Supply dealers in our industry are seeing first-hand a major uptick in commodity market pricing, and it appears 2010 will be volatile. Most companies do not have the ability to purchase large blocs of wood due to capital restraints. (And with the uncertainty in Washington on economic policy, why would you? Let's face it: Commodity prices could be in multi-year lows in two months if the politicians keep focusing on liberal and conservative issues instead of the economy.) Most in the lumber industry who have survived for the last three years are strapped in the Price Machine rollercoaster and will be riding the markets up and down.
[Earlier this month], one of our salespeople visited a regional builder who told us something astounding and very spooky in regards to pricing. The builder said that in November, a large national supply company gave him a locked-in six-month price which was lower than our most competitive November price. The builder was laughing at them and basically said he wasn't going to stop anyone from putting the horns to themselves. It was such an obvious bad decision that even the builder knew the supplier didn't know what he was doing and regarded the salesperson as a sucker.
For the last 30 years, there have been builders who wanted a "locked-in price" so they wouldn't lose money on a project and were okay with you losing money. My wife, Darlene, knows nothing about lumber commodity markets, but she overheard me speaking with a builder who was trying to push for long-term pricing. She said: "That's silly. Do you think I can go to Wal-Mart tomorrow and tell them to hold that $1.79 price on a dozen large eggs? Everyone knows prices fluctuate all the time; it's expected."
You know Darlene is right. Where can you find any retail merchant that advertises they will hold a price for a year on any commodity item such as food, jewelry, fuel, or adult spirits (for some of us, the economy has been so bad for so long that adult spirits are now a commodity item)? I mean no disrespect to my bride, but she couldn't calculate a per-thousand price if her life depended on it. Still, she has more sense than many operating companies in our industry. And please, if you think a low price buys loyalty, you really are an amateur. Price loyalty is only as good as the next lowest bidder.
My response to builders who have ever asked me about holding price has been, "the longer the price, the higher the price." Yes, I will admit that if you absolutely insist, I will give you a year-long price guarantee on an item, but the price will be a Chinese calculation between the highest price of the last three years times the potential rate of inflation and the "cover your butt in case of emergency" multiplier. [At least] 99.9% of the time the builder chokes on the price and will not ask for a year-long price again.
Most builders are quick to tell you that you must have the lowest price, and now they want you to hold it for a year so they won't lose money on their job. Look at that statement and somebody smarter than me please tell me why any dealer would agree to those terms. There have been executives who have tried to convince me for years that you can hold pricing if you work through the highs and lows of the market. That may work if your customer isn't there manipulating the process to beat you down to the last penny. The overwhelming majority of customers will not allow you to sell them studs at 20 cents above the market just to hold a price for the year.
The supply and demand equation in America has two new participants: capital and profit. For many, judgment day is here. Either these businesses will raise prices and become profitable, or they will become abandoned buildings. Capital is too restrictive to pile inventories in a store or cover huge losses, and most companies' reserves have dwindled to nothing, so a profit portion of the equation is a priority. Holding prices is incongruent with a successful business, especially in volatile markets. And those who continue to do so will meet with a bitter end.
Bottom line: The next time someone asks you to make a decision to hold pricing for a year, verbalize the entire scenario out to yourself and see if it makes sense. For example, you could say, "Builder ABC wants me to quote him the most competitive price today and hold that price for the next 12 months, despite the volatility in the market, and he is also going to want prompt service, quick deliveries and easy credit terms." Then ask yourself, "How do I make money doing this?"
Sometimes, the quest for sales will make us all do dumb things, but holding prices for a year is just about the dumbest. I suspect there will be some managers having to explain to executives why they are selling items at 30% below cost. That's when holding prices will really look dumb.
Don Magruder is vice president of Ro-Mac Lumber & Supply in Central Florida and former chairman of the Florida Building Material Association. This article originally appeared in FBMA's Feb. 18 newsletter.