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AWMA Industry Performance Report Shows Return on Assets Is Key Indicator for Success
Financial results for candy, tobacco and convenience product distribution companies reveal key differences in performance among firms.
Fairfax, VA (11/18/03) — The 2003 "Hershey Industry Performance Analysis" (HIPA) Report, published by the American Wholesale Marketers Association (AWMA) and sponsored by Hershey Foods, reveals that convenience distribution firms with the highest profits produce a "return on assets" (ROA) of 12.3 percent, compared to a 5.5 percent return for the typical company. The Profit Planning Group of Boulder, CO, conducts this annual survey of AWMA’s convenience distributor members, analyzes the results, and writes the report.
According to the report, ROA, which measures the economic viability of a company, is the single most valuable measure of overall performance. Simply, ROA is profit before taxes expressed as a percentage of total assets or total investment. For a company with $56,230,000 in sales, the difference is a profit of $393,610 for the typical AWMA member, versus $843,450 for the high-profit firm. The gap in performance is one that AWMA encourages all member firms to close--or else, as the report says, face a "difficult future."
Other important benchmarks in the report include profit margin (net profit before taxes to net sales): The high-profit convenience distributors produced 1.5 percent profit margin, while the typical firms produced a 0.7 percent profit margin. Asset turnover ratio-the measurement of net sales to total assets-was 7.8 ($7.80 in sales for each $1 invested in total assets) for a typical AWMA distributor; for the high-profit distributor it was 8.2.
In addition to providing detailed financial results for convenience product distributors, the report focuses on the importance of various operating statistics to help member companies plan for profit. The 2003 HIPA Report identifies six critical profit variables that -- year-in-year-out -- drive profitability within the industry: sales growth, gross margin, personnel productivity ratio, non-payroll expenses, inventory turnover, and average collection period.
Sales growth allows a company to offset operating-expense increases that occur every year. With adequate sales growth, a company can offset inflation and provide greater customer service. The high-profit firm may not produce higher sales growth every single year; they simply produce higher sales growth most of the time. The 2003 HIPA report shows the typical convenience-distributor firm has sales growth of 6.4 percent, while the high-profit firm has a sales growth rate of 7.6 percent.
Gross margin also a huge impact on profitability - getting the margin right takes pressure off other operating areas. For the typical AWMA distributor firm, gross margin was 6.6 percent, compared to 6.3 percent for the high-profit member.
Payroll expenses are by far the most important factor. Controlling payroll is essential to controlling expenses. For the typical firm, the Personnel Productivity Ratio (PPR), or percentage of every gross margin dollar devoted to payroll and fringe benefits, is 56.4 percent, versus 49.2 percent for the high-profit firm.
Non-payroll expenses represent 2 percent of sales for the typical firm and 1.6 percent for the high-profit member. To control these expenses, companies must literally examine every expense category to make modest improvements in multiple areas.
In 2002, the typical firm had an inventory turnover of 18.8 times, or every 19.4 days. In comparison, the high-profit company had an inventory turnover of 17.8 times, or every 20.5 days.
The average collection period for both the typical and high-profit firm was 19.4 days.
Interesting in the study this year was the fact that the typical distribution firm performed the same or a little better than the high-profit firm in the areas of gross margin, inventory turnover and the average collection period. The difference was the high-profit firm did a much better job of controlling expenses while growing sales.
The Hershey Industry Performance Analysis (HIPA) Report measures key benchmarks among convenience wholesalers, including sales per employee, gross margin, return on investment, inventory turnover, salaries, and much more. The 2003 HIPA Report is based on income statement, balance sheet, and operating data for 2002 provided by 75 participating AWMA distributor member companies.
For more information on the HIPA Report, contact Jill Kosko at 703-208-3358, ext. 644, or jillk@awmanet.org.
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