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Gale Media, Inc.
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Untitled Document
Mind the Gap
Wholesaler-distributors in varied sectors have been seeing strong double-digit top-line revenue growth. While the economic expansion increased unit sales, recognize that unusually high commodity prices have made revenue growth easier to achieve in recent years. In Adam Fein’s recent MDM Webcast, “Wholesale Distribution Economic Outlook,” he addressed this issue.
Fein, president of Pembroke Consulting, presented as example the hardware, plumbing, heating and cooling distribution sector, which has seen flat growth year-over-year. But once adjusted for inflation, unit growth was negative.
“I call that the growth gap,” he says. In this case, the gap was 5.3 percent. “I can’t predict commodity prices any better than anyone else can. But what it does say is there has been a substantial amount of artificial inflation in the revenue growth of some distributors.”
Affecting the growth of plumbing distributors, for example, is the price of copper, which quadrupled between 2003 and 2006. The price was driven by demand around the world, particularly China and India, which are starting to consume a substantial amount of the world’s products – including steel, oil and other core commodities.
Fein said distributors should use a more strategic approach and move away from a dependence on inflation-boosted growth.
“What that means for a distributor is that as you’re looking at your growth year-on-year, you need to be careful and understand how much of your growth is actually growth and how much is simply the benefit of inflation flowing through to the bottom line.”
Ask yourself: “How much would top-line revenue growth slow if product prices remain flat over the next 24 months?”
Evaluate sales based on changing prices of underlying commodities. “While profits may feel very good right now, I want to caution distributors as we go into a potential slowdown that commodity prices tend to decline, and therefore the revenue hit for distributors could be unexpectedly large. That may catch some distributors by surprise, so certainly it is certainly something to look out for,” Fein said.
Order the CD here of “Wholesale Distribution Economic Outlook: Adam Fein’s First Look at 2008," or call 1-888-742-5060.
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