How to Make Money

Warren Buffett once said that there are only two rules in business:

• Rule No. 1: Never lose money.


• Rule No. 2: Never forget Rule No. 1.

If you agree with Mr. Buffett, then I have three books for you!

The Official Guide to Wholesaler-Distributor Financial Success is a new 3-volume set of books by Brent Grover of Evergreen Consulting. It is published by the NAW Institute for Distribution Excellence. (The NAW Institute also publishes Facing the Forces of Change®: Lead the Way in the Supply Chain.)

These ambitious books represent the first and most complete attempt to distill the best practices of wholesale distribution management into one compact package. In my opinion, they are a truly outstanding resource for anyone who runs a wholesale distribution company. As I discuss below, this series would also be an amazing tool for any CEO who wants to develop the next generation of leaders for his or her business.

THE STRAIGHT DOPE

Volume 1 (Exploring the Financial Fundamentals of Distribution) is my own personal favorite of the group. The topic may not sound glamorous, but understanding the content of this volume is the only way to master Mr. Buffett’s Two Rules. As you all (hopefully) know, any wholesale or retail company should measure its true profitability using Return on Investment (Pretax Profit / Owner’s Equity). Brent provides one of the most readable, concise discussions of true profit in a distribution company that I have ever read.

To be frank, I’ve personally met too many distribution business owners who are overly focused on income statement items – revenues, gross profit, or operating profit. I once worked with the owner of a $100 million wholesaler-distributor who seemed proud of the fact that he couldn’t read a balance sheet. Maybe he read the Unofficial Guide to Success?

Volume 2 (Distributor Manager's Guide to Departmental and Branch Financial Excellence) covers a lot of ground in a short amount of time, ranging from sales management to credit issues to purchasing effectiveness. It’s a solid overview for anyone moving into a branch or division management, although each chapter deserves its own book.

Volume 3 (Distributor Executive's Guide to the Art of Top-Quartile Financial Performance) is an integrative look at how top management can bring together all of the disciplines for long-term management. I found the chapter on benchmarking metrics to be the most useful and practical. Brent emphasizes the fact that benchmarking should be against other companies, not just against your own company’s past performance. I also liked the many suggestions for how to begin this process in yoru own company.

These books are very readable, despite the subject matter. Rather than a straightforward text, the books are interspersed with first-person accounts from the employees of a fictional wholesaler-distributor. For example, “Susan, Vice President and General Manager” has a friendly, chatty introduction to Operating Profit. I enjoyed this stylee because it makes the books very accessible for the non-specialist. Nonetheless, I would also appreciate a future companion reference book that boils down the essential financial content and ratios for quick reference. (Yes, that’s a request for Volume 4, Brent!)

In the spirit of full disclosure, Brent and I both serve as Fellows of the NAW Institute and are both on the Advisory Board of Supply Chain Equity Partners. Nonetheless, I am giving you the straight dope on these books. They are well worth your investment.

BUILDING FUTURE LEADERS

In Building Future Leaders, I describe how George Pattee, CEO of Parksite Group, used my Facing the Forces of Change®: Lead the Way in the Supply Chain book as a management development tool for building the next set of leaders in his business.

I encourage wholesale distribution CEOs or Presidents to use Brent’s books in a similar fashion. Form a virtual book club for all senior executives and managers in your company. Go through these books one chapter per week and schedule weekly conference calls to discuss how your company really operates and makes money. In 16 weeks (chapters), I guarantee that you’ll gain unique insight in your own company and the capabilities of your next generation of leaders

---------------

I’ll be at the NAW Executive Summit in DC this week. If you’ll be there, please let me know what you think about this blog – good, bad, whatever.

Private Labels Will Boom in '08

I project that 2008 will be a banner year for private labels in wholesale distribution. Growth will be driven by customer demands for lower-cost alternatives in a weakening economic environment. I also see a number of compelling reasons why the U.S. dollar's fall (shown on the right) will not necessarily stop import-led private label growth.

Trading Down

As I document in Facing the Forces of Change®: Lead the Way in the Supply Chain, roughly four out of ten distributors sell some kind of a private label product.

As customers start to feel more economic pressure, they often trade down to private labels. This pattern is playing out right now for consumer products, where private label sales for 10 household and personal care products grew by 21% in the second half of 2007 although overall industry sales were only up 1 to 2 percent. (See Even Package Goods Not Immune in Advertising Age.)

I believe that the same pattern is occurring in business-to-business markets. Customers may be more receptive than ever to moving away from a national brand in categories where the manufacturer's brand does not add enough value to the customer. (See Brand Killers.)

Dollar Devaluation

The flipside to this story is the value of the dollar. The trade weighted value of the U.S. dollar has fallen by more than 25% relative to other currencies since 2002, leading to a boom in exports from the U.S. (See slide 20 of my 2008 Economic Outlook presentation and the audio discussion for how savvy distributors can benefit from the export trend.)

Since almost 60 percent of wholesaler-distributors with private labels source their product from an overseas plant, we might expect the cost advantage between private labels and imports will narrow as the dollar depreciates and imports become more expensive.

However, there are at least four reasons why a currency-related increase in private label imports will not necessarily get passed on to customers.

1) China is the most important source of imported products for wholesaler-distributors with private labels. However, the yuan has appreciated much less against the dollar than other currencies since China stopped pegging the yuan’s value to the dollar in July 2005. (That said, the Chinese yuan has still risen ~14% against the dollar.)

2) Many so-called “US manufacturers” actually outsource production to China, too. So dollar depreciation is being felt by both private labels and the “national” brands.

3) Customers will only see a portion of the cost increase because most distributors will not want to pass on substantial cost increases in a weak economy. Historically, less than one-quarter of currency depreciation gets passed through as higher prices for imports.

4) It's unlikely that the dollar's record drop in 2007 will continue. (See Weak Dollar Might Change Course.)

---

My bottom line: I see private label strategies accelerating as the economy weakens. Wholesaler-distributors will be able to stabilize or improve their margins with private labels even as economic conditions worsen, if appropriate for their business and done with selected product categories for the right customers.

Wholesale Distribution in the Economy

Happy New Year!

As you know, I’ve been on vacation and have not been blogging. Unfortunately, there was no wi-fi access on the beach and our hotel did not subscribe to Modern Distribution Management or Industrial Distribution. You can surely see my disappointment in the photo on the right.

I want to start off 2008 with a key point from my recent Wholesale Distribution Economic Outlook presentation: Distribution as a whole is still a stable and substantial part of the U.S. economy.


Many people are surprised by this point because they think “the middleman is dead.” Yet more than $4 trillion dollars in products flowed through wholesaler-distributor warehouses in 2007. Plus, wholesale distribution’s share of the U.S. economy has not changed much in the past 50 years. In the 1950s it was about seven percent. Today it’s still about seven percent. Lindsay Young picked up on this point on the MDM blog in Distribution's Part in the Economy.

The key to understanding this surprising factoid is that regardless of where manufacturing takes place, distribution is a local service business. Naturally, the specific products that are distributed today are much different than what was distributed 50 years ago. There are fewer distributors of industrial products but many more distributors of products that sell into service industries such as food service, commercial office buildings, MRO supplies, construction, healthcare, entertainment, recreation and lodging.

Despite some poor economic news over the past few weeks, the future of wholesale distribution looks solid.