Good wholesalers to great ones — quickly

by D. Bruce Merrifield

Ninety percent of wholesale-distributors (WDs) are probably making about one-sixth the pre-tax return on investment (ROI) of the top 10 percent¹. That 90 percent may be working hard, but with flawed assumptions that make them undifferentiated price-takers. Meanwhile, the top 10 percent work smarter at achieving and selling the best total-service offering tuned for one type of customer at a time.

The poor profits of the 90 percent are frustrating to all stakeholders. Shareholders in privately held companies are locked into a lousy investment, especially the minority owners. And meager reinvested profits can’t finance the growth expectations of the other three stakeholder groups. Employees, customers and suppliers will all steadily leave or shift support from the poor WDs to the ones that perform the best. The top 10 percent have all of the best players in the industry offering their services, new ideas and purchasing volume, while the weak get weaker.

That the best employees avoid or leave the sagging majority is old news. According to many surveys, finding, keeping and motivating the best employees has been the No. 1 problem for service firms in the U.S. for the past 10 years. Demographic and employee-expectation trends guarantee that these personnel challenges will only get worse in the next 10 years. Defection rates for the best employees always drop going into recessions like our current one, but jump when the economy turns around and the high-quality firms begin hiring again.

What’s the solution for the bottom 90 percent? How can a mediocre company become great while looking into the teeth of a recession? Some answers are found in Jim Collins’ recently released book, "From Good to Great: Why Some Companies Make the Leap…And Others Don’t." ²

Collins and his research team screened 1,435 long-established, publicly traded firms. They found 11 that were mediocre for a long time before outperforming the rest of the stock market indexes by 300 percent or more for at least 15 years. Two of the 11 are in retail distribution: Kroger, which after 80 years of mediocrity out-performed the indexes by 416 percent; and Walgreen’s, which beat the averages by 1,500 percent.

After thoroughly researching the 11 companies that seemed to get a shot in the arm, Collins concluded they used the following principles:

1. Get the right people – “A” people who can do A⁺  work. With mediocre people, no strategy works.

2. Pick a strategic focus in which you can be the best in your marketplace.

3. Generate a “stop-doing” list that doesn’t fit the focus.

4. Determine the economic measure that will drive the entire plan.

5. Pick, promote and pursue values that high-quality workers can be passionate about.

Collins and his team also found out that these companies didn’t have one big transformational moment or program. Instead, they all became tired of mediocrity and built a new framework of success assumptions along with a focused strategy that took an average of four years to implement and support.

Because most WDs in the grip of the economic downturn don’t have four or more years to create a solution for poor profitability and stakeholder avoidance/abandonment problems, here are some more distribution-specific thoughts that expand upon Collins’ five general guidelines:

1. It’s difficult to find “A” people. Find the hidden ones who are already on the job. Are there some employees who have A⁺ energy they put into hobbies and economic savvy they are leaving at home? How do we induce them to turn on at work? And, how do we create an environment that forces the people who can’t fit into a high-performance culture to weed themselves out?

2. WDs must become much more focused on customer niches in order to tune their total service offering to different strata of customers within a niche. Every employee must strive for perfect service metrics for each niche, as well as make outstanding service encounters routinely happen for best- and target-accounts.

3. On the “stop-doing” list, every WD must shape up or ship out the 50 percent or more customers they lose money on. This involves a number of new assumptions, tactics and skills that must be applied first remedially, and then preventatively, on an ongoing basis.

4. The economic number that will drive the transformation to high performance is “gross margin dollars generated annually per full-time employee.” To attract and keep best people, a firm must pay premium wages for every job. Premium wages can only be afforded by premium productivity-per-employee. Premium productivity can only happen if every employee’s heart, mind and wallet are wired into the work.

5. Create an atmosphere in which employees can become passionate about certain values, including a) achieving, selling and getting paid for the best everyday service; b) growing the value, wages and future career prospects of all employees; and c) being on a winning team where everyone respects and helps each other.

Tough economies can be the best time to get all company stakeholders to consider doing things differently. But turnaround plans must have the right vision, assumptions, tactics and economics. Cutting back and working harder with flawed strategies and assumptions isn’t an option for longer-term survival.

1. From data specially recalculated by Profit Planning Group of Boulder, Colo. () that produces comparative financial reports for more than 35 distribution trade associations. We infer that most service industries may have similar 90/10 ROI differences.
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Bruce Merrifield is a well-known authority on high-performance distribution service management. Find out more about his newest video and accompanying implementation guide by visiting his Web site, www.merrifield.com.

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