REAL ISSUES. REAL ANSWERS: Razor Thin Margins
Real Issues. Real Answers
This month’s question came from a dealer in Northern California, who wrote: “If a rising tide raises all boats, why do I feel like a submarine? We are several years now into the housing ‘recovery’ and margins are as challenged as ever. It is a very expensive proposition to run a full service production lumber yard, and there are not that many of us left. Am I the Lone Ranger, or is anyone else fist-fighting for a profit?”
As always, we reached out to our opt-in list of readers for their insights on this tough question, and we got another healthy response to our brief survey. A big thank you to the readers who took time to share their insights into this issue. If you’d like to participate in future surveys, please drop me a note at Rick@LBMJournal.com, and I’ll make sure we add your name to our list.
QUESTION 1 & 2
To begin, we wanted to see how LBM companies are doing with both top-line revenues and bottom-line margins. As the two graphs to the right show, just over 57% of respondents report “modestly healthy” revenues and margins.
On the revenue side, comparable numbers of readers report “Soft/weak” sales (22.0%) versus 20.8% who report “Robust/strong” sales. Considering the vast differences between regional economies, this variation shown in Question 1 is no big surprise.
The more challenging deviation is seen in Question 2, where more than 35% of respondents report “Soft/weak” margins, and only 7.2% report “Robust/ strong” margins.
Back to the original question that prompted this survey, in an industry that’s enjoying its strongest market in nearly a decade, the fact that nearly five times as many dealers report soft/ weak margins as those enjoying robust/ strong margins makes it clear that the dealer who supplied this month’s question is clearly not the Lone Ranger.
That’s the issue. We know this dealer isn’t alone. Now, what’s the answer?
While housing starts and remodeling are up overall, there are reports from markets throughout the U.S. that have yet to rebound, and continue to struggle. Which one of the following best describes the health of your market interms of overall revenues?
Which one of the following best describes the health of your market in terms of margins?
What advice would you have for a LBM dealer whose market continues to struggle, resulting in a hypercompetitive sales environment and razor-thin margins?
“Focus on what you do best and build on that. Protect your margins with quality of service and quality of product. Be willing to make deals for volume commitments on certain products.”
“Find a niche and grow it.”
“Diversify. Learn all you can about all you can. Then hang in there.”
“With an ever-changing market, you must know your customers’ needs, know your competition, make sure your supplier is giving you the best price, and be willing to sharpen your pencil. You will make your margins with the add-on sales from hardlines. All customers, orders, etc. are not always the same. You must be willing to adjust your margins when necessary.”
“Do not have any hope we all survive this or maybe the government can come in and give us a check like they do for the agriculture industry. When we struggle, our business situation seems like a Catch 22 to me.”
“You can’t raise margins unless you are selling the customer first. Get the sale, build the relationship, reap the value in higher margins. There is no substitute for doing it the right way.”
“Our company is in farm country, when the grain price is down so are our sales. All we can do is wait and pray.”
“Have the right inventory on hand and service, service, service. Make price secondary in the equation.”
“Try to get more commercial business and get into installed sales.”
“You have to sell the value you bring your customers. They have to know that you are both in it together with the same purpose: to grow together.”
“Hold firm. You don’t want to win a race to the bottom.”
“We judge our success on increased margin dollars and not on increased sales. We decided years ago that our success was based on what monies that we could put on the bottom line with minimum exposure. Some years ago, we visited with a dealer in Florida in a highly competitive market, who made extremely high net profits. We asked him what his secret to success was. He stated picking the right customers, who had good credit, and worked to become their supplier of choice. He got rid of the lines that were not profitable and sold higher margin items. He used lumber as his draw, but wanted the millwork and other high margin items if he was going to be their supplier of choice. He was not interested in high volume and low margins. His sales were approximately $20 million at the time. This holds true today for a lot of the dealers across the nation.”
“Add salespeople who have a strong following, and fight like hell!”