The falling profitability of wholesalers should be a concern for everyone, says David Gilroy.
Mature oak-panelled walls. Polished mahogany table. High-backed leather chairs. The air sweet with the smell of beeswax polish. Papers carefully laid out in order.
This boardroom has the timeless air of permanence, of careful governance and stewardship. The company has a long and diligent history of wholesale trading. Today, the calm, unshakable charted course of steady progress is going to be shattered by the wrecking ball of unwelcome numbers. Everything comes down to this. The numbers can’t be denied. For the first time in the company’s history, the net profit will be stated at below 2%. Today, the world changes forever.
The company in question here was Nurdin & Peacock. It was seen as an industry leader in its day.
More than 20 years later, a recent report showed overall sales for the 30 biggest wholesalers are up 5.6% year on year. However, profits were down by 50.7% for the same period and the net margin across all operators was 0.93%. Out of the top 30, only eight were reporting net margins above 2%.
Accepting that published figures can’t always be taken at face value, this represents a serious erosion of net profit. If sales are vanity and profit sanity, there’s a case to be made for certifying the entire wholesale industry insane.
Of course, comparing wholesalers’ profits today with those of days gone by is spurious. Times have changed, most notably inflation and interest rates. In the halcyon days of wholesale, inflation was running high and stock profit opportunities were aplenty. Bulk purchasing of selected dollar-influenced commodity goods represented a better investment than money on deposit.
There were also rich stock profit opportunities to be harvested on tobacco buy-ins, promotional bonuses on invoiced goods-in rather than today’s predominantly front-end sales-out model.
Today’s wholesalers have much tougher cost challenges to manage: scaling up of deliveries, the hidden cost of click and collect, the impact of the minimum and living wage on labour costs, the tightening labour market, and the insidious cost of credit and bad debts. In short, they are being squeezed at both ends.
Then there’s the internet, which has opened up the market to a whole range of new competitive service providers, hungry to sell to the small retailers and foodservice operators.
Should we be worried about all of this? Most definitely we should. The health of wholesalers is of critical importance to the UK food and drink industry. Wholesalers provide the only means of offering a comprehensive range of goods to such a diverse customer base. In so doing, they take in bulk deliveries and then break down loads into digestible parcels for the small operators unable to handle dozens of small direct deliveries every week.
Wholesale continues to be the most effective channel-to-market for suppliers, too. It also offers unique added value services in retail, such as symbol fascia development, merchandising support and own-label ranges. And in foodservice, you have menu solutions development, new product ranges and key dietary information. In many cases, these services are vital for the smaller operators.
Wholesalers need to be profitable to survive. They need to be in a position to invest in sales development, people and their operational infrastructures – particularly systems and productivity. Failure to develop these areas will make them vulnerable to competitors and will leave the industry on a knife-edge with fewer choices.
For the sake of us all, I’d like to see wholesaler profits being nudged back up. Then we won’t be witnessing any further wrecking ball demolitions.