Volume 48, Issue 3 - May 2009

Maintaining Margins
When Being Cheaper Isn’t the Best Strategy

by Samantha Carpenter, editor of Shelter magazine.

Danny Talbert says that it’s important not to have hasty reactions when pricing in the current economy. Sure, his company has had to lower product margins in certain situations, but he says that his company, Talbert Building Supply in Roxboro, N.C., hasn’t seen its product margins decrease significantly. 

“We try to be as competitive as possible in any economy, but in order to keep our head above water in trying times you have to remain consistent and try not to have ‘knee-jerk’ reactions,” Talbert says.

But it’s not just about maintaining margins so that building product distributors and dealers can stay afloat, it’s about maintaining margins to be able to offer good service. Distributors and dealers warn that companies offering the cheapest products may not remain in business long.

“We know what margins will allow us to maintain service levels. Chasing sales by reducing margins does not make sense to me. I would much prefer to be a smaller top-line company and keep a positive bottom line,” Jack Cortese, chief executive officer of Bridgewater Wholesalers Inc. in Branchburg, N.J, says. “Expense control becomes most important during an extreme downturn like this.”

Dan Barber, vice president of finance and administration of Barnett Millworks in Theodore, Ala., says his company tries not to get caught in the “price game.”

“Our goal is to provide the most cost effective products through a combination of factors including price, delivery, service and quality. This equates to fewer issues that require the products and jobs to be revisited,” he explains.

Barber says his company has had to reduce margins to compete for the fewer jobs available in the market.

“There will always be those who will accept low or no margins to make sales, but our goal is to be around in the long haul and be prepared to support our customer base,” he says.

He believes that this philosophy equates to one that says: “the strong will survive and the weak will not and will not be around to deal with any long-term effect of selling cheaper and inferior products.”

The Right Strategy
How do these distributors feel about competitors selling below-cost?

“If this company is still in business when the economy improves, they will have to raise their prices and margins eventually. This increase will cause them to lose customers back to people like us solely because of the service we provide on top of remaining price competitive,” says Talbert.

Barber says that he assumes that there are some distributors and dealers selling at material cost and cautions they are not considering the full cost.

“It is likely these are desperate moves to survive and they certainly run the risk of being no more than short-term players if surviving at all,” he says.

Barber believes this is a “single-minded strategy and has no room for errors such as product issues or credit losses.”

He says it is important for a company to be attuned to the fact that there are credit risks in each sale and that, no matter what the best controls might be, there will be losses. “If you sold at cost or below and lost the credit gamble, where does that leave you?”

“I’m sure their [my competitors] margins are very thin,” Cortese says. “I never thought selling on price alone was a good strategy. There has to be more value added. There are a lot of services and processes that can warrant higher selling prices. The cheapest up-front price for products is not always the cheapest overall cost of the product being sold. Delivery, selection, ease of ordering and product knowledge can add value that will support higher pricing.”

Risky Business
“Good, solid companies—both financial and procedural—will make it through these trying times. Companies that have struggled maintaining a solid balance sheet through the good times will find the road much tougher now as available sales prospects dwindle. They will probably drive themselves out of business," Cortese adds.

Talbert agrees that companies selling below-cost can be their own worst enemies. “The only company I am aware of selling at or below-cost is currently fighting to keep its doors open. Looking at the big picture, the only company they tried to push out of business was themselves.”

Staying Focused
Barber says Barnett Millworks will continue to focus on its customers and “what affects them the most.”

He says it’s important to “communicate and inform more than ever and to anticipate needs and offer solutions before requested.” 

Moulding Manufacturers Weigh-In on the Margin Issue

Building product manufacturers, including moulding and millwork manufacturers, face margin issues too. 

Al Delbridge, president of EastCoast Mouldings in North Wilkesboro, N.C., says if a company is selling below-cost it will not “make it to the other side.” “Selling below-cost can be an anomaly. We’re confronted with this question often with our sales force,” Delbridge explains.

He says that there are three unique methods to value inventory: first-in-first-out (FIFO), last-in-last-out (LIFO) and weighted average.

“On a falling market, company A using the LIFO market could be more aggressive while posting acceptable sales-order margins. And, company B, using the FIFO or weighted average, may accuse that company at selling below-cost. The contrary happens when the market gains momentum and prices begin to rise,” Delbridge adds.

Setzer Forest Products’ margins have suffered in the current economic climate, and the company attributes this to off-shore competitors. 

“Chile and Brazil still are taking market share of domestic finger-joint and MDF mouldings, says Jim Murk, sales manager of the Sacramento, Calif.-based company.

Murk says that Setzer stays competitive with off-shore producers by emphasizing its good service as well as the fact that it has California Air Resources Board (CARB) 1-approved panels. Murk says in 2010 the company will begin using CARB 2 panels. 

“We believe that CARB 2 will become a challenge for off-shore producers,” Murk says.

Craig Young, sales manager for TLC Mouldings, says that his company is seeing more off-shore product in the marketplace again. To stay competitive, his company is getting as lean as possible and watching costs and expenses very closely. 

“We are able to offer a much quicker turn around time [than off-shore manufacturers], so we have been able to stay in the market,” Young says. 

Young adds that his company’s proximity to its board supply enables it to stay competitive on raw material supply as well.

John Morrison, president of Sunset Mouldings in Yuba City, Calif., says other moudling and millwork manufacturing countries are having the same problem as China. 

“Ship time of three weeks for domestically produced product verses three months for import product in an uncertain market is a very high hurdle,” he says. “There are still some considerations to be made though concerning purchase price. The MDF market price is very comparable when looking at import to domestic, but the wood market can vary enough to make a distributor consider purchasing at least a portion of their projected needs from an import producer. Other influences can be the exchange rate that has been very radical in its movement in the last several months and the late arrivals by the shipping companies.”

Art Ramey, business development director of Royal Mouldings in Marion, Va., says all moulding and millwork manufacturers face competitors who slash prices from time to time. 

“Normally, a competitor will pick one item not the assortment. Offering a larger product selection, value-added finishing, design, performance, marketing and listening to the customers needs to be more productive can help off set the threat.”

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