January 18, 2006: Distribution Channel Commentary (DCC) #86

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TOPICS:

  1. DO DAVOS FOR 1/1000TH THE COST AND GREATER BENEFITS BY JOINING THE JAN. 26TH TELE-SEMINAR ON "INNOVATION 101 FOR WHOLESALE DISTRIBUTORS".
  2. IS HOME DEPOT MAKING AN INVENTORY INFLATION PLAY FOR 2006?
  3. TIME TO SELL TO A PRIVATE EQUITY FIRM?
  4. NEW INNOVATION MOVES? LESS IS MORE. 
  1. DO DAVOS FOR 1/1000TH THE COST AND GREATER BENEFITS; THE JAN. 26TH TELE-SEMINAR ON "INNOVATION 101 FOR WHOLESALE DISTRIBUTORS.

Since 1971, The World Economic Forum (usually hosted in Davos, Switzerland) has occurred at the end of January. It is a big talk and networking fest of executives from the top 1000 global companies who pay for everything via annual subscription dues. Out of the dues stream, all of the top politicos and hottest topic experts with a sprinkling of entertainment stars – Angelina Jolie, Richard Gere, etc. – are invited for free.

The annual themes all revolve around the mission statement of "contribute towards solving the problems of our age". Last year’s theme, in the aftermath of the Asian Tsunami, was "Taking responsibility for tough choices" coupled with on-going concerns about global poverty, climate change, Islam and more. Over the past five years, there has been a lot of airtime dedicated to "outsourcing, China and global capitalism".

This year "innovation" reigns! There are 22 sessions under the theme of "Innovation, Creativity, and Design Strategy". There is a special series of six workshops just for CEOs with titles like:

  • Building a Culture Of Innovation
  • What Creativity Can Do For You
  • A World Without Intellectual Property
  • Making Invention Real
  • Prepping for the Creative Economy (everyone can attend this one)

If you haven’t received your free invitation to attend Davos this year, or if you can’t afford the $250,000 per year fee to be a "knowledge partner", then don’t sweat it. You can get much better how-to information on innovation that is tuned to wholesale distributors for $199, and you can participate in the comfort of your old, conference room. Next Thursday, January 26th, from 2:00 PM to 3:30 PM (EST) I will be conducting a tele-seminar for Modern Distribution Management on "Innovation 101 for Wholesale Distributors".

If $199 per phone hookup and 90 minutes of time seem like steep resource investments for learning how to grow your future profits a lot better, then I have a suggestion that might help you decide to participate. You can view the slide show that I will use for the tele-seminar before signing up. We’ve posted it on our web site at this link: http://www.merrifield.com/articles/MDM_seminar.pdf.

The slide show includes a lot of slides that you can read as food for thought. They will hopefully raise questions in your mind. There will be two 15 minute discussion slots during the 90 minutes to ask questions – anonymously if you choose – because you never know which other competitors might be lurking in on the same seminar.

So, check out the slide show, write down your questions, and then reach for your wallet. You can sign up for this session two ways:

  1. Go to MDM’s "landing page" at the following link and follow the directions: http://www.mdm.com/conferences/merr.html.

    2. Or, call them for free at 888-742-5060 and tell them that you heard about it here!

    2.   IS HOME DEPOT MAKING AN INVENTORY INFLATION PLAY?

How would you connect these informational dots?

  • Home Depot buys Hughes Supply. Hughes is $4.4 B distribution chain with a lot of inventory made from commodity metals that go into home construction. But, the Fed’s measured interest rate increases were starting to cool down the $30 trillion housing bubble going into December, especially in hot cities and for condos.
  • January 11 – Bloomberg (Danny King): "Home Depot Inc., the world’s largest home-improvement retailer, and IndyMac Bancorp Inc. will begin lending as much as $2 million to individual home contractors and developers to boost revenue from the homebuilding industry. Under the new SPEC Construction Loan program, builders can borrow as much as $2 million for as long as 18 months, Atlanta-based Home Depot said. Builders will also get 5 percent rebates on Home Depot products. ‘SPEC’ refers to speculative homes built before they are sold to a consumer."
  • Mortgage lending continues to be strong. Countrywide Financial reported an impressive December. Total Fundings were up 28% from December 2004 to $44.5 billion. The Mortgage Loan Pipeline was up 25% to $59.6 billion. Purchase Fundings were up 28% from the year ago period, Non-purchase/refi 27%, and ARM fundings 21%. ARM fundings were 50% of Total Fundings during December. Home Equity Fundings ($4.0bn) were the strongest since record fundings posted last August. Subprime Fundings of $4.4 billion were the second strongest on record. Countrywide’s Bank saw assets balloon 78% over the past year to $73.1 billion. (Gotta keep young people buying with nothing down, interest-only ARMs!)
  • The Fed seems to want housing to continue to stay buoyant. For the past two weeks, the Fed added $93.5 billion to the money supply, a 24.0 percent annual clip. Over the past six weeks it is up $192.9 billion, a 16.7 percent Banana Republic hyperinflationary pace. (What does the Fed foresee that has them inflating so aggressively? Was it the cooling down stats in housing? Is it the $100B in treasuries to be sold in February?)
  • January 13 – Bloomberg (Harris Rubinroit): "Georgia-Pacific Corp., the lumber company bought by Koch Industries Inc., led U.S. borrowers this week seeking more than $16.5 billion of loans for acquisitions amid record investor demand for the credits." (You would think that Koch Industries has enough exposure to housing after recently buying GP.)
  • It was announced late last week that wholesale inflation in the US increased by 0.9% in December, the highest amount since 1990 and an annualized rate of 10.8%
  • The commodity index increased 18.9% during 2005 and it has been up smartly so far this year. Cost-push inflation in the entire "metals complex" and "peak oil" energy should accelerate price increases for channel products.

So what? I’m guessing that the Fed is doing tightening lite by simultaneously raising rates AND pumping the money supply to attempt to cool the housing bubble, but not pop it. But, commodity inflation will continue to be very strong. If you buy copper wire with money borrowed at a long-term fixed rate of 5%+ and then the inventory appreciates at 10 to 20%, its not a bad thing. Companies using FIFO accounting can report record earnings and taxes. Companies on LIFO can avoid taxes on inventory profits and get a bigger contribution to cash-flow for ’06.

I don’t suggest companies speculate by buying more inventory than they need with borrowed money, but 2006 looks to continue to be good for those holding building material inventory. So, using fixed, low (compared to real inflation) interest rate debt for faster appreciating inventory looks promising. A deflationary drop in inventory value could be delayed into 2007.

    3.   TIME TO SELL TO A PRIVATE EQUITY FIRM? IT’S A SELLERS MARKET FOR NOW.

I’m honored to serve as a board member for two companies that are owned by private equity firms. The money that these types of "financial buyers" have raised to do buyouts vastly exceeds the available deals that are out there. Highest-bidder auctions – discretely done – for potential sellers to these financial buyers is becoming commonplace. Of course, you will usually get the highest price from a motivated strategic buyer (as Home Depot was for Hughes or, on an even bigger scale, as Koch Industries was for Georgia Pacific).

If any readers think that they might want to sell their business in ’06, I would be glad to offer my general advice on the entire process.

    4.   NEW INNOVATION MOVES? LESS IS MORE.

Here’s some interesting news. Two companies launched products last week. Apple Computer unveiled one laptop and a desktop that is identical to one already on the market, but works faster. Apple's shares rose by 6 per cent. General Motors revealed a bevy of new cars and sports utility vehicles, its shares fell.

The lesson to me is that it is better to have fewer, much better corporate initiatives, then to have more, me-too activities that are largely empty of any significant new value proposition. But, the best way to have one really great idea well implemented is to start with a lot of "good" ideas which are then very well developed before being very carefully judged down to the one or two great ideas for both your company and your target customers.

If you want a lot of ideas on how to do a better job of transformational thinking for your company to come up with fewer, more successful initiatives, then, a the very least, check out our new, slide show posted on our site that we will use for next week’s tele-seminar for MDM. Here again is the link: http://www.merrifield.com/articles/MDM_seminar.pdf

That’s all for this commentary!

Bruce Merrifield

Bruce@merrifield.com

919-933-7474