December, 2003

The Culture of Caution: Are You Ready For a Downturn

Housing remains strong-but can that last? Dealers discuss steps they've taken to ensure they can stay on top in a down market.

By Craig A. Shutt

With the housing market staying at a high level and interest rates a comfortable low, most dealers are maintaining strong sales. But worries about whether that success will continue into the future has some dealers preparing for leaner days-and now, they say, is the ideal time to do that planning.

"Our concern is that housing is continuing at a record pace right now, but is there a dip on the horizon after 20 years?" asks Valerie Hansen, president of Big Buck Lumber in Racine, Wis. "I'm concerned that with the low interest rates we've had, we've borrowed business into the future, and we may hit a trough." Her key concern is that during the long-term boom, Big Buck Lumber became more dependent on professional business, putting more eggs into one basket. "We're a lot more exposed to the effects of a downturn in residential building that we used to be," she says.

Dave Anderson, VP/CFO of three-store Millard Lumber based in Omaha, Neb., also has his eye on the financial forecasts. The chain is experiencing strong growth, including all-time high sales in September. "But can we maintain that level?" he asks. "We almost have to go down from here. Are we prepared for whatever comes?"

These are questions that dealers should be asking even when times are good, say consultants. In fact, that's when the questions must be asked; to ensure that actions aren't taken in haste when a downturn arrives that would worsen a slide rather than aborting it. Preparing for that scenario when the economy is good provides the luxury of creating a plan under less pressure. (And even if the economy stays strong, there are no guarantees that a new big-box store won't set up shop and start targeting your customers.)

"Anything dealers should do for a downturn, they should be doing already," stresses Jim Enter, president of Performance Achievement Group in Murrells Inlet, S.C., a management-consulting group for lumber and building material dealers. "But because of the discomfort of thinking about and implementing these programs, they don't get done."

When a downturn comes and sales begin to slide, two basic courses of action are available: Increase revenues or cut costs. The former can be difficult, since new sales are even tougher to find as the economy cuts back. But reducing costs ineffectively can cut the business's service level, which starts a spiral of more lost business.

Adding New Business
The best way to offset dropping sales from existing customers is to add new customers. That's a process dealers should be undertaking all the time-but they aren't. "We've been so blessed in this industry with a strong economy that dealers generate enough volume with existing clients and don't need any more to sustain a good growth rate," says Bill Lee, president of Lee Resources in Greenville, S.C. "More dealers need to create a strong, proactive new-business strategy to remain successful no matter what happens with the economy."

He suggests making a list of every contractor in the marketplace by gathering names from Yellow Pages, trucks in home-center parking lots, job signs in rural areas, local homebuilder association rosters and other sources. Consider offering a bounty to employees who find new names; the process can also be turned into a contest among drivers.

The credit manager then should identify which of the contractors are credit-worthy. Giving him names to check when business is good allows him to perform these duties when there's time in the schedule, rather than asking him to do it overnight so a hungry sales person can call on the account tomorrow.

Once the best candidates are identified, they should be marketed to-not sold to, but marketed to, Lee stresses. "We do a great job on sales in this industry, but we use it with interchangeably with marketing, and they're two different processes." Rather than calling on these prospects immediately, send them direct-mail pieces and catalogs to make them familiar with the company. Then when sales seem to be slowing, give the names to sales people to keep them going. "That way you don't have to scramble to find new prospects when you need them."

Another source of new business might be found in niche markets, such as small custom builders. "When a downturn hits, custom guys will still be there," Lee says. "If you aren't able to sell to them as the big builders slow down, you'll miss sales." Installed sales as well as commercial and industrial business also offer potential for adding new accounts, notes Lee. All those businesses require managers who understand the needs and services that those unique customers seek.

Regain Consumer Sales
Regaining lost or ignored consumer business also offers a strong possibility for adding sales as pro business drops off-if your company can adjust to the different culture. Parr Lumber in Hillsboro, Ore., saw an opportunity to reclaim that business in 2001 and has achieved dramatic results, says Nate Bond, director of sales. When big-box stores moved into the territory in 2000, their consumer sales dropped "precipitously," he says. But contractor sales were so strong, the 24-store chain didn't care.

Realizing they were letting business slip away-and not wanting to keep all their eggs in one basket, Parr's people began marketing program in late 2001 to reintroduce the company to consumers. They reorganized the cabinetry department to free up an employee, Jennifer Swick, who worked with a consultant to learn techniques so she could become Parr's marketing director. She created a TV, radio and print campaign using Bond as the talent to express the company's family-owned, community-focused approach to business.

The store also began running a variety of events, including how-to seminars aimed at women. Layouts and merchandising emphasized creative endcaps, and some product categories were expanded, such as landscaping and bird feeding, to meet the customer base's changing needs. But tool categories remained the same, as consumers were willing to be sold up to the professional-grade tools being stocked. The company also instituted a series of classes and workshops for employees to explain how to service this new type of customer, including lessons on upselling, greeting customers and telephone situations.

The program's results were dramatic. Beginning in 2002, consumer sales across the chain began rising from $250,000 to $500,000 each month, and that rate has been sustained, says Bond. September 2003 registered a $500,000 increase over the already-strong September 2002 sales.

Adding New Services
Offering services not previously considered-but possible as staff time opens up-also can add revenues. Parr's Swick is working with builder customers to improve their own marketing image, providing her consulting services at cost. In return, the company asks that the customer purchase all products from Parr and not quibble over prices. A number have used the service. "If we can help our builders get out their message and grow, they'll buy more and help us grow," says Bond.

Val Hansen also has been looking at ways to bring more revenue to Big Buck Lumber. The company never has taken advantage of its status as a woman- owned business; today she is looking into how to leverage that position to gain federal contracts. The company also is using its technology to tap into state programs and find ways to take advantage of available resources.

Cutting Costs
Reducing expenses also will improve the bottom line. But there are few expenses that will save much money in a long-term downturn other than laying off employees, and that can be risky. "Companies sometimes decide to cut overtime or pay increases, but very few people are impacted by those moves, and they don't save enough money," says Enter. "If a real downturn comes, you have to cut payroll."

Enter suggests preparing for such an eventuality by ranking all employees by how well they perform their jobs-that is, comparing their performance to the job's qualifications and ranking them in order on one list throughout the company. When layoffs are needed, cutting from the bottom can keep the business effective. Some managers prefer rating their employees on a 1 to 5 scale, Enter notes, which often leads to all employees being rated above average. That may be accurate, but it offers no direction when a cut is needed. If the company-wide ranking shows all of one department's employees near the bottom, the manager needs to be evaluated.

"If you wait for attrition or eliminate performance raises, your poor performers will hang in there, and the good employees will look elsewhere," he points out. Capable employees usually know who isn't pulling his weight, so, rather than causing problems, laying off underperformers can improve morale by showing dead wood will be cut.

"Independent dealers are not as tough on themselves when it comes to lowering costs to get results as large, well-run public companies," agrees Hansen. "We act more like a family, but sometimes we need tough love in the family to make sure that the business remains strong and continues as a business for the rest of the employees." But cutting must be done judiciously, she warns, because builders depend on strong, reliable service to do their own jobs effectively.

Finding qualified employees when it's time to ramp back up creates problems, too, notes Pat Clancy, VP of Morse Lumber Company in Rochester, N.Y. "Every area of the business has a hard time finding good people." To avoid laying off people only to hire again later, Morse cross-trains employees so they can fill slots that open through attrition and tries to move people from over-staffed departments into new areas, such as installed sales.

The company also creates a maintenance to-do list that it holds until winter when sales are slow and then assigns out to staffers, to avoid having to lay off anyone. "Even cleaning the parking lot of snow can take half a day, and it keeps someone busy so they can keep working," he says. "Downsizing is never comfortable, and when things pick up, it's just about impossible to get enough good people and get them fast enough."

Cutting Equipment Costs
The need to purchase new equipment also can be minimized, particularly if business falls off and less equipment is needed to handle orders. Benchmarks for selling off equipment can be tuned to productivity levels or maintenance costs, Enter says. "If you've got a truck sitting and it's almost time to replace it, sell it," he says. Millard aims to turn one- seventh of its capital equipment each year, Anderson notes, and it tries not to vary from that schedule. "But in severe bad times, we might slow down buying new equipment."

Buying in general may slacken if sales slow, but that doesn't necessarily mean costs can be saved. "Costs aren't as variable as many people think," Hansen points out. "They don't drop off across the board as sales go down." Many suppliers will still sell in set units (truckloads, pallets, etc) even though the time to turn that quantity lengthens, and discounts will drop on smaller volumes. Enter suggests that as dealers see their turns lengthen, they should work with their suppliers closely.

"Dealers may be able to commit to longer contracts for better pricing- which they should be doing in many cases in any economy," he says. Manufacturers are driven by volume and stability, and being able to depend on certain levels of sales is worth some pricing help to many. "I know dealers who have committed this year and received reductions as high as 15 percent, especially in high-margin categories like moldings," he says. Lumber also can be negotiated based on weekly pricing. "Creating partnerships, especially in down times, is critical," he says. "And it really is a partnership, because both sides are benefiting."

Working closely with good customers also can pay dividends as times tighten. Millard's Anderson says his company identifies the customers who seem to weather downturns the best and ask them what they see ahead. The company also asks what services these customers will need and if they foresee any changes. "We want to do everything we can to ensure we're in tune with their needs." Big Buck's Hansen agrees. "Get your arms around your best customers," she says. "Get closer to them and make sure you're serving their needs."

Insurance Efficiencies
Enter also suggests taking a close look at health-insurance costs. In some cases, deductibles can be increased with the company providing self- insurance for the difference, ensuring no change for the employee. Doubling the deductible to $1,000 from $500, for instance, may save significant premium fees, and the company can pay the $500 difference with the savings and come out ahead.

Dealers often look to cut marketing and margins when sales drop, but Enter warns that both tactics can be dangerous. Cutting prices only levels off the competition at new lower pricing, and it creates a cut-rate image that can be hard to shake when the economy revives. Similarly, cutting volume incentives or travel promotions can send a bad message or lose more than it saves.

Enter suggests extending the qualification period for rewards programs, say from 12 to 15 months, which won't make customers balk. He also suggests eliminating or lowering the cash discount period on invoices. "If you explain the reasons, there is very little resistance," he says, noting that manufacturers have taken this approach in the past.

Another key category dealers don't consider in flush times is the number of stores they operate, says Hansen. "For professional customers, you serve more as a distribution center, with a need for good trucking routes and access to highways rather than high visibility," she points out. If a dealer's business has focused onto these customers, he may be operating more stores than is necessary, and consolidating may create a more efficient system.

When to Implement
Deciding when to implement changes to prepare for a downturn rather than react to one is both science and art. Enter emphasizes that many of these changes should be enacted already, because they make companies more efficient, and that's a benefit in good times as well. Others use specific business statistics, including those beyond sales figures. Lee stresses the need for a strong Gross Profit Per Employee figure, with $100,000 an ideal. At any level, he says, "If you see your number beginning to trickle down, you should consider putting in your contingency plan."

Both Big Buck's Hansen and Millard's Anderson recently have undertaken exercises to create budget-tightening programs in case of drops. "Ask what you would do if sales fell 10 or 25 percent," Hansen suggests. "That's a worthwhile exercise you can model to create answers. If you can't model it, you need to develop new skill sets."

Anderson had precisely that discussion with Millard's management group in October. "We asked what would happen if sales dropped 15 percent," he says. "We don't expect that to happen, but we want to have a plan ready in case it's needed."

Finding time and making it a priority can be difficult when sales are high. But successful managers hope for the best and prepare for the worst. If the company is well run to begin with, the planning only needs to find all the efficiencies that are possible, Hansen notes, not draconian measures. "To survive a downturn, you don't need to be the best business in the world," she points out. "You only need to be better than your competition."

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