The Drainage Report

Drainage Sales Remain Robust

Overview

“The end of the US recession was formally declared in July, but last year’s worldwide economic slowdown is still unfolding,” writes Mike Rigby, whose company produced this report. “With concerns over global terrorism and Iraq, confidence is weak. Business is reluctant to invest while prospects for returns in key markets are uncertain, and interest-rates cuts in Europe and the US have not been as effective as expected.

“Japan seems locked into a damaging combination of economic stagnation and deflation. Germany, the eurozone’s largest economy, is expected to stagnate this year and is at risk of deflating.

“In the US, the bounce-back from the Iraq war has been muted. We have yet to see a significant reaction to the major tax cuts in June, when the Federal Reserve cut interest rates to 1%; their lowest level in half a century. However, the US housing market remains relatively strong. Even if business is cautious, consumers continue to spend.

“In the UK the economy failed to pick up in the second quarter of the year. This followed a disappointing first quarter, when the economy grew by just 0.1% – its weakest performance since 1992. Consumer spending rose by a mere 0.2% in the same period, its weakest since 1997, when Labour came to power. The number of loans taken out for house purchases fell by 25% in the last year and some of the leading housebuilders appear to be suffering, after rumours of rough trading and profit downgrades.

“Unsold homes rose to their highest level in almost three years in June according to the Royal Institute of Chartered Surveyors. However, buyer interest has perked up and a recent Halifax survey suggests that the property market remains strong despite a slowing growth rate. High levels of re-mortgaging are expected to compensate for the falling number of first time buyers. Figures from the Bank of England show mortgage borrowing not reinvested in housing could support consumer spending for some time, particularly on home improvements, which continue to boom.

“The signs of a recovery are mixed, but cutting through the general economic uncertainty drainage sales are robust and confidence remains high.”

Building Drainage Sales – All materials

Fifty percent of merchants reported increased sales of all types of drainage in the last three months compared with the previous three months. Ten percent reported a decrease and forty percent stayed the same.

The difference between the number of companies reporting an increase over those reporting a decrease is the net balance, expressed as a percentage. A positive net balance indicates growth, a net balance of zero implies little has changed.

On this basis a net 40% of merchants saw a rise in sales of all types of drainage in the last quarter compared with the previous quarter. Small and medium outlets (40% and 48% respectively) were ahead of large outlets (24%). All regions performed well, particularly the Midlands (48%) and North (55%).

Compared with the same period last year, a net 61% of merchants improved sales of all types of drainage (chart 1).

The smaller the company, the more widespread the growth. Nationals (68%) were ahead of independents (57%). Regionally merchants in the North (86%) did best.

Building Drainage Sales: Above and Below Ground – Plastic Materials

April to June sales compared with the previous 3 months ABOVE & BELOW Ground Plastics Drainage Products by size of firm

Size of Merchant	Increase	Decrease	Stay the same	Total	Base
Small	54%	9%	37%	100%	35
Medium	50%	2%	48%	100%	44
Large	33%	10%	57%	100%	21
Total	48%	6%	46%	100%	100

April to June sales compared with the previous 3 months ABOVE & BELOW Ground Plastics Drainage Products by area

Area	Increase	Decrease	Stay the same	Total	Base
South	41%	10%	49%	100%	39
Midlands	65%	4%	31%	100%	23
North	55%	0%	45%	100%	22
Scotland	31%	6%	63%	100%	16
Total	48%	6%	46%	100%	100

A net 42% of merchants saw sales of above and below ground plastics drainage increase in the last three months compared with the previous three months.

Small and medium-sized outlets (46% and 48% respectively) experienced widespread growth over the period. Large outlets (24%) also grew sales.

Sales grew in all regions particularly the Midlands and North (61% and 55% respectively).

A net 62% of merchants reported improved sales compared with the same period last year.

Small companies (net 71%) and those in the North (86%) did best.

Building Drainage Sales: Above and Below Ground – Non-Plastic Materials

A net 4% of merchants saw sales of non-plastic drainage increase in the last quarter compared with the previous quarter.

Medium-sized outlets (9%) grew sales. Small and large merchants saw little change.

Merchants in the North and Scotland (20% and 30% respectively) were ahead of those in the South and Midlands (-8% and –14%) who saw sales fall.

A net 6% of merchants grew sales over the last three months compared with the same three months of last year.

Small and large outlets (14%) increased sales while medium-sized merchants reported a decrease (-3%).

Merchants in the North (25%) saw increases, followed by the Midlands (7%). Sales fell back in the South and Scotland (-4% and -10% respectively).

Product Mix

All merchants surveyed sell above and below ground plastic drainage products. Fifty eight percent of outlets sell other types of below ground drainage, such as clay, and 32% of merchants sell other types of above ground drainage such as cast iron or aluminium.

Plastic drainage sales through merchants continue to make inroads. By volume 88% of drainage sales in the quarter were above and below ground plastic drainage (chart 2).

Employment

A net 11% of merchants increased employment levels compared with three months ago (chart 3). Small and large outlets (14%) were more active in recruiting than medium-sized merchants (7%). Merchants in all regions except the South took on more staff.

Stocks

A net 42% of merchants increased stock levels of above and below ground drainage compared with three months ago (chart 4). Stock increases were widespread across all size of outlet and regions.

Prices

A net 9% of merchants put up prices compared with three months ago (chart 5). Independent outlets (20%) reported increased selling prices while merchants belonging to National chains cut back (-8%). Outlets in all regions apart from Scotland (-19%) raised prices over the period.

Price Expectations

A net 69% of merchants forecast putting up their prices over the next twelve months compared with the previous twelve months. Expectations are strongest among small and medium outlets and merchants in the South and North.

Profitability

A net 69% of outlets predict a rise in profits over the next year compared with the previous year.

Forecasts are strong among merchants of all sizes and in all regions.

Outlook

Looking ahead a net 34% of merchants forecast improved sales of all types of drainage in the next three months compared with the previous three months (chart 6).

Medium-sized outlets are most confident (43%) compared with large (net 33%) and small (23%) merchants.

Nationals (net 45%) hold higher expectations than independents (27%).

Merchants across the country are positive for improved sales over the period.

A net 40% of merchants are also more confident about the overall prospects for builders’ merchants compared with three months ago (chart 7).

Medium-sized outlets (net 50%) and those in Scotland (63%) are most optimistic with none of those interviewed reporting less confidence.

Overall prospects for the building drainage products market are good with a net 27% of merchants more confident now than three months ago (chart 8).

Confidence is similar among merchants of all sizes.

Merchants in the Midlands and North are most bullish with no merchants interviewed in these regions reporting less optimism.

Problems

Margin squeeze (62%) and price cutting (60%) were the biggest problems facing merchants in the last three months, followed by poor profitability (32%) - up on last quarter where 53% of merchants complaining of margin squeeze, 50% price cutting and 28% poor profitability.

The single biggest problem in the last three months was price cutting in the market, mentioned by 30% of merchants interviewed this quarter (chart 9).

PROBLEMS FACED BY MERCHANTS IN LAST 3 MONTHS	% MERCHANTS REPORTING PROBLEMS IN Q2 03
Margin Squeeze	62%
Price cutting in the market	60%
Poor profitability	32%
payments & bad debt	26%
Too much volume	20%
Lack of sales leads	21%
Supplier service and availability	21%
Lack of confidence	18%
Low sales volume	14%
Supplier quality	12%
Internal/operational problems	12%
Cash flow	5%
Bank’s support, interest rates, charges	5%
Other	4%
No problems	14%
Base	100

Internet Usage

Just under a third of merchants use the Internet on a daily basis (chart 10). Ten percent of merchants use the Internet weekly, and 41% never use it.

Fifty five percent of merchants that have a website say customers can order on-line.

Comment

“There has never been greater recognition of the need for construction and building work in Britain”, says Mike Rigby, Managing Director of Michael Rigby Associates. “The country’s infrastructure is in a poor state. The public are demanding better roads and railways. Builders’ merchants and the manufacturers who supply them struggle to get material to where it is needed. More and more time is added to journey times to ensure that deadlines are met. Costs rise.

“In certain parts of the country the need for housing is acute. Lack of affordable housing is affecting the functioning of society. Teachers and hospital workers among others are in short supply because they cannot live where the jobs are. John Prescott, the Deputy Prime Minister, has set a target of 200,000 new homes by 2016, but where will the money come from to build the infrastructure?

“It is a paradox. The need has never been greater, and Government has promised to solve these problems. But promising when Government finances are rosy and delivering when tax revenues are falling looks increasingly problematic. The scale of the need is such that it is hard to imagine it being swept under the carpet or prolonged indefinitely. It is easy to see a makeshift solution of fewer homes and further delays. That’s not great news for the South East, but for merchants and manufacturers who will supply the materials it is good news.”

The Drainage Report, a quarterly trends survey, is produced by Michael Rigby Associates and sponsored by Builders' Merchants News. The aim is to keep a finger on the market pulse and to monitor merchants' views and expectations of market movements in above and below ground building drainage products. Michael Rigby Associates specialises in research based marketing in the home improvement and building materials’ markets in the UK and Europe. The survey covers a representative sample of 100 builders’ merchant outlets. Telephone interviews took place between the 10th and 15th of July 2003 across a balanced spread of size and type of merchant, and geographical area. Numbers employed was used as an indication of size. The size categories of merchant outlets are small (1-9 employees), medium (10-25 employees) and large (over 25 employees). Free copies of the full report from www.521621.com, e-mail: results@521621.com or call Lucia Di Stazio on (01453) 521621.