You may remember the phrase “it was the best of times; it was the worst of times.” Well, the past two years have had both.
The best of times for distributors and manufacturers can best be exemplified by looking at your sales and gross profit dollars. For most, it has been the best of times, especially if PPP monies in 2020 are included. Additionally, the resilience of your workforce to adapt and serve customers during trying times should be recognized. As an industry faced with numerous challenges, kudos to all.
It has also been “the worst of times” given that we’ve had to battle with COVID and its ebbs and flows and supply chain disruption.
But rather than rehash the past, let’s look forward.
If we listen to the economic and media pundits, the worst of times, as summarized with the R-word (recession) is coming. No one knows when but, in the words of Larry Summers, former Federal Reserve chairman on a recent Bloomberg television interview, “sometime within the next two years.”
Many believe some level of a recession is coming due to high inflation and rising interest rates, which leads to “demands” for higher wages, higher product costs and a slow/declining economy. These are further hastened by COVID, supply chain disruptions and the war in Ukraine.
But remember, the axiom that what goes up inevitably comes down.
- A rising economy, at some point, slows its growth rate or declines a bit.
- Inflation, which is stimulated by supply chain issues, compensation increases (and yes, Amazon’s warehouse compensation model is a competitor to distributors and manufacturer warehouses), as well as too much demand chasing commodity supplies.
- Fuel costs have risen with much attributed to the war in Ukraine.
- COVID is not going away. While this has employment and staffing issues, it also has supply chain issues. At the time of this writing, several Chinese provinces are in lockdown with some ports closed or allowing minimal exports. China’s zero-tolerance policy, if continued, will have a worldwide supply chain impact—provinces closed = factories closed = no exports for a month or more.
At the same time, rising home prices and mortgage rates will combine to either slow or create a decline in the housing market nationally. This can be different geographically where demographics are changing.
The question then becomes, what to do?
The good news is that, for most, business is still good. Prosper when times are good. Gather resources. Make desired, albeit prudent, investments and consider how to build a moat around customers while selectively targeting new opportunities.
Sounds easy (typical consultees speak!) but here are
- Seek ways to improve gross margins by taking advantages of opportunities in your pricing files. Supplier price increases are opportunities for profit optimization. Customers that are very small, and probably unprofitable even at 25-30% gross margins, are your low hanging fruit, but there are other opportunities.
- If suppliers are allowing SPAs/ship and debits, take advantage of them.
- Technology. Invest in operationally oriented technology to automate processes wherever you can to enable you to do “more with less” while having a stable cost structure.
- While on the technology topic, identify tools that will add value to your customer. As your customer buyer demographics evolve, and they are, they want to interact with you electronically but, more importantly, they want self-service and ease. Some things to consider include:
Some consider investing in technology “digital transformation,” which can be daunting. Think of it as “smart business.”
- A robust website, even if it only has an online catalog. Adding commerce helps, but sometimes it needs to be done one step at a time. Don’t let perfection be the enemy of progress and timeliness.
- eMarketing…if you have the in-house skills, consider a tool such as Hubspot or make better use of your email marketing tool (they have engagement functionality.
- Text communications.
- Electronically connect with customers.
- What modules does your ERP offer that are customer-facing that you are not using? Image capture? Delivery signing? Others?
- The supply chain issues probably will not get any better soon. Many manufacturers say “end of the year” but that is not accounting for China’s zero-tolerance policy that currently shuts down factories if COVID is present as well as shipping delays. If you have the cash, stock up on A and perhaps some B items. In a recession, cash is king, but you cannot generate cash without something to sell.
- Speaking of selling, review your sales metrics and ensure that your salespeople are salespeople and not account managers. Accountability is key. A key distribution metric is gross margin dollars/invoice. It is all about profitable sales. Other key metrics relate to market share of a salesperson’s account base, the percent of their business coming from key customers and new account (and sales) development. Salespeople remain vital to customer retention, as the plumbing industry is a relationship business.
- Data analytics help but remember that these are rear-view window oriented. They inform but are not deterministic, especially in project-oriented businesses. Use the information to gather account-level and salesperson-level gap analysis information, to guide pricing and inventory decisions, as informational tools to support suggestion selling. Invest some. Know your numbers but remember, every investment needs an ROI.
- Marketing is a core complement to sales as marketing can be a salesforce multiplier. Good marketing can be a business differentiator, a messenger, and an auxiliary salesperson when your salesperson is not present and to accounts that sales does not call. You need to invest in an integrated marketing strategy, inclusive of thoughtful eMarketing. And marketing should be supported by key suppliers.
- Part of your marketing strategy should be a loyalty and growth initiative. Not loyalty as in “give them points,” but loyalty as in “what activities signal their loyalty and what do they value?” It requires some customer research and understanding of the buying journey. Points can work for independent contractors, but they do not work for all audiences. Consider how to build a moat around your customers with the guiding mantra of “how can I make my customer want to do business with me?”
- Business diversification will be important. With the residential new construction market slowing in many parts of the country, do not settle, consider how to diversify, or pivot. How can you be proactive in the renovation sector? Consider opportunities in the Infrastructure Investment and Jobs Act (IIJA), which will benefit institutional facilities, the PVF and waterworks segments. Perhaps promote clean water residential buyers given interest in key demographics? And be a new product introduction marketing machine.
Research shows that during recessions companies that invest in selected areas come out of the recession sooner and at a greater growth rate. Some never experience the recession. The phrase is “don’t let a good recession go to waste.” Given that there is only talk of a recession, albeit the construction trades are predicting a mild one to start in mid-2023, take the opportunity to strengthen your business today. Make prudent investments with today’s cash so that you can gain market share, sales, and profits for the long-term.