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A rising tide raises all ships

Five surefire ways to tell if you are swimming or treading water

Results from all around “distributor land” indicate 2006 was a darn good time. A Progressive Distributor survey revealed that 72 percent of distributors said their sales increased by 10 percent or more in the past 12 months. Fifty-four percent expect sales in the next 12 months to grow between 10 and 15 percent. NAED – The Electrical Distribution Association – reported that 2Q 2006 found a strong majority of distributors experienced 10 percent or greater growth. Wolseley plc – the owner of Ferguson and the largest distribution company in the world – reported sales growth of 17 percent in the United States. WESCO reported 25.8 percent growth with a measurably higher GM. Home Depot saw its sales grow 17 percent and continues to buy their way into the industrial distribution-served market.

With only a few exceptions, we are experiencing very robust times. The financial analysts explain we have enjoyed 39 months of continued economic expansion. The reports for the future are mixed. Some see good economic times through the next election. According to an article in the August 23 issue of USA Today, executives of both large and small businesses see continued but slowing growth throughout the next year.

We all remember the tough times of 2001 and some of us remember the tougher times in 1992 and 1984. And all of us know there will be another downturn, sometime.

If we do not prepare now for future downturns, disaster awaits. Preparedness 101 teaches “know your environment.” Knowing your position in an expanding market becomes lesson one. Are you taking business from your competitors? Are you growing market share? Is your position better today in the relative marketplace than it was two or three years ago? These questions are all keys unlocking the planning process and posturing your business for the future.

Following are five surefire ways to tell if you are growing or just treading water at high tide.

1. New customers
New customers can serve as a barometer of business conditions.
A list of these is typically easy to get – just ask your credit manager. If you are taking business from a competitor, you should be able to find a nest of brand new accounts ready to grow and fly.

2. Dormant customers
Experts claim the cost to find a new customer is five times greater than selling more to an existing customer. As your shadow grows bigger in the market, the vast majority of expansion purchases will come from accounts that previously came to you for specialized purchases. For example, if you stocked the broadest line of batteries in your market, they purchased odd-ball items (when the other guy was out of stock). These are the good ones – you already know their credit history, location and billing address. I recommend loading your customers into a spreadsheet. This allows you to sort for those with less than $500 business last year and sales of greater than $5,000 this year. If you are capturing market space, your number of these will be large.

3. Sales by product mix
Another good measure of how your organization is doing in the competitive fray is to compare sales by product mix. Every distributor has “featured” product lines as well as “add-on” product lines. You are well known in the market for providing these lines. Salespeople refer to them as door openers and all of your salespeople know the ins and outs of selling them. In times of economic growth, the market for featured and add-on products increases at approximately the same rate. If you find featured product lines outpacing your add-on lines, you need to be wary. Customers naturally think of you for your best lines. If add-on lines are going nowhere, it may be a case of you selling your share and your competitor selling his (increased) share. The result equates to no real gain in market for you, and a weakened position when the economy goes down. If you find sales of add-on products growing along with your featured lines, you are growing your place in the market.

4. Benchmarking good to great
Great customers are partners who buy everything possible from your business. Good customers are wonderful but they split the business between you and your competitors. The split can range from “your fair share” to “just a taste” to keep the other guy honest. In this benchmark, we use the great customers to establish reasonable expectations of business. In a hypothetical example of an office supply distributor, it could be the ratio between copy paper, writing tools (pens and pencils), printer cartridges, and other product groups (see Table 1).

Table 1

Product Group

Great Customer

Copy paper

22%

Writing tools

10%

Printer cartridges

8%

Binders and accessories

8%

Legal pads & notebooks

11%

Envelopes

5%

Clips, rubber bands, staples

6%

Mailroom supplies

14%

Tape and adhesives

10%

Other

6%

Once you determine averages for the great customers, good customers are gauged by these newly derived percentages. This would be especially valuable if you knew that you were selling nearly all of their tape and adhesives grouping and wondered what share of the copy paper you were receiving. The numbers could then be calculated to determine what portion of their business as a whole you enjoyed.

5. Trade associations and trade magazines
Most trade associations publish information regarding the condition of the market. For instance, the Profit Planning Group (www.profitplanninggroup.com) works with more than 50 industry associations to prepare a report that contrasts your company versus the industry. These will give you a very good picture of your company versus the industry in general. The trick is to determine how your particular market compared to the national market. This is difficult to do accurately, and because the Profit Analysis Report (PAR) lags real time by nearly a year, the results are often less than satisfying.

Another option is to compare the economic data provided by trade publications to determine how your specific area is doing in the current economy. These reports are broken down by specific market areas (Pacific Northwest, New England, and Upper Midwest). These reports trend one to three months after the fact, but the smaller breakdown gives you a better picture of the market as a whole.

What should I do?
OODA (Observe, Orient, Decide and Act) was the strategy developed by Col. John Boyd – the father of the jet fighter strategy. As business people, we need to follow the same plan.

Observe – If your business is tracking ahead of last year: congratulations.

Orient – Let’s find out if we are swimming or treading water in a rising tide.

Decide – Market and market share leaders weather the storm of a down market better than those with a shrinking share. Now, Act.

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