Later this month, a crucial element of the floor covering supply pipeline will gather for a meeting in Schaumburg, Ill. They will no doubt contemplate the enormous challenges they face. They will likely agree the climb is getting steeper and the pace is getting quicker. They will detail their efforts to accommodate both the people who manufacture flooring and the people who sell it. They will lament being “squeezed from all sides.” Many will wonder out loud how anyone in their field can stay profitable in the face of an industry-wide obsession with trimming costs. The expression “razor-thin” margins will be heard at many meetings. Those assembled will be reminded of their value to the industry and the importance of communicating that value to suppliers, dealers and anyone else with a stake in flooring. They will hopefully leave feeling better about themselves-as well they should.
When the North American Association of Floor Covering Distributors
gathers for its 37th Annual Meeting & Distributor Marketplace, there will
most certainly be an element of group therapy involved. That has been the case
at many industry functions over the past year or so. But distributors hold a
special place in our flooring universe-a hugely important place that is too
often overlooked. They are the conduit that moves a massive amount of heavy,
bulky flooring in exchange for a sliver of the price paid by the end user. If
you boil it down to percentages, a waiter in most any restaurant can expect a
much bigger tip than what a distributor gets for his efforts.
As any distributor will tell you, the pipeline is designed to
flow two ways: Product comes in from the manufacturer and goes out to the
retailer. Cash comes in from the retailer and goes back up to the manufacturers
(minus a modest percentage). A big problem for distributors: Many retail
customers are struggling to pay their bills. Unlike a dealer who uses credit to
sell, distributors are not waiting for a check from a credit card company. They
ship product to retailers and get paid when the goods move out the dealer’s
door. If a store goes under, the distributor can stand in line with the other
unsecured creditors who are also owed money. After that happens a few times,
you can imagine distributors are a bit reluctant to extend credit to new
customers (or even established ones). You can also appreciate why they feel a
bit under siege these days.
The NAFCD’s recent member survey underscores how slim the
margins are these days. It says the typical floor covering distributor
generates sales of about $43 million and sees a pre-tax profit of 1.4 percent.
That’s less than two cents on the dollar. For the sake of comparison the report
says a “high-profit firm” with sales of around $56.5 million enjoys a pre-tax
profit of 4.8 percent-which is more than three times that of the typical
distributor. To their credit the NAFCD leadership does not simply dangle those
figures in the hope they entice members to somehow do better. Over the years,
the group has become far more sophisticated and savvy about advancing the
interests of its members.
For example, the report urges members to scale that
high-profit peak by focusing on critical profit variables (CPV) like sales
growth, gross margin and payroll.
NAFCD notes that if a distributor were to mirror the
performance of the “high profit” firm used in the example, the distributor with
$43 million in sales would see profits climb by nearly $1.6 million a year. To
help them ascend to that lofty perch the NAFCD encourages members to ask a few
questions aimed at self awareness: What steps do you take to monitor a
manufacturer’s satisfaction with your services? What are your key messages to
manufacturers and retailers about the value of distribution? What programs do
you offer to underscore this value?
Two of the final questions speak volumes about the current
state of floor covering distribution: “What message would you like to
communicate to manufacturers?” and, even more important, “What key elements of
the relationship are those partners overlooking?” You’ll notice that the
question does not say “What, if any, key elements…” It assumes that
distributors have a message that is not being heard and that distributors are
under-appreciated by their “partners.”
Those assumptions, unfortunately, are often true. Distributors
are the lifeblood of the floor covering business and they are vital to our
future as an industry. While the folks gathering in Schaumburg this month
already know that, it is time for that message to reverberate to every corner
of our industry.
Why Distributors Matter
October 16, 2008