The optimal mix

Balancing the high margins and the low unit prices of hand tools

By -- Industrial Distribution, 11/1/2000

For the typical Specialty Tools & Fasteners Distributors Assn. member, hand tool sales are a mixed blessing. They offer high margins, but this doesn't automatically translate into comparable profits because they command much lower prices than their power tool counterparts.

K.B. Winterowd, president of Construction & Industrial Supply Co. in Kansas City, Mo., notes that power tools get a lot of attention, particularly during periods of technological improvements such as the recent advances in cordless tools. Yet despite what he calls the "glamour" associated with power tools, Winterowd points out that hand tools will always be indispensable to contractors, plumbers and other trade professionals.

The 23-year-old distributorship gets a lot of hand tool business from the trade unions, Winterowd explains, because members seek out top-quality products. And a dispassionate look at his books has convinced Winterowd that hand tools are a key part of his business.

"What we want people to pick up as a point of purchase in the showroom is a hand tool, trowel, specialized tape for a plumber, a new deburring tool or a threading tool," Winterowd says. "In our business, I would call hand tools the fulcrum. We're able to consistently have a base of customers come in for replacement tools or the latest tool."

For Chicago-based Cragin Industrial Supply Co., Inc., both hand and power tools are sidelines rather than mainstays of the business. Yet sales manager Rob Szafraniec Jr. says they are an excellent add-on product for the company. Customers aren't as price-sensitive when shopping for these products, Szafraniec says, because they are small-ticket items when compared with power tools.

"Power tools have been destroyed by the big boxes," Szafraniec says. "They're driving the pricing down. For our hand tool sales, our gross margin is about the same as for our overall sales. If you look at total gross margin in any given period, power tool sales are well below the margin average."

Bill Derville, president of General Tool & Supply Co., which is headquartered in Portland, Oreg., sees evidence of the positive and negative aspects of hand tool sales in each of the company's five branches. Derville says that the billing amount is too small unless the company can sell a whole box.

"Lots [of customers] buy one or two and the gross margin dollars don't cover the cost of filling the line of billing," Derville says.

The example that Derville gives is that if a distributor sells a power tool for $100 to $300 at a 15 percent margin, the returns are much higher than selling a $15 pair of pliers at a 30 percent gross margin.

"Unless you're selling six or a box quantity, you can be fooled into [thinking you're] making money," Derville says. "When in actuality gross profit dollars don't cover the transactional costs."

Al Bates, a consultant and founder of The Profit Planning Group, a research and education firm based in Boulder, Colo., says the best distributor strategy is to sell hand tools as an add-on product.

"Ideally, if hand tools are an add-on product, distributors shouldn't be concerned that it's a lower price," Bates says. "The only time [distributors] would have a real problem is when they replace $500 sales with $20 sales. If they're making $520 sales [with the hand tools] it should be gravy."

Derville uses a two-fold strategy to address the issue. First of all, he offers a discount for customers buying at full-package quantities. Second, he carries more inventory to avoid backorders.

"Many times the cost of a backorder is much more expensive than the carrying cost of the inventory," Bates says. "It also encourages customers to buy at full package quantities if you have a full package on your shelf."

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