9 Warning Signs Your Wholesale Business is in Trouble

We all know the peculiarities of doing business in Australia. We have a small market in a big country, we have an expensive labour force and we are a long way away from the rest of the world.

Wholesalers have occupied a unique place in our economy for a long time. The wholesaler typically sources product locally and/or abroad in economically viable quantities. They use their skill to predict trends (think fashion, for example), bring the product into the country and co-ordinate ‘delivery’ of the product to the retailer either directly or through a distributor.

More recently, however, our wholesalers are coming under pressure. Large retailers are using their fiscal muscle to deal directly with manufacturers. Travel has become cheaper and we are all becoming more educated about how to do business in other countries. Our Government is working to reduce red tape and technology is enabling good communication across borders.

So, if you’re a wholesaler, what should you look out for? What are the warning signs that your wholesale business is – or may soon be – in trouble?

Slow-moving stock

Slow-moving stock is a cash flow disaster. If you’re taking the risk on stock, that cash-to-cash cycle is critical. Many wholesalers rely on freeing up the cash from one order to place the next. Particularly in seasonal businesses like fashion, this can mean you ‘miss the boat’ on the next season and you will be feeling the effects of slow moving stock for quite some time.

Tip: Order only small quantities of stock that has not been pre-sold

Shrinking demand/Yesterday’s hero

Is demand for your products shrinking? Are you supplying cassettes when the world has moved to digital streaming? Consumer preferences are changing rapidly and failure to detect those changes could see you without a seat when the music stops.

Tip: Read widely and be on the lookout for trends that may affect demand for your product.

Margin pressure

Margins can come under pressure for a variety of reasons. However, because you are essentially a handler of goods or services, you will be one of the first to feel the margin pressure when it comes. And it is unlikely to reverse, at least not in the near future. That means that you have find savings by buying better, improving logistics or finding other efficiencies that help you to reclaim lost margin.

Tip: Know your costs (so you can calculate your margin accurately) and know your required rate of return. When those numbers begin to converge, it’s time to review your model.

Customer power

When customers gain too much power, they can exert severe pressure and even cut you out of the picture.

Tip: Don’t put all your eggs in one basket – keep your product lines and your customer base as diversified as it makes sense to do so. Be in a position to say ‘no’.

Vertical integration

We are seeing more and more of this, particularly (but not only) in the area of private label products, where the retailer will go direct to the manufacturer to source product.

Tip: Watch overseas trends as we tend to lag what happens in larger economies. If possible, move away from products that seem to lend themselves to a direct relationship between manufacturer and retailer. Actively seek out smaller accounts to reduce your overall reliance on large customers (it is less practical for smaller customers to go direct to the factory).

Supplier concentration

Similarly, if you deal with only a small number of suppliers, you are prone to accepting their terms because they know you can’t easily go elsewhere.

Tip: Pro-actively seek out alternative sources of supply. Apart from rebalancing your market power, it’s a good idea anyway, in case your supplier has a factory fire or is offline for a period of time for any reason whatsoever.

Exchange rate

Understand what drives the exchange rate. With most pundits expecting further falls in our currency, check that you can pass on the impact of any price changes to your customers. If you can’t then trouble might be coming. And in the good times, don’t easily give up ground that you will find hard to get back later.

Tip: Know how to manage your forex exposure and don’t punt on the dollar. It’s a zero sum game and only the very best traders consistently make money by trading currency.

Outdated systems

If your systems are outdated, you’re probably inefficient and you’re certainly behind the eight-ball competitively. When push comes to shove, you are the one that won’t survive.

Tip: A business requires constant investment to upgrade systems and capabilities. You can put it off only for so long before it comes back to bite you. When upgrading, consider what your needs will be in the future, not just what they are now – the world is moving so rapidly that you risk being out of date again straight away.

Technological change

The world is changing. Nothing is what it used to be. Look at 3D printing, for example. That makes it possible to manufacture small quantities of a product that was previously uneconomic to manufacture in Australia. Now, if you are wholesaling such a product, you might not be needed for much longer. So, keep an on eye it.

Tip: Once again, read widely. Attend trade shows. Consider technological change that could conceivably be replicated in your product category.

Talk To

Neil Parker

MANAGING DIRECTOR

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