By Ron Sturgeon
I continue to hear from folks who say their business is tougher than it has ever been. I always chuckle when I hear from a recycler that business in his area is off, after I’ve just spoken with another recycler in the same area who is having record sales and/or profits. How can this be?
First, it is tough. I am not in denial. Cost of goods is continuing to rise, and I think if you are buying the same way you were a year ago, it has likely increased 5 percent. Some folks have made changes in their buying, but most haven’t. And, sadly, because folks haven’t cut their expenses, a similar percentage of their profit has gone away.
Most affected are those who are buying 5 year and newer vehicles, especially if the average cost is more than $2,200 or so per vehicle.
The reality is that gross margins have declined for many reasons. It won’t do me any good to go over the reasons because we can’t change most of those factors.
Here is the solution. You simply have to understand what is selling. You must know which parts to inventory and pull and how to price your parts competitively. Also, maintaining your margins on the best parts must be protected. Your yard management system will provide you with information in these areas, with the level of details depending on your platform. You simply must sit down and review your buying practices.
You need a good level of confidence in your pricing; don’t cut prices when it isn’t warranted but slash them when appropriate. In the past, we made these decisions off the seat of our pants, but that just doesn’t work anymore. You MUST have your buyers go over the cars carefully and reconcile the potential purchases with your demand.
Recyclers who are using the tools they have are protecting and even lowering their costs, while increasing turns and cash flow. Don’t kid yourself – while you are wringing your hands, one (or more) of your competitors has figured it out, and they are slowly getting traction and market share at your expense.
The Coronavirus Impact
I know many of you are reeling from the current crisis caused by Coronavirus. I hope that you have taken these two steps:
1. Applied for your PPP Loan through your bank.
2. Applied for your SBA Disaster Assistance loan.
I’ve talked to lots of business folks who were already not as profitable as they should be. Right now, the smallest of recyclers are dropping like flies. I have 11 salvage yard tenants, and in the last 20 years, there has been almost no turnover until the last 6 months. In that recent period, 3 have closed.
They were still relying on retail and the phone calls, and missed their turn on several occasions to change their business – such as put their employees on pay for performance, advance in computer use and skills, and more.
Many of these folks are going to say coronavirus did them in, but I believe they were already on the edge. Some of you whom I’ve spoken with have made deep cuts, which are likely well-thought out, yet could also be a potential issue. My old friend Greg Winfield, who is a corporate restructuring guy, says, “Cuts are needed, but don’t cut into the bone.” Make cuts wisely.
For instance, one facility owner laid off or cut the wages of almost every employee. And because he needed to pause buying cars, he laid off his buyer. The take-away is – never forget how many years it took you to find and train key employees. Your competitors would love to have those folks. Also, since buying is a core competency, which likely affects close to 50 percent of every dollar we bring in, losing that person and having to retool to buy cars is much more key than, say, training a new dismantler.
With the PPP program, keeping every employee working at full salary, or paying them to go home, positions you to be one of the first to spring back and be at full speed with your top folks. And the government forgives the loan if you do it properly. Losing people is just short sighted and unnecessary in my opinion. Be thoughtful.
If you are a smaller facility, hunker down, weather the storm, and promise yourself that you will make significant changes in how you operate when this is over. Follow through and become a change agent or find someone in your organization who can fill that role.
Maybe it is really time to put your son or daughter in charge!
Ron Sturgeon, speaker and author, regularly shares his expertise in strategic planning, capitalization, growing market share, and more, providing his field-proven and high-profit best practices. Reach him at (817) 834-3625, ext. 232 or email RonS@MrMissionPossible.com.