Developing bolder business practices - Part 1

Merchants face a constant battle not to give their profit away. They are caught between a competitive marketplace and a precarious economic climate. Builders’ Merchants News and H+H invited some of the industry’s outspoken business leaders to air their views about how merchants should aim to banish the fear factor and adopt a bolder, more proactive approach.

Panel

Lisa Arcangeli: Are merchants giving their profits away? The nationals always seem to make much higher margins. Why? Are your margins too low? Are the suppliers to blame? How can independents overcome the fear factor in raising prices?

Andy Williams: Everybody around this table and probably the industry, would say ‘yes’, our margins are too low. No-one has ever told me they are making too much money. There’s overcapacity in the marketplace and we’re all facing a smaller slice of the cake.

Simon Clark: But, who’s driving the margins down? All of us!

Alan Boyd: Smaller builders have more time and pressure at their end to shop around for smaller items. There may have been an occasion where you could price the bricks for an extension for a single house competitively and pick up the rest by right, but not anymore. They are shopping around much more.

Simon Clark: We’re the ones who are having to do the pricing even though the end-user may be shopping around.

Tom Parker: The perception on our side of the trade counter is that everybody knows all the prices on the catalogue. They don’t! At an independent builders’ merchant, the service quality is normally very high. But, our price structure is being knocked down because the builders do their shopping and then come back to the person who has the knowledge, the stock and the availability. Inevitably, they want us to supply them at someone else’s price. Another factor is the internet. They are looking at it but they don’t want to buy from it. They are more informed, but want to buy from the local guy, because they can knock on his door if things go wrong.

Simon Clark: The internet market is solely based on price. That erodes everything we want to do, which is to give service.

Alan Boyd: Here’s a perfect example: I’m buying some new IT hardware from the people who look after our network, but I’m going to look it up on the internet to make sure that I am not paying them too much.

Tom Parker: What is too much? There are a lot of customers out there at the moment who do not have the knowledge. They don’t have apprenticeships these days so they want someone who does have knowledge. We are winning more than ever before because they will come to us to remove the hassle and want us to solve the problem. But then, they also want the cheapest price as well.

Simon Clark: And you do it. Smaller and medium-size builders don’t want to buy materials; it’s a pain for them. If you can take that pain away, if you’ve got that customer talking to you – British people are so reserved, they won’t take the order away from you – you won’t lose it.

Tom Parker: That means having staff in your branch of the highest calibre to be able to do this. We’ve all been thorough a lean period of time and then the weather gets better and all of a sudden there’s business out there. You can be as hard as you wish, but you still get no profit or turnover.

Andy Williams: All the merchants offer their staff training. One of the basic things we are taught is ‘ask for the order’. What happens to the guy who comes in with a set of drawings and says ‘do me a take-off’. You end up with bricks and blocks and some other pieces and an order for £10 000. Would he then say ‘now give me an itemised list’. Once he has got that price, what stops him from going elsewhere?

Nick Walley: Isn’t that through a lack our knowledge and serviceability? If you go and buy a car, you don’t go and buy the tyres from somebody else.

Simon Clark: It’s the quality of your staff. We are looking for people through agencies.

Bob Butler: Construction is not a sexy industry. Everybody wants to work in IT these days.

Simon Clark: Is that because every- body goes to university? I got into builders’ merchanting because my preferred career choice didn’t work out.

Tom Parker: Isn’t that always what happens in any business?

Simon Clark: The levels of expectation from the younger generation are high. If you ask them: ‘do you want to get into the building industry’, it’s a case of ‘no thanks!’.

Tom Parker: On top of that they have a stonking great student loan. They are then in their early 20s and want more salary because of it. They want more salary, but they have nothing to bring to the company. They have no knowledge. You wish more people left school with A-levels and then came into the business. They would be more use to us. We could educate them in the way we want them to work. How many people who go to university end up doing the job they studied for?

Nick Walley: Travis Perkins now runs a management scheme. It used to be a graduate scheme.

John Churchett: There’s also a concern on the building side about a skills shortage.

Simon Clark: Things aren’t that tough enough anymore. Young people have been given everything they want and there doesn’t seem to be any ‘want’ anymore. That’s because everything is so much more achievable.

Bob Butler: There are too many distractions.

Tom Parker: They earn money so that they can go travelling again. I see that all the time.

Alan Boyd: Nick mentioned a management scheme. Would you say it has been downgraded?

Nick Walley: It’s a case of picking the people at the right level at the right age. We have plenty of people who apply.

Simon Clark: Is it easy to select the people you want to go through the scheme?

Nick Walley: It’s easy to select them; whether they actually stay is another matter. Most of our middle managers all came through that management training scheme.

Tom Parker: Our industry, like many others, is losing its ‘characters’. They seem to be a dying breed. Is that because of management training systems?

Bob Butler: Those characters tend to be the owners of businesses. And, there are less merchant businesses now than there were 10 or 20 years ago.

Tom Parker: There are definitely less businesses now.

Nick Walley: Look at the consolidation of the industry – it’s a big factor.

Alan Boyd: We have seen a big change to that over the last four years. You now see independents expanding more rapidly. In the South East alone there’s Chandlers, Covers, Parkers, PGR, Lawsons – every one has expanded.

Andy Williams: Buying groups are more relevant than they were in the past.

Alan Boyd: It would be very hard to survive nowadays without the presence of those groups. Margins are about buying at the right price as well as selling at the right price. Without the buying groups you would have the right price for a few items, but certainly not across the range.

Tom Parker: Some of the buying groups don’t help our margins, generally. Cost plus pricing is the most dangerous weapon in the world if you don’t have the technology. And, some of the smaller merchant buying groups, do not. You buy better, you just put a margin in plus 10%. All you are doing is giving away your benefits straightaway.

Nick Walley: You have a 10% gain on your purchasing price because you are buying through a buying group and you give it away.

Tom Parker: Now, you have an enhanced cost because you are paying 10% less. You look at the computer screen and put 10% or 20% on a sale and your benefit has been passed on to the customer.

Simon Clark: You now have an enhanced margin. You buy blocks at 20p more and rather than say ‘here’s a new cost price’, you put in a fictitious cost price.

Tom Parker: We cannot do that because our invoices have to be certified with the right cost on them. What we never give people are the rebates.

Bob Butler: Isn’t that how the buying groups are structuring the deals? They give lower cost and lower rebate.

Alan Boyd: It depends on the product. Sometimes, if you make a saving, you have to enshrine that saving in rebate – almost to protect yourself from your own staff.

Tom Parker: We structure and save ours. If you an owner of a business in a one-branch operation, you haven’t got he overheads of some of the other companies or groups. If someone has a £3m turnover and is buying from any of the groups, they are buying outside of their league.

Simon Clark: There are some instances where we may fall into that category. A buying group becomes a bigger beast to manage because you have to make sure they are representing you.

Alan Boyd: You have to balance it, as well. You have to do a deal that suits your number of depots but also one that suits a single-branch merchant in Yorkshire or Scotland. Sometimes, when you structure the deals, you have to find a national solution. You can’t say everything is answered by the buying groups, but the benefits are there.

Tom Parker: Cost plus is still going on and in difficult times, it does not enhance our margins. It damages them.

Nick Walley: Travis Perkins has a list price and there is no negotiation.

Simon Clark: Do you find you are having to be more competitive with your selling price?

Nick Walley: We are all chasing the same amount of market and reducing our margins. The industry lacks skilled salespeople.

Alan Boyd: You get the impression that national merchants are trying to improve market share and change their pricing policies. Would you lower your costs or just lower your margin expectations?

Nick Walley: Most of our branches would say that their biggest competitor is the little local merchant who is cutting their prices. Merchants are just not strong enough in holding their margins and their selling prices.

Andy Williams: Where do you draw the line? If you say ‘I’m going to sell a bag of cement – a commodity product – and I’m going to make 20p’. Then somebody comes in and says ‘I’ll pay 19p’.

Nick Walley: If you’re a good salesman you’ll tell them to go and drive another 10 miles and they have lost their penny!

Bob Butler: You take each job on its merits because nobody is going to make a living on 20p.

Simon Clark: If you know you are offering value to that customer and if we ask them, they’ll tell us that they like ringing Tiptree because when they put the phone down they know that if we say it will be ready tomorrow morning, it will. 

We sell cement in Essex to a brickwork contractor. He said he was willing to buy cement at ‘X’ price because he could get cement elsewhere at a silly price. The conversation expands, I give him a cup of coffee and it transpires that the company’s lorry broke down. That company couldn’t even afford to maintain their lorries and you want me to cut my margins and my service and become the same as that company?

Tom Parker: Profit is not a dirty word. We all need it.

This article first appeared in the September issue of Builders' Merchants News.

Part 2 of the Builders’ Merchants News/H+H Round Table