Distributors Speak Out!
Most of this industry’s leading distributors gathered in Chicago last October for “Network 2010,” the annual convention of the American Supply Association. As partners in industry progress, ASA and Supply House Times decided to use the occasion to provide the industry with a glimpse inside the minds of industry leaders to see what they are doing to remain relevant during these tumultuous times. So ASA Executive Vice President Mike Adelizzi helped us recruit a blue-chip panel of distributors representing a cross section of the PHCP industry to discuss the industry’s present and future. Participants included:
- Richard Amaro, General Plumbing Supply,
Walnut Creek, CA
- Jeffrey Beall, American Pipe & Supply,
- A.J. Maloney, Coburn Supply, Lafayette,
- Colin Perry, Rampart Supply, Colorado Springs,
- Jeff Pope, F.W. Webb Co., Bedford, MA
- Rick Waters, J.O. Galloup, Grand Rapids, MI
Topic: How has your business changed over the last five years?Naturally, much of this discussion gravitated toward the general economic collapse since 2008 and how these distributors have reacted to it. Coburn’s A. J. Maloney established a theme joined by others in saying, “The most significant business change for us has been recognizing that measuring our business is critically important to help us run the business better. We try to measure about every aspect of our business. One key measurement we pay attention to that we didn’t before is gross profit per full-time employee, which helps drive employment at each location.”
Besides gathering the data, it’s important to share it, Maloney advised. “Once we provided our general managers with access to detailed financials, we were amazed at the results. They acted on it.”
Colin Perry said his company also has taken to “measuring everything” but noted the importance of “trying to reach balance between paralysis by analysis and getting something meaningful out of it.”
He added: “One thing we’ve gotten better at is not relying as much on manufacturers and reps for market information. Instead, we’re getting in on the ground level ourselves and holding hands. When times were good and we didn’t get a job, we didn’t always find out who did get it and why we didn’t. Now that’s totally unacceptable. We might not get the job at the end of the day, but now all the players know who we are and we are able to give input. I think this has helped us a lot and made us better businessmen.”
American Pipe & Supply’s Jeff Beall brought a unique perspective to this discussion as a CPA who bought into the business 14 years ago as an outsider without industry experience. “I had to learn the PVF business from the ground up and am still learning. It’s been one big MBA case study to me,” he quipped.
Beall seconded the importance of “measurables”- especially given today’s environment - and cited ASA’s Operating Performance Report as “a baseline that we look at religiously. When sales were going up 10-15% we didn’t really go for in-depth analysis,” he noted. “Now we come to staff meetings more prepared to talk in depth about inventory levels, purchasing, customer credit and so on.”
At the same time Beall echoed Perry’s caution about paralysis by analysis and sparked a new train of discussion by noting “we’re investing more and more in relationships - with manufacturers, with customers and with our buying group.
“Our company wasn’t marketing-oriented when we bought it,” Beall said. “So we’ve tried to better position ourselves as intermediaries between our customers and our manufacturers. We can sit and analyze if this level of inventory is right or wrong, but it boils down to the customer wants what he wants when he wants it, and can your manufacturers help you get it there?”
Rick Waters of J.O. Galloup commented that “today’s information systems can spit out so much information it’s easy to overreact. The big question is, what do you do with the information? Executive management can’t tell the customer he can’t have five two-inch 90s because of some computer printout. We need to market ourselves based on customer needs.”
He added, “Business change today is more important than ever for us, because we don’t have as much support from manufacturers and reps as we used to. Manufacturers used to have people covering two or three states who are now responsible for a dozen or more - so a lot more is demanded of those of us in distribution. We like to work markets that are growing and emerging, and which dovetail with industrial PVF.”
Enhanced marketing was among the biggest business changes cited by F. W. Webb President Jeff Pope. He pointed in particular to his company’s tie-in with the Boston Red Sox via advertising on their famed “Green Monster” wall at Fenway Park, supplemented with broadcast advertising. I asked him if he had any way to measure results.
“We’ve been asked that many times and also asked it ourselves many times!” said Pope. “You look at a company like Budweiser spending millions of dollars during the Super Bowl, even though everybody knows who they are, and wonder why they continue to do it. We did it because not everybody knows our name. That’s changing and we think our name on that wall does get us into some buildings.
“We’ve also jumped in recently with NASCAR, putting our logos in key places with two events a year, although nothing on a car yet,” Pope added.
Richard Amaro of northern California’s General Plumbing Supply threw a curveball by citing his state’s no-lead law, which went into effect this past Jan. 1, as one of the biggest business disruptions ever. “We had to get rid of all the old product and bring new product into inventory in less than three months,” Amaro recalled. “We spent a lot of dollars and effort on the task. We’re now beyond it and pushing on, but it was painful. One silver lining is it helped us identify certain manufacturers who supported us at the time. We remember that and these will be our partners going forward.”
Topic: How are you dealing with THE roller coaster economy?This discussion overlapped the first topic on business changes somewhat, but brought about some revealing responses. It’s a reflection on the caliber of distributors recruited to this session that all of them looked at the downturn as much in terms of opportunity as adversity.
Jeff Beall noted: “Cutbacks are a given, but the biggest thing to me is to set the right kind of tone. If I come in every day looking depressed or uptight about the economic conditions, that negative energy will spread. So I’ve tried to look at strategies where we can go on the offense and find opportunities we didn’t see before. We’re not the only ones facing hard times, and where we identify weaker players, that’s the time to get in their customers’ faces.
“Also, we have someone in the office dedicated to training and are utilizing ASA Education Foundation programs to train our people in the basics of profit enhancement,” Beall added. “I’ve found it helps employees get around the negatives of the day-to-day grind. All the educational processes (provided by ASA) have helped us get through it.”
“Another thing is, we’re really utilizing our A-D (Affiliated Distributors buying group) manufacturers more now than four or five years ago. In turn, we’re appreciated by them more, and they’re helping us more with our customers. It’s helped make things fun again,” said Beall.
Colin Perry was another participant energized by competitors making steep cuts in staff and inventory. “We went after their business and their people with a vengeance,” he stated. “We came through the recession pretty well and never laid anybody off - although for about 18 months we didn’t replace people who left due to natural attrition. Instead, we focused on capitalizing when some of our competitors crawled under a rock.”
Jeff Pope echoed Perry. “Comparatively speaking, we didn’t cut as deep with staffing or inventory. It’s important to keep in mind that up to 2008 we had some really good years. We were on that roller coaster when it was going up, so when it started going down it didn’t mean we suddenly turned into dummies. The way we looked at it is highly qualified people are our greatest assets. The same goes for our inventory. There wasn’t the same level of business, but when word got out that we had what our customers needed, they came to us.”
F.W. Webb’s president continued: “We really try to push our managers and sales force to understand exactly how we can help our customers, whether it’s time savings via the Internet, or next- day deliveries, or deliveries with forklifts on the back. Whatever it is, we need to get to know our customers’ needs and treat them with the utmost respect.”
“We followed the same path in getting closer to our customers,” said Amaro. “We’re always asking, is there something we need to do better? Is it inventories, hours, or what?
“Something else we did that helped us greatly during the downturn was to focus on reducing workman’s comp,” said Amaro. “It’s a tremendous burden in California, and we got our insurance company to help us out with a safety program that realized substantial savings.”
“From our standpoint in Michigan, things went from bad to worse to awful,” said Rick Waters. “When the economy was real good, companies built new plants. When it was just okay, they would invest money in existing plants to keep them running. In the last few years we saw a third direction - shut down the plants and move out. But we managed to survive thanks to our product diversity and helping our customers find solutions to their problems. There were fewer of them, but those that remained still needed the same things - and we focused on providing them. It all boils down to basic blocking and tackling.”
“We did not see the roller coaster as much as other places,” said Coburn’s Maloney. “We’re in an oil and gas area, which has kept our economy in better shape than most. Of course, we’ve been hurt like everyone else by the residential construction decline, but we’re pretty diversified and that helped us a lot. Also, some companies hurt more by the downturn made good personnel available to us, and one thing we’ve come to realize is that conscientious and motivated people make a big difference. So even while we advised our general managers to watch expenses, we advised them not to go overboard in removing people.”
Maloney threw out a question of his own to the group. “Is anybody surprised that more wholesalers haven’t gone out of business?”
There was general agreement around the table that relatively few firms in our industry have folded amid the most wretched economic conditions anyone had seen in their lifetime. One participant commented that some supply houses are hanging on by a thread and may yet go under, but a general consensus was that the big national chains took the biggest hit from the recession and this reflects the underlying strength of our industry’s independents.
Topic: How do you deal with slow pay?I took note of some stunning data revealed in ASA’s latest Operating Performance Report showing that 15% of receivables were in the 90-day column. That’s almost one out of six customers of ASA distributors and the highest level reached in the last 20 years of OPRs.
Jeff Beall thought this data was something of a statistical artifact reflecting a change in the business mix of customers. “Because of the recession, our customers are doing a larger share of government work, which requires submissions and transmittals that take a lot of time. I think that explains some of it.
“At the same time, as business leaders we have to understand our customers’ credit dilemmas,” he emphasized. “Are they making the changes necessary to stay in business? A large bonding company in Birmingham recently said that they could see up to 40% of the subcontractors lose their bonding capacity or go out of business in the next three years, and we’re seeing that trend to be true. So we’re really trying to be creative in understanding our customers and helping them stay in business. A lot of them are doing jobs they’ve never done before and in places they’ve never worked before. We’re communicating with them to understand their credit risk where in the past that’s not something we’d worry about.”
Rick Waters agreed with Beall’s contention that a higher proportion of government work explains the stretched-out receivables. “Government contractors have the longest pay cycles. We have to extend out in this environment. Nobody likes it, but we have to do it.
“The other side of it,” he added, “is we have some customers that have told us because of market conditions they want terms of 90-120 days. So we had to make business decisions whether to accept. The problem is, what we originally thought was a one-time reset has fallen into the norm. A good thing is money is cheap right now, so we’re in a better place in terms of what’s at risk.”
Richard Amaro contributed: “Whereas before someone maybe had $150,000 past due, in this environment it creeps up to $250,000 and beyond, exposing us to greater catastrophic loss. So where do you cut the guy off? You almost have to carry him. This is a challenge and you really have to keep these guys close to you.”
Colin Perry revealed that “we’re going so far as to check the credit risk of GCs. Bonding is becoming a big deal with some of our customers, where the GCs are asking subs for bonds.”
“Something to keep in perspective,” said Waters, “is how much credit is at risk as a percentage of your business. If you have 50% at risk, you’ve got real problems. In our company, it’s more like 5%. You just have to keep an eye on things.”
Topic: Are relationships with manufacturers better or worse than they used to be?Coburn’s A. J. Maloney commented that “our relationships with manufacturers are very good. We’ve been in situations before where we’d been going in different directions with certain vendors and now don’t do business with them anymore. Now we try to have marketing meetings at least once a year with our major vendors, and we find they are interested in marketing, not just in making a product and shipping it out. They see value in strong independents and want to cultivate our business.”
“Manufacturers are in the same boat as we are and seem to want to partner with us,” Amaro agreed. “I think the buying groups have brought us closer. Everyone is making a big effort to circle the wagons.”
“I definitely think our relationships are better today than they were four or five years ago,” echoed Beall. “I think it’s because while they can call direct on a job or a GC, in the end they find that their relationships are really with distribution. That’s because contractors know we put it all together, not just focus on a particular product.”
Rick Waters put a different spin on the discussion by noting “the number of quality people is not what it used to be. In the old days you dealt with a lot of what I call ‘useful madmen,’” i.e., people with distinct personalities who had been around a long time and you could count on to make things happen. “Now people move around so much and the decision makers are not necessarily the people who come to see you. The executive levels are hard to reach. The industry has changed. Maybe we’ve changed as well,” said Waters.
“Maybe they aren’t coming in our door as often, but they’re going in the door to the end user more often,” Jeff Pope observed. “We find manufacturers, especially in commercial plumbing and heating, going right to the mechanical contractors.” He added, however, that “I’d like to believe we have better relationships than in the past.”
Amaro took note of an unnamed china manufacturer that has started selling commercial products via Lowe’s. “That’s totally outside the norm. I’m not sure what they’re thinking.”
Offered Beall in response: “They may be wondering if we’re too busy focusing on our own business rather than promoting their products to engineers, GCs and so on.”
The second installment of our roundtable discussion will appear in next month’s issue.