The heavy-duty parts industry, confronted with rising costs and interest rates, must prioritize strategic financial decision-making to fortify their economic positions.
In part 1 of this series, we talked about the impact of demographic inversion, and in part 2 of this series, we talked about how to get the trucking industry to adopt a digital sales channel. Now we will complete this 3-part series with a discussion of the current financial challenges faced by the heavy-duty parts industry.
Problem #3: Inflation and Increased Interest Rates
The Federal Open Market Committee (FOMC) commonly just referred to as The Fed in the US, along with the Bank of Canada, decided to combat inflation by raising interest rates. Increasing interest rates to slow down the economy works, but it is causing distinct challenges for the industry and impacting heavy-duty businesses in multiple ways.
They include but are not limited to:
- Operating Costs on the Rise: Heavy-duty businesses are dealing with increased costs across the board—vehicles, inventory, maintenance, and shipping. To maintain profits, companies are passing these costs on to consumers. However, the risk of losing customers due to frequent price adjustments is a looming concern.
- Credit Tightening and Loan Restrictions: Banks adopting strict measures, like “call loans,” compound the industry’s challenges. These financial constraints put heavy-duty parts companies in a tight spot, with limited options for loan refinancing and the looming cost of higher interest rates negatively affecting cash flow.
- Debt Vulnerability: Businesses with substantial debt face the risk of bankruptcy. The combination of stringent repayment terms and higher interest rates creates a challenging situation. For leveraged businesses, this scenario could force tough decisions, including selling assets, layoffs, increasing prices, or in a worst-case scenario, going through a controlled shutdown.
“If inflation does not stabilize anytime soon, expect the rates to continue rising but the committee is committed to reducing and achieving the rate back to 2%.” – Jerome H. Powell, the chair of the USA Federal Reserve (Bloomberg, 2023)
These challenges are more than businesses can handle! Think about this, banks have started to reduce lines of credit and “call loans” meaning the bank says to the company, ‘You owe us a million dollars and you have 45 days to pay the loan back or go through a requalifying option, and “if” you still qualify for a loan of that size, it will now be at a much higher interest rate’. This hurts cash flow and that makes it harder for heavy-duty parts companies to operate.
For instance, if a heavy-duty parts company has a lot of debt, commonly called being leveraged, and this happens to them, it can force them out of business. Sometimes the only way to repay the loans is to sell all the inventory, but then you have no money to buy more inventory and so you are forced to either sell your business to someone else or do a controlled shutdown.
“This whole situation has made cash a lot more expensive, a lot harder to get your hands on, and that has a direct implication on the cashflow of a
business.” – Jamie Irvine, Heavy Duty Consulting Corporation
In turn, heavy-duty businesses deal with increased operational costs like inventory, maintenance, shipping, and fuel, and they often have to raise prices to stay afloat. But here’s the catch – they risk losing customers in the process. Plus, with our heavy reliance on global trade, what happens outside of North America disrupts the global supply chain, leading to higher logistical costs, delays, and overall inefficiency.
Strategies for Taking Advantage of Inflation and Increased Interest Rates
At the Heavy Duty Consulting Corporation (HDC), we have seen the impact of inflation and higher interest rates on our heavy-duty clients. The reality is that there is little we can do about rising costs. But one thing that is under our control is how we sell our products.
If you have inventory, inventory is now king. There are specific ways to leverage your inventory to improve your economic situation. Inventory purchased in the past at a lower purchase price can create higher profits now that offset rising costs. Additionally, while you may not have as much available cash flow from cheap lines of credit and business loans if you increase your margins with your older inventory, you can generate the cash needed to keep your business running profitably.
“Things have improved, but they’re not nearly where we want them to be quite yet.” – Travis Kokenes, MacKay & Company at HDAW 24
While it does appear that rising interest rates have slowed inflation and that we may have successfully created a “soft landing” for the economy, we do not feel that we are quite where we need to be. We are still at the bottom of the truckload cycle and parts volumes for many of our clients remain down.
Suppliers are not immune to these economic pressures facing heavy-duty parts distributors, and we know that there are some great deals out there for distributors if they leverage their buying power correctly. Additionally, 2024 may very well create some unique merger and acquisition opportunities.
“We will need to stay in good communication with our customers too. We need to be on the front side with them, talking about their business and what their challenges are.” – Jon Pearson
To remain competitive, you must adapt, embrace innovation, improve working conditions, and prioritize sustainability and safety. Here at Heavy Duty Consulting (HDC), we want to see your heavy-duty business challenge the status quo, be empowered, and continue to grow.
You Shouldn’t Have to Struggle to Create and Implement a Sales Strategy That Works.
In times of inflation and rising interest rates, the solution is increased sales revenue.
Do you find yourself feeling…
- Overwhelmed because the world of parts distribution is rapidly changing?
- Worried about choosing the wrong strategy and wasting time and money?
- Unsure of the best way to achieve your strategic goals?
If you need help creating a sales strategy for your heavy-duty business and want to eliminate the overwhelming feeling of rapid economic change. In that case, we encourage you to meet with us!
It’s Easy to Get Started.
- Get a B2B Sales Audit. We will provide you with a complete assessment of your current sales system.
- Get Access to Our Program. Gain complete access to our Learning Management System and our weekly Consulting Calls for support as you learn how to implement our sales program.
- Empower. Grow. Build and execute a sales strategy that will transform your company.