The profit kings

The profit kings

Keywords: Plimsoll, Metal treatments, United Kingdom

Wouldn't you like to be one of the 64 companies just named by Plimsoll as the profit kings of the industry? Featured in their latest report on the UK metal treatments industry, these kings show no signs of stepping down, as for the last four years these companies have consistently maintained high profits.

According to Plimsoll, these 64 companies, an élite 15 per cent of the industry, are without question the royalty of the industry. Their average profit last year was a regal 11.5 per cent, compared to the industry average of only 3.3 per cent.

Many of these companies are well established, with 44 having been in business since the 1980s. A further 28 companies have been around since the 1970s. Yet they still seem to be out-performing the industry.

Perhaps to no one's surprise, most of these kings were the larger companies in the industry – 44 kings have sales of £10 million or more.

Top profit kings (in no particular order) are:

• Trefn Engineering (Metal Treatments Division) Ltd;

• Abbey Metal Finishing Co Ltd;

• RIW Ltd;

• Bodycote International plc;

• Robert Stuart plc;

• Tor Coatings Ltd;

• Hammerite Products Ltd;

• Hunting Industrial Coatings Ltd;

• Chromeco Ltd; and

• Quaker Chemical Ltd.

On their way to becoming a king in the metal treatments industry are nine companies that have, in their latest year, started making comparable profits. These princes of profit have only recently come into serious profit making. Companies like S Lucas Ltd proved last year that a breakthrough could be achieved. Yet will they go on to challenge the kings?

Plimsoll has classified 40 per cent of the industry, or 176 companies, far removed from regal profit making as living like paupers. These companies are currently performing to a level that is considered below the poverty line, with 131 of these companies currently making a loss. Overall, their profitability is at least half the industry average. For some this is an isolated year. Yet an unfortunate group of 65 companies have under-performed in the industry in each of the last four years (see Table I).

The criterion that separates the kings from the rest of the industry is that they are adding more value to their products and services. For those companies suffering from low and declining margins, simply competing on price is proving an unrewarding strategy. "The kings are proving that to compete in the future metal treatments industry, the pursuit of innovative products and services that can justify a price premium must be maintained to give a clear advantage in the market", says David Pattison of Plimsoll.   Table I Profit margins

In a second report recently published by Plimsoll, the question is asked,what if your company's costs were increasing and profits were falling? A new study by financial analysts has revealed that as many as 47 of the top 219 metal treatments major players in the UK are now facing this strategic dilemma.

The study looked at the ability of a company to spend wisely and generate a profitable return. It revealed a wide variation in successful spending. With an ever-increasing cost burden, as many as 24 major players may be forced out of the market.

Overall, 45 per cent of the major players had costs increase last year by 10 per cent on average, yet only a third managed to increase profits. Are companies working harder to hang on to profit? How can companies fight against these rising costs? The alternatives are surprisingly few.

Of the top 219 major players, 113 made less profit last year. For 47 of these, their costs went up. They did not successfully spend this money. For some, this is the second year of rising costs and declining profitability. Their average margin, in fact, fell from 4.8 per cent to 2.4 per cent in the latest year, yet costs increased by 9.7 per cent (see Table II)

The retreaters are the 66 companies with falling profits and falling costs. Arguably reducing costs is a sensible strategy against level or declining profits. Of the 113 companies making less profit, only 66 companies managed to reduce costs last year, indicating this is not a strategy favoured by the major players. Their average margin, in fact, fell from 5.8 per cent to 1.2 per cent in the latest year, despite costs reducing by 11.7 per cent.   Table II Classifications

The thrifties are the 22 companies increasing profits and reducing costs. Only 22 of the major players successfully improved profits while reducing costs. Keeping or reducing costs is proving an almost impossible strategy to maintain.

Spending more, then, seems an inevitable strategy. Last year 73 of the majors increased costs by 10 per cent on average, yet only 26 of these increased spending wisely and made more profit. This lifted pre-tax margins, on average,from 5.4 per cent to 7.5 per cent.

For the 113 major players suffering an erosion of profitability, arguably their options are limited, especially if cash and time are running out. Currently, 24 of these companies are in high financial risk. A way forward needs to be developed.

Options

There are several options open to those companies which are not profit kings:

• Push costs and sales up and go for profits – the risk associated with this approach is high and the level of cost growth is considerable.

• Reduce costs and sales and go for profits – this is arguably only a short-term strategy, but for some it is their only alternative.

• Sell the company – not a strategy that many will favour; yet some will need to seriously consider this option.

• Buy a company – this must be seen as a serious option. A review of the alternatives should be considered.

• Close the company down – some of the players are heading this way,suffering serious losses and weakening balance sheets; for some time is running out.

• Seek an alliance – probably the most favoured alternative, as it has the greatest potential for the smallest cost, assuming agreements can be forthcoming.

Plimsoll's study concludes that if you allow your cost base to rise above your competitors, your company is in a strategic disadvantage. As major players look for extra market share to afford these increases in overheads and, in particular, salaries, then there is a real need for many of them to merge, be taken over or seek alliances.

Readers can receive a 5 per cent discount by mentioning this article when ordering a copy of the full report, price £305..

Details available from Plimsoll Publishing Ltd. Tel: +44 (0) 1642 257800;Fax: +44 (0) 1642 257806; E-mail: plimsoll@dial.pipex.com;Web site: www.plimsoll.co.uk