Price and Performance

With commodity pricing soaring, many manufacturers are pushing price increases down to distributors who are scrambling to enter the information into their systems to update costs and then pass them on to their customers where ever they can. Sometimes they can’t do to contracted pricing and negotiations, or SPAs, need to commence.

And price increases can provide distributors with an opportunity to add a little bit to improve margins but sometimes the competitiveness in the marketplace inhibits price increases fom holding.

Price increases can also create the false impression that business is improving. Revenues go up, and GP dollars increase, but the net may not change.

And then there are companies that somehow operate differently:

1. Lowe’s, in the June 25 issue of WSJ, states it is seeing “unprecedented requests for price increases” from suppliers and will be raising retail prices ‘as it can'”. According the CFO, “the market sets the retail price so retail hasn’t moved with supplier increases”. So does this mean Lowe’s is absorbing the increases (doubtful) or that Lowes is rejecting the increases (or negotiating smaller increases)? When was the last time you went into a
   retail store and wouldn’t buy something because it was .50 to $1.00 more? Perhaps it is time for distributors to start to comparison shop Home Depot and Lowes again to see if price increases are being passed on? Retail customers don’t negotiate pricing (or do major projects), but contractors pursue options and distributors can provide material and supplier alternatives.
2. In the same issue, Kroger, the supermarket chain, reported a 15% increase in net income. The keys: “an array of discounts to lure customers into the store; promotions and loyalty programs; consumers buying more private label (in-house) brands which are cheaper but offer higher profit margins.” We’re not advocating private labeling, but seeking alternative purchasing / sourcing solutions can improve profitability.
3. And last but not least is Rockwell who has had “reasonable” (our term) sales performance 7-9% increase (not counting currency issues) but has seen slower performance in the U.S.
   and Europe. A key comment in the June 26 issue of WSJ:

   “The company has seen continued strong revenue growth in its solutions and services businesses within the Control Products & Solutions segment. However, in the higher-margin Architecture & Software segment, the expected revenue growth has not occurred.

   The Company is currently evaluating the market outlook for the balance of the year along with appropriate cost control actions and will comment further during the third quarter earnings call.

Keith D. Nosbusch, chairman and chief executive officer, said, “I continue to have confidence in the long-term growth prospects for this business. It appears that market growth is slowing in two key regions and we will deal with that reality.”

Our read: It wouldn’t surprise us if “deal with that reality” will be increased “focus” on distributor performance and cost-cutting (in-field personnel), thereby moving more expectations and costs (hiring of personnel – ex-Rockwell people) to distributors.

For more on Rockwell, check out Jim Pinto’s weblog.

Your thoughts?