Recovery (at what cost?)

Understanding the ramifications that could come as a result of raising product prices during a recession, jan/san manufacturers stood firm on their principles and did not roll out lofty increases in 2009. By holding steady, manufacturers were able to keep procurement prices at somewhat comfortable levels for their distributor customers and the rest of the supply chain. But relying on suppliers to continue down the same path in 2010 may not be practical.

Many manufacturers say they are anticipating a cost increase in raw materials near the end of the first quarter and the beginning of the second quarter in 2010. It remains to be seen just how much, but what these manufacturers know for certain is that they will not be able to absorb raw material increases much longer, especially if they match the severity of those that occurred in the second and third quarters of 2008 (when manufacturers were forced to pass rising costs down the supply chain).

2009 wasn't an easy year for jan/san distributors and many are on edge wondering how they are going to recoup losses experienced from the recession. Although economists are in broad agreement that the recession is over, most in the jan/san industry believe the effects will linger well into 2010. In fact, distributors say it would be entirely too soon if manufacturers were to inflate prices just 90 days into 2010 — especially since the economy is only in the early stages of recovery.

"There is too much risk in alienating and angering customers by raising prices just as we come out of the recession," says Andy Brahms, president of Armchem International Corp., a distributor based in Fort Lauderdale, Fla.

Manufacturers agree that increasing prices following a two-year recession is not ideal, but in order to protect their own investments, they say they will have no other choice but to react to the market conditions. Thus, distributors must prepare now for what is to come in 2010.

What's Going To Rise?

With the U.S. economy coming out of the worst downturn since the Great Depression, jan/san distributors are fully aware of what follows an extended period of economic struggles: inflated pricing.

The primer in past instances came from the result of raw material suppliers looking to recoup profit margins that were lost during economic downturns. Manufacturers say this cost passing process is very systematic as it starts with the large level petroleum companies, breaks down through the raw materials or any of the components that people are using, trickles through onto the distributor and ultimately makes its way to the end user marketplace.

With economists predicting the price of a barrel of oil to rise near triple digits in 2010, most manufacturers say they will have no choice but to pass on inflated costs down the supply chain. But understanding the severity of the struggles that have gone on in the economy and in the industry, manufacturers say if raw material prices rise as expected they will not pass on increases in one large lump sum.

Instead, they will release price increases very cautiously and judiciously. Thus, distributors should expect to see very small increases occurring throughout 2010.

Traditionally, when raw material prices rise, jan/san products most affected are plastics, paper and certain chemicals, says D. Bruce Merrifield, president of Merrifield Consulting Group, Chapel Hill, N.C.

Wholesalers interviewed for this article say this trend is likely to repeat itself in 2010. They also expect high energy costs and the price of pulp to increase, causing the price of towel and tissue products to rise. In fact, some distributors have already received notices by paper manufacturers that announced increases for the first quarter of 2010. Some chemical companies and equipment manufacturers also announced increases for the first half of 2010, due to rising raw material costs.

The Effects Of Inflated Pricing

During the recession, distributors watched their margins erode as countless customers either downsized or went out of business. With the threat of price inflation occurring, things only look to get worse for distributors during the recovery.

Price increases so soon after a recession puts distributors in a compromising position. Because end users are already facing unprecedented budgetary cuts due to the poor economy, distributors say they are afraid the current end user community can't afford any price increases passed down the supply chain. In fact, distributors say if they are forced to introduce price increases just a few months after the recession, customers will not only be up in arms, but will be more likely to price shop, causing distributors to lose market share to "big-box" stores that can afford to sell products at lower price points.

"The new younger buyer is about now and this quarter's budget," says George Abiaad, president of Royal Corp., a distributor headquartered in Santa Fe Springs, Calif. "And if they are not getting their value or meeting their targets, the nature of their approach is to shop around and look for alternatives."

Traditionally, when the industry reacts to price adjustments, it reacts in totality where manufacturers follow one another. At this time, however, not all manufacturers are raising prices, allowing distributors to offer alternative products to customers to avoid a price increase.

It's unknown how long this strategy will be a feasible option. As the year continues more manufacturers may follow the market and introduce price increases, too. However, this scenario isn't necessarily bad for the distributor.

"If manufacturers raise price across the board, we can say it's not just from us but from everyone," says Bill McGarvey, training manager for Philip Rosenau Co., a Warminster, Pa.-based distributor. "It's a bitter pill to swallow but at that point there may be a little less shopping around by the customer."

Though price increases are expected to come throughout the year, distributors should deal with one increase at a time to ease the burden on customers.

"If our prices are raised then we should only raise the cost of goods," says Brahms. "We can't add on margin. We certainly don't want to scare customers away."

When receiving price increases, distributors should be mindful to communicate to customers what is coming down the pike quickly to avoid losing accounts.

Recovery Efforts

Even if customers accept the price increases, they will still want cheaper options to save money. Though the economy is improving, facility cleaning budgets won't be returning to pre-recession levels any time soon.

The recession forced many distributors to start selling cheaper products such as lower grade towel and tissue as end users budgets were cut. A lot of distributors resisted selling these lower-grade items during the recession because it goes against what they traditionally stand for, but they say inflated pricing, coupled by money-strapped customers, will give them no other choice but to move in this direction.

"The consumer is more than ever open to new brands," says Abiaad. "It will be our job to develop parallel alternatives to most key commodity items that will still perform and do the job with some modification that we can train the customer on."

Another way distributors can offset rising product prices after the recession is by offering customers private-label products. These products enable better profit margins, and from past instances, have helped distributors make it through rough economic times, says Brahms. Designed to compete against branded products, distributors market private-label products as a cheaper alternative to national brands. Thus, customers benefit from private label products' lower prices.

While always important, these upcoming months of price increases will make it even more crucial that distributors act as educators and consultants to their customers and not just be order takers.

"Return on investment becomes more important now than it has historically as the customer is clearly watching his nickels and dimes more than ever before," says Dick Friedman, president of The RTF Group, a manufacturer rep company based in Lake Bluff, Ill.

Customers (especially ones trying to meet strict budgets) will need to be educated on the fact that higher-priced products often can save money in the long-run. If distributors can demonstrate that the quality of these products far outweigh their high price points, then they'll be successful, says Friedman.

"Whether saving money in the form of using a more cost efficient product or a more efficient way to do something, it is the distributor's obligation to always show the customer the most cost efficient way to use a product," adds Brahms.

Distributors must also get back to fundamentals and focus on enticing existing customers as well as new accounts with traditional value-adds such as product training, flexible delivery and emergency service. Customer service will also help solidify relationships during the tough months ahead.

"If the end user feels genuinely that you are not borrowing power by taking advantage of a situation they will work with you as long as they can see you are exploring with them all avenues and options," says Abiaad. "However, if they feel you are conspiring and capitalizing on a temporary situation then you will lose their interest."

No one knows for sure how long the lasting effects from the recession will carry over into 2010, but distributors know one thing for certain, that they won't let price increases hamper business.