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First, anyone thinking that a recovery will mimic the years from 2003-2007 needs to be taken behind the woodshed. The years of hyper commodity inflation, rampant construction, and profligate spending won’t come around for a long time. The commodity bubble was largely a result of money pouring into the commodity sector and this drove up the price of commodities 3x or more than their historic averages. Of course the inventory values skyrocketed and outpaced the cost of labor and other expenses and wholesalers’ bottom lines ballooned. Construction reached a fevered pitch with new home construction climbing to over 1.3 MM units in 2007, and fell to slightly less than 1 MM starts in 2008. Housing starts appear to be down in 2009 versus 2008. In all, there is a likely 35% to 40% decline in housing starts from the peak in 2007 to the trough, which (we hope) is in 2009.
Lastly, consumer spending was rampant as homeowners used cheap money and rising house values as a bank account to fund excessive lifestyles. Of course this business climate helped wholesalers grow sales far in excess of operating costs and pass on price increases on a regular basis. The result was an environment that was about as perfect to lift wholesaler earnings than any other time I have seen in my three decades in the business. The recent past, however, was a gross anomaly and it’s gone for good and not coming back anytime soon.
The press is awash with forecasts on when we will come out of this recession, but less is predicted on what the recovery will look like. My take is that we will begin a slow repair of the negative GDP in the third or fourth quarter of this year. Beyond this, 2010 and possibly 2011 will be slow growth. Construction and repair and remodel will be muted for sometime as layoffs will continue for much of 2009 and hiring probably won’t begin in earnest until 2010 and later. Hence, consumers will have little appetite for buying or building.
Commercial construction is taking a dip later than residential, which means that recovery in this sector will be pushed out well into 2010 and possibly much later. Finally, the industrial sector will begin a slow and erratic recovery well into next year and possibly 2011. Global demand is softening and has lagged the U.S. down cycle which means domestic manufacturers won’t be able to ship near as much overseas for a long time.
Today, most wholesalers are just beginning to feel the pain in a big way. They have burnt off most of their high-cost commodity inventory and witnessed substantial drops in top line sales. Our information says that layoffs started in December but have become commonplace in the first month of 2009. We expect more layoffs as wholesalers adjust their capacity downward. Most companies aren’t making anything in the way of substantial investments and are working off planning horizons of 90 to 120 days. For the most part, the words “hunkering down” apply and while this is a good short-term strategy, it won’t be much help when recovery does come.
My estimate is that recovery will be slow, price sensitive, and ultra-competitive. Therefore, my recommendation is for wholesalers to get prepared to operate in a new environment where efficiency, better measurements and better knowledge will be needed to compete. Slapping the warehouse full of inventory and hiring the best salesguy away from the competition won’t be of much help in the recovery, and many wholesalers will have to learn new things or they will be relegated to a “hunkering down” role long after the recovery starts.
What's Needed In The New Environment?I have been studying and working in wholesaling markets for nearly three decades. I don’t believe that much of yesterday’s knowledge will help one thrive in the coming environment. Much of the knowledge is old, research is limited or poorly done, and the tools and measurements are worn. Hence my suggestions below may appear on the fringe but, again, I don’t believe you will win in the new environment by doing the things that allowed for success in the Shangri-La economy of a few years ago. If you want a read on why I believe the old measures are worn out, see my White Paper on Transaction Management.
To thrive in the new economy, my suggestions are:
Margin dollar compensation is old and, in light of the new knowledge, has a high probability of destroying operating profit. And, forget the debate about Straight Commission, or Salary and Bonus or Salary and Commission being the best compensation plan(s). All of these plans essentially fail because they are based on single measures of sales or margin dollars to drive performance. Whatever you have learned about compensation in the past should, for the most part, be thrown out. You could probably have as much effect on operating profit by rewarding sellers on phases of the moon than by driving single measure compensation plans.
In summation, the new times and new environment will demand new tools. The old systems and measurements of the past won’t help much in the new environment of efficiencies and price sensitivity. Of course you can play the “hunker down” game and live from quarter to quarter playing tactical games with your employees, their salaries, the vendors, and your banker. But this is not much of a life and it won’t hold up against wholesalers who learn the new knowledge and use it strategically.