Why McLane’s core operating margins dropped about 50 percent
McLane’s core operating margins have dropped about 50 percent from where they’ve generally been since acquisition.
Could you elaborate on the competitive pressures in the grocery and convenience store distribution business that have caused the deterioration in profits? And do you expect the margin structure of that business to eventually get back to where it was, or is this the new normal?
Well, I don’t know the answer to the second part about the future, but there’s no question that the margins have been squeezed. They were very, very narrow, as you know, they were about one cent on the dollar pretax, and they have been squeezed from that. Payment terms get squeezed.
In some cases we have fairly long-term contracts on that, so it will go on for five years (the sound in this part of the video is inaudible).
It’s a very, very tight margin business. And the situation is even worse than you portray because within McLane we have a liquor distribution business in a few states and that business has actually increased its earnings moderately, and we’ve added to that business, so within
McLane’s figures there are about 70 million or so pretax from the liquor part that have nothing to do with the massive parts you’re talking about, in terms of food distribution.
So it’s even… the decline is even greater in what you’re referring to than you’ve (the sound in this part of the video is inaudible).
That’s just become very much more competitive. We have to decide… if you’ll look at our competitors, they’re not making much money either. And that’s capitalism.
I think, you know, there comes a point where the customer says, you know, “I’ll only pay X,” and you have to walk away.
And there’s a great temptation when you’re employing… particularly employing thousands of people…and you’ve built distribution facilities, and all of that sort of thing… take care of them… to meet what you’d like to term as “irrational competition,” but that is capitalism.
And… you’re right. We took… the earnings went up quite a bit from the time we bought it. And we’re still earning more than then. And we’ve earned a lot of money over time.
But, as I say, a fair amount of that is actually coming from liquor distribution, activities in about four states that we purchased… very well-run.
And… we will do our best to get the margins up. But I would not… I could not tell you… give you a really… your guess is almost as good as mine, or better than mine, maybe, as to what margins will be in that distribution business five years from now.
It’s a very essential service. We do $40-some billion. And we move more of the product of all kinds of companies that names are known to you, than anybody else. But… when you get… when you get… Kraft Heinz for that matter, or Philip Morris, or whomever it may be, on one side of the deal, and you get Walmart and some other… 7/11… on the other side of the deal, sometimes they don’t leave you very much room in between.
I think you’ve described it very well.