By Craig Webb, President, Webb Analytics
The first wave of dealer reports for the 2022 Construction Supply 150 reveal both a happy and a worrisome trend. The happy news is that dealers' revenues shot up last year, surpassing even 2020's COVID-fueled rise. The worrisome part is that these same dealers also have incurred a substantial rise in personnel costs.
Granted, virtually every company's revenue exceeded their percentage increase in payroll. And there's such a frenzy to find product and meet demand that contemplating longer-term issues gets pushed off the day's to-do list.
But it's a problem worth pondering. What will happen to a lumberyard's finances if $1,000 lumber drops to $500, or even back to pre-COVID numbers in the $300 to $400 range? What will happen when prices for windows and shingles and rebar decline? The impact from those revenue drops will be offset somewhat by the reduced commissions and bonuses you're paying your sales reps, but you can't make your yard workers and back-office staff take pay cuts. And even sales reps typically get a draw.
The bottom line is that, as dealers scramble to get through today's chaos, they're also unknowingly raising the bar on themselves, counting on higher revenues in order to cover higher costs. So long as prices remain elevated, everything works. But if they return to Earth, it could be tough for many dealers to achieve even the minuscule 3% net profit level that had been the benchmark.
What to do?
* Track whether gross margin percentages are holding up as prices go up. GMs that don't could be suffering from poor pricing strategies.
* Follow advice from experts like Ruth Kellick-Grubbs and measure sales by the unit or piece, not just by the number of dollars collected. That can help reveal whether high pricetags on product are obscuring the fact that less material is being moved today.
* Set a target range for personnel costs as a percentage of revenue, adding staff only when costs fall below the target. Likewise, be willing to cut staff when costs exceed the target.
* Explore lean operating practices.
* Invest in software that makes the company more efficient.
There are lots of good reasons to pay workers more, both out of choice and out of necessity. It's a problem only when income starts to exceed outgo. We're not at that point now, but times change.