the average 2.6 percent raise workers are receiving this year and 2.6 percent they received in 2010. Similar raises for 2012 are planned for executives and nonexempt employees. “Until the economy shows some solid and consistent improvement, most companies are keeping their salary budgets relatively tight,” said Laura Sejen, Rewards Global Practice Leader at Towers Watson. “At the same time, companies also recognize the need to reward their top performers or risk losing them to competitors and, as a result, continue to diﬀerentiate pay raises based on individual performance.” According to the survey, workers who receive the highest performance ratings will see median salary increases of 4.5 percent this year, which is 80 percent more than workers with average ratings, who will receive 2.5 percent. Workers with below-average performance ratings will receive median merit increases of 1.4 percent. A separate survey of 316 North American companies conducted by Towers Watson found that companies’ average projected bonus funding for current-year performance is 101 percent of target, marking the second consecutive year that companies are able to fully fund their annual bonuses for workers. Companies funded annual bonuses in 2010 at 111 percent of target. “Despite the recent economic turmoil, many companies are experiencing stronger profits and higher revenues this year. Since funding of annual bonus pools is typically based on these financial measures, companies are anticipating being well positioned to fund their annual bonus pools at target or better at year-end,” said Sejen. The Towers Watson North American Talent Management and Rewards Survey was conducted in May and June of 2011 and includes responses from 316 companies from the U.S. and Canada. The Towers Watson Data Services Salary Budget Survey was conducted in June and July of 2011 and includes responses from 773 U.S. companies representing a cross section of industries. The Towers Watson Data Services Salary Budget Survey Report provides data on actual salary budget increase percentages for the past and current year, along with projected increases for next year. Reports for both surveys will be released in September. Renew Your Subscription Online in Three Easy Steps: 1. Log-in online at the top left of www.mdm.com using your email address and password. 2. Click on My Account. 3. Under My Publications, click Renew. Call MDM at 1-888-742-5060 for log-in information or click Forgot Password? Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com 7 MODERN DISTRIBUTION MANAGEMENT / VOL. 41, NO. 16 / AUG. 25, 2011 Monthly Wholesale Trade Data 8 Monthly Inventories/Sales Ratios of Merchant Wholesalers: 2002-2011 June 2011 wholesale revenues, except manufacturers’ sales branches and oﬃces, were $395.8 billion, up 0.6 percent from May and up 15.4 percent from June 2010. June sales of durable goods were up 1.6 percent from last month and up 10.2 percent from a year ago. Sales of nondurable goods were down 0.2 percent from May and up 19.9 percent from last year. (Estimates adjusted for seasonal and trading-day differences, but not for price changes) RATIO 1.45 1.40 June ratio = 1.16 1.35 1.30 1.25 1.20 1.15 1.10 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Source: U.S. Census Bureau Inventories. Inventories were $458.7 billion at the end of June, up 0.6 percent from May and up 15.8 percent from a year ago. Inventories of durable goods were up 1.3 percent from last month and up 12.1 percent from last June. Inventories of nondurable goods were down 0.4 percent from May but up 21.4 percent from last June. Inventories/Sales Ratio. The June inventories/ sales ratio was 1.16. The June 2010 ratio was 1.16. Sales and Inventories Trends: June 2011 Sales $Millions Inventory $Millions Stock/ Sales Ratio Percent Change Sales 5/11-6/11 Percent Change Sales Percent Change Inventory 5/11-6/11 Percent Change Inventory 6/10-6/11 NAICS Code Business Type 42 U.S. Total 395,837 458,667 1.16 0.6 15.4 0.6 15.8 423 Durable 174,581 265,718 1.52 1.6 10.2 1.3 12.1 4231 Automotive 26,487 41,019 1.55 8.7 4.7 4.3 14.6 4232 Furniture & Home Furnishings 4,519 7,087 1.57 -0.1 -4.9 -0.4 7.9 4233 Lumber & Other Construction Materials 8,457 11,916 1.41 0.4 5.2 -0.7 0.1 4234 Prof. & Commercial Equip. & Supplies 31,097 31,806 1.02 0.6 3.4 1.2 9.3 42343 Computer Equipment & Software 16,408 12,460 0.76 -0.8 1.2 3.5 10.1 4235 Metals & Minerals 12,134 25,690 2.12 -1.2 11.2 2.6 23.6 4236 Electrical Goods 33,829 39,756 1.18 -0.2 10.2 -0.7 11.7 4237 Hardware, Plumbing, & Heating Equipment 8,720 17,406 2.00 1.2 8.1 1.1 15.3 4238 Machinery, Equipment & Supplies 29,272 66,122 2.26 2.1 18.9 1.8 10.1 4239 Miscellaneous Durable 20,066 24,916 1.24 -0.3 25.9 -1.5 12.1 424 Nondurable Goods 221,256 192,949 0.87 -0.2 19.9 -0.4 21.4 4241 Paper & Paper Products 6,980 7,508 1.08 -1.0 2.7 -0.1 6.8 4242 Drugs 34,227 31,370 0.92 -0.5 8.3 2.1 1.9 4243 Apparel, Piece Goods & Notions 10,856 22,101 2.04 -1.6 0.8 2.4 30.2 4244 Groceries &Related Products 48,013 32,141 0.67 1.8 9.9 0.1 13.3 4245 Farm-product Raw Materials 23,422 23,977 1.02 0.5 67.8 -6.2 72.8 4246 Chemicals & Allied Products 9,635 11,472 1.19 2.3 13.5 2.2 18.5 4247 Petroleum & Petroleum Products 60,291 25,301 0.42 -2.9 40.5 -4.0 32.8 4248 Beer, Wine & Distilled Beverages 9,713 12,459 1.28 4.0 7.3 -0.9 10.2 4249 Miscellaneous Nondurable Goods 18,119 26,620 1.47 1.7 5.0 2.5 21.6 6/10-6/11 U.S. Bureau of the Census, Current Business Reports, Monthly Wholesale Trade, Sales and Inventories Series: MDM compilation and analysis. Adjusted for seasonal and trading day differences. Figures for sales and inventories are preliminary adjusted estimates. Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com Industrial & Construction Markets Update VOL. 41, NO. 16 | AUG. 25, 2011 Circos File Lawsuit Against DXP; DXP Files Counterclaim Dennis Circo and Chris Circo filed a lawsuit earlier this month against industrial distributor DXP Enterprises, Houston, TX, over alleged contract breaches related to the acquisition of their company, Precision Industries, Omaha, NE. The acquisition closed in September 2007. DXP denied the claims and filed a counterclaim against Dennis Circo, Chris Circo and Circo Enterprises LLC/ Circo Holdings LLC, alleging Circo made false representations regarding inventories when the acquisition of Precision was made, including that adequate reserves had been reflected in the balance sheet for obsolete, excess, damaged, slow-moving or otherwise unusable inventory. DXP alleges the value of Precision’s inventories were “grossly overstated” and its reserve was “grossly understated.” In the Circos’ complaint filed with the U.S. District Court for the District of Nebraska, they allege that DXP wants to adjust the value of the inventory and the sale price “in order to extract from Plaintiﬀs [the Circos] sums not due Defendant [DXP] and also to avoid paying to Plaintiﬀ Dennis P. Circo certain earned buy-out fees called for by the Agreement.” What’s more, the Circos say that no claim for a breach of contract was brought before the one-year anniversary date of the acquisition’s closing, as outlined in the original agreement. The parties had included a one-year “survival period” post-acquisition, which allowed DXP opportunity to ensure books, records and inventories were accurate per pre-closing representations, according to the Circos’ claim. In its counterclaim, DXP said that it did not and could not have reasonably become aware of alleged inventory discrepancies until Precision’s financial and M&A BlackHawk Industrial Distribution, Inc., Tulsa, OK, No. 40 on the list of top industrial distributors, has acquired Sanders Tool Supply. Sanders Tool Supply, based in Peoria, IL, expands Blackhawk’s geographical footprint into the central region of the U.S. Anixter International Inc., Glenview, IL, No. 5 on MDM’s list of the top 25 electrical distributors, has agreed to sell its Aerospace Hardware Division to entities controlled by Greenbriar Equity Group LLC for $155 million in cash and up to an additional $30 million if certain milestones are achieved on or before Dec. 31, 2013. Bristol, CT-based Barnes Group Inc., has received a binding oﬀer from Berner SE to acquire its Barnes Distribution Europe business, comprised of the businesses that operate as Kent, BD France and Toolcom, subject to customary conditions and approvals. Chicago, IL-based Grainger, No. 3 on the list of top industrial distributors, announced its intention to acquire Fabory Group, a European distributor of fasteners and related MRO products, for $344 million. Diversified industrial manufacturer Eaton Corp., Cleveland, OH has acquired E. Begerow GmbH & Co KG. E. Begerow develops and produces filter media and filtration systems for food and beverage, chemical, pharmaceutical and industrial applications. The company is headquartered in Langenlonsheim, Germany, employs 270 people and had 2010 sales of more than $84 million. Ingersoll-Rand plc, Swords, Ireland, has agreed to sell a 60 percent stake in its Hussmann refrigerated display case business to the private equity firm Clayton Dubilier & Rice, LLC for $370 million in cash. Honeywell, Morris Township, NJ, has acquired Atlanta, GA-based EMS Technologies, Inc., for $491 million. EMS is a provider of connectivity solutions for mobile networking, rugged mobile computers and satellite communications. Other Distributor News Airgas Inc., Radnor, PA, No. 4 on the list of top industrial distributors, has named Chuck Broadus president of Airgas South. Broadus succeeds Jay Sullivan, who was recently appointed as South Division vice president and chief financial oﬃcer. IBT Inc., Merriam, KS, No. 39 on the list of top industrial distributors, has appointed Mark Byrne as president and CEO. Byrne replaces Stephen Cloud, who will continue to serve as chairman of the board. St. Louis, MO-based Graybar reported sales growth of 21.2 percent in the second quarter. Sales for the first half of the year were $2.6 billion, an increase of 20 percent from the prior-year period. Profit for the first half of the year were $35.4 million. continued on p.4 of this section Copying or reprinting all or parts of this newsletter without specific permission violates federal law! continued on p.2 of this section www.mdm.com MODERN DISTRIBUTION MANAGEMENT / VOL. 41, NO. 16 / AUG. 25, 2011 10 MDM News Digest Continued from p. 1 of this section MARKETS UPDATE SUPPLEMENT P. 2 Grainger, Chicago, IL, reported daily sales for the month of July 2011 were up 10 percent from July 2010. Results for the month included a 1 percentage point positive contribution from acquisitions and a 2 percentage point contribution from foreign exchange. Applied Industrial Technologies, Cleveland, OH, reported sales in its fiscal 2011 year ended June 30, 2011, were $2.2 billion, up 16.9 percent from fiscal 2010. Profit for the year was $96.7 million. Fourth-quarter sales for the industrial distributor were up 12.8 percent to $589.8 million. Profit for the quarter was $28.5 million. Beacon Roofing Supply Inc., Peabody, MA, reported sales for the third quarter ended June 30, 2011, were up 14 percent to $540.7 million. Organic sales growth was 11.6 percent. Profit was $24.1 million. For the first nine months, sales increased 10.2 percent to $1.24 billion. Organic sales increased 6.9 percent. Year-to-date profit was $28 million. New chief financial oﬃcers have been appointed for WinWholesale Inc. and its wholly owned subsidiary, Noland Company. Roland L. Gordon was appointed CFO to replace Jack W. Johnston who became WinWholesale’s president July 11; and Jeﬀ M. Dice has succeeded Gordon as Noland Company CFO. Dice had been WinWholesale’s vice president, electronic data integration. Economic News June U.S. manufacturing technology orders totaled $459.39 million according to the Association for Manufacturing Technology and the American Machine Tool Distributors’ Association. This total, as reported by companies participating in the USMTO program, was up 15.3 percent from May and up 91.7 percent when compared with the total of $239.68 million reported for June 2010. With a year-to-date total of $2,453.78 million, 2011 is up 103.9 percent compared with 2010. Industrial production advanced 0.9 percent in July. Manufacturing output increased 0.6 percent in July following gains of 0.2 percent in both May and June. Capacity utilization for manufacturing in July was 75.0 percent, a rate 10.6 percentage points above its trough in June 2009 but still 4.0 percentage points below its long-run average. Wholesale prices rose 0.2 percent in July, seasonally adjusted, the U.S. Bureau of Labor Statistics reported. This advance followed a 0.4-percent decrease in June and a 0.2-percent rise in May. At the earlier stages of processing, prices received by manufacturers of intermedi- Calculation of MDM Inflation Index for June 2011 1136 1135 1145 1081 1149.01 1132 1144 0713.03 1042 108 Abr. Prod. Cutting Tools Power Trans. Fasteners Valves, etc. Power Tools Mat. Handling Belting Hand Tools Misc. Metal “New” June Index “New” May Index BLS Price Indices Jun. ‘11 BLS BLS Price Indices May ‘11 Price Indices Jun. ‘10 % Sales Weight Indices Jun. ‘11 (1)X(4) Weighted 534.6 478.8 753.5 489.4 877.2 342.3 539.0 733.9 739.0 469.0 535.2 475.6 750.4 487.2 875.1 342.3 537.8 736.8 739.3 468.1 516.8 455.0 717.0 475.8 873.0 338.3 524.9 636.4 733.2 454.3 19.1 18.9 15.4 9.0 7.6 6.5 6.2 6.1 8.1 3.1 102.12 90.50 116.04 44.04 66.66 22.25 33.42 44.77 59.86 14.54 310.4 309.8 June Inflation Index 594.20 May Inflation Index 592.97 June 2010 Inflation Index 571.12 % % Change Jun. ‘11 May ‘11 Change Jun. ‘11 Jun. ‘10 -0.11 0.68 0.42 0.44 0.24 0.00 0.21 -0.39 -0.05 0.18 3.45 5.24 5.10 2.84 0.48 1.18 2.68 15.33 0.79 3.23 0.21 4.04 New index reflects 1977=100 base other #: 1967 To convert multiply by .52247 Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com MODERN DISTRIBUTION MANAGEMENT / VOL. 41, NO. 16 / AUG 25, 2011 ate goods moved up 0.2 percent in July, and the crude goods index declined 1.2 percent. Privately-owned housing starts in July were at a seasonally adjusted annual rate of 604,000, according to the latest release from the U.S. Census Bureau and the Department of Housing and Urban Development. This is 1.5 percent below the revised June estimate of 613,000, but 9.8 percent above the July 2010 rate of 550,000. Single-family housing starts in July were at a rate of 425,000; this is 4.9 percent below the revised June figure of 447,000. The Power Transmission Distributors Association Business Index indicated the second quarter of 2011 was the fifth consecutive quarter for business growth among PTDA members. With a reading of 70.2, the second quarter results indicate the power transmission/motion control industry is still expanding. However, the 70.2 reading is the lowest the index has been since its inception a year ago, indicating expansion has slowed. The U.S. global trade deficit in manufactures rose by 21 percent to $213 billion in the first half of 2011, compared with 2010, while the Chinese surplus soared by 27 percent to $280 billion, according to U.S. and Chinese Trade Imbalances in Manufactures Surge, a new Manufacturers Alliance/MAPI report. These trade imbalances are back to the excessively high pre-recession levels of 2008. The Conference Board Leading Economic Index (LEI) for the U.S. increased 0.5 percent in July, following a 0.3 percent increase in June and a 0.7 percent increase in May. The Coincident Economic Index (CEI) – a measure of current economic activity – rose 0.3 percent, and the Lagging Economic Index rose 0.2 percent. Led by improvements in production-related indicators, the Chicago Fed National Activity Index increased to -0.06 in July from -0.38 in June. The index’s three-month moving average, CFNAI-MA3, increased to -0.29 in July from -0.54 in June. Construction employment increased in 26 states between July 2010 and July 2011 and during the past month, according to an analysis by the Associated General Contractors of America of state employment data released by the Labor Department. Canadian manufacturing sales fell 1.5 percent (C$713 million) in June to C$45.3 billion, the lowest level since November 2010, according to the latest release from Statistics Canada. Sales have declined for three consecutive months after growing steadily since May 2009. Constant dollar manufacturing sales were down 1.6 percent in June. Over the past decade, the four largest emerging market economies – Brazil, Russia, India, and China (the BRICs) – contributed 36 percent of the world gross domestic product (GDP) growth in purchasing power parity (PPP) terms in 2010, and their share of global output has increased from 16 percent in 2000 to approximately 25 percent by 2010, according to An Anatomy of the Growth in BRICs: Past Trends and Future Prospects, a new report from the Manufacturers Alliance/MAPI report. Other Manufacturer News Emerson, St. Louis, MO, reported sales for the third quarter ended June 30, 2011, were $6.3 billion, up 16 percent from the prior year quarter. Organically, sales grew 10 percent, with 6 percent growth in U.S. sales and 13 percent growth in international sales. Profit grew 17 percent to $683 million. For the first nine months of the fiscal year, sales increased 16 percent to $15.2 billion, with profit improving 21 percent to $1.4 billion. Gibraltar Industries Inc., Buﬀalo, NY, reported sales for the second quarter ended June 30, 2011, were up 18 percent to $208.8 million from the prior-year period. Profit from continuing operations was $7.2 million. For the six months ended June 30, sales increased 15 percent to $372.4 million from the prior-year period. Profit from continuing operations for the first half was $8.7 million. RBC Bearings Inc., Oxford, CT, reported sales for the first quarter ended July 2, 2011, were $93.3 million, up 13.3 percent over the first quarter of fiscal year 2011. Profit increased 18.2 percent to $10.7 million. Rexnord, Milwaukee, WI, reported sales increased 17 percent in its fiscal first quarter 2011 to $476 million. Core sales were up 14 percent. Income from operations was $63 million. continued on p.4 of this section Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com 11 MODERN DISTRIBUTION MANAGEMENT / VOL. 41, NO. 16 / AUG. 25, 2011 12 MARKETS UPDATE SUPPLEMENT P. 4 DXP Continued from p. 1 of this section accounting systems were integrated into DXP’s systems in late 2009 and early 2010. DXP alleges that the Circos “actively concealed their fraud” while conducting “day-to-day operations” for Precision for several years after the acquisition. DXP alleges that the Circos knew or should have known of the alleged inventory misstatements. But the Circos allege that DXP “intentionally conducted the business of Precision during the Earn Out period in a manner designed to reduce the value of Plaintiﬀ Dennis P. Circo’s Earn Out rights under the Agreement.” The complaint also alleges DXP adjusted financial statements to reduce Precision’s income; for example, it says that the company took “inappropriate” inventory write-oﬀs. The complaint alleges that DXP has “attempted to coerce employees of Precision into making changes in the inventory accounting methods that are unwarranted” to support its claims; it also alleges that DXP made misrepre- sentations to the Securities and Exchange Commission and others with respect to the inventories in an attempt to “wrongfully account for the inventories on the books.” DXP denies and addresses these claims in its counterclaim with examples of alleged inventory misrepresentations. DXP seeks rescission and return of the entire purchase price paid for the shares of stock of Precision; recovery of actual damages; attorneys’ fees, costs and expenses; and pre-judgment and post-judgment interest. The Circos seek a declaration that the time for DXP to assert claims with regard to inventories has passed; that all representations and warranties with respect to inventories were correct and that there has been a breach of agreement; and that any claims to the contrary are without merit. DXP Enterprises’ and Circos’ claims are both available in pdf at this article online at mdm.com. MDM News Digest Continued from p. 3 of this section General Bearing Corp., West Nyack, NY, reported sales for the second quarter ended July 2, 2011, were $39.3 million, down 3 percent from the same period a year ago. Profit attributable to the manufacturer of bearings and bearing components nearly doubled to $3.5 million, from year-ago profit of $1.8 million. For the first six months, sales increased 3.4 percent to $75.7 million. Profit was $6.8 million, compared to $2.8 million a year ago. The Home Depot, Atlanta, GA, home improvement retailer, reported second quarter 2011 sales of $20.2 billion, a 4.2 percent increase from the same period a year ago. Comparable store sales were up 4.3 percent, and sales for U.S. stores up 3.5 percent. Profit was $1.4 billion. For the first half of the year, sales were up 2.2 percent. Now Available on DVD & On-Demand MODERN DISTRIBUTION MANAGEMENT Founded in 1967 by J. Van Ness Philip Questions, comments, article proposals, address changes or subscription service to: Gale Media, Inc., 3100 Arapahoe Avenue, Ste 500A, Boulder, CO 80303. Tel: 303-443-5060. Fax: 303-443-5059. Website: http://www.mdm.com ISSN 0544-6538 To subscribe to Modern Distribution Management, please call 888-742-5060, email [email protected] or http://www.mdm.com. Subscriptions are available by online delivery and/or first-class mail. Published twice monthly; $345/yr., $365 U.S. funds other countries; $169 each additional subscription to a company ($189 other countries). Copyright © 2011 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. Managing Change: Tactics for Distributors Order Today: www.mdm.com/change-webcast or call 888-742-5060 Join distribution management expert Bruce Merrifield in this 60-minute MDM program as he boils down the latest research on change management to practical how-to tactics. Copying or reprinting all or parts of this newsletter without specific permission violates federal law! www.mdm.com