Edger-exclusive insight to the state of the industry.
The goal of this article is to provide an overview of financial trends in the distribution industry between 2003 and 2007, emphasizing the changes between 2006 and 2007. The following exhibits compare MHEDA to other industries, encompassing 40 unique lines of trade in distribution.
Exhibits 2-6 divide the results for all distribution into three subgroups: industrial, construction and consumer. “Industrial” consists of industries that primarily serve the factory floor. “Construction” reflects industries that primarily serve the construction trades. “Consumer” includes industries that sell consumer products or service businesses that sell to consumers.
EXHIBIT 1: Return on Assets
Return on assets (ROA) is the best overall measure of financial performance in distribution. The ratio is net profit before taxes (but after all expenses) expressed as a percentage of total assets. ROA remained strong for most distributors in 2008, but began to slip. For an individual line of trade, a median ROA of 5.0% is considered the absolute minimum level of performance. In contrast, a median ROA of 10.0% indicates a strong, vibrant industry. In 2007, MHEDA’s ROA was 6.8%.
EXHIBIT 2: Sales Growth by Segment
Across all 40 lines of trade, there was a significant increase in the level of business activity over and above any price increases in 2007. The construction industry was hit hard by the mortgage crisis, but still saw some growth. Industrial and consumer segments were strong throughout the year. MHEDA’s companies experienced a modest 0.2% growth.
EXHIBIT 3: Gross Margin Percentage
In prior years, most segments of distribution were able to increase their gross margin percentages. In 2007, the wheels came off the trolley in a major way. A significant portion of the problem was associated with the price increases that helped drive growth. The industrial and construction markets saw decreases in gross margin percentage, while MHEDA experienced a 0.5% growth.
EXHIBIT 4: Operating Expense Percentages
Any time sales growth is diminished, operating expenses as a percentage of sales tend to increase. The construction and consumer segments followed this pattern. Industrial was the only segment where the operating expense percentage actually fell. MHEDA’s operating expenses rose 0.1%.
EXHIBIT 5: Inventory Turnover
In 2007, inventory turnover fell in every industry group, the first time this has happened in the 5 years this report has been prepared. The slowdown in economic activity in the fourth quarter seemed to catch many firms off guard. Sales growth moderated while inventory build-ups were taking place. MHEDA bucked the trend slightly, recording a 0.1% increase.
EXHIBIT 6: Average Collection Period
MHEDA saw a 1.3 day increase in its collection period. Typically, as sales growth lessens, the collection period increases as customers take advantage of opportunities to delay payment. However, in an unprecedented collective movement the collection period declined in all three segments. The most likely scenario is that given the somewhat sudden reduction in sales growth that firms responded by tightening credit and collection policies.
|Meet the Author
Albert D. Bates, Ph.D. is founder and president of the Profit Planning Group, a distribution research firm headquartered in Boulder, Colorado, and on the Web at www.profitplanninggroup.com. Dr. Bates is a frequent contributor to the MHEDA publications as well as a mainstay on the MHEDA University educational calendar.