How the High Profit Distributor Outfoxes the Competition
As we enter 2001, the ACTUAL start of the new millennium, you may find the time is right to establish your New Millennium Resolutions. One very good resolution for the independent tile distributor would be to get out of the tile commodity business and commit to adding value to his product offerings. The business environment is changing for independent tile distributors and they must be prepared to deal with such change.
Big-box retailers have made floor and wall tile a commodity. In times past, the presence of ceramic tile in your home was an indication that you spent a lot of money on its installation. But that's not necessarily true anymore. Today, ceramic tile can be sold to retail consumers for less than 99 cents per square foot. This puts ceramic floor tile well within the price range of most homeowners.
Also, floor covering distributors have had a lot do with lowering the margins of virtually all price classes of floor tile. The typical tile distributor has overhead expenses of nearly 30%, whereas many full-line flooring distributors have overhead as low as 15%. And even though the full-line distributors have taken full advantage of their lower-cost overhead infrastructure, the independent tile distributor has not lost any market share whatsoever. As a matter of fact, independent tile distributors still handle significantly more than half of all ceramic tile sold in the United States.
However, this doesn't illuminate the most interesting part of the equation. The fact is that the typical independent tile distributor is increasing sales by approximately 8% annually and is still enjoying high gross margins (39.4% for high-profit distributors). And rather than fighting toe-to-toe with lower overhead full-line distributors, the tile distributor is actually increasing his overhead (32% for high-profit distributors).
So, how does the high-profit distributor manage this feat? A number of strategies allow him to grow in our changing business environment. Among these are:
- he adds value to what he sells.
- he refrains from cutting staff or overhead.
- he maintains plenty of inventory (high-profit distributors turn their inventory less often).
- he is market savvy, and invests in marketing and merchandising.
- he makes his business relationship-oriented.
So in the changing environment of tile distribution, the High-Profit Distributor (HPD) remains part of an exclusive club. It should be the goal of every distributor to gain membership in this club. Ironically, membership in the HPD Club is open to anyone, but most distributors do not want to make the effort necessary to join. By default, they remain part of their existing fraternities - either the TTD (Typical Tile Distributor) Club or, even worse, the RBTD (Really Bad Tile Distributor) Club.
How can you join the ranks of the exclusive HPD Club? Those who attended the Ceramic Tile Distributors of America (CTDA) Management Conference last November heard Al Bates construct a financial model of the HPD based on independent surveys. Attendees listened to Jonathan Trivers speak on the changing distribution channel and how to take advantage of the changes. And at the Distributor Forum, we had the opportunity to share ideas with other independent distributors. If you would like to get an edge over your competitors, plan to attend the next CTDA Management Conference in Phoenix this coming November.
Based on this information, as well as additional data collected during the conference, I've assembled a model of the high-profit tile distributor. I've identified the common principles they follow, and ascertained just how they put them into practice. You must decide how these models relate to your market and your business plan.
The HPD financial modelHigh-Profit Distributors are NOT earning their profits through:
- higher sales-per-employee ratios. There is less than 3% difference between the ratio of a Typical Tile Distributor and a High-Profit Distributor. The TTD's net sales-per-employee ratio is $222,675, compared to a ratio of $228,139 for the HPD.
- asset turnover. The HPD does not have higher turnover of assets than a TTD. As a matter of fact, the HPD turns over his inventory less often than a typical distributor (4.7 times per year for a TTD vs. 4.4 times per year for a HPD).
- low operating expenses. The HPD does not lower overhead to boost profit, but instead does just the opposite. The HPD has operating expenses that are nearly 3% greater than those of the TTD (29.4% for the TTD vs. 32% for the HPD).
These numbers run contrary to everything they teach you at Harvard Business School. Evidently, the truly prosperous distributors didn't gain membership in the HPD Club by taking their accountants' advice to cut staff and decrease inventory. A HPD knows innately that one cannot chop, cut and hack his way to becoming a successful distributor. Instead, the HPD concentrates on the two most basic elements of distribution: service (employees who are not too busy to serve the customer) and stock (inventory availability as promised).
High-Profit Distributors ARE making their profits by focusing on a single element:
- higher gross margins. The HPD commands margins (39.4%) on his products that are a full 5% higher than those of a TTD (34.4%). This means that the HPD is either buying better or adding extra value - and perhaps a little of both - to sell to his products at higher prices.
So, what's the bottom line? The Typical Tile Distributor earns a net pre-tax profit of 4.9% with a 14.2% return on assets (ROA). The High Profit Distributor realizes a 7.6% net profit with a 22% ROA.
On $10 million in annual sales, the TTD will net $490,000, while a HPD will net $760,000. And don't forget that the HPD turns over his inventory less often, has higher expenses and has virtually the same sales-per-employee ratios as a TTD. Essentially, the HPD earns an additional $270,000 a year by adding value to his products.
The supplier modelThe supplier represents the third leg on a three-legged stool. A distributor may have the right employees - and even the right customers - but it is his suppliers/partners who provide the quality product, timely deliveries, back-up inventory, and necessary post-sale support when a problem arises.
To maintain a successful and sensible inventory product mix, the distributor must carefully categorize all of his stocking products. That product mix should be broken down as follows:
"A" items - good stock, highest turn (commodity products), 30% margins.
"B" items - good stock, good turn, 35% margins.
"C" items - adequate stock, average turns, 45% margins
"D" items - niche products, special order or very slow turn, 55% margins.
The HPD resists the temptation to focus primarily on the "A" item commodity products. Rather, he concentrates his efforts on products that can give him adequate turns and higher margins. He leaves most of the commodity business to his competitors.
The importance of a strong relationship between the HPD and his suppliers cannot be overemphasized. Your suppliers can help you succeed or be an obstacle in your path. I recommend that you treat your suppliers as you treat your best customers - and stick with those the suppliers with whom you most enjoy doing business.
The sales and marketing modelConsider the salesperson who works for a HPD. When she goes out into the field, she knows she's part of a company that she can represent with confidence. She knows that her employer will have the inventory as promised and, because the company is adequately staffed, that her colleagues back in the office will take good care of her customers. She also knows that when customers need extra service or support, management is not so overly consumed with overhead expenses that it degrades her customer's perception of the company.
Can this saleswoman sell her product at a higher margin than her competitors? I'd say the distributorship that maintains operations as I just described them has provided an excellent foundation from which she can achieve her sales goals.
When you give your salespeople adequate marketing tools, a strong sample department, price flexibility (within guidelines), ongoing education, and good product lines, you've created an environment that allows them (and your business) to be wildly successful.
Supercharging your efforts...and resultsI've covered the key attributes that all High-Profit Distributors share. But you can go beyond these to even more effectively vault your business into the exclusive HPD Club. Consider using some or all of the following strategies in your own operation.
- special customer events -- such as barbeques, open houses or charity events -- at your place of business. These are tried-and-true ways to bring in customers.
- For an even bigger attraction, have the event catered, hold it at a park, have vendors donate door prizes, and promote the heck out of it.
- Establish incentive programs. Using airline frequent flier programs as your model, introduce a Frequent Tiler program that awards gifts and other perks. I know of one distributor who realized a 25% increase in sales through with a gift incentive program.
- Create a gold coin promotion. Promote heavily the fact that customers will be awarded a gold coin for placing a predetermined number of orders.
- Set up a toll-free telephone line specifically to track responses to your programs.
- Provide extra incentives for your own sales staff.
- Set goals and rebates for customers who achieve certain sales goals.
- Make your presentations fun. Include games, PowerPoint slides, activities, hands-on product demos, and music in your architectural presentations.
- Attach a little mosaic tile to the corner of your business card.
- Have really good aromas -- such as the scent of baking cookies, brewing coffee and fresh doughnuts -- in your showroom.
But if you want to become a High-Profit Distributor, you'll need to commit to additional investments in people, education, inventory, and overhead. You'll need to carefully plan how to integrate all of these investments in a way that adds value to your company and your product. But, most of all, you have to commit to take action.
As I said at the outset, now is a great time to make your New Millennium Resolution. Resolve to take the action necessary to get out of the commodity tile business and join the exclusive HDP Club.