A (hypothetical) Mr. Coyle started two identical lumber dealerships years ago in a thriving area of New England. When he retired, he gave one location to one son, named Mark, and one to another son, Chris.
For both locations, Coyle had kept the stores open on weekends as a convenience to the townspeople. But Mark, the older son, had always suspected that weekends barely broke even. For his location, Mark curtailed hours down to Monday through Friday. With that change, Mark also decided just to go for a pro sales focus, selling to his solid contractor base. Really pushing the experiment, he got rid of all his sales reps, along with the weekend counter help. In short, he went lean, real lean. With this business model, Mark understood that his gross processing margins would be lower to compete for the pro sales/contactor segment, but they would be met with lower and more-efficient operating expenses as a percent of sales.
He also integrated PlanSwift takeoff software with his estimators; and he educated his pro customers and his staff to create orders right off the customers’ Bills of Material (BOM). Now Mark could go from BOM, to estimate, to purchase orders, while assigning orders to lots, dates, and drivers. He also focused on high-margin items to sell along with commodities: windows, millwork, and paint. Then he tracked key performance indicators to see if his gamble paid off, watching his pro sales dollars, GPMs, OPEX (operational expenditure) dollars, OPEX as a percent of sales, EBITDA dollars, and EBITDA as a percent of sales. We’ll check back in with Mark in a minute.
Chris was the younger, ambitious brother. For his location, he stayed open on weekends, and expanded into specialty retail, with Halloween and Christmas lines, and even some grocery items. He not only kept his pro sales reps, but he added more, trying to pick up more remodeling work to supplement new construction. Since labor was tight, he gave truck allowances to lure in new sales reps, but then had to equalize those allowances with his other sales staff. More sales means more gross profit, which means more EBITDA, right? That was his logic, initially. He too tracked OPEX dollars, OPEX as a percent of sales, EBITDA dollars, and EBITDA as a percent of sales.
When Mark took over his store, he was clear that he wanted to be a pro shop, not a retail or DIY store. His new KPIs proved him out: Weekends were a wash, unprofitable. With his new lean, pro/higher-margin posture, Mark saw his OPEX dollars decline, and every dollar lopped off OPEX went directly to EBITDA. He could even have fewer net sales than his brother Chris; however, since his OPEX as a percent of sales were much lower, he achieved higher EBITDA dollars than Chris, even if Mark handled fewer sales.
Although Chris wanted to straddle the two camps of pro dealer and retailer/DIY, he had quite a shock when he reviewed his OPEX and EBITDA numbers. His OPEX as a percent of sales were much higher than Mark’s; his EBITDA margin was lower, and of course his EBITDA dollars suffered too, gobbled up by the OPEX expenditures required for his grand vision. The cost of his beefed-up pro customer sales team ate into his margins, as did his new remodeling sales team. Add to this, upon review, the labor costs alone for his Saturday and Sunday retail help made those two days break even, at best. Chris had a professional identity crisis—was he a pro dealer or a hybrid pro/DIY retailer? As he watched his bother Mark pack up his ski gear for weekends away, Chris fielded Saturday calls that the soft-serve machine was broken, and that a customer had flattened the Christmas tree display with her kid’s stroller.
In the end, the net sales figure was not the only indicator Chris should have watched. Sure, it’s nice to have cash flow. But it’s the efficiency with which you manage gross profit dollars (moving them down through OPEX to the EBITDA line) that is really the mark of success. Plus, you’ll have more gross profit dollars to work with, if you have high gross profit margin items, which result from the value-added things like millwork, windows, and paint.
There are a number of business-advice clichés we can derive from this tale, but let’s start with this one: Work smarter, not harder.
John Wagner is a managing director at 1stWest Mergers & Acquisitions, which offers a specialty practice in the LBM sector. Reach John at email@example.com.