STAFDA State of the Industry – Smith: The Concern is Profits

John Wolz

The industry is �going through a troubled time,� Jim Smith declared in his State of the Industry address at the 25th annual convention of the Specialty Tools & Fasteners Distributors Association.
�My concern for the next year and the immediate future is profits � not sales,� STAFDA president Smith observed. \
According to STAFDA�s PAR Report, typical distributor members had pretax profits of just 2.4%.
�That�s a median figure, so half did worse than that,� he pointed out.
�Surely none of us went into business expecting to achieve such an unacceptable profit,� Smith reasoned.
�In a rush to grow sales and meet competition, we�ve watched margins shrink,� he observed.
Distributors are giving away too many free services and not controlling expenses, and specialty products have turned into commodities.
�We each need to invent a differentiated strategy for our companies. Let me suggest we draw every employee into the task of figuring out how to make our business excel beyond its current level. Focusing inward and building a company that is strong in its foundation, creative in its thinking and proactive with customers will give us the strength to compete successfully in these challenging economic times.�
After STAFDA members posted 10 consecutive years of quarterly sales increases over the previous year, �that string came to an abrupt end,� Smith reported. �Both first and second quarter sales this year were down from a year ago. Those members who rely on industrial customers for most of their business have been especially hard hit.�
Smith, president of Albuquerque, NM-based Nail Fast Inc., added that a �decade of investment in technology has improved industrial efficiency to the point where we now have a 25% excess manufacturing capacity that can�t be absorbed by current sales levels.�
�Even with inventory reductions, production slashes, pink slips and reduced capital spending, nobody expects the corporate profits to recover anytime soon. Together with the collapse of the dot.com industry and the fall of the stock market to 1997 levels, consumer net worth has crashed. This reverse wealth effect adds another negative element.
Attempts by the Federal Reserve to jump-start the economy with lower interest rates �haven�t worked.�
Smith noted that since 1983 there has been only one brief recession, followed by the �greatest expansion in American history. Until the terrorist attacks, it had been the optimism of the American consumer that had enabled us to escape an all-out recession. But with consumer confidence sinking, we could see an avalanche of defaults in household debt that would trigger the most serious downturn since World War II.�
Smith pointed out that �bankruptcy filings this year are already on pace to surpass 1998�s record of nearly 1.5 million.�
World Economy
�Since we live and work in a world economy, the state of our industry is also affected by what�s happening internationally. For the first time in over 50 years all three economic engines in the world are in decline at the same time � Japan, Europe and the U.S.
The good news for construction-oriented STAFDA distributors is that �the construction industry is one of the few bright spots� in the current economy, Smith pointed out. Interest rates are low, unemployment is still under 5.5%, and total construction for the first nine months was up 2%. Residential construction is ahead 4%, and such nonbuilding projects as highways and electric utility projects are up 13%.
The need for power plants will drive construction gains next year in many states, Smith predicted.
Rising unemployment may help contractors who have been unable to take on more work because of labor shortages.
Expenses and Profits
Nail Fast customers could be lured by items that are $10 less at a big box outlet.
�Of course it�s $10 less! It�s $10 less from Home Depot, because the customer finds his own product, pulls his own order, stands in line waiting to have his product scanned by an $8.50-an-hour, part-time worker, pays cash, then totes the product to his truck and gets very little after-sale service, technical advice and so on. If your customers are talking home center prices, they�re either not interested in or unaware of your bundled services.�
Smith predicts the small contractor and individual tradesman business will grow for STAFDA distributors.
�In Albuquerque the most recent local carpenters union labor agreement calls for tradesmen to supply their own hand and electric power tools,� Smith noted.
Home Depot�s operating expenses were reported to be down 20% and now 37% less than a typical STAFDA distributor. �So if we try to match their prices and then throw in all our standard services for free, given our traditional cost structure, the results will be disastrous.�
STAFDA distributors must find ways to deal with such products as power tools that have become commodities and �are priced at levels where there is absolutely no way for a distributor to sell them profitably.�
Nail Fast traditionally bundled services and overhead into every transaction, whether or not the services were needed.
�We now establish pricing based on the level of service requested, not just the cost of product purchased. We do this by performing a quarterly simplified activity-based cost analysis of our top 120 customers. We then look at credit terms, payment history and the customers �hassle� factor. We then establish, or adjust, pricing based on the amount of service that the customer expects.�
Sales compensation must change for commodities sales without engineering, design, installation or maintenance support.
�Fulfillment� is not a sales situation. �We need to develop a business model that strips out services that today�s customers don�t need and are unwilling to pay for.
�We all like to think our sales reps are managing the relationship between our business and the customers. But is this the case? Ask your reps to describe the last problem they solved for a customer.�
Disintermediation
�It was only a couple of years ago that there was widespread uncertainty about the impact of the Internet on distribution,� Smith recalled. �Many were forecasting our demise once customers could easily access comparative bids and place online orders.�
Distributors would be �disintermediated� as end users and manufacturers dealt directly.
�No, in hindsight we learned that customers are reluctant to disrupt systems that work � even if those systems are somewhat inefficient. The e-commerce hype is largely history, and today B-2-B could mean �back-to-basics.��
The National Association of Wholesalers predicts the Internet will be �common� by 2006, but not the �dominant� method of receiving orders. �It will be an option much like the fax machine or EDI,� Smith predicted. �2001 FastenerNews.com