The Drainage Report

Merchants complain of 'too much volume' but still forecast second quarter Drainage growth

Overview

“Mercifully the war in Iraq was short,” says Mike Rigby whose company produced this report. “It devastated life in Iraq, but failed to disturb the course of the world economy, as some had feared.

“The relief encouraged US consumers to put aside their concerns about job losses, and celebrate with a return to the shops and the property market in April. The bounce-back is a relief to America. Consumers' confidence and free-spending habits have kept the US economy going despite a stream of bad news from business and stock markets over the last two years.

“It will need more than a revival of consumer spending to kick-start the US recovery. For that, business will have to start investing again. But it's a relief to the rest of the world, which is increasingly dependent on the American powerhouse to pull the major world economies along.

“Japan is in the grip of falling prices and going nowhere. The Germany economy goes from bad to worse. France faced 'negative growth' at the start of the year - a falling economy to you and me. But French consumers are reacting to concerns for their pensions by taking money out of circulation to boost their savings and putting the brakes on. China, the world's fastest growing economy, is struggling with the SARS epidemic, so don't expect much help from them.

“Britain is still the best performing of the big European economies, but retail growth has slipped, manufacturing is at a low, business confidence has fallen, and the housing market is slowing. More worryingly, given the economy's dependence on housing, re-mortgages now account for over half total gross advances, and loans to first time buyers have fallen to their lowest level in 30 years as the gap between what is asked and what they can afford stretches out of reach.

“But for now, merchants have their hands full keeping up with demand. There is no slowdown in RMI or public sector work, and construction is still expanding. Yes there are clouds on the horizon, and doubts over Gordon Brown's forecasts for the economy. But in the short to medium term merchants look set for a busy twelve months.”

Building Drainage Sales - All materials

Just under three in five merchants reported an increase in sales of all types of drainage in the first quarter of 2003 compared with the previous quarter. Five percent recorded a fall and 39% saw no change.

A useful way to look at the results is by the net balance of merchants reporting either way. If for example 36% of merchants saw an increase in sales, 16% a decrease and 48% no change, the net balance of 'ups' and 'downs' would be +20% (+36 less 16% equals +20%). Reverse the figures and it would be a drop of -20%. A net balance of zero implies little has changed.

On this basis a net 51% of merchants saw a rise in sales of all types of drainage in the last three months compared with the previous three months (see chart 1). Large outlets (net 70%) experienced the most widespread growth.

Merchants in all regions reported growth with the Midlands (55%) and Scotland (60%) just ahead of merchants in the South and North (48%).

Compared with the same period last year, sales are equally strong with half the merchants surveyed reporting better sales over the period (chart 2).

More large merchants (net 70%) saw sales increase compared with a net 45% of small and medium-sized outlets.

A net 65% of merchants in the North reported higher sales followed by a net 50% of merchants in the South. Merchants in Scotland (33%) also increased sales.

Building Drainage Sales: Above and Below Ground - Plastic Materials

January to March 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	40%	7%	53%	100%	40
Medium	60%	2%	38%	100%	40
Large	70%	0%	30%	100%	20
Total	54%	4%	42%	100%	100

January to March sales compared with the previous 3 months

ABOVE & BELOW Ground Plastics Drainage Products by area

Area	Increase	Decrease	Stay the same	Total	Base
South	55%	7%	38%	100%	42
Midlands	60%	5%	35%	100%	20
North	52%	0%	48%	100%	23
Scotland	47%	0%	53%	100%	15
Total	54%	4%	42%	100%	100

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

In contrast to plastic, a balance of one in ten merchants saw sales of non-plastic drainage increase in the last three months compared with the previous three months.

Large outlets did better than medium and small sized merchants.

Regionally, merchants in the South and Scotland saw sales rise (net 20% and 33% respectively) whereas the North fell back (-13%). Merchants in the Midlands reported no change.

Significantly more national chain branches (net 24%) recorded better sales than independents (-3%).

Year-on-year the picture was a little brighter with a net 17% of merchants improving sales of above and below ground non-plastic drainage. Large outlets (net 36%) experienced the most widespread increases.

A net 28% of merchants in the North and South saw sales improve over the same period. However, merchants in the Midlands reported little change and Scotland fell behind.

Product Mix

All merchants surveyed sell above and below ground plastic drainage products.

Fifty per cent of outlets sell other types of below ground drainage, such as clay, and a net 35% of merchants sell other types of above ground drainage, such as cast iron or aluminium.

Plastic drainage sales through merchants continue to make inroads and by volume 90% of drainage sales in the quarter were above and below ground plastic drainage (see chart 3).

Employment

A net 14% of merchants increased staffing levels compared with last quarter (chart 4).

A net 28% of medium sized outlets and 20% of large outlets took on more staff contrasting with small merchants (-3%) who cut back.

More merchants in the South (net 31%) and Midlands (15%) recruited staff than outlets in the North (4%). Scotland cut back (-20%).

Stocks

A net 30% of merchants raised stock levels compared to last quarter (chart 5).

More large companies (net 50%) increased stocks than small (23%) and medium (28%) sized outlets.

Regionally there was little difference with a net 33% of outlets in the South and Midlands recording higher stock levels compared with a net 26% of merchants in the North and Scotland.

Almost twice as many National merchants (net 41%) built up stocks than independents (22%).

Prices

Just under one third of merchants interviewed put up prices compared with last quarter (chart 6).

More small (net 43%) and medium-sized outlets (30%) upped prices than large merchants (15%). More Independents put up prices than Nationals.

More merchants in the Midlands and Scotland hiked prices than those in the South and North.

Price Expectations

A net 58% of merchants expect to increase prices over the next year compared with last year.

Profitability

A net 70% of merchants forecast higher profits over the next twelve months compared with the previous twelve months.

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

Outlook

Looking ahead, over one in two merchants expect sales to improve in the next three months compared with the previous quarter (chart 6).

Large (net 70%) and medium sized outlets (60%) are more bullish than small merchants (43%).

Merchants in the North and Scotland (net 68%) have higher expectations than merchants in the South (52%) and Midlands (35%).

National merchants' branches have much more widespread expectations of growth than independents.

A net 35% of merchants are more confident now about the overall prospects for builders' merchants than three months ago (chart 8).

Medium (net 48%) and large outlets (50%) are more positive than small merchants (15%).

Merchants in Scotland (net 61%) are most bullish. Merchants in the South (24%) the most cautious.

Prospects for building drainage are a little more subdued with a net 27% of merchants more confident now than three months ago.

Large and medium sized outlets are more positive than small outlets and national chains more optimistic than independents (chart 9).

Across the country there is a North / South divide, with merchants in the North (39%) and Scotland (53%) more confident about the overall prospects for drainage than the South (12%) and Midlands (25%).

Problems

Price cutting (50%) and margin squeeze (53%) were the biggest problems facing merchants in the last three months, followed by poor profitability (28%). More merchants this quarter (23%) experienced no problems than last quarter. A similar number complained of too much volume.

More significantly when asked what was their biggest single problem nearly a quarter (24%) said 'No Problems' (see chart 10). It's not often that concerns about price cutting get pushed into second place! Price cutting, as merchants' single biggest problem, fell from 32% in the last three months of 2002 to 20% in the first three months of 2003.

PROBLEMS FACED BY MERCHANTS IN LAST 3 MONTHS	%MERCHANTS REPORTING PROBLEMS IN Q1 03
Margin Squeeze	53%
Price cutting in the market	50%
Poor profitability	28%
Too much volume	23%
Slow payments & bad debt	22%
Supplier service and availability	22%
Lack of confidence	20%
Lack of sales leads	18%
Low sales volume	16%
Internal/operational problems	16%
Cash flow	11%
Supplier quality	7%
Bank's support, interest rates, charges	3%
No problems	23%
Other	3%
Base	100

Internet Usage

Just over a third of merchants use the Internet on a daily basis (see chart 11). Nine per cent of merchants say they use the Internet weekly, and 47% never use it.

Fifty seven per cent of merchants that have a website say customers can order on-line.

Comment

“In financial investments we are reminded that past performance is no guide to future returns,” writes Mike Rigby, whose company produced this report. “Yet we continue to behave as if tomorrow will be much like yesterday. We know that the people, products, companies and markets that contributed to that performance have changed, sometimes significantly, but prefer to rely on the facts of history than consider how trends may change. We're more comfortable looking back than looking ahead.

“We are not alone. In the last two years, as plunging equity markets, pension shortfalls and the fall out from investment slowdowns have taken their toll, a series of Chief Executives of leading companies have made their excuses and put question marks on their profit forecasts, blaming the 'fog of uncertainty' and unusually cloudy crystal balls.

“The march of plastic appears relentless in the drainage market', as one merchant told us in this survey. Ninety percent of merchants' drainage volume is now plastic, but will it continue to displace other materials? There is nothing in the rule book to say. There is no certainty in trends, which simply reflect the actions of all the specifiers, stockists and installers in the market. In windows and doors for example, aluminium replaced timber, and in turn PVC replaced timber and aluminium. But, after more than 20 years on the back foot, both wood and aluminium are staging a comeback. Will they succeed? Who knows? Trends are the sum of the decisions you, your customers and specifiers choose to make. If your crystal ball is clouded over and neglected, give it a rub. Don't be afraid to say what you think may happen. You're closer to the action than most forecasters.”

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 15th and 22nd of April 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.