Small is Beautiful

Smaller distributors heard how to identify cost advantages and seek out unique market opportunities from Al Bates.

Photo © 2011 Gary Michael www.exposuresltd.com

Industry consultant Al Bates, of The Profit Planning Group, led a breakout session designed to offer profit improvement recommendations for smaller distributors, typically those with annual sales of $50 million or less.

“This industry has seen profits go up four years in a row,” said Bates. “We have now taken a giant step to where we are in the middle of the distribution industry. So are we going up further? Are the smaller firms getting their share? The bigger you are, the more profit you tend to make. Size for whatever reason matters a lot.”

Today, typical gross margin for a $30 million company is about 10 percent, Bates said, adding, however, that payroll and fringes are “way too high compared to other segments of industry.”

Bates recommended implementing a 2-point spread between sales growth and wage growth, and gave examples of improvements this would yield to the bottom line. He also recommended that companies look at product categories that are generating high margins – say 40% -- and increase prices there.

“Hose ‘em!” Bates said. “Raise the price on those things where you already think the gross margins are wonderful. If this were a stand-alone business you could not survive on 40% margin. So raise prices by 10%.”

Bates also recommended that distributors carefully analyze delivery frequencies for smaller accounts, and reduce deliveries wherever possible – a step that he also predicted would yield increased profits, acknowledging, however, that this could result in competitive challenges.

“This session was right on the money,” commented Nick Zaden, City Wholesale Grocery Co., Birmingham, AL, at its conclusion. “We think a margin that is crummy is good, and it’s not. We are leaving money on the table. That’s my take after listening to this presentation.”