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27, Sep 2020 -

The future of Joineries in the southern Cape

The future of Joineries in the Southern Cape

Oct_2017_-_Red_river_timbers_-_Large.jpg

In so many ways, a joinery is like a swimming pool – and in so many more obvious ways it absolutely isn’t!  Yes, both are power-hungry creations, needing to be used and maintained every day. A more serious strategic challenge is that both are equipped to be used for very specific activities. Of course you can empty a swimming pool and use it for skateboarding, just as you can empty a joinery and use it as a gym, but the point is the capital expense in setting up a ‘single focus’ operation. Your swimming pool insulations, tiling, piping, filter, pump and the water offer no advantage to the skateboarder, in the same way as bandsaws, planers, timber and all those technical tools are of no value to the fitness instructor. A joinery is like a swimming pool in that both are purpose-equipped structures. With this picture in mind, what does the future look like for joineries in South Africa in general, and in the Southern Cape in particular?

Let’s unpack the challenges using the key input costs in a joinery business as a guide:

  • Energy & Labour: here we include all power usage and supply costs, all transport and associated costs, and all employment costs – both fully-funded and contingent.
  • Materials: if there’s nothing to ‘join’ in a joinery, you can pull the plugs! Included under this heading are: adhesives, veneers, the timber itself, fasteners and all other applications and additives to the finished products.
  • Market-making: listed under this heading are all the costs of communicating with the market (both supply and demand sides), for example websites, telephones, advertising, time spent with customers etc.
  • Insurance, safety & maintenance: a joinery is a technically-rich, physical environment where things can and do breakdown and go wrong. Accidents carry costs, and machinery requires servicing.  All these and associated costs are included under this heading.
  • Facility costs: whether rented or owned, the joinery building carries costs including maintenance, rates and taxes, and a rental charge. A leaking roof in a joinery can be a show-stopper !
  • Time, design & craftsmanship: this refers to the income required each month not only to cover all purchases, creative inputs and operating costs, but also a minimum net profit margin of 40% as reward to the investor / owner of the business.

We have now painted a very basic picture of the operating and business environment of a typical joinery.  Of course there are a myriad of other expenses and incidentals, but we have covered 80% of the context.  What will happen to these input costs in the medium to long-term? Here is my synopsis:

  • Energy & labour: costs rise by a minimum of 10% over next 12 months
  • Materials: costs rise by a minimum of 15% over next 12 months
  • Market-making: costs rise by a minimum of 5% over next 12 months
  • Insurance, safety & maintenance: costs rise by a minimum of 10% over next 12 months
  • Facility costs: costs rise by a minimum of 10% over next 12 months

(You will note I have omitted the heading Time, design & craftsmanship. We will deal with this in conclusion.)

You should now be asking me: “What are the dynamics that will drive these increases in operating and business costs? ”These are the same indicators that drive the global economy, and there in lies the beauty of the issue. By carefully monitoring these global indicators, and with an acute knowledge of the history of, and responses to these trends, we can in fact position ourselves in the cycle and to a large degree determine its trajectory, amplitude and velocity. This is NOT rocket science although ‘the professions’ would have you believe that it is well beyond your understanding. Let’s test your business gut!

Complete these questions with one of following … increase, decrease, remain neutral:

  • In the medium to long-term global interest rates will…….
  • In the medium to long-term, the South African Rand will …… in value.
  • The costs of energy (fuel and electricity) in South Africa will…
  • South African labour costs will…

I am certain that 99% of you would have completed as follows: interest rates to increase, SA Rand to decrease in value, energy costs to increase, as will labour costs. Yes, there will be bounces, dips and surges, but the trends are set and will continue. Doing business in South Africa is set to become very much more expensive, begging the question: How do we anticipate the market/consumers to respond? I will leave your experience and insight to answer that all-important question. For now, open your Income & Expense Account spreadsheet for your last completed trading month, add 20% to your expenses total for that month and reduce your income total by 20%. What you are left with is a glimpse of the shape your enterprise will be in this time next year if you do nothing right now! Not a pretty picture, right?

Facing this certain scenario, you and your enterprise are left with a couple of options. You can:

  • cut operating costs
  • innovate on production and design
  • change the product mix (if upmarket – go downmarket as well, if in the middle – expand in both directions, if focus is at the lower end – go upmarket as well)
  • find new markets (advertise more aggressively, more creatively, more often)
  • find more competitively priced suppliers
  • reduce your debtors book to zero
  • inject capital to reduce interest and debt burden on cash-flow
  • improve management (reduce inefficiencies while improving productivity), and even
  • reduce your profit margins.

The majority of enterprises follow not one of the above nine cost-saving, income generating tactics. No, when faced with the adverse market conditions and inflating operating costs outlined above, most businesses increase the selling prices of their products and services. History teaches us that this leads to a self-perpetuating spiral towards failure. This time next year, there expenses would have increased by 20% but their income would have dropped by 40% and they will be well on their way to bankruptcy, foreclosure or liquidation… most often, little bits of each !

Will things be different for joineries in the southern Cape? Well, the short answer is Yes & No! Dollar-denominated, multi-national conglomerate dominated, parity-pricing strategies set international commodity prices, and, for the purposes of an analysis of a joinery business, that takes care of energy, timber, steel and all of our production and finishing materials. When it comes to labour costs, the South African market is still largely at the mercy of a socialist government, inflexible labour laws and the Trade Unions. As governments begin to hunt more aggressively for taxes, higher rates and taxes will be levied on properties, both existing and new, especially where growth and development is taking place. This is again of course exactly the opposite of what government should be doing, that is reducing taxation and incentivising growth, but like us, they too never seem to learn the lessons that history so clearly illustrates. The Southern Cape is growing at 6%, twice the national average. Where and how will our region perform better in managing the growing costs?

With a relatively lower risk profile in terms of safety, security, crime and unemployment, escalations in insurance premiums and other levies in the southern Cape will not be as dramatic as in Gauteng, KwaZulu-Natal or even the Cape Metropole for example. With the exception of Mpumalanga and parts of the Eastern Cape, transport costs of timber from plantation to sawmill to joinery are a fraction of the cost in the southern and western Cape when compared to other regions of the country. That leaves three sets of core input costs to focus and work on, these being :

  • Market-making
  • Facilities costs
  • Time, design and craftsmanship

What can be achieved in these areas to reduce pressure on the business and increase turnover of stock and sales? I will introduce ideas under each heading.

Market-making

  • Have you activated your own and your family’s network of contacts?  Personal references are powerful, and friends of friends can make excellent customers.
  • Have you fully exploited social media and the internet as ‘channels to market’?  These are inexpensive and relatively easy mechanisms to activate.
  • Have you kept records of past trades? If so, go back to these and make contact with old, loyal customers. They have bought from you before, and if your products and service are as good as you say they are, they will buy from you again and even refer you to their friends if asked.
  • Is your business listed in the local Yellow Pages & Telephone Book ?
  • When last have you placed a classified advert in your local community newspaper? You should be looking at a booking at least once a month, which could cost you less than a cup of coffee !

Facilities costs

  • The cost of living in the southern Cape is slowly but surely rising, but still well below the averages of the cities of South Africa.
  • This fact must be reflected in the cost of the joinery on your books.
  • If you are the owner of the building, make sure the rental you charge your enterprise is at least at a 5% discount to the going market rate.
  • If you pay rent to a landlord, you need to fix a longer-term competitive rate of at least 2% below inflation.
  • Furthermore, ensure that the owner of the building is using the allocated budget for maintenance and repairs to keep the location in good condition.
  • ‘Presentation’ is important for both staff and especially to customers.

Time, design and craftsmanship

The honest truth is that if you are not making an average of 40% net on monthly sales, you should sell the business, and either move into a different sector or at worst seek employment. Here are the foundational questions for this set of core inputs :

  • Do you ensure good time-keeping among all your staff?
  • Is all timber and production material secured under lock and key at all times?
  • Are productivity levels at least at the industry standard?
  • When last have you introduced or experimented with new designs or innovations?
  • Would it be possible to reduce your drawings from the business by 5%? If not, perhaps this indicates that your personal and household expenses are not being managed and controlled carefully enough

In conclusion, the southern Cape offers proximity to source of commodities, a relatively lower cost of living for a better quality of life, access to a skills pool especially in the timber and agricultural sectors, and importantly an under-serviced market growing at 6% per annum. If joineries and sawmills in the southern Cape are unable to adequately prepare, and then successfully weather the coming economic storm, then few such enterprises in this country will survive.

For further information and contacts, please visit our sites at:

www.southerncapecorridor.co.za
www.commoditiestrading.wixsite.com/website
www.redrivertimber.wixsite.com/home

Source: Red River Timber

Contact Sawmilling South Africa