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Distributor Profit Trends Sales Grow but Profit Lags in 2011 very year the Profit Planning Group reports on the key profit trends in distribution. The analysis is based upon the results for 40 different lines of trade and benchmarks the key drivers of profitability as well as how management has been able to blend them together for improved results. Since distributors' lines of trade vary widely in terms of their gross margin and expense structure, the report also focuses on how results changed during the year. That is, did the gross margin percentage improve during 2011 or did it decline? The analysis breaks distributors into three broad industry segments: 1. Industrial includes firms selling largely to the factory floor, 2. Construction represents firms selling a wide range of building materials and suppliers and 3. Consumer firms are those selling consumer products or products that are used by retailers of all sorts. For each of the exhibits, results are compared directly to the performance of FEDA members. Prior to 2011, distribution firms followed a somewhat predictable pattern in relationship to the economy. As the economy entered a recession, sales and profits tumbled. Coming out of the recession, both sales and profits improved dramatically. This pattern changed in 2011 (the last year for which information is available). Sales increased sharply, but profits did not.To understand why,it is necessary to examine key profit drivers–the factors that put profit on the bottom line the quickest. They are as follows: E Sales – Increasing sales volume so that operating expenses can be spread across a broad base of sales. Operating Expenses – Reducing the level of expenses, especially overhead, without reducing the level of sales volume. Gross Margin – Increasing the gross margin dollars without necessarily having to increase sales volume. Inventory – Reducing the level of inventory investment without lowering sales. Accounts Receivable – Lowering the level of accounts receivable without a negative impact on sales. Exhibit 1 Return on Assets by Year The Trend in Return on Assets Exhibit 1 tracks the Return on Assets performance for distributors over the last five years. Return on Assets (ROA) measures pre-tax profits as a percentage of the total assets invested in the firm. It is the most important overall measure of financial performance. For distributors, ROA fell from 8 percent in 2007 to 5.8 percent in 2009. Most profitability analysts argue that a 5 percent return is the minimum required to allow the firm to make the new investments in technology, reinvest in physical facilities and maintain a strong position with financial institutions. Distributors, in aggregate, were barely above the reinvestment line by 2009. ROA improved in both 2010 and 2011, but at an incredibly slow rate. By 2011,ROA was only 6.2 percent.At the current rate of improvement, it will take 10 years to return to the ROA that was generated in 2007. To a certain extent, distributors are following the slow-recovery pattern demonstrated by the entire economy. However, for distributors,the pattern is actually very different when the individual profit drivers are analyzed. Sales Growth Profit stagnation could not be attributed to a lack of sales growth. As can be seen in Exhibit 2, distributors experienced outstanding sales growth in 2011.The industrial sector led the way for the second straight year with growth of 14.5 percent. Construction, which had almost no sales growth in 2010, recovered with 9 percent growth. The consumer segment lagged with 5.6 percent growth. Even that should have been enough to substantially improve ROA, though. It should be noted that the sales growth numbers presented here are significantly higher than what is reported for overall growth in distribution. Individual firms enjoy growth when competitors cease business or when competitors are acquired. The total market does not grow as a result of either factor but the firm does. Considering sales growth alone, there should have been a substantial increase in ROA rather than the almost imperceptible .2 percent increase in 2011. Clearly, other factors were offsetting sales growth. continued on page 32 10.0 Exhibit 2 Sales Growth by Industry Segment 2011 Vs 2010 15.0 6.0 Sales Growth-% ROA-% 8.0 4.0 2.0 10.0 5.0 0.0 0.0 2007 2008 2009 All Industries 30 FEDA New s & View s26 New s & View s 2010 FEDA 2011 Industrial Construction Consumer Industry Segment FEDA

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