Rising oil prices cause profit slippage

By Staff -- Industrial Distribution, 5/1/2000

Newton, Mass.-Climbing energy prices are cutting into the bottom line of distributors in many sectors, yet companies remain reluctant to make customers pay more.

These same distributors are taking a wait and see approach concerning the Organization of Petroleum Exporting Countries' recent decision to increase the production of oil by about 1.7 million barrels a day. The extraordinary OPEC ministers meeting, scheduled for June 21 in Vienna, is expected to make a final decision on further production increases.

E & R Industrial Sales of Sterling Heights, Mich., a six-branch, full-line distributor to metal cutting shops and the automotive business, has a salesforce of more than 100 people and a fleet of about 15 trucks for product deliveries. Paul Thomas, director of marketing, says superior customer service is more important to the company than lower-cost delivery methods.

"It may cost a certain [additional] percentage of a point to make the delivery," Thomas says. "We notice, but we're not going to make sacrifices or pass the costs along."

Joe Mika, president of the Aston, Pa.-based Goodall Rubber Co., says management at the hose and accessories distributorship is making sure each salesperson spends time efficiently and effectively.

"A little more of our resources are being spent working with the salesman," Mika says. "It's the way we should be doing business, [and] because of the cost of gasoline it's caused us to focus a little more on it."

Hose companies like Goodall may be particularly hard hit since most of their products are petroleum based. Goodall is also affected because manufacturing and trucking companies are tacking on surcharges, but distributors find it difficult to do the same.

"We're passing on price increases whenever possible, but it's not an easy task," Mika says. "It takes you sitting down with the customer and if you're locked into a contract the distributor gets squeezed."

Although some of the 80 vehicles owned by Windsor Factory Supply, Ltd. of Windsor, Canada, cross the border each day between the company's six sites in Canada and one in Michigan, company president Wes Delnea says adding the charge to an invoice would be a public relations nightmare.

"In Canada, even though a few companies have tried to put a fuel charge on invoices they've been very unsuccessful," Delnea says. "A lot of customers complained."

Lee Helfer, president of Specialty Hose Corp. in North Canton, Ohio, says nearly all of the carriers he does business with have added surcharges to the company's bills. The metal and Teflonrhose distributor targets the industrial and aerospace markets, but does most of its own shipping through UPS and LTL carriers.

"We're affected more on the inbound side than the outbound side," Helfer says.

On the other side of the coin, a distributor like Standard Supply & Hardware Co. stands to gain from the price spikes since it sells to the offshore oil industry, oilfield service companies and oil companies. Mac Hadden, the CEO of the New Orleans-based company, says the firm hasn't experienced significant benefits so far but forecasts higher demand for the second half of the year.

"All of our major customers have very bullish forecasts for this summer, to the point of advising us to beef up our stock and our capabilities to be in a position to handle their anticipated volumes," Hadden says.

Hadden says anything could change in a moment's notice if OPEC moves to drive the price down, but other distributors aren't counting on quick relief. Helfer says he thinks the OPEC decision will ease the pricing a little bit, but it's unclear how much.

"It seems the prices have gone up disproportionately to the rise in the price of crude vs. the amount of foreign crude we use," Helfer says.