Competitive Bidding Hurts More Than Profits
Day after day the news is littered with instructive pieces describing how all of your daily transactions should be conducted as if you are at an auction. Whether you are at an electronics store or online shopping for some clothes the economy is so bad you are supposed to be able to hammer any seller down on price at your leisure. As a wise person once said it never hurts to ask and as a consumer there is no harm in asking. As a seller and business owner there is harm in obliging bid requests and we will discuss the reasons why in depth.
Studies have repeatedly shown that the least loyal customers are those that shop purely on price. Although times have changed the traditional rule of 80 percent of your business coming from 20 percent of your customers is still consistent to some degree. Knowing that a majority of your business comes from a small portion of your customers typically means your most loyal customers are the basis for your success. The other 80 percent of your customers continually change as customers come and go. Studies have also shown loyal customers are much less sensitive to price so long as they are not being gouged and are instead interested in the business relationship, consistency and meeting of mutual goals. When a new customer calls or emails asking for your business to participate in a time consuming and lengthy bidding process that will come down to the lowest bidder you have to ask yourself is it worth the cost? Do you really want to establish a relationship and tie up financial resources on a customer who values you only for your price and what does that do to the industry you operate in as a whole? Take for instance the story relayed to us today of a customer that asked four different distributors to participate in a sealed bid. One distributor refused to participate probably having previous experience with this organization. Three others submitted bids. Two "finalists" were selected each likely being played off of one another and asked to bid again. The final outcome was a friend of the company President getting the order at between 0 and 5 percent profit not including carrying costs. The customer may think they have "won" in this case but in the end they too lost as there is no way that distributor can continue to effectively service that account at those margins and will either be out of business in a year or will be like the distributor that refused to bid. By the time they reorder that distributor will refuse to take the order or be out of business which means they'll incur new costs associated with acquiring a new distributor and likely expensive setup costs. If the customer saved $500 in real order costs but spent 10 hours of manpower to do it they too had a net loss as those hours should have been spent on revenue producing activities. Meanwhile in this era of decreasing credit the distributor that took the order at 5% is chewing up valuable capital resources to produce an order that they make little money on and are potentially on the hook for a five figure loss if payment is not made.
We will discuss this in more detail tomorrow, meanwhile take a look at earlier entries such as the arrival of custom bpa free sport bottles that we wrote about last spring and our post on retail brands crossing into the corporate channel.
The Invisible Shoe is Already Dropping
With jubilation on Wall Street this week comes the ridiculous news stories and hype of the economic return of the US. The stark reality is the winds pushing against reasonable growth are far stronger than the tailwinds the markets can provide today. There is some good news at first glance with the major banks reporting profits but a closer inspection would again show that the reality of the situation is that without taxpayer funds and massive federal support many banks would still be in trouble.
The single biggest factor that argues for continued difficulties is the rapid contraction again of available credit to both consumers and small businesses. For various reasons this critical issue remains under the radar of the major media outlets and most financial reporters likely because they are disconnected from that segment of the economy. When they report from the floor of the Dow they are not capturing the pulse of a majority of the economy that produces a majority of the new jobs over the last few decades. What they instead see is the one portion of the corporate sector that can borrow which is large corporations. Last week I had "Fools Rally 2009" stamped on an Alicia Klein Bookmark and sent it to an associate in the markets. Why do I say this with certainty? Because the lifeblood of the economy is being cut out of it as credit to small businesses has already contracted 25-30% or trillions of dollars since last year. Even worse leading expert Meredith Whitney reported in a recent Wall Street Journal article that another 1.5 trillion will be chopped from available credit to small businesses and consumers by the end of next year. Some may shrug off this news thinking they are immune as their customers pay via cash or check but that does not account for the fact that your customer may pay you with a check but they likely pay at least a few vendors with credit cards or lines of credit. When those vanish entirely or are decreased they now have less spending power and the previously rapid paying check customer may be on a restricted cash flow. Worse yet the psychological impact of reduced lines or the fear of reduced lines changes consumer behavior and will have a negative effect on commerce as the dismal September retail sales figures show.
So what is being done to support 38% of the US GDP? Not a thing is being done. There are no government programs providing direct loans to small businesses. Banks are not lending which means the engine that drives a third of our economy and 50% of our employment is being strangled. The pace is accelerating and anyone reading financial forums such as creditboards or myfico forums will see that in the past week many big name banks have been furiously chopping lines. Their favorite tactic is slashing lines right after payments are made in full. It's a trap as they don't want to see high balances but the moment a consumer pays off the line to avoid interest they are sometimes being closed out entirely. This can be absolutely fatal blow to a business that had expected to be able to use that credit again the following month. Profitable businesses are failing all over the US not because sales are poor but instead because the recent changes have left them without the cash to operate. Take for instance recent reports of a new tactic by the banks that involves them holding the available credit for up to two weeks after a payment is made. In essence a customer makes a payment today prior to the due date or statement date expecting to be able to use it the next day. Instead the payment is made and credited against the balance but the bank does not release the funds for 7 or sometimes 14 days. No doubt it is a temporary mechanism for reducing potential exposure without directly cutting the lines.
It is likely that banks are about to accelerate the credit closures to prevent the potential exposure that the holidays bring. This may be good news for their losses but it is terrible news for the economy and for anyone running a small business in this country. The question now becomes what will it take for Washington to offer support for small businesses when trillions have been given out with little explanation to major corporations foreign and domestic?
Implosion Continues in the Trinket Industry
Despite the veiled attempts by the various associations and groups to paint the current situation as improving the destruction of the industry continues. Depending on which source the official 2008 sales were down either a little or a lot but there are few suppliers within the industry reporting even mediocre sales. The fact is business was horrible in 2008 and was even worse in 2009 for the majority of suppliers and distributors. There are people that have been in the industry for decades that have never seen it this bad. To find out where the industry is going we have to look at where it has been.
The promotional products industry started decades ago from the concept that there was a market in the corporate arena for branded items. For most of the last few decades that relationship involved three parties, the end user, the distributor and the supplier. Distributors worked to open new accounts by traditional means of cold calling, knocking on doors and networking. They relied on small groups of suppliers to provide product for them and the average distributor historically did well under $200,000 in sales. Along came the associations to act as the de facto referees and central database for the industry. All of these associations would require a membership fee and in turn provide the distributor access to information that would be difficult to obtain elsewhere such as catalogs, pricing, ratings information on the suppliers and credit services for the suppliers. In short they provided a useful service and acted as a go-between greatly reducing acquisition costs for both sides of the aisle. Distributors that did not have entire sourcing departments now had access to hoards of information they would not otherwise be able to gather and suppliers had a targeted and priceless mailing list.
This all began to change in the late 1990's as major online distributors like Branders began to appear. At the same time the use of the internet for sourcing products began to skyrocket circumventing the need for expensive membership services that often did little when subscribers needed them most. Indeed most played a hands off role even in blatant abuses of the system such as suppliers stealing customers directly from distributors. As suppliers began to ramp up their online product listings the ability to jump online and search for the needed product information began to trump the need for expensive and non-eco friendly catalogs. Along came Sage which provided the same basic services as ASI but at a much lower price and the fight was on for the remaining market share. Sadly what the increase in competition did was drive the desire to report success within each association. However the PPAI annual survey has probably summed up the trends most appropriately. Prior to 2000 the industry had experienced consistent and rapid growth. After 2000 the industry has been contracting 50% of the time. Sales are probably still being grossly overestimated as the few companies that reported publicly have taken a huge beating. Several like Norwood and Broder Bros. which occupies the number one spot in the industry for supplier size either threatened bankruptcy or have gone bankrupt. Major suppliers such have Cyrk have also gone off the grid and are no longer in business. Sales for 2008 were atrocious dropping at least 10% and most major suppliers are reporting 20-40% drops in 2009. I am sure the major associations will spin it as just a slight drop but when two of the top 5 suppliers were in danger of or went bankrupt and most of the top 10 had significant staff layoffs the situation is grim. Actual sales will likely be down more than 20% in the promotional products industry in 2009. There will be more failures on both sides of the aisle as distributors collapse under the weight of shrinking credit and increasing delinquencies of customers. Suppliers face the same concerns as distributors are increasingly stressed. Although the data is rarely released it is obvious the credit departments of many suppliers are under strain trying to deal with collections. In general the business credit reporting agencies report the average days beyond terms has extended to 10 up from 2 earlier in 2009. That's a rapid descent and with credit availability scheduled to shrink in the trillions this year and next it will only get worse.