The market’s volatile pricing environment, long lead times, interest rate increases and economic uncertainty were top-of-mind in the 2Q 2022 quarterly survey published by Vertical Research Partners (VRP), (www.verticalresearchpartners.com), an independent equity research firm, and EW. Thirty-five distributor respondents in the survey offered some real-world analysis of these market challenges. Here are the top takeaways in VRP’s analysis of the survey data.
Pricing powers sales
Q2 distributor sales were up +13.7%, with prices accounting for +8.2% of the increase and volume growth accounting for 5.5%. This pricing increase was the highest reported in the VRP survey’s history back to 2006, across all categories. Electrical equipment sales were strongest overall, with a +16.9% increase that includes an +8.3% increase in prices. Power had the strongest pricing result at +9%. Power volumes were up +2.8% for total growth of +11.8%. Higher prices accounted for +7.5% of the +10.2% increase in automation sales, while increased sales volume accounted for the other +2.7% in growth. The total two-year growth stack of +29.5% included growth topping 20% in all categories, lapping the strong Q2 2021 recovery from the peak pandemic pain in 2020.
Backlog masking emerging signs of slowing, interest rates having an impact
The overall tone from distributors was relatively consistent with recent quarters. Sales are generally strong, but the operating environment remains highly dynamic and frequently frustrating. OEM price increases are causing some consternation among customers but have not yet materially impacted underlying demand. Some smaller projects have been put on hold or cancelled with cost inflation bumping up against budgetary limits and interest rates on the rise. Early signs of interest rates dampening demand are emerging, with some indications of slower quoting/bid activity. Several respondents also pointed to declines in day-to-day counter business, seemingly at odds with normal seasonality. Record backlogs are masking some of this slowing for now, and with lead times extending well into 2023 in some instances it’s possible sales stay strong until 2024.
Some indications of improved availability
Lead times remain historically elevated with persistent supply chain challenges. All major gear manufacturers are having their share of issues. The scramble for supply has reduced brand loyalty and driven an increase in alternate channels/suppliers, though it sounds like even these secondary sources are largely tapped out. Some customers are willing to take used or refurbished equipment. For higher-end products with more complex specifications, product substitution is not an option, with products such as programmable logic controllers and switchgear being the tightest.
Some distributors saw an improvement in stock-and-flow products like boxes, fittings and PVC-related product, but these were still constrained in other areas. Several distributors indicated factory labor availability is as much if not more of an issue than material availability at this point. Trucking has also become increasingly challenging with diesel prices pinching fleet operators.
Distributors speak out
Looking forward, distributors are expecting +4.8% growth on average for Q3 2022. Some creeping caution exists amongst distributors, ranking among the highest sequential decelerations on record and the largest since Q1 2020 on the precipice of the pandemic. However, VRP suspected that outlook will prove too conservative, given the carryover effect of price into Q3. Expectations for Q3 2022 are most robust for Electrical Equipment with a +7.5% increase, but positive across categories.
Several respondents commented on the impact product availability is having on brand preference. “Current lead-times, pricing and delays are forcing customers to seek nonstandard channels to find equipment,” said one distributor. “Brand no longer is important and used equipment can be acceptable,” said another.
Several respondents saw some signs of a slowdown, such as a decrease in bidding activity and quotations, and one distributor said walk-in business is slowing. Another respondent said their company was cutting back on inventory in anticipation of a reduction in demand. One distributor said forecasting future business activity is challenging right now. “The crystal ball is out the window,” they said.
To participate in VRP’s 3Q 2022 survey, e-mail Nick Lipinski at [email protected].