Dr. Al Bates, President
The Profit Planning Group
Boulder, Colorado
The accompanying set of exhibits provides an overview of financial trends in distribution between 2005 and 2009. It places special emphasis on the changes between 2008 and 2009. The information related to EASA comes from data provided by participants in the Operating Performance Survey.
The analysis covers 34 different lines of trade in distribution. In developing such a macro-view of distribution, it is not possible to compare most financial ratios directly. For example, some industries have a high gross margin and accompanying high expenses, while others have a low gross margin and low expenses.
What is possible is to compare the direction and magnitude of change. The emphasis is on how much performance changed during the time period covered.
In most of the exhibits, results for all of distribution are divided into three subgroups:
- Industrial—Industries that primarily serve the factory floor.
- Construction—Industries that primarily serve the construction trades.
- Consumer—Industries that sell consumer products or service businesses that sell to consumers.
The year 2009 represented the third straight year that return on assets declined in distribution (see Exhibit 1). The composite figure of 6.0% was the worst since Profit Planning Group started conducting financial research twenty-five years ago.
The chief culprit, of course, was declining sales volume (see Exhibit 2). Unlike the last two years, sales fell in all three key industry segments—construction, industrial and consumer goods. Only a couple of individual industries—out of thirty four that were analyzed—experienced sales growth.
Firms fought back by getting control of their gross margin percentage after two years of systematic declines (see Exhibit 3). The only segment that continued to have a margin decline was industrial and even here the decline was small.
The increase appeared to reflect two issues. First, there were major opportunities to buy advantageously. Second, firms began to think about pricing across the product line in a much more strategic way. This allowed them to generate margin on the slower-selling end of the product line.
Unfortunately, the margin increases were almost always offset by increasing expense percentages (see Exhibit 4). Simply put, firms were unable to shed expenses as rapidly as sales declined. While most firms did a yeoman’s job in controlling expenses, they were simply overwhelmed by the magnitude of the sales declines.
Inventory turnover followed the same sales-driven pattern as expenses (see Exhibit 5). As sales declined, firms were able to lower their inventory levels, but only slightly. The inevitable results was declining turnover across the board.
Finally, accounts receivable collections rose slightly in the two segments most impacted by sales declines—construction and industrial (see Exhibit 6). The fact that the collection period did not expand further again reflects strong performance by distributor organizations.
