August, 2006
Prepared to Compete
If a savvy competitor were to invade your domain, would you be ready?
By Bill Lee
City #1. Full-line building supply business doing $20-plus million in a trade area with a population of 500,000. Door shop, mill shop, window-unit operation, engineered wood capability and truss operation. Framing-related products account for 42% of total sales volume. Gross margin: 29.2%. Operating expenses: 21.6%. Pretax margin: 7.6%. City #2. Full-line building supply business doing $40-plus million in a trade area with a population of 2 million. Full-blown millwork division, truss operation, engineered wood specialists and huge framing yard. Framingrelated products account for 48% of total sales volume. Gross margin: 23.6%. Operating expenses: 16.7%. Pretax margin: 6.9%.City #3. Framing-only yard (100% of sales volume) doing $70-plus million in a trade area with a population of 2 million. Gross margin: 16.8%. Operating expenses: 9.8%. Pretax margin: 7.0%. The business results in these three cities prove that owners and managers around the country have discovered several ways to earn an optimal pretax margin. But can you envision the impact on the dealers in City #1 and City #2 if the company in City #3 should decide to expand its low-margin, low-overhead concept into those markets? What might happen to their framing sales.
The question each owner and manager must ask is: Are we vulnerable to a new competitor who enters our market? Take Preemptive ActionIf you are in a metropolitan market and don’t yet have a competitor such as I’m describing, you have time to take these action steps: 1. Begin working on operating expenses.Pay special attention to gross profit per employee and personnel-related expenses as a percentage of gross profit. We’re seeing more and more large, highly efficient operations achieving in excess of $120,000 in gross profit per full-time-equivalent employee. Begin charting your productivity and make sure it’s trending upward. 2. Analyze your costs by product category. What, for example, are your operating expenses as a percentage of sales for framing sales only? What about millwork? Are there product categories in your mix that are losers? Are there profit centers in your business that are dragging down your overall bottom-line margin?
3. Develop a relationship with an owner or manager in markets where low-cost yards operate.
Budget time and money to get outside your own business environment and learn what kind of operation may enter your market in the years ahead.4. Begin documenting as much personal and professional information as you possibly can on each customer and prospect in your market.
Don’t assume your salespeople have a personal relationship with your customer base. Consider establishing new business objectives for each of your outside salespeople. Assign prospects to each of your salespeople and hold them accountable for closing more new business.5. As an owner or general manager, be on a first-name basis with each of the customers who make up 80% of your annual sales volume.
Reduce your company’s vulnerability should a competitor “buy” one of your topproducing salespeople.6. Increase your company’s value to your customer base.
Invest in builder seminars. Investigate incentive-travel programs as an offensive weapon.7. Begin documenting your company’s service levels.
How efficient are your operations personnel? How do they compare to your competitors in the market? How well do they live up to established customer service standards? Do your salespeople feel comfortable making service commitments to customers without having to personally follow up with shipping?8. Analyze the profitability of each customer in the group that makes up 80% of your total sales.
Do you have customers who demand service but beat you up so badly on price that you lose money on every sale? Look at profitability by customer and invest in customers who appreciate your service enough to pay for it.
| Answer | Votes | Percent |
|---|---|---|
| Visibility |   | 50% |
| Watermark |  | 12.5% |
| Ignore It |  | 12.5% |
| Prosecute |  | 25% |
