ZIG or ZAG?
Here we are in June and 2015 is shaping up to be a yawn.
Retail sales are lackluster.
Consumer debt is flat.
US production is flat or slightly down.
International production is flat or down.
The dollar’s strength is hurting exports.
Here we are 70 months into the recovery and there still is no recovery.
- So where does the material handling industry go from here? Is it time to ZIG or ZAG?
By ZIG or ZAG I am referring to both your short and long-term strategic plans to increase business, profitability, cash flow and value. Depending on the timeframe you set for yourself to monetize your investment, changes in the material handling supply chain, disruptive activities impacting every industry and timing of reasonable growth returning in the economy ….you have a big job ahead of you.
I don’t know what you’re thinking but I find it hard to see a significant turnaround any time soon. Consequently, management has to tightly manage the balance sheet and at the same time generate positive cash flow. The lowlights noted above I believe justify my thinking. To me the short term almost requires a zero-based budgeting approach for the entire operation. You remember zero-based budgeting don’t you? You start with a blank sheet and start building your budget for what you really, really, really need and dispense with the rest. At the same time and somewhat of a result of your zero-based work you find ways to lower your fixed costs, thus making it easier to make a profit.
This approach helps you hunker down and protect your investment until such time as a miracle recovery occurs where you can take advantage of your solid balance sheet and low fixed costs, or it is time to monetize the business without needlessly depreciating shareholder value.
On the other hand, if you are a hard driver and a (calculated) risk taker, you may choose to ZAG and take advantage of the low interest rates, dealerships with cash flow problems, manufacturers looking for dealers that know what they are doing and expand the business and consolidate activities to reduce costs and improve profits. Right now there is no doubt that this scenario is possible. Did you know Warren Buffet recently bought a group of auto dealers? A couple of other hedge fund managers are looking to do the same. Hmmmmm, wonder why? Could it be that rolling up dealers is a good idea?
Speaking of dealer groups I suggest you go to the Hendricks Auto Group website and review the history of the company and how they acquired 133 franchises, 95 dealerships and 29 brands. In 2014, according to the website, Hendricks sold 180,000 vehicles for approximately $10 billion dollars. Can you imagine how many customers came through the service department? How did they do that? How could they own franchises from different manufacturers? If you want to find out how they reached this point I suggest visiting their website, and while you are at it you may want to do the same for Berkshire Hathaway because you will be surprised how many different dealers and rental businesses they own.
What these large investor groups have done is create a brand, a brand that means more to a customer than the equipment or vehicle brand that is being sold. Sure they have to deal with vendors and sure they have to meet their territory numbers, but they can achieve above average results because they are a more efficient operation, created a reputation of providing excellent service and have the horsepower to get the job done. In short, most vendors would want them on their team.
If you like this ZAG approach there are people out there looking to make a return on their money and while the money is expensive from mezzanine investors, when you combine it with a bank loan the blended rate isn’t so bad. Since the mezz funds can be considered equity it makes the loans easier to get. What I have found is there are banks that work with specific mezz players to make these types of investments possible.
I have mentioned a few months ago that the means of getting material handling equipment to the market is changing and has to change to continue to make it a win-win-win for vendors, dealers and customers. The game as we know it is probably on the way out…..with new ways evolving of providing material handling solutions to customers. Squawk Box on CNBC has been bringing on leaders from the top 50 Disruptors. Go get a copy of the list along with a stiff drink….you are going to need it. It is absolutely amazing how these young and old people alike are changing the way products go to market with more services and cheaper prices. One that recently caught my eye has to do with batteries. Think about this for a moment….if Elon Musk and his crew find a way to produce batteries that can basically convert all lift trucks to be battery operated, what would that do to your business?
If you are making plans to retire or sell the business I would ZIG. If you still have fire in your belly and like a challenge then ZAG after giving a tremendous amount of thought to how money will be made in the lift truck business or the one of many businesses your find yourself in using the hard and human assets you have at your disposal.
Garry Bartecki is a CPA MBA with GB Financial Services LLC. E-mail [email protected] to contact Garry.
