Following the recession, merchants have been pulled in all directions: the key is not to lose focus of your business’ core objectives.
Merchants in the middle
Published: 26 August, 2010
The merchant industry has been thrown around since the start of this roller-coaster recession. Just when the ground has stopped shaking and the industry congratulated itself on emerging from dark days in better shape than expected, TP’s bid for BSS had the market entering the half-year with a lurch. Lisa Arcangeli talks to some key players about what the future holds.
In the builders’ merchants sector, as Chris Pateman, managing director of the Builders’ Merchants Federation points out, “we often have periods of stability, then one big shock comes along and, like tectonic plates, a series of shifts and movement occurs”.
He recollects Jewson’s purchase of the Harcros business for £318m in 1997. There followed a number of smaller acquisitions within a comparatively sort period of time. “There are not many PLCs left,” says Mr Pateman. “And, not many of them are badly-managed or ripe for plucking.
“BSS is an extremely well-managed PLC. Its only vulnerability was the additional cost it had to bear in order to integrate its various back office systems. It would make sense, considering the cost of disruption to a business, if you are going to embark on that you may as well do it at the time of a takeover because that is the time when you will lose accountancy staff and you will have to rationalise back-office systems.
“From the market’s point of view that avoids duplication of costs so it’s bad news for computer consultancies, but it’s good news for the profitability of the sector.” Looking at the bigger picture, he says: “We have some stability again in the market and everybody feels that we have bottomed out. However, I am very concerned about the second half of the year.
“The reason that things are not worse is because of government spending. Quite a bit of money was pulled forward from last year into the 2010 budget. Now, the money has been spent and it has only just stopped getting worse.” That money is public sector cash and represents 20% of total spend.
“No one was willing to talk about this during the General Election because as soon as the Tories were honest with people, they started to lose points. If they had kept their mouth shut, David Cameron would have had an all-out majority.
“Housing sites that began under the Kick Start scheme have stopped and stopped quickly. This is just the first tranche – it’s what the Government views as the low-hanging fruit. What is to come in the Budget?”
Hopefully, housing will still receive some money. However, Mr Pateman is not optimistic about the Building for Schools programme and the hospital building programme. “Fortunately, merchants are not heavily exposed to new schools building, as housing is where they make their money. However, if you look at some of the figures and the prognostications going forward, the only area where the Construction Products Association sees growth is from the Olympics and rail. And, most of the big cash for the Olympics has already been spent, although what remains will probably be skewed more towards merchant,” Mr Pateman comments. The large private sector is also not immune.
“Assuming the Government increases VAT and makes no allowance for home improvement spend or to increase the low rating of insulation products, the home improvement market will slow down. “If there is no incentive for people to improve their properties, they won’t do it and especially if the cost of buying anything will go up by 2.5% at 20% VAT – if that’s where we’re heading. We are doing all we can to make this point with the Government,” he states. The market may surprise us all and continue to do well.
“Merchants are feeling reasonably confident. Things are, broadly speaking, a little better than they were a few months ago. But, if you look at the BMF sales indicators, they are still negative year-on-year and the market overall is not growing,” Mr Pateman reports. “The second half could be a bit of a bastard.”
A wise government won’t dole out all the pain in year one – but it has got to come. Add up all the mixed messages emanating from the industry and examine the figures and you are left with a market recovery that is still fragile, to say the least. Carl Arntzen, director of Bosch Thermotechnology, says all the reports indicate that the market for his sector has shown a “pleasing development over the last five months for gas and oil-fired boilers. “We are seeing growth of around 10%, compared to the equivalent of the comparable five months last year.”
However, Mr Arntzen adds a note of caution: “In the first half of last year, we saw a big downturn, so we may not be comparing like-with-like. “The boiler scrappage scheme has definitely had a positive impact for the entire market because it created a much-needed awareness around the topic of heating and CO2 emissions and the carbon reduction discussion. It without doubt generated additional business for the first few months,” he says.
Now, the question – was this additional business and growth? Or, did it simply shift business from the second half of the year to the first half?
“The industry is reasonably satisfied with the results,” Mr Arntzen says. “We are being cautious with regard to the remainder of the year,” he adds. “All the soundbites we are getting from government is for difficult times ahead and with the huge deficit we have in the economy, there will be heavy expenditure cuts that might yet throw the country into a double dip recession. That is why we are not expecting the positive development in the first half to carry on for the full year.”
According to Chris Hayward, managing director of the National Merchant Buying Society: “There is a lot of fear-mongering in the market. That wasn’t helped by David Cameron’s recent speech about how bad times are going to be. “What we had detected pre-election was that there was a quiet tickle – things were slightly better and there was more confidence in the market. Now there’s a malaise where people are waiting for things to happen,” he says.
The Government, Mr Hayward adds, offered the appeal of just wanting to get on and do things. “Well, get on with it guys, let’s drive forward. We need to be positive. Enough with the bad news. Let’s just get on with what we can do,” he says. “People are too preoccupied with ‘the big picture’. We can’t influence whether Greece goes bust or what happens to the euro. We can, however, influence how we run our businesses, how we manage our cost base or how we drive new sales. “David Cameron did identify that in order to move forward and get a better result, we have to do so in a different way.
“We cannot simply rumble on doing what we have always done. There will be some pain, and it is how you react to that pain that matters. But, if you do not take a positive attitude, it will bury you,” he warns. Within the NMBS itself, Mr Hayward has been urging members to step out of the box. “It’s not about working harder or ‘smarter’, it’s about changing how you do business.”
Mr Hayward is angry. “We don’t need softening up; we need to know what is happening. We know there will be job losses in the public sector. That means fewer people will move home, or refurbish their home.”
He likes Nike’s advertising slogan. It should be adopted by our industry: ‘Just do it!’
This article first appeared in Builders' Merchants News June 2010 edition.