January 16/23, 2017: Volume 31, Number 16
By Scott Perron
Nostradamus was said to be a prophet who lived in the 16th century, spawning many tales of his ability to predict tragic events far into the future. While this seer may have been misinterpreted during his lifetime, one thing is for sure: He was not in the flooring business.
Now please do not take my comments to suggest a great flooring famine or plague is on the horizon. It is not my intent to derail the last several years of recovery many have enjoyed or to cast a spell of negativity about the coming year; however, to reference a presentation I gave early in 2008, “be prepared.”
My message, simply stated, is to take a good, hard look at the road ahead and pave a lean but calculated approach to running your business. Although I feel very strongly 2017 will be good for sales, my concerns are the increased costs many of us do not factor into our budgets until after we feel their effects.
Our major suppliers of carpet and some hard surfaces have announced price increases from 5% to 15% on goods being shipped after early or mid-January. While price increases handled properly result in higher gross margin dollars, be sure to adjust your sales prices immediately so you don’t fall victim to a lag in margin for being a nice guy. As of this writing fuel prices have escalated over 40 cents per gallon here in the Southeast since Nov. 1 and most economists are predicting an additional 40 to 70 cents per gallon increase over the next six months. This not only affects the cost of your inbound freight but also your rolling expense for fleet vehicles, estimating costs and the deliveries you provide. Failure to budget these costs can take an unnecessary bite out of your net dollars.
Next are the increased costs in interest expense as the borrowing rates escalate, resulting in a larger cost of carrying debt or supporting cash flow. More importantly, if you are not showing healthy performance in profits and cash flow, my close friends in banking at the high level say their direction is to tighten the noose, as they are adverse to any risk in the home improvement sector. Increase your credit line power to the maximum you feel comfortable with as this may not be available to you if future needs arise, particularly if we experience some type of market correction. Get funding in place now if you had a strong P&L for 2016 and other financials to support your request.
Finally, make a conscious effort to look at increasing your overall gross profit margin by simply raising your prices. Many dealers feel 30%, 35% or 40% is a bar that cannot be vaulted over, which is truly a matter of perception and not reality. When your staff tells you it’s not possible, train them to see the competitive landscape or hire new people that can sell. If Empire Today and other major players in our industry can dwarf our perceived margins by using salesmanship over the rest of us, then they deserve the sales. Their systems build value in starting at a very high suggested retail price and then progressing like the negotiation for any other large ticket you might buy.
More profit dollars means more cash to add on new profit centers; upgrade your equipment; train your teams or spend more dollars marketing and networking. When large private equity firms are buying these kinds of companies as well as some of their supply chain, the proverbial writing is on the wall.