Commentary: Beware the Next Enemy of Profitability

As difficult as it may be in current conditions, scenario planning has to be given more time in distribution executive team meetings, as well as distributor-manufacturer planning meetings. The worst reaction today is to say there is too much uncertainty to plan, so let's just focus on the next three months. The vast majority of conversations I've had with executives have often included the observation that revenues dropped by more than double what the company was using as its worst-case scenario.

Based on second-quarter results, distributors are hoping the trough is behind them. With few exceptions in select markets, distributors saw a deeper slide in second-quarter revenues, as reported in the analysis in this issue. While broader economic trends are pointing up, there is always a distinct lag in manufacturing production until consumer spending recovers enough to drive the start-up of idled or reduced production lines. So, as usual, what we see and read in the mainstream press about markets jumping up" doesn't match many end-use markets of wholesale distributors.

There is also the widespread consensus that this recovery won't mirror any in collective memory as jobs will be slow to rebound and consumer behavior may have been altered dramatically. In our Webcast with Adam Fein in June, he advised distributors to prepare for significant economic volatility and new risks associated with the emerging recovery period. Fein said there is a credible scenario developing for unexpectedly rapid growth in 2010 and 2011 as the full impact of the current government stimulus spending combines with potential rebounds in housing construction and other sectors.

The danger of missed opportunity is just as great on the upslope. Push the needle on both sides of your scenario planning meetings. There are surely a lot of challenges as well as opportunities developing over the next 12-24 months in your market and your supplier set that define how you create value for your customers.

An interesting comment in one of the second-quarter financial reports by Wolseley was how Ferguson was not experiencing anticipated price pressures based on the horrendous current state of the U.S. residential construction markets. "We're seeing that price is not always the key thing," says CFO Steve Webster. "Instead, customers are looking more at service and other aspects in addition to the base price." What does that comment say about opportunities in these times for those distributors who can create a customized offering that meets some very specific and unique customer needs, without getting into a low-price battle?"