January 29, 2003 Distribution Channel
Commentary # 9
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THIS WEEK’S TOPICS:
1. STALLED ECONOMY; HOW TO GROW PROFITS?
a. free market facts win over cheerleaders; interesting deflation cycle
graph
b. lessons from: Stanley Tool; Depot vs.
Lowe’s Service Duel; McEmpire declines?
2. TIPS FOR REFOCUSING ON YOUR BEST NICHES
3. TEAM FOCUSING ON KEY ACCOUNTS, “NEXT LEVEL” IDEAS FROM READERS
4. EDUCATING ALL EMPLOYEES (FEEL GUILTY?); AFFORDABLE SOLUTIONS
5. “HIGH PERFORMANCE’ VIDEO USERS’ SHARE-WARE (will this get you to the
end?)
1. STALLED ECONOMY; HOW TO GROW PROFITS
The Iraq war is being used as an excuse by all of the
expert forecasters and Wall Street cheerleaders as to why the data from
December and early January is showing the economy at stall speed; already less
robust than what they were forecasting a few weeks ago. I believe that root
causes of our muddle along economy are, instead, the excesses of our bubble
economy (EB#1, DCC#6.1), the rapid growth of China(DCC#1.2) and our
borrow-to-consume-keep-the-economy going federal policies(DCC#2.1). The
combination of growing our money supply to maintain artificially low interest
rates to induce the last, naïve consumer to buy a house and car with nothing
down has both forestalled and aggravated our country’s need to collectively
save and invest in productive investments.
Our economy, at any rate, is quite fragile and any shocks
to it could cause another, tougher recession than 2001’s. When conditions are
as stressed and uncertain as today, it is important to develop worst-likely-best
scenarios and be prepared for them. Most wholesalers have already been through
one to three rounds of cutting costs and trying harder, but few have figured
out how to do all of the following: downsize, upgrade, refocus and revitalize
their businesses. Most businesses are like overweight bodies in which there is
a ripped athlete trying to get out. How do we liberate the athlete within to
better cope with these tough times? It’s a key theme of these commentaries.
From the on-going dirge of weak economic/business news, I
plucked a few case examples that
might speak to a number of wholesalers and their high performance service
issues. First, a typical PR hype-job
from a common supplier to many durable distributors,
Stanley Works. The title of the 1-25-03 release was “Profit at Stanley Triples.”
Digging into the details the story isn’t so sweet:
a.
These
numbers are only for the fourth quarter and roughly 60 days later the final,
audited ones that will quietly be reported to the SEC, etc. I wonder if the
final numbers by public companies have, on average, positive or negative
surprises in them that are, of course, consolidated in footnotes of annual
reports.
b.
During
the quarter Stanley issued $350 million in new debt to
buy Best Lock and added their profits into the “triple” total. Do you want more
debt in a deflationary world when your incremental profit power is eroding
faster than the lower interest rates that have to be financed? If you,
incidentally, want to think about “the cycle of deflation” and how it already
is working on the following industries and countries: airlines, hotels,
telecom, autos, and all Asian countries. Then go to this URL and scratch your
head:
http://www.comstockfunds.com/files/NLPP00000/110.gif
c.
Without
adding in Best Lock’s numbers, sales fell 2%; earnings were less than
forecasted for a second consecutive quarter; expenses for both the acquisition
and raw materials were higher than anticipated.
d.
Gross
margins fell from 34.2% a year ago to 31%.
Here are the questions I found myself asking:
a.
If
top line growth is flagging and margins and profit power are both eroding
partially because China is probably making more of both Stanley’s and its
competitors hand tools, is Stanley in control of their core business?
b.
What if we are in the early stages of a
deflationary period that already has gripped all of Asia and durable goods America? What if the stock markets are
still in the early stage of a secular bear market? Do I want to buy another
company to digest and run with debt at today’s prices? Or, should I first try
to re-invent sustainable profit power (not just through headcount reductions)
in my core business and do deals later on at even lower prices with a better
balance sheet and presumably a higher interest rate coverage ratio?
c.
Wouldn’t
Stanley’s numbers reflect the collective
experience of all of the distributors that they sell to? What are those
distributors doing to combat declining sales, margins and profits? I hope they
aren’t pursuing more volume that runs up their working capital debt in hopes of
achieving some sort of mythical economies of scale.
Next case, what is Home Depot’s real problem? I came across two different articles on
why HD’s stock is down more than 50% in ‘02 and same store sales are off 10% in
the fourth quarter amidst the biggest housing boom in history. The 2-3-03 issue of Fortune article, “Can
Home Depot Get Its Groove Back?”, just reports the
financial symptoms – same store sales off and likely to remain so for the next
three quarters – and speculates on how they can get volume growing again by
going into new markets. Sounds like Stanley Works’ strategy above; if your core
business is flagging don’t fix it, buy more growth by getting into another game
(or more locations if you are a distribution chain consolidator).
But, a 1-27-03 article in Business Week (“What
Worked at GE Isn’t Working at Home Depot) offers, in my opinion, better, deeper
insights to what HD’s real problems are. The article centers on what HD’s new
CEO from GE, Bob Nardelli, has been doing. A
retailing neophyte, Nardelli was a manufacturing star
at GE who came into HD two years ago to bring it manufacturing efficiencies. He
centralized all buying, consolidated suppliers and increased part-time sales
clerks from 26% to 50% and improved margin percent by 1%. But, reorder lead
times to the local stores stretched out and fill rates dropped. I also infer
that service quality from part-timers probably dropped and customers defected
to competitors. Here’s why HD’s same store sales drop of 10% in the fourth
quarter was the seventh straight quarter in which HD lagged Lowe’s same store
sales rates. Lowe’s, by the way, has 80% full time sales associates and has
been scoring higher service satisfaction rates.
Conclusions,
Discussion Points:
1.
Local
fill rates are the cornerstone of great service, especially for distributors.
HD seems to have made a pennywise, pound-foolish, financial trade-off decision
to improve margins at the expense of fill rates. For more on rethinking your
business around fill-rates see the case study in DCC#8.3.
2.
Attracting,
keeping and educating the best quality employees is
the keystone to the “service quality/customer retention model. Having cheaper,
higher turnover, less motivated part-timers at HD seems to be another pennywise-pound-foolish
trade off HD’s new CEO has made. I wonder if Mr. Nardelli
understands the why’s and how’s of employee/customer
retention practices? I transformed a distribution company with the “service
economics chain” in the early ‘80’s. I borrowed and adapted it for a
distribution branch environment from my service management professors at
Harvard, Jim Heskett and Earl Sasser.
For more on this topic see VM#3.12 and WS-Art#3.7. For a quick simple read on
the subject that I found through Google on the web,
check out this URL: http://www.loyaltypath.com/FourStepsArticle.htm
3.
It
appears that HD’s new, centralized buyers are not as responsive to what local
stores and local customers need in stock as HD’s previous methods. Wouldn’t you
think that if you were put in charge of one of the most successful,
historically service driven success stories in retail America you would try to see what was good
about the existing systems instead of “fixing its inefficiencies?” Businesses
like our bodies responding to prescription drugs are a lot more complicated and
finicky than anyone can ever seem to know. Maybe consolidator executives from
outside the service industries that they enter should practice a little
“appreciative inquiry”(DCC#5.3) as to why “inefficient
practices” seem to be working, on balance in an optimum way. Honeybees, for
example, look ill equipped to fly, but when you consider their entire ecosystem
and energy trade-offs, they are perfectly suited for their total job.
4.
Neither
article mentions what has happened to Nardelli’s
inherited corps of store managers and local buyers. What do you bet that with
changing the entire purchasing and sales associate model, a lot of them have
left? How important do you think the quality and longevity of good store
managers are to hiring, keeping, training and motivating good front-line
service employees? I know from lots of experience and client case studies that
this is hugely important for branch managers at distribution chains.
(WS-ART#2.12)
And
lastly, is McEmpire in decline? Did you notice that in
December McDonalds announced its first quarterly loss in 47 years.
They also first announced that they would close 175 of their some 30,000 global
locations, then upped that by hundreds more in early
January. This is not a sudden, new, turn of events. McDonalds has been doing a
slow, profit-power erosion number for years. This has been punctuated with
turn-it-around, touch-down-bomb announcements and investments in things like
new high-tech, automated equipment and co-marketing toy-with-the-meal
advertising deals with Beanie Babies, Star Wars stuff, etc. (McD’s did score a legal victory this past week when U.S.
District Judge, Robert Sweet, threw out a class action lawsuit that sought
damages from McD’s for causing obesity with this
refreshing legal perspective: “Nobody is forced to eat at McDonald’s.”)
What are
the real problems for McEmpire’s economic decline?
After 12 years of having to go to McDonalds (Yes! I am a victim, I was forced
Judge Sweet) with my now 14-year-old son and 10-on-Friday daughter (the end of
this painful necessity is in sight!), I think it’s because of a steady erosion
of what Ray Kroc pioneered and made famous – quality,
service and cleanliness. Don’t just take my view that these basic, vital
ingredients of their once compelling total value proposition have eroded badly.
Go to epinions.com and read the vox pop reviews for
Wendy’s and Chick-Fillet versus McDonalds: high 80’s and 90’s versus 50’s for
big Mac. What are the root causes for this service deterioration? Here are a
few points of discussion for your management team:
a.
Volume
is vanity, profit is sanity? Maybe the executives got bored with maintaining
basic service excellence religion and growing at a slower rate determined by
their ability to attract, train and promote people who were ready from a
service competency viewpoint. The sirens of Wall Street, big executive options
and private jet trips to far off lands made them want to grow faster than they
could maintain service quality, especially through franchisees.
b.
Pursuit
of financial economies of scale instead of sustainable service profit power?
Look where that has gotten them; they probably buy everything for less than
their competitors, they just can’t make any money.
c.
Going
from win-win economic thinking with their stakeholders to win-lose? Read Ray Kroc’s story about McDonald’s (“Grinding it Out”) or John Love’s book “Behind the Arches”, or at least
read some of the reviews on them at Amazon. Both books were airbrushed to make
both Ray and McDonald’s appear more enlightened and foresightful
then reality, but they both capture the spirit of win-win thinking that
McDonald’s had for developing suppliers, franchisees and turning jobs into
careers for their associates. Today, McDonald’s franchisees, for example,
complain bitterly about how the different ways they are being squeezed by the
parent organization.
Final summary questions for the three case studies. Are most of America’s consolidating, distribution
chains guilty of the same problems that we see in these three case studies:
a.
Too
much growth through acquisition adding up to much debt which looks ominous in
deflationary times?
b.
Industry
outsider CEO’s adept at: “roll-ups’; managing by the financial numbers with an
eye towards fast exit strategies with big stock option gains instead of
improving local service metrics through employee and customer retention
economics, making money off suppliers with ever bigger clout for short-term
results and long-term problems.
What
percent of all distributors of any size and stripe truly believe and practice
“high performance service management” principles? If they do, you can spot them
easily. They are the ones that are growing faster than their industry and
making 3 to 6 times the profit margin of the average distributor. That’s only 3
to 5% of the players. How do they do it? Read more in DCC#5.2; skim through our
E-Booklet; or buy a total strategic planning, educating and high performance
implementation program in a box (our “high performance” video) for a nominal
cost compared to the value of your time and your lost profit-power opportunity
cost.
(2) TIPS FOR REFOCUSING ON YOUR BEST NICHES
A few
clients have recently asked for more detailed suggestions on how to identify
the exact core of their historic #1 best niche so that they can refocus on it;
re-tune their service value offering more perfectly for the niche to better
dominate it for maximum profit growth. Here are some steps and tools to use:
a.
With
the mega-assumption that your historic strategy is where you make the most
money, do a simple customer profitability ranking report to see what 10
customers are on top (EB#12; VM#s 3.1-7).
b.
Look
for 4 or more customers in the top 10 that seem quite similar; they can then
become the central voice for and co-creators of your re-invented service
proposition. (VM#3.2 & 3)
c.
Besides
giving this niche a name, define it by the top 5+ most profitable customers in
the niche along with the 5+ most promising target accounts in the same niche
that every employee most know by heart and look for “heroic (service) actions”
to do for them (see topic #3.b below).
d.
Post
the basic service metrics that these customers help to re-define on the wall
and appoint a “service manager” who’s new job includes
gathering, posting and enabling the continuous improvement of these metrics
(VM#4.1-13; WS-Art#3.1, 3.9).
e.
Further
segment the # 1 niche by two other dimensions: why they buy –
loyalty/friendship, value or price and size/mode of selling – “A’s” by outside
sales ($400 in gross margin/month and up), B’s by tele-sales,
C’s by direct mail, catalog and D’s cash-n-carry retail counter(VM#3.6;)
For more
general ideas on why every distributor needs to focus on value-added service
basics tuned to one niche at a time, which can vary amongst multiple locations,
check out the following web documents:
1.
“How
the World Works, Part I and II” by Ray Alderman. Simple, elegant articles on
what works for both manufacturers and distributors at these two URL’s:
Part I:
http://www.elecdesign.com/Globals/PlanetEE/Content/3785.html
Part II:
http://www.elecdesign.com/Globals/PlanetEE/Content/4491.html
2.
“The
Electrical Marketplace (parts I and II by Jim Lucy editor of “Electrical
Wholesaling” magazine). These two articles do a wonderful job of laying out and describing all of the distribution channels
for electrical goods. If you are an electrical distribution channel creature, its good to review to better understand your ecology, your
most important niches and who isn’t really your competitor. For all other
distribution channel people, Lucy’s taxonomy can be generally applied to many
niches in your respective channels.
Part I:
http://images.ewweb.com/files/32/50ways.pdf (great graphics; strategic
planning forms too)
Part II: http://ewweb.com/ar/electric_electrical_marketplace/
(3) TEAM FOCUSING ON KEY ACCOUNTS, “NEXT LEVEL” IDEAS FROM READERS
Once a
distribution branch has zeroed in on the most profitable, historic, core
accounts within one niche at a time AND the best, faster-growing, target,
gazelle accounts in the same niche, what do you do? Here are some ideas from us
and refinements from first-through-the-video users:
a.
Review
the two pages of recommendations in DCC#7.3. Most of this stuff and more is in
our video in VM#-3.7 with more ideas in VM#s- 3.10,
3.11, 4.13.
b.
A industrial packaging distributor went looking for past “heroic
actions” that employees had taken which in turn help to land new chunks of
business from old and new accounts. He not only publicized and thank the people
retroactively, but coined the term going forward of “heroic actions.” We had
fun toying with the idea of buying “action hero figures” in quantity at
Wal-Mart to present to anyone who did an “heroic
action for one of the accounts posted on the wall.”
c.
A
distributor of both wine and wine accessories has had huge success by both
solving a horrendous small order opportunity while super-focusing on his
customers with a future. He went from 5 outside sales reps to one super-star
calling on the “true A’s and gazelles” and one, new dedicated tele-sales person calling on the “true and potential B’s.”
The super-star has landed major new chunks of business in all 15 accounts
(that’s all!). The tele-sales person has grown net
margins out of accounts that used to be covered by former outside sales personnel
by 20%. The net results: sales are up 10%, average order size is up 40%,
special service charges are up thousands per month, profits are up 600% and
debt has been totally paid off.
More specifics on target account
team activities: Every employee knows the top 15 core and target accounts by
heart, because the sales rep quizzes them during monthly review meetings for
the entire team. The rep, in turn, has guaranteed the accounts that no matter
what their problem is “everyone at the company will do extra effort service
actions to solve their problems and grow their bottom line.” Also the rep has
brainstormed regularly with the management team on: what else they can find out about the
targets? What else they can do to sell not just to the accounts but through
them at the lowest total procurement cost with the highest internal
productivity for the customer all to put more measurable profits to the
customer’s bottom line. And when company honchos should go out to visit key
account honchos to talk about working together on “next level” business
building ideas. It is all working in a tough to down economy!
d.
A
regional plumbing supply distribution chain has identified 50 accounts that are
costing the firm $100,000 in lost profits due to huge amounts of small orders(VM#3.5-10; EB#11-14). Instead of expecting the
assigned sales reps to turn these lead accounts into gold, he has identified a
manager who’s total job for the next 6 to 12 months is to do “free TPC (total
procurement cost) Reduction Audits” and implementation guidance for these
accounts. This “consultant’s” goals will be to identify things that the two
companies can do together to both lower the customer’s TPC as well as the
distributor’s cost to serve significantly. Their goal is to do two audits a week
over 25 weeks and turn 100K in losses into 20 to 50k in profits – a monster
swing in profit for this company. Think about it. If a distributor can improve
their bottom line by 150k by selling more to the same customers that also buy
less often in larger quantities to both parties benefit, that is like going out
and getting $3MM in new sales that generate a 5% operating profit margin or
$6MM at 2.5%.
Anyone else out there have refinements and successes to
share?
(4) EDUCATING ALL EMPLOYEES – SEVERAL GREAT SOLUTIONS
Most distributors will admit:
a.
Employees
are our most important asset and the key to our service quality.
b.
But,
we can’t afford to invest in their continuous education.
To break out of the doom loop of: 1) Profits stink. 2)
Let’s cut costs including educational expense and payroll increases. 3) Good
people leave or can’t be hired to begin with due to poor pay, training and job
growth prospects. 4) Our service is, therefore, “average” (or undifferentiated
which makes us price takers) so back to #1. You might read EB#10, “Affordable
Education for Front Line Employees.”
Or, you might go to this web site www.univid.org
TO CHECK OUT THE BEST EDUCATIONAL VALUE IN WHOLESALE DISTRIBUTION FOR
ALL TIME. This “university” has been run about 10+ times over
the past 5+ years by a consortium of 20 distribution trade associations that
are all in the durable goods, distributor-to-industry category. The product is
combat tested, great. And, as a long-time faculty member I can guarantee that
all of the faculty members have worked in lots of distribution channels besides
those represented by the 20 sponsoring associations. The teaching is 95%+
applicable to any type of distribution channel, and “how should I apply this in
my channel” questions are always welcome. You
don’t have to be a member of the 20 sponsoring associations; anyone can go.
So, for those of you who are looking for a great educational
experience for some important employee(s), why not try an experiment.
Send them to this best cost-benefit program with the understanding that they
are going to come back and make a full report on what they have learned of
value that can be applied at your company.
(5) “HIGH PERFORMANCE’ VIDEO USERS’ SHARE-WARE
Two happy users of our video have
offered to share the following items. The plumbing supply distributor mentioned
in #3-d above sent me this quote and a form that you are welcome to request
from Karen@merrifield.com.
A.
“After
running the management team through the video, we are now running all employees
through it. After 6 modules you can already see the light bulbs going on. At
first, the ambitious wanted to fire the slackers, but quickly everyone realized
that everyone has a chance to become part of the high performance solution and
those that don’t will self-weed themselves over time.
We have been focusing on getting people to realize that
change can only happen if they are involved and committed, they can not look to
me or other managers to make their future better. To that end, we have asked
everyone to come up with one thing that they can work on to make themselves
more productive and valuable for our common cause. It doesn’t have to be grandiose, we just want them to start thinking about any
sort of proactive effort on their part. Attached is the form that we are using.”
B.
The
industrial packaging, Jan-San distributor referred to in #3-b above put
together a 21-slide power point
presentation that he has used with excerpts from the video for regional
meetings of his buying group (Afflink). His firm has
improved their net profit by +70% and their return on total assets from
“average” for their industry to “high” with lots more upside to come. If you
want a copy of the slide show, the CEO has given us permission to forward it
on.
Regards,
Bruce
