February 4, 2004: Distribution Channel Commentary (DCC) # 56


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In the "much ado about nothing" category, the US Fed changed some wording about its prospects for raising short-term interest rates from "a considerable period" to "the committee believes that it can be patient", and the markets gyrated wildly. Why all the fuss? The Fed will start raising interest rates when it is forced to do so by the global currency and bond markets. The futures markets are now forecasting that the Fed will be forced to make its first bump in short-term rates this summer instead of immediately after the November elections.

The Fedís rephrasing was calculated, I believe, to attempt to give the sinking dollar a rally lift before the G-7 finance meeting on February 7th. At that meeting our Treasury Secretary will tell his peers that the US is trying to make the dollarís decline a gentle and orderly affair; plus tell them the usual "we are committed to a strong dollar that is valued fairly on global exchanges".

All of the attendees know, however, that the US is really happy to see, and expecting, that our dollar will continue to drop until after the November elections. This is caused by the huge imbalance in growing supply and slackening demand for dollars. Our fiscal and monetary policies are committed to stimulating huge increases in the supply of dollar credits to keep our borrow-and-consume recovery going. Why Asian countries continue to buy our bonds to keep the currencies cheap and our long-term interest rates low in exchange for jobs and taking over our manufacturing base is a fascinating story. For more on the behind the scenes economics see the link references below.

The global markets are right to be nervous about interest rates eventually going up and the effects that will have on the debt-heavy US. If any of you donít see these concerns clearly and would like to read a bit more about the big, fundamental economic picture that will eventually weigh down our "economic recovery" and lance the bubbles therein (stocks, bonds, houses, autos, credit card debt) below are a few best reads for the week:

For superficial coverage that gets the notion that a lot of debt-heavy companies in the US have been kept alive by the Fedís artificially low interest rates, check out this article from the New York Times: "Debt-Heavy Economy May Be Too Jittery About Rates" (1-31-04) http://www.nytimes.com/2004/01/31/business/31rates.html.

To get the really big, slowly unfolding picture with great graphs that donít lie, check out this article: "The Mistakes of Our Grandparents?" http://www.contraryinvestor.com/mo.htm.

About 5 to 10% of U.S. companies in mature industries have too much debt today as a result of growing their sales too fast without making and reinvesting enough profits. The shortfall in growth capital was filled by borrowing debt. The good news for these debt-heads has been how fast and much the Fed has cut their short-term interest rate costs over the past three years of our post-bubble economy. The bad news for these strapped players is that profits havenít been growing enough to pay down the debt. Excess capacity in all industries has been kept going by the flood of cheap lending dollars. When rates finally go up the big borrowers will see debt service increase while profits decline. The economy then goes into a recession. This is a double whammy that will wipe out mediocre performers with big debt.

If you think that you may violated the "long-term, stable growth rate formula" (for more on that see our article # 2.8 "Grow at a Long-Term, Stable Rate; Donít Flame Out" -2_8.asp), then you may need to rethink how you can quickly: "downsize, upgrade, refocus and revive your profit power". For more on how to do this, read "Chapter One" of our forthcoming book that is posted on our home page; see DCC #5.2; and lots of our past DCC topic coverage. An index to all past topics can be accessed through the "past commentary" link in the upper right hand corner of our home page. http://www.merrifield.com

If you want to know why big picture, long-term investors like Warren Buffet, the greatest investor ever:

  • "canít find any good new investments" in todayís "over-valued" stock markets,
  • has parked enormous amounts of cash in other countriesí stronger currencies,
  • repeatedly points out that in the short-term, the markets are emotional barometers, but in the long term they weigh and reward fundamental, value investing.

Then, here is one more good, big picture, read. It offers a balanced view on both the prospects for the US economy and stock market evaluations over the next 10+ years in a simple, clear writing style. It is entitled "The Super Trend Puzzle", and its penned by John Mauldin at: http://www.2000wave.com/article.asp?id=mwo013004.


On January 29th, the Associated Press reported that workersí wages and benefits grew by 0.7% in the final quarter of 2003, the smallest increase in a year. I did see one related graph that I canít readily link to that split the average rise in total compensation for the year into health benefit and wage change lines. The health benefit line was obviously up strongly, while the take home wage line actually was slightly negative over the past year. More than 100% of the total compensation increases went into health benefits.

A few weeks ago, I noticed that of the 1000 net jobs created in December, which was way below the 150,000 that the average economist was predicting, a big chunk were temp jobs. The national billing rate for these new temp jobs had dropped from $15.50/hour a year ago to $13.50. Seems like the commodity labor rental rate is deflating.

Our jobless recovery, deflation in commodity labor rates and lower take home pay stats continue to be the biggest reason that the "sustainable recovery" scenario might not happen. It also raises these questions in my mind:

  • Does the reporting of these grim averages reinforce our financial management reflex to take advantage of a buyerís market for labor by freezing wages to improve profits? Or, could it inspire us to rethink how we can work together in strategically smarter, value-creating and selling ways to grow margin dollars per person faster than rising compensation. The increases in compensation could be paid out in a flexible gainsharing portion that could be earned and maintained as long as there is higher productivity and profitability. Lincoln Electricís famed variable incentives for all programs was born in the depression when the alternative was to close down the business. We might be surprised at how amenable all employees might be today to put up with some risk/reward pay for a chance to keep their job. Wouldnít it be great if there was more business media coverage about the 4% of the companies in the US who are growing sales, profits, jobs and wages much faster than the averages?
  • If there were more detailed success stories, would we, however, be able to understand the true sources of the profitable growth power that make the good financial numbers happen?
  • Would we have the guts to define why we arenít top 4% and what we should do to close the gap?
  • Would we have the persistence and the letís all learn together and change organizational capability to close the gap?
  • If not, why?

The topics that follow will shed more light on these questions.


January 26th, Houston Ė SYSCO announced that their net income increased 20% in its latest quarter to $222MM. This beat last yearís fourth quarter total of $184.6MM. Sales increased by only 10.8%, but they had lower operating expenses as a percent of sales, 14.2 versus 14.8 in í03.

Wouldnít it be nice to grow your sales at 10% per year and profits by 20%? It wasnít just a fluke good quarter! Here are some important number averages for the past 5 years: SYSCOís versus their industry versus the S&P 500ís averages:  

                                   SYSCO               Industry             S&P 500


Sales Growth Rate:           9.95                  -0.05               5.43

Gross Margin                  20.5                   15.4               47.4

Net Profit Margin               2.7                    1.0                 5.4

Return on Assets             10.5                    3.8                2.0

Return on Equity              29.7                  12.3              12.1

Another metric that speaks to me is SYSCOís operating profits per employee for the last 12 months trailing: SYSCOís was $18,000/employee; their industry average 4,000; and the S&P 15,000. For users of my "High PerformanceÖ" video, you may recall that the profit after tax reinvested per employee is touted as the "cost of the employees secure and growing future". If a company canít finance growth, then they canít finance the expectations of the most competent and ambitious employees.

Does Wall Street believe SYSCOís numbers? Itís a fair question after the US Foodservice division of Ahold (based in the Netherlands) revealed late last year that they had cooked the books with supplier rebate accounting tactics for roughly $1B. SYSCO and other publicly traded food distributors all saw their stock prices sell down due to the assumption that rebate rot might be common to the industry. I think SYSCO is the real deal based on their 5-year numbers and what I have gleaned out of reports about their one-stop-shop of private label goods sold at a profit using customer profitability software.

Who else in the foodservice channel has:

  • As broad a one-stop-shop offering that can consolidate out other types of miscellaneous distributors (disposable paper goods, food equipment, Jan-San, etc.).
  • Aggressive use of activity-based, customer profitability software to know what to charge and then for small accounts what minimum order sizes to set.
  • The sales force aggressively managing accounts for profitability and not just margin dollars regardless of transactional activity/delivery costs.
  • The ability to charge and get premium prices on private label goods, because the smaller customers canít meet minimum order sizes if they spread the total spend over four or more different types of suppliers. The cost of transactions and delivery off refrigerated trucks is forcing little customers to go to consolidated, integrated supply deals whether they understand the implications of "total procurement cost" reduction for them and "totals sales, service cost" reduction for SYSCO.

We all should aspire to have a strong, "unique value proposition" for one niche of customers at a time. The test of our propositionís value and strength should be that we can charge higher prices and/or get more favorable economic terms than mediocre service value competitors that are generally trying to be too many things to many different customers with too generalized a service proposition. If and when we ever achieve such a value monopoly, then we should expect to hear some customers grumble. Some of them will not like giving up the power of being able to play undifferentiated suppliers off against one another for better deals. I have heard criticism of SYSCO from both customers and competitors about how they push their private label products, charge higher prices and demand larger average order sizes. Why donít these customers switch? Because they canít get a better total procurement cost from other suppliers who arenít as fully broadlined as SYSCO. Only unique propositions that afford the lowest total procurement cost outperform industry financial numbers.

If you would like a process for how you can identify the best, historic, number one niche of most profitable customers within your active account roster and then build a dominating, unique value proposition for that niche(s), then skim through the first three chapters of our forthcoming book as well as the table of contents for our "High Performance.." video all listed on our home page.


I had an interesting (to me anyway) connect the dots experience this past week. The dots were:

  • A junk mailing claiming that 20% of business people get 80% of the intellectual business enlightenment that is floating around, but then only 20% of the 20% (or 4% of the total) actually implement ideas successfully. This may be a bastardization of Wilfredo Paretoís original 20/80 rule, butÖ
  • The 4% figure happens to be equal to the number of "gazelles" that David Birch discovered by tracking 10MM U.S. businesses over a decade. These were players in every SIC code that grew 2-5X faster than their industry peers and were making 4 to 6 times the return on equity. SYSCOís 5-year numbers in topic 3 above would, for example, qualify them as a giant gazelle in their channel.
  • The 4% figure is also close to the 5% figure that I came across when researching what percent of alcoholics go into spontaneous remission on their own. These are folks who finally get over their denial, admit they have a serious problem and just quit without doing any special assistance program. Not all succeed, however, on the first try. One, big-name, dry out program does not advertise, for example, that their average customer has already tried to twice quit drinking before writing out a $15K check for a four-week program.
  • In an article in USA Today entitled "Life Coaches Offer Cheers For Fears", one "coach" pointed out that he would only work with people who really could and would change and that "most people, most of the time were not reachable, realistic or coachable". http://www.usatoday.com/life/lifestyle/2004-01-27-life-coaches_x.htm.
  • A review on the book: "Who Really Matters: The Core Group Theory of Power, Privilege and Success" by Art Kleiner.

My summary questions for these related points are:

  • Whoís in your "core group" (not necessarily your management team)?
  • Is the group collectively coachable?
  • If 4 to 5% of companyís can change successfully on their own, what additional percent could do it if they had effective coaching?
  • Whatís effective coaching and how might it be delivered economically?

To give you more help on these questions, hereís some more background on the last two "dots". The "Core Group" book sounded interesting, so I checked out:

  • Amazonís reviews and their "look inside the book" pages. Read the introductory chapter in which there is a funny account of how one exec at a management meeting of an international company declared that the customer comes eighth after a priority list of executives. Stunned silence was followed by uproarious laughter, because it was true.) I ordered a "new", "used" copy from an independent dealer for $6 less with one click. Amazing!
  • Google for more reviews. Here is a link to a review on the book, its key concepts, and it is an interesting site that sells Ďvalue based management" services with free, good content: http://www.valuebasedmanagement.net/leaders_kleiner.html

For those of you who want the shorter version, a writer interviewed four life coaches, lists their web sites and the organizations life coaches belong to. One coach has a "how coachable are you?" quiz. All of them are keen on taking only clients who: have a track record of proactiveness, are willing to pay a retainer fee of about $250 to $400 per month, and can stand some confrontational in-your-face candor. Basket case folks are referred to therapists.

One question raised in the article that applies equally well to companies is: What belief system is currently holding you back from doing what you know you should? Another point is that when things get bogged down, doing brainstorming to arrive at a few measures that will not radically change your life (or company ways) but get new breezes blowing through, can lead to good positive change.

In getting back to my questions, if any readers have thoughts on the last two, let me know! Otherwise, I hope these links might provide some food for thought about positive change within your company.


In a 1/28/04 article in the Wall Street Journal, a chap from the Gallup organization proclaimed that a big survey of US employees had concluded that:

  • A majority of recognition programs "do more harm than good".
  • 71% of workers are disengaged - essentially clock watchers who canít wait to get home.
  • 61% had not received any "meaningful attaboy" in the past year.
  • there is (still) a huge untapped human potential at the average business, in spite of decades of reward and motivational tactical activities.

Hereís the link to the article. You may not be able to get through if you are not a subscriber: http://www.careerjournal.com/columnists/cubicleculture/20040130-cubicle.html.

As a fall back, the main source in the article is Curt Coffman, who has written a well received book on the problem and the solutions for the disengaged worker. Hereís a best link on that reference:

Over the years I have spent a lot of practical energy on this problem, as well as a lot of writing and videotaping. Here are a few of our back up sources. Iím a big believer in educating all employees from the micro to the macro forever greater motivation, cooperation and productivity.

Itís one thing for someone to learn how to do a job, its another for them to understand how to apply "mastery" to the job to become a "black belt 10th degree, Jedi Master at their job/craft". See our "high performanceÖ" video module 5.4 for more on this. Also our following articles:

2.7 - "Kaizen" or Continuous Improvement- but how? 2_7.asp

5.5 - "Measurement Systems That Spark Productivity" 5_5.asp

5.10 - "High Performance Distribution- Six Key Systems 5_10.asp

People are motivated to learn about the service processes that weave through departments. We shouldnít hate each other, we are all of the same service value, execution team. They are fascinated to know, memorize and do extra effort for the most important customers that pay a disproportionate amount of our wages. They are fascinated to learn about where wages comes from and how they can be part of the high productivity, high job niche wage solution for themselves and others.

As for the art and science of published praising statements as often as possible, see video module # 5.2 and/or article # 6.4: "The Science and Value of Praising Statements". 6_4.asp.

Our entire "High PerformanceÖ" video is a micro-to-macro motivational education curriculum in a box. It isnít just "best practices" in a strategic vacuum. There is an entire section of modules on how to rethink a distributors customer-centric strategy suitable for all. Enough said!


I came across two interesting sports strategy stories in which competitors chose to be different to win. First, there is a chap named Ed Moses who is setting world records in the breaststroke and gunning for gold in Athens this coming summer. He started swimming full time in 1998, halfway through high school, and won a silver at the 2000 Olympics in the 100 meter breaststroke. He chose to attack a new discipline in a very personal and strategic way. He wasnít doing laps at 6 with a stage door Mom cracking a whip.

Read about how, after his times slipped in the world rankings, he tried new experiments to get back on top by not doing the conventional more hours in the pool routine. http://www.usatoday.com/sports/olympics/summer/2004-01-29-moses-feature_x.htm.

If we are working hard in our business and not getting gold medal results, is the answer working harder in the same way (more hours in the pool)? Or is it to rethink our strategic corporate capability and retune it around our best strengths (our body build) and our best niche of customers (a specific event) like Moses has done?

A second article is about the Grinnell College Panthers menís basketball team. They sub in three shifts of 5 players each on an average of every 42 seconds and run a flat out run-and-gun offense with constant full-court pressing on defense. They have become the winningest team in their competitive niche. Itís a fun and fascinating read that illustrates how a coach assessed the competitive landscape and came up with a strategic solution with supporting systems, recruiting, and a culture that creates sustainable success. Other competitors could copy it, but they donít so they keep losing to these guys. Shouldnít we rethink our "kinetic chain of profit power" to have a unique value proposition for one niche of customers at a time within each of our distribution locations? (For the kinetic chain story see: ./exhibits/Kinetic_ChainEx_16.pdf)

For the article, go to this link: http://www.nytimes.com/2004/01/29/sports/ncaabasketball/29GRIN.html?8br.


Thatís all for this week!

Bruce Merrifield