PAR for the course as margins, and profit, race downhill

We’ve been talking with distributors the last couple of weeks and a common refrain is the lack of profitability in much of their businesses. Many are attributing this to marketplace pricing strategies and some distributors’ desire to take share based upon price or the need for cash flow (and then others need to “meet/beat” the price on the street).

Some of the “race to the bottom” is distributor driven and, according to some distributors, they are starting to see some manufacturer pricing (with and without SPAs) that they never thought they would see/receive (which means someone asked for the price).

The challenge, from an industry viewpoint, is that industry profitability suffers as others react.

Which got us to looking at this year’s PAR report, which is supposed to be the industry bible for distributor metrics.

According to PAR:

• The “typical” NAED member is a $57M company (please don’t laugh, especially since this would be about a top 125 distributor according to Electrical Wholesaling’s Top 200 report and NAED has only about 450 members!)
• The “high” profit NAED member is a $72M company, which reinforces the belief that larger companies gain more operational synergies which enable them to be more profitable. The COGS differential between a typical and a high profit distributor is 2.1% (meaning that larger companies either buy better or are using more SPAs to reduce their COGS).
• According to press releases we’ve seen, 157 distributors submitted information to be included in the PAR report (out of an industry of 2500+ distributors). Consider, if you were stretched thin in Q1 this year, concerned about cost cutting and managing your business, and last year was only fair, would you take the time to gather the information to submit (and pay for) a report? Typically participants are the “better” companies in the industry, hence the data is probably somewhat skewed.
• Distributor pre-tax profit margin was 2.6% for the typical and 6.6% for the high profit groups.
• G&A is higher for typical companies … 5.7% vs. 4.4%. This means they operate more efficiently, have lower overhead and are better able to execute through revenue generating personnel
• High profit companies have more inventory turns … 5.1 vs. 4.2 and their GMROI is 171.2% vs. 138.2%. Inventory that doesn’t turn is a non-performing asset.
• Average Collection Period, or daily sales outstanding (DSOs), of receivables is 53.7 for typical members and 49.1 for high profit companies … they collect money faster and hence have improved cash flow.
• And trends for ROA, gross margin and inventory turns continue to decline over the past three years while operating expenses continue to grow.

So, what does this mean?

Distributors lament their profitability (and yes, we know many are family-owned businesses which can mean something different financially), however, they control their destiny. For some the goal is to maximize profitability.

Rather than a “race to the bottom” and letting customers dictate price, distributors need to either:

• Optimize their business models to enable profitability with lower margins
• Promote their value to generate higher margins
• Identify segments that enable profitability
• Develop new models that support lower margins.

Manufacturers, on the other hand, don’t need to be enablers unless they too are after market share and are confident that they can achieve their margin goals through other means. In the words of Nancy Reagan, manufacturers can always “just say no!” (and saying no to a few distributors could impact the market for many!) Strategies can be developed to address all of these scenarios, the question becomes “is someone willing to implement?”

What are you seeing in your market regarding margins? What does PAR tell you and is it of value (with only 6% of the industry reporting)?