Preserving The Bottom Line
Economists said 2009 was not going to be an easy year. But they never could have predicted that the United States would find itself in the worst recession the country has bared witness to since the Great Depression.
Large financial institutions that were deemed too big to fail have been bailed out by the government, large corporations have filed for bankruptcy, and countless business owners in all sectors are barely holding on after being forced to squeeze budgets, freeze wages and eliminate jobs in record numbers.
Like most industries, jan/san has not been able to escape the crippling effects of what is being called the “Great Recession.” Because of tight credit restrictions by loaners, companies are struggling to pay payrolls and are falling by the wayside.
But jan/san distributors for the most part have stood their ground despite seeing a decline in profit margins. In fact, most distributors have been able to ride out this current economic storm because they were prepared for situations like these.
“We prepared for the recession a good year, year and a half beforehand,” says Andy Brahms, president of Armchem International Corp., Fort Lauderdale, Fla. “So we started to make sure that we were getting our cost in line, we made sure we didn’t have any fat, and we were accumulating cash with the bank to weather the storm. Because once it hits and you’re trying to get credit, good luck, it’s like rolling the dice.”
Those distributors like Armchem International who have positioned themselves to make it through the recession unscathed are also going against the grain while in the downturn. These companies are viewing this as a perfect opportunity to shore up and to focus on the core of their business. In fact, in turbulent times, Brahms says there are gains to be made.
“It’s definitely an opportunity to grow market share,” he says. “We’re looking to pick up market share from companies that have gone by the wayside and from companies that are maybe struggling and are under a mountain of debt and now all of a sudden they can’t really lower prices to keep customers.”
Dip In Sales
In today’s battered economy, most jan/san distributors are experiencing a decline in the sale of cleaning supplies due to customers’ budget cuts across the board.
“People are buying in smaller quantities,” says Jerry Garbett, general manager of Arkansas Bag & Paper, Little Rock, Ark. “Customers are being a little cautious and are cutting back a little bit.”
Garbett, who estimates his order sizes have dropped by as much as 8 percent so far in 2009, says customers aren’t at all interested in investing in high-ticket items like a new floor machine. Instead, in a way to reduce cleaning costs, they’re asking for their old one to be repaired. They’re also scaling back on product usage.
“They’ll tell their guys not to empty the smaller trash can liners if they’re not dirty, just pour it out into the big trash can liner,” says Garbett. “And some people are not refinishing the floors as often.”
Distributors also say the purchase of quality products have taken a back seat to cheaper, lower-grade products because of budgetary constraints by most customers.
“For instance, people are cutting back from a top quality tissue down to a mid-grade, or a mid-grade down to a lower-grade tissue,” says Garbett.
Because of these cost cutting strategies being implemented by end users, distributors say they could essentially see sales plummet as much as 20 percent by the end of 2009.
But while customers are forced to penny-pinch and shop around for the lowest priced product, distributors are not content on sitting back and watching their margins erode. As a result, they are altering their selling and purchasing methods to complement the current purchasing patterns of customers.
“We have focused on modifying programs and giving customers alternative options with lower cost,” says George Abiaad, president of Royal Corp., Santa Fe Springs, Calif.
So instead of distributors only offering quality name brand products, distributors are forced to search high and low for secondary and less expensive products that meet their customers’ budgetary limitations.
However, some distributors say it’s an important time for distributors to educate and capture market share through quality products and inform customers that although quality products cost more up front, they save more money in the long run.
“A quality product will always save you money,” says Brahms. “Whether it’s a recession, whether it’s in great fertile times, you’re always going to save money with a quality product. You use them less, and those kinds of products always will weather the time.”
In these trying times, distributors are focusing on innovative methods and programs that still offer customers a true value-add. And in some instances, distributors have found stability by re-examining their business strategies.
“Strategies are like the curvature of the riverbank, they turn and adjust their path according to what they face, but the destination remains constant,” says Abiaad. “Whether in this economy or at any other time, strategies should constantly be reinvented and renewed.”
Unlike their customer base, most distributors have not been forced to cut back on personnel. Fred Kfoury Jr., president of Central Paper Products in Manchester, N.H., says reducing staff is not the answer to the problem. In fact, he says if it comes to a point where profit margins dip too low, his employees would be asked to take a salary cut rather than being let go. Other distributors interviewed for this story echoed this viewpoint as well.
Instead of reducing head count in this current recession, distributors are more concerned about revamping their selling tactics to make up for any dip in sales they are experiencing.
“One way you work your way through a recession is to sell your way out of it,” says Brahms. “Keep knocking on doors and keep your nose to the grindstone and working real hard and don’t give any excuses because regardless of the situation, there’s still plenty of business out there, you just got to find it, you have to uncover every stone.”
Despite seeing sales slightly lower than a year ago, Armchem International has hired 15 new salespeople this year to combat the losses from the current recession.
“We’ve gone out and increased our training significantly,” he says. “Not only training the new people, but having our trainers out in the field a lot more.”
By adding more sales personnel, the company has been able to satisfy existing customer relationships, while at the same time open up a significant amount of new accounts this year, despite the recession. These new accounts have also made up for what the company lost with customers that have gone belly up or have downsized.
But simply hiring more salespeople wasn’t the trick to capturing more business. What has allowed Armchem International to keep profit margins in check is the fact that the company created an in-house program where it is generating more leads for its veteran sales staff. So instead of having the veteran salespeople knocking on doors and trying to capture new business, the company instead has commissioned its newer salespeople to cover the streets and knock on doors, says Brahms. Then, the veteran sales staff is asked to follow up with any interested prospects.
Other distributors like Milhench Supply have used the current time as an opportunity to gain sales by expanding their locale. The New Bedford, Mass.-based supplier recently opened a new walk-in location near Boston to capture new business and make up for any losses during the current recession, says Heike Milhench, the company’s president.
“It’s a little bit crazy to be expanding at this time, but it was an opportunity and the timing was right for us to do it because we had a competitor in the area who moved out to another part of the state,” she says. “We figured we have been losing a little bit of business and we needed to grow somehow and this is a way that we’re trying to expand right now.”
On top of revamping their selling strategies, distributors have also been re-evaluating their purchasing process.
Today, more so than any other time, distributors are looking at how they can improve margins through their procurement process.
“We’re making sure that we consolidate vendors whenever we can so that we improve our buying power, and we’re making sure we stay on top of our vendors so we’re getting the most competitive pricing that’s available,” says Milhench.
Although distributors have been hit with price increases over the last two years, they say vendors have been doing a good job holding pricing at reasonable numbers and have been giving breaks on pricing during this current economic downturn. By working with vendors that are easing up in tough times, distributors have been able to hang on to valuable customers while also remaining competitive in the marketplace in attracting new clientele.
“You have to make sure to let vendors know that it’s competitive out there,” says Milhench. “If they’re not competitive, we’re not competitive.”
Distributors are also tapping into their supply chain partners to help ride out the economic storm and keep their businesses in good standing order. Arkansas Bag & Paper has been working diligently with its wholesaler, pounding them for pricing and deals, says Garbett.
“There’s no reason for me to stock high dollar items when I can get them from my wholesaler one at a time, basically on a pre-sold basis,” he says. “We keep our inventory down on the things that are not moving all that quickly and at the same time, we can still get a decent profit for it.”
Garbett is also part of a buying group. He says by being a partner with distributors, wholesalers and vendors from across the country, he has been able to trade information that has been helpful in keeping his business above water.
“We have the ability to sit down and talk about software, market conditions, vendors in the buying group, and really have an opportunity to share ideas and discuss points of how we can help our business.”
Although most distributors will take a loss on margin this year, they are going to continue to watch their inventory and their cost. They’ll also continue to invest where they deem necessary. But the lessons learned from making it through a recession of this magnitude will only make them stronger. Economists predict that the recession will likely ease up before 2009 concludes, but until then, distributors will continue to strategize and use their business know-how to keep their heads above water.
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