The industry’s leading profit prophet, Al Bates, president, the Profit Planning Group, walked attendees in a mid-morning educational session through the process of evaluating how to cope with customers that are currently unprofitable and largely responsible for low overall distributor pretax profits and return on assets (ROA).
Pointing out that a new tool developed by his firm and made available at no cost to AWMA members can help evaluate the profitability of each customer, Bates explained that increasing prices to high cost-to-serve customers could result in a significant improvement in gross margin, substantially more than changing product mix or taking steps to be more efficient.
“Hose ‘em,” he advised half jokingly. “That means you will get a fair margin. We have tended to under- price our non-tobacco items.”
Bates said the industry is making progress on both pretax profits and ROA, but there is much room for improvement. He said the convenience distributor sector is the only distribution segment that was profitable last year, despite the recession.
“You have the best collection program and the best inventory program,” he said, noting that companies are extremely efficient and it will be difficult to achieve much more savings by improving efficiency. “It’s hard to improve on excellence,” he said.
Thus, he said, a major opportunity is supporting the top customers that generate most of the profit, working to help those that do not to improve, and increasing prices on the worst performers.
Distributors were encouraged to stop by the AWMA Resource Central on the trade show floor to pick up a free copy of the profit planning tool discussed by Bates in his presentation.
Asked what he got from the presentation, David Han, president, Triple C Wholesalers, Inc., cited Bates’ advice to increase gross margin by weeding out unprofitable customers and allowing payroll to increase to a level two points lower than increases in sales – advice that Bates said could significantly increase the bottom line. If sales increase by 5 percent, then payroll should not be allowed to increase more than 3 percent, he said.
“That is very important,” said Han. “If I can do those things, I can immediately increase our profit before taxes. This was worth the trip.”
Danny Thompson, director of category management and purchasing and Jim Ball, category manager for grocery and beverage at Harbor Wholesale Grocery Co., said they began implementing Bates’ advice more than two years ago and it has paid off.
“The whole idea of looking at customer mix and firing the incorrigible ones has worked for us,” said Ball. “Only a very few were let go.” But Thompson said the effort has been a key to the company’s improved level of profitability.
“His focus on profitability, on looking at your customers to improve your bottom line, that was excellent,” said John Guarnieri, Albert Guarnieri & Co. Guarnieri is co-chair of the AWMA/DEF Education and Research Committee.
