B-to-B Still Waiting for Its Turnaround

Jun 01, 2003 9:30 PM  By

Consumer spending may be picking up. But not so capital spending in most business sectors. According to Investor’s Business Daily, nonresidential fixed investment, a key indicator of capital spending, was down 4.2% in the first quarter of 2003.

And most analysts believe that capital spending will be flat or down throughout the balance of 2003. Given that spending on IT alone has contracted as much as 6.0% during the past two years, according to Boston-based IT research firm Aberdeen Group, even a flat level of expenditures isn’t good news for catalogers that specialize in selling big-ticket equipment and merchandise to businesses.

Business-to-business mailers are “feeling the effects of companies pulling back spending,” says Jim Adams, managing director of Wellesley, MA-based investment bank Tully & Holland. As for a turnaround, “business spending is more controlled, so the ramp up time is longer,” he says. In other words, it often takes businesses longer to react to an economic recovery than consumers.

At Fort Worth, TX-based Allied Electronics, sales tumbled from $200 million in 2001 to $158 million in 2002 — a direct result of reduced capital spending, says Rob Birse, director of marketing communications. Allied, which sells components to engineers and industrial manufacturers, has seen customers purchasing what they need to perform repairs and keep manufacturing going, but they’re not making the large investments that they were before the recession began.

To compensate for the lost business, Allied has stepped up prospecting, identifying more than 1 million new companies with a propensity to buy. And in what might seem like a counterintuitive move, it has also upgraded the production values of its catalog. Allied used to print black-and-white product pages on 30-lb. newsprint with a four-color wrap on 45-lb. freesheet. Now its catalog is all four-color, printed on 32-lb. groundwood #5. Allied hopes the move will help it hold onto as many sales as possible and keep it poised for the eventual economic rebound.

Seeking the right niches

At Chicago-based Newark InOne, an electronics components cataloger, sales have declined 24% during the past two years, from $626.2 million in fiscal 2001 to $476.75 million in fiscal 2003, which just ended. The company, formerly Newark Electronics and a division of Premier Farnell, has “seen sales declines from telecomm and computer support sectors,” says Jake Ring, senior vice president of marketing for the Americas. He adds that overall sales in the electronics market shrank from $7.8 billion in 2000 to $5.0 billion last year.

But some niches within the electronics market are still relatively strong, so Newark InOne is renewing its focus on those. “The greatest spending is on medical equipment and wireless communications devices such as cell phones and PDAs,” says Ring, who cites statistics showing that medical and biotech spending will increase up to 11% during the next three years.

“We are concentrating on those sectors, and this year we will add products so that we can become more of a one-stop shop for these and other niches,” Ring continues. “As the work force has been reduced at most companies, you see fewer employees doing a number of tasks. They are looking to place necessary orders through one company to make the task as easy as possible, which has helped raise our average order value.”

Newark InOne is also investing $10 million in a CRM program that it launched in March. The goal is to better understand customer behavior and buying patterns as well as to identify market sectors that are starting to recover and spend.

“We have not reduced circulation,” Ring says, “but we have shifted who we are mailing to within our own house file, and the CRM program will enable us to do that in a more accurate and efficient manner.”

Another industrial supplies cataloger, Chicago-based Grainger, is also targeting new customers as a way of working through the overall decline in capital spending. To attract these buyers, Grainger is expanding its merchandise line.

“Our broad offering is our key business proposition,” says vice president of merchandising Kathy Hebb. So in the face of depressed spending, the company added $90 million of inventory in 2002. “We have a strong balance sheet that enables us to make investments,” Hebb says.

Among the new products are items to help businesses reduce costs and maintain operations. For instance, Hebb says, “we have new light fixtures that are more efficient and save energy, which appeals to companies that are trying to save money.”

In another move to get sales from sectors that are still spending, such as healthcare and heating, ventilation, and air-conditioning (HVAC) contracting, Grainger is creating specialty catalogs for those markets. In addition, the company increased circulation on its core book 20%. “We really believe in the need to get in front of the customer with our catalog,” Hebb says.

Boise Office Solutions is taking a similar approach. “We are continuing to aggressively go after the market segments that are working for us,” says Dan Cogan, area furniture manager. To better target the healthcare, university, and government sectors, which Cogan says are still investing in capital expenditures, Boise has developed targeted sales collateral pieces to supplement its Furniture Collection catalog. The mailing pieces promote furniture products specifically suited for each type of workplace. And with a 10% increase in its first-quarter sales, Boise Office Solutions seems to be on to something.

Universities and governments “seem to be the only ones still investing,” agrees Kimberly Schoenekase, business product manager for cabling structure marketer Homaco. But while the Chicago-based company is putting a greater emphasis on these market segments, it hasn’t yet seen steady increases that point to a rebound anytime soon.

Profiting from streamlining

While companies such as Grainger and Newark InOne are spending more during this time of decreased customer expenditures, others are focused on streamlining. Telephony products cataloger Hello Direct, for example, is moving from San Jose, CA, to Nashua, NH, later this year. The move offers “reduced overhead costs as well as a lower cost structure for personnel,” says senior vice president/general manager Ron Becht.

In fact, by cutting costs Hello Direct has managed to increase its profits. And according to Adams of Tully & Holland, although sales are down among most b-to-b mailers, layoffs, hiring freezes, and cautious circulation plans have actually resulted in greater profitability for many of them.

Another mitigating factor for Hello Direct: Although overall sales began declining in early 2001, the company’s average order size has increased 10%-15% during the past two years, Becht says. “And some segments, such as government, are still spending robustly,” he adds.

Other catalogers feel that keeping a rein on expenditures even when the economy was booming has put them in good stead now. “We have always been a conservative company,” says Randy Smith, president of Winsted, a Minneapolis-based marketer of technical furniture for the security industry. “And we built this company one brick at a time, so I think that makes it easier for us to withstand tough times without having to resort to staff reductions and scaled-down mail plans.”

Winsted’s sales began to decline in 2001, Smith says. And even with a renewed awareness of security in the U.S., the cataloger, which sells items such as security consoles and LAN file server storage units, did not see an uptick. “We expected to see a bump in security products, but as time went on and the economy continued to plummet it was obvious that customers were holding off even on these products,” says Smith.

But in February, after two long years of depressed sales, requests for quotations and call volume finally started to pick up, Smith says. “I think that customers are beginning to become more optimistic and preparing for an improved economy.”

Still, Smith isn’t increasing his company’s spending yet. “There have been no layoffs, and we are still keeping up with our prospecting, but we are careful with our spending and will continue to be,” he says.

National Business Furniture hasn’t had to lay off any staff, either, but it has reduced its prospect mailings from 75% several years ago to 50% this year.

“The office furniture business has definitely suffered,” says George Mosher, president of the Milwaukee-based office furniture cataloger. Mosher estimates that industry sales dropped 20% in 2001 and another 20% last year. But while Mosher says his sales have declined, he notes that the decrease was less than that of the industry at large.

National Business Furniture’s June 2001 acquisition of online-only marketer OfficeFurniture.com certainly helped the cataloger stem the sales decline and maintain profitability. “It has helped us bring new customers on board and utilize the Web channel,” Mosher says.

PC Connection, a Merrimack, NH-based computer reseller, instituted layoffs two years ago, and it is still in a hiring freeze. Many of its customers are postponing large investments such as new servers or storage applications, says chief financial officer Mark Gavin. Instead, most are buying less-expensive products designed to maintain the computer equipment and software they already own.

“Government sales are doing better, but they are a smaller portion of our business,” Gavin says. And while first-quarter sales among its small and midsize business customers rose 6.5%, sales from the large-business sector declined. “The first-quarter results reveal an apprehensiveness and delayed buying decisions,” says Gavin.

Nonetheless, Gavin says that the time will come when customers can no longer put off capital expenditures. “I think that demand is building because many businesses purchased computers and software in 1999 for the Y2K upgrades, and those systems are going to need to be replaced,” he explains. He expects to see this “replacement cycle” start in the second half of this year and continue through 2004.

For his part, Mosher doesn’t expect to see increased capital spending until the end of the year at the earliest. “But certainly the end of the war [in Iraq] may spark people to begin thinking about capital projects again,” he adds.

Live long and prosper

At institutional products cataloger ATD-American, you wouldn’t have guessed that there is a recession to contend with. “If you listen to the rest of the world and stop advertising and promoting, then sure your business will go down,” says executive vice president Arnold Zaslow. “There is no law that says that you can’t outperform the marketplace.”

That attitude may explain why Wyncote, PA-based ATD-American reports sales growth of as much as 20% during the past few years. Sure, certain areas are underperforming, Zaslow says, but that is why marketers need to be proactive in areas where there is opportunity. For instance, ATD-American has long sold metal detectors to prisons. To seize more market share, it has started to market the machines to schools and hospitals, where the need for security items is increasing.

Another key, according to Zaslow: longevity. His company is 73 years old and has a solid customer base to show for it. Mosher, likewise, thinks National Business Furniture’s longevity has enabled the company to ride out the economic downturn. “We are a catalog that has been around for 25 years,” he says, “and consequently we have a lot of customers.”

Michael Hogan, chief administrative officer/chief financial officer for St. Louis-based Sigma-Aldrich, echoes Mosher’s sentiments. “We have been around for a long time,” he says, “and we have not and will not change our marketing or circulation strategies, since they are our lifeblood.”

First-quarter sales at Sigma-Aldrich, which sells research products for the life-science and high-tech industries, grew 2.5%. “The pharmaceutical industry is facing tough times and is spending less on research,” explains Hogan. So while its growth is down from 8% in 2002, “we are pleased about how well we are doing, and we look forward to better growth because we are staying the course once the economy rebounds.”

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