Consumer sales will remain sluggish

By Frank W. Denny President, Builders Square, Inc.

HE YEAR 1986 should be ex- factors of slow gowth with flat and, early o[, lower interest rates are examples of the contradictions currently being noted in the economy. Consumer sales, as evidenced by the record 3.390 ftober, 1985, decline, will continue their sluggish pattern as real income growth slows. Recent family income gowth was primarily derived from an additional wage carrier entering the work force, rather than higher individual earnings. As the employment picture flattens, household incomes tend not to expand sufficiently to absorb the presence of new retail outlets. Therefore expansion must primarilY be achieved at the expense of existing market participants.

The primary industry economic factors facing lumber and building material retailers next year would appear to be flat housing starts for the contractor supply segment and the beglnning of the maturation cycle for the home improvement retailing segment. As a sub-segment, home improvement retailing would appear to be accelerating toward maturity ils Builders Square, Home Club, Mr. How, Home Depot and Home Quarters roll out their aggressive expansion plans. For them evidence of this rush to maturity is the early on entry and exit of Bowater and Homecrafter warehouses.

In this environment, productivity and cost controls, both difficult achievements in a fast growth mode, become even more critical to those companies which will become national concerns in the next several years.

Productivity in our industry is heavily skewed to inventory productivity and earn and turn management skills are magnified ina tight economy. Productivity increases are most readily achieved via improved systems which reduce the cost of processing merchandise and paperwork and provide quantified repors of relative productivity rates for small segments of the inventory. In other words, today's merchant must be concerned with the productivity of hammers as opposed to prior concerns of the hardware department.

The manufacturing side of the industry must be prodded to incorporate features such as LJPC coding on the merchandise to further facili-

Sfory at a Glance

Economic lactors are contradiclory...household incomes cannot support new retail outlets...aggressive expansions will push out some retailers... eamings growth will come from better management ol inventory and employees.

tate improved productivity. With the information explosion in our industry, manufacturers will be chocen on the basis of on time shipping and order fill rates as oppoced to price and in-store service.

Employee productivity is the other obvious criticd factor. Approximately 7O9o of most op€rating ov€rheads is payroll related. The successful operator wil managp ttrcse payroll dollars to optimize crxitomer service while providing satisfactory rcurns of capital. With maturation upon us, the successful mid-to-long t€rm op€rator will benefit from a hase of loyal ctstomers which price alone cannot pro vide.

Sales per errployee and gross margin dollar per employc meailriF ments should become as familiar to the successful operator as prwious standards such as sales per square foot and average dollar transaction.

On the other hand, manufacturers must also move toward maximizlqg test standards to bocome or remain a low cost producer in today's world market.

In closing, I feel the home improve. ment segment will continue to eirpand at an approximate l09c annual rate for the next severd years. Rcailing in general will not erperienoe real growth of any significant size and I therefore feel that raail earnings in general will be flat. The indiyidual market shares of 1985 do not @mpare with those of l9E0 and they will continue to shift in 1985.

Earnings growth must therefore come from better management of inventory and employees, not increased sales per unit.