International Business Bustles at Domotex Asia Floor Covering Show and Wood Summit

I just returned from China where I attended Domotex asia CHINAFLOOR ("DACF") and  participated in two international summits in which representatives from around the world reported on regional and global issues affecting the flooring industry.  I return with some strong impressions to share.

First, if there was any doubt about the business climate in China, that question was answered when the opening gate was flooded with 20,000 up beat visitors.  They were anxious to see the products of 1,300 exhibitors from 70 countries, including Armstrong and Mannington among other U.S. exhibitors, all hoping to penetrate the expanding Chinese market.  The show included the largest collection of bamboo manufacturers of any trade show along with wood flooring, vinyl, carpet, rugs, manufacturing equipment and accessories. First day attendance set a record for the 12 year old show with a significant increase over last year.  While pre-registration was up, the number of on-site registrants nearly overwhelmed the show’s staff.

Even for this veteran of the global flooring market, that “global” reality was brought home in a striking way when I participated in two international summits focused on wood flooring.

I was honored to join high ranking government officials to make the opening remarks at the first World Flooring Forum.  This gathering explored the impact and role of wood flooring on the environment, developing low carbon economies and global opportunities. This was an all day event attended by over 500 people. The U.S. was represented by Mark Elwell of the National Wood Flooring Association ("NWFA"), David Sheehan of Mannington representing the North American Laminate Flooring Association ("NALFA"); Jim Traweek of Maretti USA and John Chen from the American Hardwood Export Council ("AHEC"). This meeting underscored the need for the world’s collective effort of governments, suppliers and consumers to make progress in building low carbon economies using sustainable practices.

On the second day, the Floor Covering Institute moderated the third annual International Wood Flooring Summit, an event organized jointly by the DACF, the Floor Covering Institute and Floor Covering News.  Ruud Steenvorden and I were pleased to bring together representatives from Europe, Africa, the U.S and host country China, to report on changes in governmental legislation and environmental concerns affecting the wood flooring industry.

At the summit, Jürgen Früchtenicht, representing the European Federation of Parquet Importers, presented the requirements of the European Union’s recently enacted Forest Law Enforcement Governance and Trade ("FLEGT") legislation.  While much of this law is still being finalized, it serves as a warning to manufacturers around the world that Europe will not support trade in illegally harvested wood products.  Früchtenicht  pointed out that like Lacey, FLEGT unfortunately focuses on the legality of timber rather than sustainability.  Still, it is a significant step in the direction of protecting the environment.

Mark Elwell updated the group on recent Lacey Act Amendment activities, dispelling any question about the American government’s willingness to spend the money needed to enforce Lacey.  Elwell reported on the recent raid of Gibson Guitar by federal agents of the Fish and Wildlife Service to confiscate rosewood that they say was illegally harvested.  Read the original breaking news on the Gibson story here.

Obvious to all was the fact that wood flooring offers the environmental benefit of carbon sequestration.  Trees that are not harvested but are left to decompose in the forest release all the carbon dioxide they absorbed during their life back into the atmosphere. Meanwhile, timber that is manufactured into wood floors continues to sequester that carbon. In Germany, there is an unfounded concern that wood floors are not good for the environment. This should be a warning to our industry to “tell our story” before uninformed perceptions becomes a reality and hurt our sales and our environment.  Well managed forests and sustainable manufacturing processes combined make more than just a strong story, they can make a difference.

Jim

Jim Gould is President of the Floor  Covering Institute

Welcome Carpet One Retailers to the Floor Covering Institute Blog Site

We are always happy to see new readers and that happened recently in a noticeable way when Carpet One retailers started visiting the Floor Covering Institute blogsite in large numbers.  You got my attention - it's hard not to notice when Carpet One does something in unison. I determined that you were linking in from your own members.net where your webmaster had placed Lew Migliore's post about moisture in concrete. You should know that Lew is preparing another post about moisture problems in hard wood flooring plaguing retailers.  Look for that post very soon.

From the analytics behind the scenes (they tell how many visitors come to the site, what they read, how long they stay, etc) I could see that our new visitors also read Chris Ramey's post on Lumber Liquidators, Jim Gould's post on avoid cash traps, my post on retailers selling solutions, Stuart Hirschhorn's recent post on statistics and the industry recovery, among many others.  We are pleased you found the content here interesting.  It would be most helpful to me as editor, to know what topics you would like to hear more about.   In fact, I'd really like all of our readers to respond to this question:

What are the top two industry related issues that keep you up at night?  

You'll notice at times that even members of our own consulting team do not agree on every topic...that is part of the reality of speaking with an independent voice.  We do not have an agenda, other than to communicate and share information and opinion. We want this site to be a place for the industry to explore important topics and that makes receiving input from our readers very important.

It's a small industry, we know many of you personally and you know us.  It feels like talking with friends and you are welcome here any time!

Susan Negley
www.floorcoveringinstitute.com

To comment or respond to my question,  simply look below where you see "Posted by the Floor Covering Institute" followed by a link to comments.

Donato Pompo's Ceramic and Stone Expertise is a Great New Addition to the Floor Covering Institute

We are pleased to introduce Donato Pompo, newest member of the Floor Covering Institute consulting team. Donato is founder of two well-known flooring industry companies focused on improving everything about ceramic tile and stone flooring and the businesses that produce and sell them. They are Ceramic Tile and Stone Consultants (CTaSC) and the University of Ceramic Tile and Stone (UofCTS). Together these companies address every tier of this product channel, from helping quarries and manufacturers produce better products and improve market positions, to providing distributors and retailers with better business practices and installers with the education to understand the complexity of their work. We look forward to seeing his insight and perspectives on this blog and are happy to be able to bring his expertise and resources to you.

Donato’s professional experience is a result of over 30 years in the flooring industry starting with installing, selling, and distributing ceramic tile and stone. He ran his family’s California distributorship, Southwestern Ceramic Tile and Marble Co., then joined Laticrete International (a leading provider of ceramic and stone installation systems) in regional and national sales capacities. He holds an MBA with emphasis in marketing and finance and his undergraduate work was concentrated in biochemistry. He has a list of technical certifications too long to list here - you can click here to read his full curriculum vitae on the Floor Covering Institute website. But first, please read Donato’s story in his own words:

Donato Pompo: I started out as a union installer, learning the nitty-gritty of how to install tile. Looking back, this was very good preparation for what was to come next in my life. After being in the Army and graduating from college, I joined my family’s business in San Diego, working my way up to executive vice president of the successful importing, distributing and retail ceramic tile and stone business. I worked closely with architects, installers and general contractors, educating them about our products and assisting them to design installation systems. Eventually my interest in the latter led me to my next career move.

I continued to provide architects, builders, dealers and installers with technical consultation, but this time I was working with a leading international manufacturer of installation products and systems for ceramic tile and stone, Laticrete International. For seven years there I wrote installation specifications, developed and implemented training programs, managed a large sales force, developed and implemented marketing plans and promotions, and investigated and resolved many installation failures. We were one of the first companies to target and work with floor covering distributors and dealers to help them learn and sell ceramic tile.

The idea of establishing my own business had always been brewing in my mind; this last rung of the career ladder cinched it for me. I decided to pursue my goal to create a company to use the knowledge and education I had gained about ceramic tile, stone, installation systems, and business in general. I knew there was a need for consultancy in the industry since I had witnessed firsthand the enormous cry for help during earlier years of my work experience with all types of companies and individuals who were frustrated and desperate with job problems, and marketing and business challenges. It was then that Ceramic Tile and Stone Consultants was born!

What do I mean by a “cry for help?  I saw distributors and contractors who wanted to grow their business or manage it better but had no consultants to turn to who had both firsthand industry experience and the business education to help them solve their problems or improve their business. I saw distributors and contractors who were dragged into job problems and unjustly blamed for the failure and expected to pay for it, and owners who got substandard installations or failures and had no way to know that the work was below industry standards. There was no one available with the comprehensive experience, scientific background and professional approach to consult with them and help them defend themselves.

Today my business is divided into three main categories: (1) consulting on job installation failures and the services related to avoiding those failures, (2) education/training, and (3) business and marketing planning services. Learning what causes failures and how to avoid them is the focus of the forensic part of the business.

 
The training arm of the company is called the University of Ceramic Tile and Stone (UofCTS). I have always believed that education and training is key to being successful in business. Helping your employees to grow will grow sales and profits. The University is a Learning Management System (“LMS”) web-based campus using the same technology that higher learning institutions use where self-paced courses and web conferencing is offered. Our topics are geared towards installation methods and standards, product information, sales techniques, and business training, which are relevant to the ceramic tile and stone industry.

Some of you may have seen the series of instructive cartoons I developed in the late 80's called “TileWise” to help educate members of the industry. You can view more of them on our website.

My commitment to the ceramic tile and stone industry and the floor covering industry in general is unwavering and that makes joining the Floor Covering Institute a logical place for me to reach more of you. I sincerely believe that information and education is a must in this age where the customer expects and oftentimes insists on being informed. Research, education, and planning are the key operatives for avoiding problems and driving success with an intelligent decision making process, which I hope to continue to help perpetuate within our industry using my companies and the Floor Covering Institute.

Thank you for your interest and I welcome your questions and comments.


Donato Pompo

Ceramic Tile and Stone Consultants, Inc.
donato@CTaSC.com

Donato is certified as a Ceramic Tile Consultant (CTC) and is the past chairman of the Ceramic Tile Institute of America Technical Committee, and a member of the ANSI and TCA standards committees. He is a Council-certified Microbial Remediator (CMR), an architectural CSI member and is certified as a Construction Document Technologist (CDT). He is a member of the Forensic Consultants Association (FCA)  past board member of the Ceramic Tile Distributor Association CTDA, a primary contributing writer and researcher for the Catalina Stone Industry Report, and is a frequent author and speaker for the ceramic tile and stone industries. He is an active member of ANSI A108, APSP Association of Pool & SPA Professionals, CSI (Construction Specifications Institute), ASTM C18 Dimension Stone committee, CTDA (Ceramic Tile Distributors Association) and Chairman of the CTDA Education Committee. He is a member of the CTIOA (Ceramic Tile Institute of America), past Chairman of the CTIOA Technical Committee, member of the FCA Forensic Consultants Association and the FEWA Forensic Expert Witness Association. He is member of the IAPMO Uniform Plumbing Code, IAQA (Indoor Air Quality Association), ISO TC189 committee, MIA (Marble Institute of America), NTCA (National Tile Contractors Association) and the  NTCA Technical Committee, an NTCA Recognized Consultant, particpant in the TCNA Tile Council of North America Handbook committee, Tile Heritage Foundation member, and WSCTA (Western States Ceramic Tile Association) member.

What Lessons Should We Learn from Floor Covering Leader, Lumber Liquidators?

The most successful floor covering retailers of late are those that seemingly remain outside the traditional industry; Home Depot, Lowes and Lumber Liquidators.  Home Depot and Lowes, along with their lesser home center competitors, have taken about 25% share from independent floor covering dealers.  Most independent "Mom and Pop" dealers aren’t aware of the amount of business they’ve lost because the Lowes and Home Depot customers never darken their door.


The newest competitor diverting customers from traditional floor covering stores is  Lumber Liquidators.  With a 180 stores and growing, they’ve made a substantial impact on the hardwood and laminate industries.  Again, most traditional floor covering stores don’t know it because Lumber Liquidators’ customers don’t bother shopping around nor are they part of the traditional floor covering community.  To date, Lumber Liquidators owns an 11% share of the hardwood category and 6% share of the laminate category.

A private equity firm recently asked me whether there was a risk that another competitor would start a chain of stores in direct competition to Lumber Liquidators.  My response was “Who will fund a chain of small stores in less than ideal locations managed locally by guys that look like they belong on a fork lift?”  His response was “Point well taken.”

Forbes recently named Lumber Liquidators the #1 Small Public Company in America.
Lumber Liquidators' (NYSE: LL) market value as of February 20th was over $621 million.  To put in context, that is over 20 times the market value of Dixie Group (NASDAQ: DXYN).  Is it possible LL could be worth more than the combined value of all American independent floor covering stores who have been bleeding for three years?  Not bad for a little store started by a building contractor in 1994.

Sun Trust Robinson Humphrey tells us that Lumber Liquidators will have 224 stores averaging $3 million by the end of their 2010 fiscal year.What is the magic that makes Lumber Liquidators so successful?  They break all the rules of retail success.  Or do they?  Their assortment is concise with only 350 skus; they don’t confuse customers with selection.  Their gross margin has been hovering around 36%, and their pre-tax margin is bumping 9%.  Assuming they’re buying properly (and we all believe they do) and eliminating most distribution expenses, their value proposition is very strong.  Controlling costs and supply, and investing in marketing are elements of Retail 101.

During their most recent conference call with investors they claimed they had the highest quality and the best guarantees in the industry.   I wonder what you think ?

Here are some more Lumber Liquidator facts:
•    They buy direct from Asia and claim to control 90% of the output from most of their suppliers.
•    They believe they compete head to head with independent retailers – not home centers.  
•    Most showrooms are between 800 and 1,000 square feet.
•    The average transaction is $1,570.
•    It costs about $50,000 to open each new store.
•    New stores average $2 million their first year of operation.
•    Their focus is retail consumers – not new construction or builder work.
•    Half of their customers install the product themselves.

Their success is not an anomaly in the flooring industry.  The nation’s leading tile company, with a 25% share of the market, is Dal-Tile. The obvious similarity with Lumber Liquidators is remarkable; hundreds of small stores in warehouse locations.

So, the retail leaders of three (hardwood, laminate and tile) of the five major floor covering product categories operate in small warehouse locations.  Why not carpet and vinyl?  Who will be first?  Is this the future of floor covering?

I’d like to know your thoughts.

Chris

Chris Ramey is president of Affluent Insights and a member of the Floor Covering Institute.

Concrete Moisture Leading to Flooring Failures - Is this an Epidemic?

Sheet vinyl  lifting off concrete substrates that looks like blistered skin from a burn, wood flooring turning up at the edges, carpet tiles emitting foul odors from reactions with “wet” slabs.  All of these failures in floor covering occur daily around the country plaguing flooring contractors and end users.  Is this a flooring conspiracy or something more sinister?  Well, it’s not a conspiracy, nothing so colorful as that, and it’s not sinister unless you consider that moisture lurking in the substrates is skulking around waiting to pounce.

What are the reasons for this outbreak of flooring failures?  Have adhesives changed?  Is flooring material different?  Hasn’t concrete been the same for years?  Why is this all happening now?

Adhesives have changed from when solvent carriers were used but adhesives are actually better now.  Flooring products have changed with the onslaught of non-permeable backings which can trap moisture vapor emissions coming from concrete.  Concrete hasn’t changed much but it is finished faster and harder and this limits moisture’s ability to escape.  Most importantly, construction jobs are fast-tracked meaning the job is rushed to completion without enough consideration for the ramifications of this action.

Moisture in the concrete, missing or improperly installed vapor barrier/retarders under the slab and cycling HVAC systems to save energy are the three biggest contributors to the problem.

When changes in the internal environment of a building are caused by cycling the HVAC system, and moisture of convenience (water used to hydrate the concrete slab) tries to equalize, moisture will move from high pressure to low.  When this happens, anything in the way, like flooring, will be affected.  If the flooring material is non-permeable, meaning moisture vapor emissions are trapped and unable to escape, it will push the material off the floor.  Sheet vinyl will trap the moisture,wood will absorb the moisture; and moisture and alkalinity can affect the PVC in carpet backing and create an odor. 

Failing to place vapor barrier/retarders directly beneath the concrete will allow moisture from beneath to move upward into and through the slab affecting the flooring material installed on top of it.  Fast tracking- installation often means concrete is not allowed to cure for the appropriate length of time. Installing non-permeable flooring material on top of it is a recipe for disaster.

Installing flooring before the substrate is in the proper condition to receive it allows the laws of physics to work against you. This condition is a daily challenge to flooring installations and results in millions of dollars in claims and losses for the industry. If we keep going the way we are, paranoia will certainly accompany every flooring installation of hard backed goods.

Changes in the way flooring is installed and the materials we use have to happen and the buck stops at every level of our industry. Construction supervisors in the building industry must stop fast-tracking concrete before floor installations and specifiers have to call for moisture retarders under concrete before the epidemic will stop.

Fortunately the minds of men feed on challenges and this is certainly so in the flooring industry.  Products do exist to combat problems and make installations easier.  The advent of the new Freelay® backing and installation system, for example, allows for any carpet to be installed without using an adhesive. This system works extremely well on substrates that would typically cause installation failures by traditional means.  The EnviroStix™  installation system for hard surface flooring such as sheet vinyl, vinyl tile, LVT and vinyl plank is designed to be used on slabs that would cause an installation failure by traditional means.  Both of these new installation technologies have been proven under the harshest of conditions.  One of the things we do at LGM and Associates is test products and we have tested Free Lay for years.  I have written about it in my Claims File column that appears regularly in Floor Covering News as well as the Commercial Flooring Report published monthly.

Failure of flooring materials and their installation has reached epidemic proportions but there are ways to prevent this from happening. The technology of these systems work but they have been met with skepticism by many in the industry. The technology will prevail over the disbelief driven by the demand of the end user who, once suffering the pain of a flooring failure, will insist on it.

Lew

Lew Migliore is President of LGM and Associates, a technical consulting firm specializing in all aspects of product and installation performance and education. He is also a consultant with the Floor Covering Institute.

Shifting Home Owner Goals Call for New Floor Covering Strategies

A new “buzz phrase” in the floor covering industry is the “new normal" -  that is what life in our industry will be like following the severe decline in the home building segment. This affects every tier of our industry as well as the goals and needs of our home owning consumers. Post-recession home owners may have new goals when it comes to buying floor covering.

The last couple of posts by the Floor Covering Institute have touched on the changing landscape that lies ahead. Jim Gould talked about how post-recession growth often claims more victims than the recession itself and how to make the most of your cash and assets in  “Avoiding Cash Traps as the Recession Slows and Business Grows."  Stuart Hirschhorn posed the question  "Is Hard Surface Flooring Just a Click Away?" which speculated about post-recession consumer spending habits.

In today's post I want to explore if there is a new normal as it pertains to our home owning consumers and how they will treat, more specifically invest in, their largest asset now that the bubble has burst. The flooring industry depends upon the home building and remodeling industries so we need to be aware of how new attitudes might alter both the products and marketing that will appeal to our customers.

In preparing this post, I came across an excellent article I wanted to share with you -  “5 Lessons From the Housing Bubble Bust” by Tamara Holmes of Bankrate.com, a leading source of information about mortgage rates and consumer trends.

Her article makes the point, among others, that the length of time our consumers will keep their homes is going to change.  They will keep their homes longer.  That point alone will surely influence the way consumers approach their floor covering purchases in the future. Here are three of the lessons she thinks consumers should take away from the bursting real estate bubble with my questions of how our industry should respond. What I hope this post will do is generate some thinking and conversation about whether and how we need to change up strategies to take these new goals into account.

Lesson 1: Consumers can no longer count on a home to be worth more than they paid for it when they are ready to sell. Buying and selling homes to trade up over the last decade or more was the old normal.  The new normal means longer commitments to their home – and by extension the floor covering purchased for it. 

Could this mean fewer turns in flooring or could  it mean that homeowners will be more willing to invest in higher quality products?

Lesson 2:  Timing the market to make quick equity gains will be impossible. When home prices were skyrocketing, many people bought homes they could barely afford thinking they’d ride the wave of rising equity since the market was on the upswing. Those days are gone. Instead, she says that our homeowners should be taking a long-term approach to real estate and looking for a home that will enhance their life.

Should “enhancing lifestyles” be a greater part of your marketing strategy?

Lesson 3: The days of treating a home like a piggy bank, that is refinancing to take out cash - even for home improvements - is gone.  

Should our industry be focusing on new alternative financing opportunities for our consumers?

Post-recession consumers may have different goals when buying floor covering in the future. What I find exciting is that no matter which of these lessons homeowners take on board there is an opportunity for retailers to sell floor covering that meets their needs, and this applies to both new construction and remodeling.

Let me know what you think and as always, if you have, thanks for reading.

David   

David Wootton is President of The Wootton Group, an independent flooring consultancy, and a member of the Floor Covering Institute. He is past CEO of both Columbia Flooring and Harris-Tarkett.                                                                          

Is Hard Surface Flooring Growth Just a Click Away?

Observing and analyzing flooring covering trends is my business and this year as I walked through Surfaces, the U.S. flooring show,  I couldn’t help but wonder how the proliferation of click flooring across all hard surface categories would affect the industry.

After almost two decades of steady gains, hard surface flooring’s inroads in the U.S. floor coverings market hit a wall during this recession.  In 2009, hard surface flooring’s share of total U.S. square feet floor coverings sales declined to 37.9% from 38.1% in 2008.  This may not seem significant, however, it is the first time carpet and area rugs gained share in almost two decades.  Hard surface’s share would have fallen even more dramatically, if not for consumers growing interest in lower cost resilient flooring.  The drop in U.S. floor covering sales in 2009 was led by the sharp cut in demand for higher-priced laminate flooring, ceramic tile, wood, and stone flooring. 

So how do manufacturers and marketers respond to the adverse affects of this recession? Is the consumer shift to lower priced flooring products just a sign of the times or is there a permanent change in taste?  Are consumers going to use different flooring in the smaller, less costly single-family homes and apartments they are purchasing?

I went to Surfaces to see if any of these questions could be answered from the products showcased in Las Vegas.  What I saw was a widening array of hard surface flooring incorporating click technology.  I noticed more clickable bamboo and cork floors and more laminate flooring with ceramic and stone looks.  Valinge was even displaying a new technology, where a powder based solid layer replaces decor paper and thin gray overlay paper that will initially be used to manufacture ceramic and stone type clickable tiles.  I also noticed a new type of clickable plank that has a vinyl surface with a HDF core and a cork backing.  I call this a hybrid plank, and wonder which category the industry will classify this type of flooring.

As I walked the floor at Surfaces, I began to think about how these new products will change the prospects for the hard surface flooring market and wondered.... 

•    Will manufacturers and marketers just wait for stronger consumer spending gains in 2011 and 2012 or will the industry take action now to stimulate consumer demand? 

•    Will a strategy towards click-able flooring products make it simpler and easier to design and install hard surfaces? 

•    Will retailers target these products to the do-it-yourself first time home buyers, who are driving the current upturn in existing home sales? 

•    Will the combination of touch economic times and consumer’s desire for low prices create a greater need for a low cost retail model? 

We know the low cost strategy is already driving hard surface flooring sales to Home Depot, Lowe’s and Lumber Liquidators. What is your strategy to take advantage of the trend towards click-able hard surface flooring? 

I’d really like to hear your opinions and insights; it’s valuable feedback as I work on Catalina’s flooring reports.

Stuart

Stuart Hirschhorn is a member of the Floor Covering Institute and Director of Research of Catalina Research, Inc. which provides in-depth market research on the floor covering industry.

Avoiding Cash Traps as the Recession Slows and Business Grows

If your business has survived the recession so far, congratulations!  And fasten your seatbelts for the challenge of the recession recovery.  The economy has tested everyone’s skills but it isn’t over yet.  More floor covering businesses fail coming out of a recession than during it. 

Why?  As business slows in a recession, companies shrink inventory and collect receivables creating a positive cash flow.  While sales may struggle, there is cash to pay bills.  As business picks up, sales, inventory and receivables grow and suck cash out of the company.  All of a sudden there is no money to pay the bills even though business has improved.

Avoiding Cash Traps

Businesses need to watch out for common Cash Traps and one of the most common is inventory. As David Wootton said in his post last month  "think of your inventory as a big box of dollar bills."  Those dollars can be tied up in inventory too long if the purchasing decision is based on a faulty premise.  Some premises may sound logical but they are not always good business thinking when the total cost of procurement is not taken into consideration.  

 Examples are:

      • “If I buy the roll of vinyl flooring, I can sell it for less because my cost is less.” 

      • Or, “the margin in ceramic tile is twice that of carpet so I’ll sell ceramic and make more money.”  

      • And my all time favorite, “I’ll buy direct and save the 25% that a distributor would charge me.” 

Think about the value of cash that is tied up in the roll of inventory. Factor in the cost of remnant write downs, style obsolescence, damage, insurance, labor to cut, inventory management and a host of other hidden expenses.  A floor covering mill normally charges a 10 percent premium for a cut which is the exact size, color and style the customer wants now and is willing to pay for even before your payable is due!  Isn’t that worth 10 percent? 

Ceramic tile sells at higher margin because it costs more to handle and sell. Freight and damage are huge cost factors.  Just ask all of those people who went out of business trying to sell ceramic at laminate margins.  If you are not ceramic savvy, don’t go investing in ceramic inventory now.

Flooring distributors charge based on the services they provide and those services reduce the retailer’s cost of doing business.  A distributor’s profit is not the 25 percent difference between the truckload mill direct cost and the distributor’s carton price.  The average distributor’s bottom line profit is 2 or 3 percent.  This is not enough of a return on investment to justify “cutting out the middle man” unless you have completely analyzed the cost of providing those lost services yourself. Acting on this premise without knowing the total investment can be a drain on cash that may be needed to fund a recovering business.

In all of these cases, determining the Total Procurement Cost must be part of the analysis before investing in inventory.  

Consider freight, waste, insurance, obsolescence, inventory tax, claims, warehousing and handling, duty and tariffs, personnel to sell it and in some cases sampling.  And don’t forget the cost of capital.

Another kind of Cash Trap

Another kind of Cash Trap is when the value of  assets are under-utilized; trapping cash in a dormant state. There is a car dealer in St. Louis who has aggravated me for decades.  He advertises, “We own our lot and building so we can sell to you for less.”  What he is implying is that he does not have to pay a bank for a loan on his million dollar real estate investment so he can sell cars for less.  What?

There are two things wrong with his thinking.  First, he is ignoring the Cash Opportunity of his investment.  If he has a million dollars tied up in his lot and building, it has a value whether he is paying the bank or not.  He deserves a return on that investment the same as if the cash was in the bank, bonds or stocks.  Secondly, he has discounted the value of these assets for his business.  Should he consider borrowing on the lot and building so that he can fund a long term consumer credit program or buy more inventory?  If these would produce more sales and more profit, it definitely is worth more than an advertising slogan.  I am not suggesting that anyone overly leverage themselves in this economy; but I am saying that when cash is precious, its value should not be ignored.

There is no room for error now. Thoroughly understanding the cost of doing business is key to survival.

I am interested to receive your comments about hidden costs you've found and how you determine cost and profitability in your business.

Jim