Glasgow-based bathroom retailer Derek Miller warns anyone tempted to involve themselves in the resurgent contract market of the potential pitfalls
July 1, 2008 was a date that will forever be etched in my mind, for all the wrong reasons. It can be summed up in the stark phrase ‘economic collapse’.
July 1, 2008 was the precise day that house builders downed tools, en masse, and stopped building houses. Activity until June 30 that year had been brisk for housing companies, but the first of July ushered in the second half of their financial years and the last thing needed was any more housing stock. Some nine months after the sub-prime mortgage market collapsed in America, the domino effect reached the UK, and the British banking system stood on the brink of annihilation. National liquidity dried up like a flash flood in the Gobi desert. No one could borrow to buy property, and Britain’s house builders took the brunt of the meltdown. Building sites closed. Mass redundancies were made. Working weeks were shortened for those lucky enough to keep their jobs. The banks foreclosed on their customers and the building industry was left in the wilderness.
As collapse morphed into recession it was clear, to those of us involved in the supply chain, that only strong, hard-working, and very lean companies had even a chance of survival, and that the weak would be wiped out altogether. As the co-owner of a contracts-driven bathroom company that depended upon supplying sanitaryware to Scotland’s house builders, July 1, 2008 will always be my personal ground zero.
Panic
For many firms, indebtedness to the banks and a lack of working capital sounded the death knell very swiftly. For contract suppliers, the situation was made worse by the exposure to large levels of monthly debt; net 30-day payments soon stretched to 60 days and longer. Debtors and creditors panicked and, across the UK, many smaller house-build clients sniffed blood and refused to settle accounts at any level. For many small contract suppliers, cash reserves were wiped out in a very short space of time. Thankfully, at Scope, we had always played a cautious hand, retaining capital in the company and bluntly rejecting the banks’ lavish offers of support in better times.
I could write volumes about what my business partner and I did to survive, and what actions were taken to protect the business we had worked so hard to develop. The lessons learnt about managing overheads, cash, and suppliers will be forever ingrained in our DNA; these lessons will never be forgotten. Doing business in our sector at that time was akin to swimming in a stagnant pool full of very nasty piranhas.
Fast-forward to 2016, however, and the turnaround in the fortunes of bathroom companies – both manufacturers and suppliers – that specialise in the contracts sector, has been remarkable. If the years 2008 to 2011 were about survival, and the 2012 to 2014 period was about nurturing growth opportunities within a tight framework, then 2015 to 2016 is about coping with an explosion of activity, the like of which I have never before witnessed. This is, of course, a great problem to have, especially after an extended period in the doldrums.
As reported in kbbreview in recent months, those manufacturers involved in the contracts sector are enjoying growth way above that of retail-only suppliers. Indeed, behind the scenes, many of them are running around frantically trying to ensure that the factories can keep up with demand. In the globalised economy of 2016, they are also trying to balance the needs of different markets all developing at different times; no easy task. This is the time for manufacturers who actually own and operate their own factories to shine, and for those who depend upon China to pause for thought.
If my judgement here is correct and the contracts arena is the place to be right now, does this mean that Britain’s bathroom retailers should be lining up to jump on the contracts bandwagon? A straightforward answer to this business conundrum would have to be ‘no’.
When a contracts-driven business gets the wind at its back and builds momentum, the results can be staggering. Opportunities present themselves, seemingly from nowhere, and volumes build up at a level that can sometimes take even the most experienced operator by surprise. However, the pitfalls of the contract-supply world are too numerous to mention. The most obvious challenge is one of exposure to bad debt. To be a serious contracts player, a company has to be prepared (and able) to offer credit to contractors. Every decision to send out products without first receiving payment carries with it an inherent risk of default. Two or three defaults in quick succession can create cash flow challenges for even the most successful bathroom retailer.
Decline
With the cash supply dented, the stricken retailer soon finds it impossible to settle with its own suppliers.
An inability to pay creditors very soon shuts down lines of supply that make fulfilment of outstanding orders impossible to achieve. At the peak of recession, many companies that looked strong from the outside tumbled like a deck of cards when this spiral of decline took hold – particularly those who spent all their reserves on spectacular holidays, supercars, and five-star lifestyles during the good times.
As things stand, many medium-sized bathroom retailers dabble quite successfully in the smaller side of the contracts market. Relationships are nurtured with small house builders, private hotels, local designers, and building contractors that bear fruit for many years. It is far easier to keep an existing customer than it is to win a new one after all. However, there is a massive jump between ‘dabbling in’ and ‘depending upon’ contracts revenue. Any operator aspiring to develop a contracts-driven business model seriously needs to know what they are doing, as the risks are enormous.
However, as the economy improves, opportunities will present themselves to established, reputable bathroom retailers that will seem too good to turn down. In those cases, sensible, old-fashioned business wisdom should always override misplaced excitement. If something sounds too good to be true, it usually always is.
Whether or not retailers are involved in contract supply, the current upturn in house building is having a beneficial effect on all bathroom retailers. First-time buyers entering the housing market cause a ripple effect right up the housing chain, leading to numerous decisions to install new bathrooms and kitchens. As with previous economic upturns, increases in new-build output are directly proportional to improved performance in the bathroom replacement market.
With online traders now dominating the lower-end sector of KBB land, bricks-and-mortar retailers are well placed to offer the personal service required to take advantage of such opportunities. House building remains the most important industry for driving the economic performance of a country as it creates wealth in a whole host of business sectors.
Given the shambles inherited in 2010, the Government, led by David Cameron and George Osborne, has done an incredible job to get Britain’s economy working again. However, the Chancellor recently pointed out, quite correctly, that many dangers still exist, especially from international economic forces. With their dependency upon the capital-hungry residential and hotel industries, contract suppliers are far more vulnerable to large-scale economic slowdowns than are retailers.
Having experienced the abyss of economic collapse and the damaging effects of recession, we are only too aware of the cyclical nature of contracts supply and live in fear of such a debacle ever occurring again. Pure retailing may be far less dramatic than contracts, but it doesn’t come with anything like the baggage and tension of the volume sector.
While we would all do well to listen to Mr Osborne’s words of caution, we can surely be permitted a short period of reflection that our collective efforts in the toughest of times have strengthened our positions, leaving us squarely placed to take advantage of the outstanding opportunities that currently present themselves.
At the very least, we need to hope and pray that we will never experience another July 1, 2008.