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The drive to stock and sell environmentally friendly or “green” products is not exactly sweeping through the MRO distribution business, but it will become increasingly important in the years ahead, according to INDUSTRIAL DISTRIBUTION’s 62nd Annual Survey of Distributor Operations.

That was just one of the conclusions drawn from this year’s study, which featured responses from nearly 400 top executives of distributorships throughout the United States.

The survey also shows, certainly not surprisingly, that the economy remains distributors’ top concern, as 40 percent of respondents said we are in a recession, while another 24 percent said a recession will occur in the latter part of this year. As a result of the business downturn, nearly 20 percent said they had instituted layoffs in the past several months.

The study also showed that roughly 32 percent of respondents are private-labeling products, mostly from China.

International business is becoming increasingly important for distributors, whether they are sourcing products from foreign countries or setting up branches outside of the United States. Mexico and Canada are two of the hottest spots for expansion. Indicating the draw of the Mexican market, Grainger recently announced that it will expand there to become the country’s first nationwide distributor. And Ford Motor Co. announced in June that it will begin producing its new Fiesta compact car in Mexico, creating 4,500 jobs and expanding production capabilities.

Of the survey respondents that said they are doing business internationally, more than half said they have branches in Mexico and Canada and 20 percent said they have locations in South America. Those figures seem relatively high, since 44 percent of respondents said they have less than $10 million in annual sales.

Still, many distributors identified themselves as regional distributors with no interest in opening branches in other countries.

“We have plenty of business domestically,” one distributor told us. “Local business is what we do best.”

You can’t pick up a magazine or read a newspaper these days without seeing an article about “environmental sustainability” or “green products.” Larger distributors seem to have a stronger focus on green products that is not shared by many small and mid-sized distributors, according to our survey.

Some of the larger distributors, such as Hagemeyer, clearly see advantages in selling green products. In May, Hagemeyer introduced a catalog that contains green industrial, electrical and safety products. And Grainger has a green products section on its Web site and continues to look for new products and services for customers in this area.

“Our customers ask us about green products, we solicit their input and we’ll continue to look at adding green products and providing more green solutions for customers,” Mike Pulick, senior vice president, customer service for Grainger, told us during an interview for our annual Big 50 report in June.

About half of the respondents to our survey rated “going green” as important or very important to them in their business operations in 2008. Twenty-four percent said it was not important at all.

And the comments we received about “going green” were split. Some said selling green products is creating new opportunities for them while others said “it is a fad.”

“We’ve promoted environmentally preferred products for more than 20 years,” one distributor told us. “Most customers weren’t on the bandwagon, but are slowly coming around. There are many people touting themselves as 'green,’ but [they] aren’t actually providing environmentally preferred products. It seems to be more political than environmental.”

Ben Mondics, president of Applied Industrial Technologies, noted the growth in sales of green products and services, mainly in the areas of higher efficiency motors, bearings and variable frequency drives.

He said Applied is also working with customers on improved lubrication systems.

“The green revolution is also helping to create new markets in areas like ethanol production,” he said in an interview for the Big 50 report. “We regularly discuss green products with our customers to determine their needs and respond appropriately.”

A majority of distributors told us there has not been a strong demand from their customers for green products and that, until that happens, they will continue doing business as usual. One out of three distributors said selling environmentally friendly products has added costs, while others said it has lowered their profit margins.

“Conscientiously, I believe our company and our customers strive to do what’s best for the environment, but I don’t feel like there has been a big push for this in the machining/manufacturing sector,” said one distributor.

Internally, distributors say they have made changes in their businesses to reduce costs. Nearly two-thirds of our respondents said they have reduced their energy consumption or have stepped up their recycling efforts. Some distributors have begun using green cleaning products, while others have changed from using regular light bulbs to compact fluorescent lighting. Nearly four out of 10 distributors have changed their packaging requirements and nearly half have switched to reusable containers. And it has led to reduced costs.

“I have been making changes in the recycling of cardboard, etc., and I am actually saving money on our disposal costs,” one distributor told us.

The green movement has certainly helped some power transmission components distributors. Rather than have more motors rewound, for example, customers are replacing those motors with high-premium, more efficient models, meaning increased sales.

“Driving customers to buy more energy-efficient motors is our top goal,” said one power transmission distributor.

Other distributors told us they are selling lighting improvements, particularly for warehouses. Some distributors are retrofitting their customers’ warehouse lighting and installing motion sensors so lights will only be activated when there is a person in that specific area.

Power transmission distributors, as well as others, say they are seeing more business in wind power. To show how important wind generation is becoming, legendary oil and gas investor T. Boone Pickens recently announced that he purchased 400,000 acres in Sweetwater, Texas, and will buy 667 wind turbines to produce electric power for more than 1.3 million homes in the region. That’s equivalent to the amount of power produced by a nuclear power plant. The cost of those turbines is expected to be in the $2 billion range. Servicing and building those products will mean a strong opportunity for distributors, particularly those selling bearings, electrical products, hydraulic tools and related items.

Just 1 percent of our nation’s power is produced by wind farms, but that number could rise to 20 percent by 2030, according to some estimates.

When asked their top concerns, respondents to this year’s survey identified the economy as their chief problem. Only a few months ago, when ID interviewed the presidents of the largest distributorships in the country for our Big 50 report, those executives said business was solid and growing and that they saw no signs of a recession. The respondents to our 62nd Annual Survey—many of whom are smaller distributors—aren’t so optimistic.

But what both groups agree on is that the automotive and construction markets are showing no signs of a rebound.

Though the housing market has received much media attention, the automotive business is also seeing many difficulties due to the changing habits of consumers as fuel costs soar. GM announced in June that it will close four plants—two in Canada and two in the United States—because of slackening demand for larger vehicles, for example.

The economic future looks dim to some economists, including Alan Beaulieu of the Institute for Trend Research. In a recent speech to the Industrial Supply Assn., Beaulieu said he expects a recession to occur in 2009 and into 2010.

Distributors are taking a series of steps to cope with the predicted downturn. They are cutting back on hiring, not filling open positions caused by attrition and terminating some employees. Twenty-five percent have a hiring freeze in place, and eight percent have shuttered branches.

When asked what markets are likely to be affected by a potential recession, distributors rated the automotive and construction sectors highest, followed by aerospace and food. Distributors also reported that 70 percent of their customers have cut back on their purchases, while 29 percent have reduced the number of distributors supplying them with products.

“Since most products we offer are now made in Asia because our U.S. partners moved there—and higher quality products still come from Europe—we are squeezed on both ends by poor government fiscal policy that has made the U.S. dollar globally depressed,” said one distributor. “We can’t buy American any more because our suppliers have left the country.”

Other distributors said regulations, taxes and an“unfair business climate and price cutting” were hurting their ability to compete and maintain their profit margins. In addition, they cited customers moving operations overseas, the deteriorating relationship between manufacturers and distributors, soaring health insurance costs and lack of good hiring prospects as top concerns.

Finding qualified talent has become increasingly difficult as baby boomers head for retirement. More than 60 percent of respondents said finding qualified technical personnel, particularly in sales, is a major concern. To help solve this problem, more than half of these distributors have begun an internal training/development program, while a slightly smaller percentage are working with vocational and community colleges to recruit potential employees.

And once those new employees are hired, distributors are making sure they retain their services. Most distributors now offer higher pay for performance, training and education programs and tuition reimbursement. More than half said they are continuously evaluating their benefits package to keep in line with the competition.

Mergers and acquisitions also concern our survey respondents.

“One of the problems we’re facing is that our product lines are being acquired by companies with competing distribution,” said one distributor.

Despite the economy, distributors expect M&A activity to continue at about the same rate as the past few years. Only 5 percent of the distributors surveyed said they had been acquired or merged during the past year, although 28 percent were approached with an acquisition offer. About one-third of the respondents said they are actively seeking to acquire another distributorship.

Only 21 percent of distributors mentioned manufacturers selling direct as a top concern, which is a change from many years ago. When we first conducted these surveys, that was listed as a top concern.

Distributors traditionally have been slow to adopt new technology, but the Web is increasingly playing an important role in their business operations. More than 70 percent of respondents said their Web site is important or very important to the growth of their business this year. Last year, the typical distributor received six percent of his sales from customers via the Internet. About half of our respondents said that figure will increase this year.

To meet this growth, 18 percent said they are in the process of re-designing their Web sites. The reasons are varied. Sixty-four percent said it will help generate leads, 63 percent said it will allow them to provide technical/product information and 58 percent are redesigning in order to attract new customers. Forty percent expect the redesign to help them provide e-commerce transactions.

Nearly three-quarters of distributors said they order products from suppliers via the Web, a substantial increase from just a few years ago.

More than half of this year’s respondents said they have online Web site ordering capabilities, while more than one out of three has an enterprise resource planning system in place. What’s more, an additional 26 percent said they plan to buy an ERP system in the next two to three years.

One technology that still has not caught on in distribution is radio frequency identification. Only 10 percent of respondents said they currently use RFID technology.

One out of three respondents said they are charging fees for services that were free just a few years ago. The average respondent said 11 percent of his sales come from selling services.

Why do customers do business with distributors? More than seven out of 10 said it’s because of product availability, while a slightly smaller percentage point to the technical support they provide. Only 37 percent said price is a contributing factor.

Despite their pessimism about the economy, distributors said 2008 will be a good year. More than 60 percent of the respondents to our survey said their sales will rise this year. Some distributors told us that sales to contractors and engineering firms that are building power plants, pipelines, water treatment plants and bridges remain strong.

One of the interesting statistics from the survey is that although the growth of national chains has hurt the independent distributor, most distributors (71 percent) are still family-owned enterprises. And those distributorships have been around for a long time. In fact, the survey showed that the “average” distributor has been in business for 46 years, a figure that has not changed markedly over the years.

Somebody is doing something right.