Convenience Distributors Should Be More Profitable

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Convenience Distributors Should Be More Profitable

By Angela Hanson, Convenience Store News - 04/21/2016

NATIONAL REPORT — The convenience store industry remains healthy, but convenience distributors still need to work hard and think strategically in order to be profitable, according to an April 19 webinar presented by the Convenience Distribution Association (CDA), the trade organization working on behalf of convenience products distributors in the United States. 

The program was aptly titled "Why Convenience Distributors Should Make More Money: Managing Margins & Customer Profitability." Brent R. Grover of Evergreen Consulting LLC, who has 25 years of experience as a distributor, served as speaker.

"There are a lot of variables that go on, a lot of dials that need to be turned to the right position to make money," Grover said, noting that consolidation is happening everywhere within the distribution industry. "The pond is getting smaller and the fish are getting meaner."

To be profitable, distributors need to remember that all customers are created equal, but not all stay that way, according to Grover. Companies should examine their customers' purchase habits to determine whether they are profitable or unprofitable — if it costs more than $1 in operating expenses to generate a gross profit dollar from that customer, they are unprofitable. Some data has suggested that as many as 40 percent of customers could be unprofitable.

Distributors also need to factor in the total cost of serving a customer, which includes multiple components: selling costs, sales support costs, office expenses, cost of making the delivery, and more.

In general, customer profitability can be viewed as a three-legged stool. The legs represent profit margin, order size and cost to serve. These three components, Grover said, will vary considerably from one customer to another.

Every distributor's pricing strategy will also be different based on their costs and profitability target. However, it is important just to have a pricing strategy — which many do not. Grover warned webinar participants to be cautious about immediately opting to cut their prices in order to get business, and encouraged distributors to train their employees to focus on profits over sales. 

"In this pond, it's hard to increase margins later without provoking competitors," he said.  

The webinar concluded with a list of 10 things distributors can do right now to improve their profitability:

  • Customer cash discounts by exception only
  • Fee for customer credit cards
  • Markup freight charges
  • Small order charges
  • Handling charges
  • Profit threshold to earn commission
  • Fix pricing outliers
  • Quote new business at market-driven margins
  • Reassign low-potential accounts to inside sales
  • Read a good book about distribution

The Convenience Distribution Association's distributor members represent more than $92 billion in U.S. convenience product sales, serving a wide variety of small retail formats.