Exactly one year ago, I wrote about the results of the National Ready Mixed Concrete Association Industry Data Survey, and took a close look at how the producers who rank in the top 25% of our industry compare to their peers. I compared Leaders, or the top quartile, to the performers in the 50th percentile, or the Typical Producers.
This year, the survey captured the bottom 25% of the financial performers, and our firm conducted the first-ever analysis of how the top producers’ performances compare to those at the bottom of the ladder. The results are stunning, and reflect how far apart the top is from the bottom in this industry.
“Is the lowest quartile’s selling price temporary, or is it culturally ingrained?”
First, the Leaders are blessed with the single most important ingredient to their success: selling price. This year, the Leaders actually grew the margin of selling price, expanding their profit advantage over the Typical Producer as a percentage over last year. In contrast, the lowest quartile suffered some of the lowest selling prices in the country, which reverberates all the way down through their income statements.
Specifically, the Typical Producer saw a jump of more than $11 per cubic yard in average selling price, from $69.44 to $80.98. This is not unexpected, given the pricing power the industry has had as a result of cement price increases over the last year.
However, the Leaders enjoyed a selling price that was a significant $5.20 per cubic yard more than the Typical Producer, as compared to the lowest quartile, which suffered a selling price that is $8.67 less than the Typical Producer. When we compare the top to the bottom, the difference is a whopping $12.87 per yard.
That $12.87 goes a long way. It can mask a multitude of operational shortcomings, such as higher selling, general, and administrative costs the Leaders are saddled with, for instance.
Here are the other major differences between the top and bottom performers that drive these differences:
- The Leaders get $5.68 more per yard in value-added products such as fibers, admixtures, and color than the lower quartile, which makes up a big piece of the $12.87 advantage. Undoubtedly, the Leaders are very good at upselling their customers, and seem to work hard at pushing as much value-added products as they can in every yard they produce. The Leaders also outperformed in direct fixed costs at the plant level, adding a 97-cent advantage in this category as well.
- In contrast, the lowest quartile does have a materials cost advantage, in addition to lower SG&A costs that come from having to run a tighter ship in the face of lower selling prices. The lowest quartile has a $5.57 materials cost advantage for cement and aggregates as compared to the Leaders, which we think may actually contribute to the lower selling price. In addition, the lowest quartile is forced to run their businesses more efficiently, so they watch every penny. This is reflected in lower selling, general and administrative expenses (SG&A) by as much as $1.15 per yard in certain line items.
- The bottom line makes for a tough comparison: the Leaders saw a profit margin of $9.62 per cubic yard, compared to a mere 89 cents for the lowest quartile. This makes it tough for the lowest performers to find the money to replace aging fleets and reinvest in their business, and puts their long-term financial health at risk.
Regardless of where you stand in relation to your peers, or in what segment of the concrete industry you participate, the message is clear: The key to success is managing the selling price.
As demand softens, managers must better-manage the selling price. For example, are your current price level temporary, or is it culturally ingrained? Only when you know the answer can you decide how to better compete.
Pierre Villere is President and Managing Partner of Allen-Villere Partners. Contact Pierre Villere at firstname.lastname@example.org or telephone 985-727-4310.
© 2006 Hanley Wood, LLC. All Rights Reserved. Republication or dissemination of “Two Ends of the Spectrum” (The Concrete Producer, December 2006) is expressly prohibited without the written permission of Hanley Wood, LLC. Unauthorized use is prohibited. Allen-Villere is publishing “Two Ends of the Spectrum” under license from Hanley Wood, LLC.