The Drainage Report

Third Quarter Drainage Sales are Up

Overview

“While the world economy is in the doldrums,” says Mike Rigby whose company produced this survey, “the UK economy is still outperforming most other industrialised countries in growth and job creation. Japan is in a fragile state and Germany's economy may be shrinking. Brazil and the rest of South America is in the sick bay and much of Africa's economy is almost a contradiction in terms. Most of Asia, and to a large extent the world economy too depends on American trade, and the jury's out on the US recovery.”

“But the UK consumer isn't taking any notice. Consumer confidence in the UK remains high due to low interest rates, high employment and, most significantly, high house values.”

“Consumer credit rose by £2 billion in August - according to the Bank of England the second biggest monthly increase on record. Mortgage lending growth in August was the highest for a decade, although mortgage lending for home buying fell slightly according to the British Bankers Association. New loans were down 14% and the number of mortgage approvals dropped from 118,000 in July to 108,000. The latest Hometrack survey that measures estate agents' selling prices shows a rise of 0.6% in average prices in September, the fourth consecutive slow down in the monthly rate of increase. In particular, London and the South East are slowing more than most.”

“Bank of England figures show the ratio of house prices to earnings nearing its 1989 peak, but the ratio of debt service to income is still well below record highs. Earnings growth is slowing and this will have an impact on house values, but a gradual slowdown of the market rather than a collapse is expected. And that's good news for building materials.”

Building Drainage Sales - All materials

Fifty four per cent of builders' merchants saw an increase in sales of all types of building drainage products, eight per cent recorded a drop and thirty eight per cent were unchanged.

A useful way to look at the results is by the net balance of merchants reporting either way. If for example 40% of merchants saw an increase in sales, 34% a decrease and 26% no change, the net balance would be +6%. Reverse the figures and it would be a net -6%. A net balance of zero implies that little has changed.

On this basis, a net 46% of merchants recorded an increase in the last three months compared with the previous three months (chart 1). More large and medium-sized outlets (53%) saw growth than small merchants (32%).

The Midlands (56%) and the North (55%) were ahead of Scotland (46%) and the South (35%).

Year-on-year, a net balance of 45% of merchants reported sales growth (chart 2).

Large merchants did better than medium-sized or small outlets. More firms in the Midlands (72%) and Scotland (69%) reported improvements. Sales in the North were most subdued (18%).

July to September 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	38%	5%	57%	100%	37
Medium	63%	7%	30%	100%	43
Large	50%	5%	45%	100%	20
Total	51%	6%	43%	100%	100

July to September sales compared with the previous 3 months

ABOVE & BELOW Ground Plastics Drainage Products by area

Area	Increase	Decrease	Stay the same	Total	Base
South	50%	12%	38%	100%	40
Midlands	52%	0%	48%	100%	25
North	55%	0%	45%	100%	22
Scotland	46%	8%	46%	100%	13
Total	51%	6%	43%	100%	100

Building Drainage Sales: Above and Below Ground - Plastic Materials

A balance of just more than one in two merchants reported increased sales of plastic drainage in the three months to October. Medium sized and large outlets are ahead of small outlets.

Builders' merchants in the Midlands and North reported more widespread growth than outlets in the South and Scotland.

A net 44% of merchants increased sales of plastic drainage compared with the same three months last year. Large outlets (50%) did slightly better than the others. More firms with a turnover in excess of £500K reported sales growth than outlets achieving less than this.

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

Sales of non-plastics drainage products last quarter were not as strong. Sales were up for large (24%) and medium-sized outlets (11%), but small merchants saw a decline in sales (-18%).

Merchants in the North and Scotland picked up more than outlets in the South and Midlands.

A net 6% of merchants recorded an increase in sales of non-plastic drainage in the last three months compared with the same three months last year. Merchants in the Midlands (39%) outperformed other regions. The North saw little change while sales in the South (-7%) and Scotland (-11%) fell back. Large merchants did best (18%), followed by medium-sized outlets (8%). Small outlets suffered a drop in sales (-12%).

Product Mix

All merchants we spoke to sell above and below ground plastic drainage products. Just above six in ten sell other types of below ground drainage, such as clay and just less than four in ten sell other types of above ground drainage.

By volume 87% of drainage sales in the quarter were above and below ground plastic drainage (see chart 3).

Employment

A balance of just under one in five merchants took on more staff compared with three months ago. Medium-sized outlets reported the most widespread increase in staffing. Firms in Scotland recruited more than other regions.

Stocks

A net 29% of merchants built up stocks compared with three months ago (chart 4). Small and medium-sized outlets were most active in increasing stocks. Firms in Scotland (39%) and the South (35%) saw most rises with none of those interviewed in the Scotland reporting a reduction.

Prices

A net 49% of merchants reported raised prices compared with three months ago (chart 5). More small outlets (60%) put prices up than medium-sized or large outlets. Price rises were most widespread in the South (60%) followed by Scotland and the North (51%). No merchant in the South or Scotland saw prices fall.

Independent outlets are slightly more active than merchants belonging to a national chain.

Price Expectations

Merchants of all sizes expect to raise prices over the next year compared with the previous twelve months. A balance of more than seven in ten merchants expect to hike prices. All regions are predicting increased prices with merchants in Scotland anticipating the most widespread upward movement.

More merchants belonging to a national chain (93%) are predicting price rises than independent outlets (61%).

Profitability

Overall a net 69% of merchants expect profits to improve in the next twelve months compared with the last twelve months. Forecasts are strongest among small and large outlets (75%) and outlets in the Midlands (84%). Merchants belonging to a national chain are more bullish in their profit expectations than independent outlets, although no independent predicts lower profits.

Outlook

Looking ahead a balance of -8% of merchants expect sales of drainage products to fall over the quarter in line with the seasonal trend (see Chart 6). The larger the company the more likely they are to forecast a drop. Outlets in the North are the only ones looking to improve sales over the next three months. Merchants in the South and Scotland foresee little change, while merchants in the Midlands forecast lower volume.

More national chain outlets expect sales to fall than independents.

A net 32% of merchants are more confident about the overall prospects for builders merchants than they were three months ago (see chart 7). Small and medium sized outlets are more confident than large merchants.

Merchants in the South (net 43%) are most confident followed by those in Scotland (31%). Nationals are more optimistic than independents.

Focusing on the building drainage market, a balance of 25% of merchants are more confident about prospects than they were three months ago. Small and medium sized companies and those in the South and Scotland are most positive.

Problems

Price cutting, mentioned by 55% of respondents this quarter, and margin squeeze (52%) were the biggest problems. Supplier service and availability was also mentioned by 38% of merchants.

Lack of confidence in the market was high last quarter at 30%, but this recovered in the last three months and was mentioned by just 11% of respondents. Sales leads and sales volume also recovered this quarter, but problems with supplier service and availability were up.

Price cutting in the market continues to be seen as the biggest problem facing merchants in the last three months (see chart 8).

PROBLEMS FACED BY MERCHANTS IN LAST 3 MONTHS	% MERCHANTS REPORTING PROBLEMS IN Q3 02
Margin Squeeze	52
Price cutting in the market	55
Supplier service and availability	38
Lack of sales leads	28
Poor profitability	25
Slow payments & bad debt	20
Internal/operational problems	19
Too much volume	14
Low sales volume	13
Lack of confidence	11
Supplier quality	10
Bank's support, interest rates, charges	5
Cash flow	4
Other	3
No problems	11
Base	100

Internet Usage

As seen in chart 9, just over two in five merchants use the Internet on a daily basis. Just over three in ten never use it.

Fifty eight per cent of merchants that have a website say their customers are able to order online.

Comment

“Sales of drainage products are reasonably robust,” says Mike Rigby, whose company produced this report, “and a whole lot better than many of us expected given the general uncertainty this time last year. But closer to home the ground is shifting under one group of builders' merchants or another.”

“Many independent merchants feel threatened by increasing concentration among a few national chains. And the relentless attempts of the 'sheds' or DIY chains, to muscle in on the trade threatens both national merchants and independents. Once dismissed as irrelevant the sheds have worked away at their product range, pricing structures, opening hours, marketing, service and staffing to compete. They haven't yet turned water into wine, but they have made inroads. What was once a clear gap has narrowed. In some locations the strongest sheds are overtaking weaker merchant branches in the eyes of the trade customer. Builders' merchants need to watch the gap, and get their retaliation in first.”

“General builders' merchants are also threatened by alternative routes to market. Specialist plastic distributors, for example, have snatched the fast growing plastic fascia market from under the noses of builders' merchants, and with it the equally fast growing plastic rainwater component of roofline. Builders who are active in roofline are changing their buying habits. That leakage could be costly. With all eyes focused on concentration how many builders' merchants are tracking these developments? How many are looking, or even asking the questions?”

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 and consultancy for 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 8th and 10th of October 2002 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). © Michael Rigby Associates, 2002 For more information call Lucia Di Stazio on (01453) 521621.