The Drainage Report

Confidence Falters

Overview

“The housing market has kept economists on the edge of their seats for months,” says Mike Rigby whose company produced this survey. “It has not been a question of if the bubble bursts, but when.”

“Yet predictions of a slump in the housing market continue to be confounded. Both Halifax and Nationwide reported house price inflation of nearly 20% in May. This climbed to 21% in July. Net mortgage lending and total mortgage approvals broke all previous records.”

“The combination of high house values and low interest rates has helped feed consumer confidence and spending, credited for fending off the worst effects of recession over the past 6-12 months.”

“The ratio of household debt to income is now at an all time high. Households are exposed to rises in interest rates or unemployment which may have a dramatic effect on spending.”

“But any immediate rise in interest rates is unlikely - underlying inflation is at its lowest level since 1975.”

“UK markets are reeling with the FTSE share index at a five year low in the first half of July and 19% down on early May. Investment in shares among the general public has grown significantly in the last twenty years, but the impact of falling share prices is expected to be less immediate.”

“Manufacturing output has just about survived the Jubilee and the World Cup. Some factories across the country took up to a week off for the Jubilee which obviously had an adverse affect on production.”

Building Drainage Sales - All materials

Forty nine per cent of builders' merchants saw an increase in sales of all types of building drainage products, thirteen per cent recorded a drop and thirty eight per cent saw no change.

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 36% of merchants recorded an increase in the last three months compared with the previous three months (chart 1). More large outlets (50%) saw growth than small and medium sized merchants (32%).

Significantly more merchants with a turnover between £250-£3m (60%) increased sales than outlets turning over less than £250k (22%).

Year-on-year, a balance of just less than two in five merchants reported sales growth (chart 2).

Medium and large builders' merchants were ahead of small outlets. More firms in the North (52%), Midlands (44%) and South (33%) reported an increase in sales compared with merchants in Scotland (25%) who were slightly behind in the period.

April-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	42%	11%	47%	100%	36
Medium	45%	7%	48%	100%	42
Large	45%	5%	50%	100%	22
Total	44%	8%	48%	100%	100

April-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	45%	12%	43%	100%	40
Midlands	52%	4%	44%	100%	23
North	28%	5%	67%	100%	21
Scotland	50%	6%	44%	100%	16
Total	44%	8%	48%	100%	100

Building Drainage Sales: Above and Below Ground - Plastic Materials

A balance of just less than two in five merchants reported increased sales of plastic drainage in the three months to July. Medium sized and large outlets are slightly ahead with a net 39% recording an increase in sales compared with 31% of small outlets.

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

A net 38% of merchants increased sales of plastic drainage compared with the same three months last year. Medium and large outlets (52% and 46% respectively) are ahead of small merchants (17%). 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

Overall merchants recorded little change in sales of non-plastics drainage products in the last three months compared with the previous three months. Sales were up across large and small outlets (net 9%) contrasting with medium sized merchants where sales fell back (-10%).

Merchants in the Midlands (net 7%) increased sales, compared with outlets in the North and Scotland who reported little change and firms in the South who recorded a drop (-5%).

Outlets with a turnover of between £250k-£500k (net 16%) increased sales compared with merchants turning over less than £250k who saw sales fall in the same period (-17%).

A balance of one in ten 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 (20%) North (29%) and Scotland (8%) saw a rise in sales in contrast with outlets in the South (-10%) who recorded a drop. The larger the company by number of employees the more widespread the growth.

More independent outlets (net 15%) increased sales than merchants belonging to a national chain (4%).

Product Mix

All merchants we spoke to sell below ground plastic drainage products and 99% sell above ground plastics. Just less than three in five sell other types of below ground drainage, such as clay and just less than one in three sell other types of above ground drainage.

By volume 88% of drainage sales in the quarter were above and below ground plastic drainage (see chart 3).

Employment

A balance of one in five merchants recorded an increase in employment levels compared with three months ago. The larger the outlet the more widespread the increase in staffing levels. Firms in the North are slightly ahead, taking on more staff than any other region.

Merchants with a turnover between £500k-£3m (54%) were the most active compared with outlets with a turnover of less than £250k (18%).

Stocks

A net 21% of merchants recorded an increase in stock levels compared with three months ago (chart 4). The larger the outlet the more widespread the growth. Firms in the Midlands and North (39% and 33% respectively) are slightly ahead with none of those interviewed in the North reporting a drop. A net 19% of merchants in Scotland increased stocks compared with a net 5% in the South.

Prices

A net 17% of merchants reported increased selling prices compared with three months ago (chart 5). The further North you go the more widespread the increase in prices with no merchants in Scotland reporting a fall.

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

Price Expectations

A balance of more than three in five merchants expect to increase selling prices in the next twelve months compared with the previous twelve months. The picture is similar across outlets of all sizes and in all regions.

More independents forecast a rise in prices (72%) than merchants belonging to a national chain (55%).

Profitability

Overall a net 68% of merchants expect profits to increase in the next twelve months compared with the last twelve months. A net 74% large and medium-sized outlets forecast a rise in profits compared with a net 56% of small merchants. More companies in the Midlands (87%) expect higher profits than any other region with none of those interviewed in the region foreseeing a drop.

Outlook

Looking ahead a balance of 54% of merchants expect an increase in sales in all types of drainage in the three months to October (see Chart 6). More outlets in the South, Midlands and Scotland forecast higher sales than merchants in the North.

Firms with a turnover of between £250k-£500k (62%) are more bullish than merchants with a turnover of less than £250k (48%).

A net 17% of merchants are more confident about the overall prospects for builders merchants than they were three months ago (see chart 7). Medium sized outlets are more confident than large and small merchants.

Across the country there is a North/South divide with merchants in the North and Scotland more confident than those in the South and Midlands.

Focusing on the building drainage market, a balance of 15% of merchants are more confident about the overall prospects than they were three months ago. Medium sized companies (26%) are more bullish than large or small outlets (9% and 6% respectively). Significantly more merchants belonging to a national chain (30%) are confident than independent merchants (5%).

Merchants in the North and Scotland (33% and 31% respectively) reported higher confidence levels than outlets in the South (5%) and Midlands (4%).

Problems

In the last three months merchants reported experiencing problems of price cutting in the market (53%) and margin squeeze (54%). Lack of sales leads was also mentioned by 38% of merchants.

Significantly, the number of outlets reporting a lack of confidence in the market increased this quarter from 7% to 30%.

A net 11% of merchants recorded no problems this quarter compared with 17% last quarter.

Price cutting in the market is 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 Q2 02
Margin Squeeze	54
Price cutting in the market	53
Lack of sales leads	38
Lack of confidence	30
Slow payments & bad debt	29
Low sales volume	25
Poor profitability	22
Supplier service and availability	20
Internal/operational problems	15
Too much volume	14
Cash flow	10
Supplier quality	6
Bank's support, interest rates, charges	2
Other	2
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.

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

Comment

“Merchants aren't sure which way the market will go next,” comments Mike Rigby, whose company produced this survey. “They are less confident than last quarter but still hope for the best. At times like these it is easy to bury your head in the sand, wait for things to settle down and for the business to come to you. You know how good your product and service is and recommendations have always brought in enough business in the past. But what about the future? Can you afford to rely on the business finding its way to your door?”

“The increasing evidence and emphasis on the housing gap is good news, certainly for the South East. Government intentions to kickstart the building programme is welcome. But we've heard it all before, most recently their new build targets are looking likely to fall short. Government intentions have a habit of melting away as lobbying by different interest groups make it more unpopular in some quarters. Government and this government in particular likes to be popular, so good if it happens and on schedule, but it's down to every merchant to make its own future.”

“The key ways to bring in new business is by marketing and internet marketing. This survey shows increasing internet usage among merchants but the big gap is in using the internet to bring in new business. Some are doing it but it needs more urgency. It does work. The dotcom bubble burst and investors got burned but use by buyers and sellers has steadily increased.”

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 July 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). For more information, contact Lucia Di Stazio on (01453) 521621.