Distributors Consider Ways to Address Fuel Increases

Welcome to the unofficial start of summer and to the official start of $4/gallon gas!

• Over the past month we conducted a survey asking distributors how they are addressing this rising cost which threatens many distributors’ bottom lines. Over 250 distributors responded with 37.5% of respondents in the electrical industry and 41.1% from the industrial supply market (the remainder from other industries). Companies of all sizes responded, with 70.5% of respondents being executives or sales management.
• 33.1% of companies have fleets made up of 50+% diesel fueled vehicles (which has higher gas prices albeit supposedly better mileage)
• 32.1% say that increased fuel costs have “significantly impacted profitability as they we can’t pass on any of it to our customers”. Another 36.8% reported “Somewhat as they can’t pass most of it on to customers” and 21.7% have had “Limited Impact as we’ve absorbed some but have passed on most of it to customers.”
• When asked if they’ve calculated the incremental costs, about half have, with the increase being 25-40% of their prior year expenses. With fuel historically being .2-.3% of sales, this becomes significant when revenues, and margins, are not increasing.
• When asked how they have addressed rising fuel costs, distributors responded:

• When asked if they are charging a delivery/fuel surcharge, 47.4% responded that they are charging some type of a surcharge. Many of these were implemented shortly after Hurricane Katrina. The range of charges are:

• We have recently spoken with a couple of distributors in the Southwest who are starting to initiate a $5-7 fee; a couple in the New England area are going from $5 to $7.50 and $10; and a large Southeastern electrical distributor is contemplating implementing fees.
• Strategies being used to combat fuel costs include:

Using UPS/FedEx/DHL more, and charging for freight 53.7%
Reduced number of deliveries 40.0%
Changed delivery schedule 34.7%
Adding a small increase in overall pricing 29.5%
Using fuel credit cards to take advantage of rebates 27.4%
Using / purchasing more fuel efficient vehicles 20.0%
Using local courier/delivery services more 17.9%
Improving maintenance on vehicles 15.8%
Using truck routing software 11.6%
Nothing 9.5%
Negotiated fuel prices with local gas stations 7.4%
Providing a discount for customer pick-ups 2.1%

Additionally, over 60% of distributors are seeing manufacturer minimum orders increasing as a tool for manufacturers to control their freight (fuel costs).

Conversations with distributors who are not charging a fuel/delivery surcharge almost universally say “my competitors aren’t and I’m afraid of being the first” while at the same time lamenting that they should be charging something to minimize their loss. Essentially, this becomes an issue of “market leadership” and having confidence that your customers want to do business with you, let alone that they recognize the fuel issue – they are facing it. Interestingly, a number of contractors are charging fuel/transportation fees in their service businesses.

While you won’t recoup all of the fuel increases you are facing, remember that another definition of profit is “a reduction of loss.” If you can minimize your loss, the bottom line won’t shrink as much. The key is confidence in why customers do business with you, addressing the issue from multiple angles and having management, and market leadership. Unfortunately the problem won’t be going away.