How Price Decreases Can Imperil Distributor Profitability

By Al Bates Managers need to know is the impact that falling prices, sporadic or otherwise, have on financial performance. Over the past few years, distributors have enjoyed the benefits of continually rising prices. By passing along supplier price increases percent for percent to customers, firms have recorded record profits in almost every segment of distribution. Data from financial benchmarking programs indicate that profits in 2022 were higher than they have been in more than 20 years. In fact, in some industries PBT (Profit Before Taxes as a percent of Total Sales) was twice as high as in any other year in history. Such is the power of supplier price increases passed along to customers. As hyper-inflation has given way to more moderate rates of inflation, the increase in profits has moderated. However, the overall change in the margin and expense structure flowing from inflation remains. There is seemingly a new plateau. Unfortunately, as Herbert Stein so wisely stated: “If something can’t go on forever, it will stop.” Not only is inflation moderating, there are some anecdotal incidents that suggest that some supplier prices are falling. There is no need to panic about deflation at this point, even though China appears to be in such a brutal position. A more realistic assessment is that distributors are facing sporadic price reversals. Whether they remain sporadic or burst into deflation is an issue for economists. What managers need to know is the impact that falling prices, sporadic or otherwise, have on financial performance. This article examines supplier price reductions from two perspectives. The first is the actual profit impact. The second is strategies for offsetting declining prices. READ FULL STORY >>