Challenges of Profit, Opportunities for Success Are Summit Focus
The typical AWMA distribution company generates annual sales of about $70 million with pre-tax profit of about 0.5%, according to the Hershey Industry Performance Analysis (HIPA) report presented at the 2006 AWMA Summit in Lake Las Vegas, NV, Tuesday.
AWMA Summit participants receive a detailed briefing on the Hershey Industry Performance Analysis (HIPA) report. In foreground (left to right) are Steve Rutherford and Steve Shing of GSC Enterprises, Inc., Sulphur Springs, TX, and Larry Glass, U.S. Smokeless Tobacco Company, Irving, TX.
However, John Mackay, of the Mackay Research Group, which prepared the findings, said high profit companies produced sales of $80.5 million and a much healthier profit margin of 1.8%. Meanwhile, Return on Assets performance of the typical company was 4.0%, but 16.2% for those in the high profit category.
"What separates the typical company from high profit companies isn’t a home run, it’s the little things," Mackay told distributors at Tuesday’s opening Summit session, noting that the more profitable companies had lower operating expenses against higher sales, as well as higher productivity, as evidenced by sales per employee, than did the typical distribution firm.
If that typical firm could impose a 1% price increase, boosting sales by $1.4 million while holding the increase in cost of goods sold to about $650,000, the gross margin would be increased from $4,690,000 to $5,436,900, Mackay said. With variable expenses increasing by a modest $10,500 and fixed expenses being held in check, profit would be increased from $350,000 to $1,086,400—an increase of 210.4%.
The challenges involved in implementing such a price increase and strategies for making that possible were addressed in a new study, "The Distributor Value Equation in the Convenience Channel," presented by Kit Dietz, president, Dietz Consulting, and Bob Gatty, president, G-Net Communications Consulting.
AWMA President Scott Ramminger introduces "The Value of the Distributor Study," a landmark report which examines the essential role played by distributors.
That report quantified many of the services provided by distributors which provide value to both manufacturers and retail customers, and urged both trading partner groups to recognize the contribution they make to their own company’s success. (For details, see yesterday’s report).
During that presentation and in a panel discussion that followed, Dietz stressed the importance of distributors setting higher expectations for profit and refraining from engaging in competitive tactics that serve to restrain overall profits. "We just keep cutting each others’ throats," Dietz said. "There has to be higher expectations."
Paul Augur, former president and chief operating officer, Pine State Trading Co., advised distributors to carefully monitor their accounts and, if necessary, increase prices on those "C & D" accounts that are not generating sufficient profit. However, he as well as management consultant Wayne Outlaw, stressed the importance of "buy-in" by the sales department.
In fact, Outlaw throughout the day emphasized the need for distributors to upgrade sales personnel so they can support the concept of selling value and relate to strategic concerns of retail customer executives.
"If you have sales people who cannot sell, you are not getting value for your money," Outlaw declared. "And you’ve got to have top level managers who can manage those people. That drives new business so you have an ample number of prospects in the pipeline and you don’t have to have that customer (who only cares about price and doesn’t recognize value.)"
