Navigating a market that has quadrupled in barely six months is challenging to say the least. How are these challenges and overall market environment affecting financial performance? Turns out, the answer depends on the perspective and position of the company you consider. Many companies are setting record-breaking bottom lines, while others are setting record sales months while losing money. Why such varied outcomes from companies all presented with the same challenging market? It comes down to capital position, borrowing capability, and risk tolerance. After speaking to different companies all year, I’ve seen different approaches, different levels of success, and different levels of failure. Below are specific examples within “company types.”
Those with strong capital and borrowing positions
Purchasing. They learned a lesson from the cost increase and availability pain from last fall, so when signs pointed to a repeat, they approved massive increases in inventory budget and “loaded up.” This further stretched supply and contributed to greater cost increases.
Inventory value. Their large budget started the year, but they were able to increase lines of credit 2.5 times original max.
Pricing. A proactive approach to communication meant customers were informed of supply and cost challenges ushering in updated quote terms, for example tightening the quotes to ship windows to no more than 30 days. Quotes to accept became unique from quotes to ship.
Market share. With their customers aware of pricing challenges, most transitioned lumber and component packages into “allowances” and created transparency. They vetted out the customers who couldn’t or wouldn’t share the market risk as well as the ones who feel the need to shop around.
With record margins and plenty of material on the ground, these companies can take this opportunity to price 10-15% under replacement, take the customer, and still win.
Margin. 35-45% margins on average cost is the norm.
Net profit. 10-20% net profit…yes, some are over 20%.
Those smaller, undercapitalized, with historically low profits, or start-ups
Purchasing. This type of company tried their best to maximize purchase power in January and February, but had limited abilities due to low borrowing lines. As prices increased, inventory value stayed the same but translated to less and less board footage available.
Inventory value. Inventory turns increase for these companies out of necessity and as a function of cost.
Pricing. These companies must hold pricing at market levels. Customers don’t accept increases and go to competitors (like Company 1s) who bring much lower prices back that force unmanageable margins in order to retain sales.
Market share. Many core customers of these companies move on, though the companies thought their superior service and quality would maintain customer loyalty longer.
Net profit. 3-5% losses
Company 1s are winning. Record sales, record margins, record profits. They are taking customers from Company 2s that they couldn’t touch simply because they have the needed inventory and can sell it at a lower price.
While this record-breaking bull market gives the advantage to companies with strong capital and borrowing positions, Company 2s will be back in the drivers seat if they can successfully navigate this exaggerated market.
Shane Soule consults with LBM and component companies to increase productivity and profits, and improve the experience for both customers and team members. Reach Shane at firstname.lastname@example.org