Low margin culture leaves a trail of destruction

Catering equipment distributors bidding for contracts over the last few years, particularly in the private sector, will be all too familiar with the fun and games involved with pricing for work.

Immense pressure has been put on dealers to cut margins and take on schemes for negligible returns.

Distributors stand accused of under-pricing to win work and maintain turnover, fuelling a cycle that becomes difficult to break. In turn it has bred a culture which has left many concerned about the long-term health of the industry.

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When you work on slim margins, the profit you make still has to cover service and any goodwill that may have to be extended to customers. Both these areas suffer if the profit is small because you have to work so much harder to make the money that keeps the company solvent.

As one dealer says: “The first areas to save money will be on keeping your customers happy if you don’t need to and being ruthless on service calls — such as making the customer pay for anything that is questionably not a warranty service call. But the customer will have a soured relationship and not want to use you again. The ongoing problem is that it is well-known that it is much less costly to maintain your current customer base than find new customers. A downward spiral then ensues. So a culture of low margins becomes destructive.”

One pertinent challenge is that end-users still dictate pricing in many cases, especially where main contractors are involved and projects were won on a price bid in the middle of the recession when everyone was scrambling to secure work.

Now, there is a higher volume of work available within the building industry and the core trades such as electrical, mechanical and flooring are busy, so they are no longer willing to do the work at the rates the project was won at by the main contractor.

As another dealer notes: “We are now seeing the fit-out trades such as catering equipment being squeezed even more to meet the original cost plan the main contractor won the project at — and they are still able to get someone who is willing to do it at the very lowest margin.”

Every firm has had to take steps to retain their share of a diminished market, but as conditions pick up it is only right to ask whether it is time for companies that have gone out to win business at the lowest possible margin to rethink their approach.

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