December 2005                return to newsletter contents page

Distributor Profitability Trends from 2002-2004

The five exhibits in this report demonstrate how distribution organizations weathered the recession of 2002-2003 and recovered in 2004. On each of the exhibits, the “all distributors” number reflects the median results across forty different lines of trade where the Profit Planning Group collects data on an annual basis.

The median result minimizes the impact of unusual circumstances in one or two industries. It can truly be thought of as representative of all of distribution. On each exhibit results are shown for all of distribution and for your unique line of trade. In any instances in which the graph does not show a line, the appropriate figure is zero.

The Recent Trend in ROA

Almost every one of the forty lines of trade experienced a decline in ROA in 2003 and a sharp recover in 2004. ROA is profit before taxes expressed as a percentage of total assets (or total investment) in the business. In 2003, the typical figure dropped below 5.0% which is the point at which firms should begin to think about asset redeployment.

In 2004 ROA returned to acceptable levels, coming in at just over 7.0%. However, even this figure is slightly below desirable performance. Industry ROA levels in the 8.0% to 12.0% range are considered good.

The Change in Gross Margin Percentage by Year

The overall change in gross margin percentage from year to year followed a counter-intuitive pattern. In 2003 the typical industry added slightly less than half a point to its gross margin percentage, despite recessionary pressures. During the recovery, gross margins than actually declined.

On an industry-by-industry basis, there were significant deviations from this pattern. However, overall firms found ways to use margin to offset the impacts of recession during the down year, but then moderated those changes somewhat during the period of recovery.

Change in the Operating Expense Percentage by Year

Operating expenses followed the classic pattern of recession and recovery. Specifically, operating expenses increased as a percent of sales in 2003 due to stagnant sales growth in the best case and declining sales in the worst case. During 2004 the pattern reversed as reasonable levels of sales growth returned.

Change in Inventory Turnover by Year

There was very wide variation in the inventory turnover pattern. However, for the amalgamation of industries studied, there were modest increases in inventory turnover in both 2003 and 2004. This reflects the continuing emphasis on cash flow management throughout distribution. Of all the factors that drive cash flow, inventory is by far the most controllable.

Change in the Collection Period by Year

Not surprisingly, the collection period stretched out slightly in 2003. Despite the importance of accounts receivable on cash flow, firms always become more willing to let payments stretch out during a recession. The fact that the collection period continued to move up in 2004 reflects a reluctance to make dramatic moves in collections until the recovery is completely solidified. Collections will likely come back into line in subsequent years.