New Costs of Doing Business

Bv E. C. Porker

Patten-Blinn Lumber Co., Los Angeles

Address DeliveredBefore the Annual Convention of the Colifornia Retoil

Lumbermen's Association at San Diego, November 6,7 dnd B, 1935

Mr. Chairman-Fellow Lumbermen and Friends:

I have been asked by the Program Committee to say a few words on "The New Cost of Doing Business." A discussion of the new cost of doing business, I think, calls for a discussion also of the qld cost of doing business. I have never had any experience in the lumber business in Northern California, and istics which I lumber in Calttornia, and any statlstlcs whlch may have relate to the lumber business in Southern 'California. Ifowever, I should judge that the conditions have been and are quite similar, and that any remarks will apply in the main to the whole State.

It is evident from observance alone, and available statistics will prove that the cost of doing business has greatly increased in the last nine or ten years. During the depression our expenses may have decreased some in dollar volume, but have increased greatly in percentage. During the past six or seven months due to wage and salary increases and other such causes, they have been rising rapidly again in Dollar volume. What is the cause of the increasing cost of doing business in the last nine or ten years, and even before this time? Government regulations and requirements and taxes (city, county, state and federal) are the cause of some of it, especially so in the past year or two, but the main reasons, I think, can be laid directly at the door of the lumber industry itself. A great portion of it is due to unregulated competition-progress you may say in business service but costly just the same.

My first experience in the lumber business began in the summer of 1904 for the Nofziger Bros. Lumber Co. at Eighth and Main streets, Los Angeles, which in 1905 became the Consolidated Lumber Co. This company at that time was one of the largest companies in the city, doing probably the largest business; and yet they did not have one single outside salesman. Any one who wanted to buy lumber came to the office to buy it. It was considered very bad practice to ever go to see the customer, as we were told "it put you on the wrong foot." No service men were sent to the job during the course of construction, but instead the contractor came down and talked to the shipping clerk or telephoned him. Finish was all Round Edge, and finish bills were loaded right out of the shed; Sash and Doors were all standard sizes and kinds and loaded right out of stock. Along about 1907 a certain large lumber company started operations in Los Angeles and put on the streets of that city many salesmen, and from that point on our troubles in the rising cost of doing business began. Shortly thereafter all companies put salesmen on the streets. In Los Angeles today, if an owner took out a permit for a house, he would probably have fifteen lumber salesmen at his home tomorrow, In those days billing and estimating was done by hand and recorded in the old time press. The pr1c9 llts were viry simple, without the minute break-down of today. The Big B-oss wad the only one who had an automobile-the salesmen and collectors riding bicycles or driving the now famous "horse and buggy." Deliveries were made with horse and wagon prior to 1910 or 1911and along about that time trucks began to be employed. Trucks increased our field operations, made it possible to better serve customers, and changed our whole mode of doing business; but if you are simply considering the expense of doing business-in view of the extravagant service they brought about, I would say that they increased our cost of doing business.

Our methods of doing business went along in about the same way until after the war in about 1920. About this time a cafe man on Broadway in Los Angeles started an innovation-a smart trade getting idea, by giving a "second cup of coffee free." It was something new, and it is a positive fact that lines of people actually stood on Broadway outside the cafe waiting to get in. His competitors soon had to follow suit, and very soon the second cup of coffee simply became an added cost of doing business to all cafe men' Various lumber dealers, not to be outdone, began giving free cups of coffee in the form of plan service. As time went on, dealers and their salesmen. in their desire to do something the other fellow didn't do and secure a trade advantage, began taking ofi the contractor's Sash and Door list and then even taking ofr his lumber list-a Dractice that was unheard of and frowned upon in the good old days. Then the dealers and their salesmen began to tell the owner and contractor how much prettier the house would be with new "fandangled" mouldings and casings, and the lumber dealer, to keep abreast of competltion, soon made all these fancy mouldings and casings without set-up charges.

As-each innovation became known, all dealers had to do likewise.

No one had any trade advantage and each one's cost of doing business was gradually creeping up. To gain a sales advantage, certain dealers began giving what we called "hand spanked" finish-finish so smooth that the carpenter does nothing but nail and fit it in the building. Then soon after this followed the "shot gun delivery service" with which you are all familiar, and which has added so materially to our expenses. Then about 1928-1929 the "Free Financing Service" followed, when the owner wouldn't buy from a lumber company unless your salesman had arranged the financing of his building for him, unless you had agreed to wait titl the last loan payment for your money, had agreed to forego filing a lien (usually worthless) or had agreed to take your account out in second and third trust deeds, or had agreed to wait till he sold his building. This was the most expensive "free cup of coffee" the lumber dealer ever gave, and if he didn't give it, he didn't do business. A recital of these competitive abuses and practices could be carried on indefinitely-all of them adding to the cost of doing business. Some of them progressive business services, no doubt, but all costing money, and gross profit statistics will show that the lumber dealer gave them free.

It is well at this point, I think, to give you a few actual statistics on the cost of doing business. The industry has no uniform system of accounting, and the statistics which I will give you must of necessity be in accordance with the particular method of handling cosis with which I am familiar, The company with which I am connected considers as "cost of doing business" all expenses from the "top of the pile or warehouse out, and the money collected." We consider all items having to do with getting the goods into the pile or warehouse as purchases, such as-freight or incoming cartage, milling, wharfage and piling labor. We charge all mill expenses such as men's tirne, power, belts, etc., to the mill account, and then credit the mill with the work doue each month and debit lumber purchases with like amount. The resulting debit or credit on the mill account is an addition or deduction to the .cost of doing business. We charge all cartage expenses such as truck drivers, tires, gas, etc., to a cartage account, and then credit cartage with the amount of cartage earned. The resulting debit or credit to the cartage account is an addition or deduction to the "cost of doing business." Cartage is not in this manner credited to any commodity account, and therefore in our opinion, gives a truer picture of the gross profit on each item.

With this explanation I will give you a few actual figures I have compiled on the cost of doing business, and will then give you a few actual figures to show the amount of gross profit which our industry has been able to obtain. To take figures for any short period of six months or even one year is often misleading, and in order to get a fairer average, I took a period of time ending December 1, 1934, in which was sold and delivered many millions of dollars worth of lumber and merchandise, at retail, and found the cost of doing business from the top of the pile or warehouse out amounted to l7%\% of sales, exclusive of any charged off accounts. I deducted the charged off accounts, as this is a factor which would vary so greatly between periods and yards. During the period under consideration, I think that we are safe in assuming that all dealers would lose at least l/o on Retail Sales. Therefore, the cost of doing business for the period under discussion was l8%%. Just as a matter of interest, I might say that taxes in this period amounted to lrl% on Sales, depreciation lrlVc, insurance f ol l7o, stationary l/i of l/o, telepbone fu of. l/o, outgoing labor 4rlVo and, salaries 7/a,Vo.

I then took the first group of sales just mentioned and broke it down into two divisions approximately of equal periods of time. The 6rst division which we shall call Division A, took in the period before and after the boom year of 1923. The total sales of this Division A amounted to a goodly number of million dollars worth of lumber and merchandise at retail, and I found that the cost of doing business from the top of the pile or warehouse out amounted to 132/10% of sales, exclusive of any charged ofi accounts. Assuming that the amount of charged off accounts during this period was lVo, woald, make the cost of doing business 14-2/10y'o. As a matter of interest, taxes in this period amounted to l/1%, depreciation ft of. l/o, oltgoing labor 4%% and, salafies Sr/aVo.

I then took the second division of the first group, which we shall call Division B ending with December 31, 1934. This division does not include any boom years, but it did have several good years, and of course, the depression years. In my opinion, it represents on the average about what we can expect over the next several years.

The total sales of Division B amounted to a goodly number of million dollars at retail, and I found that the cost of doing business from the top of the pile or warehouse out amounted to 22/a7o on Sales, exclusive of any charged off accounts. Hoping that there might be some lumber dealer some place who has held his charged ofi accounts in this division to l/o,I added lEo to 22%,% which made 23j(/o as the cost of doing business in this period. Taxes you will notice in this division now represented 2l/10/o of Sales, depreciation ?tlVo due to increased buildings and equipment purchased in boom years, outgoing labor 4/a,/o and salaries l0/aVo. Just to recap these figures--on the first group of sales the expense was L9%Voi on the first half of them they were 142/10% and on the last half of them they were 23%Vo.

There has been much discussion among lumbermen as to the cost ' of getting lumber from the top of the pile on the job and the money collected. In the Division B Sales just mentioned, which period ended Dec. 31, 1934, there were delivered a few hundred millio'ns of feet of lumber. The only practical way that I know of is to give lumber that proportion of the cost of doing business, that its sales bear to the total of Lumber and Merchandise. During this period lumber sales were 59Vo and merchandise was 4lVo of the total. Giving lumber 59Vo of. the expense, which expense included 1% of Sales for charged off accounts, made the cost per M. to put the lumber on the job $8.61. As a matter of interest, we took a longer period with double the footage and the average was $8.45 per M. The year 1935 to date shows $8,74 per M, so I think it is safe to say that it costs just about $8.50 per M to put lumber from the top of the pile on the job and collect the ntoney.

Although the cost of doing business was 23fu,/o in the Division B flgures ending Dec. 31, 1934, actual statistics will show that for the past three years, due to decreased volume of sales, they have beerr right at 30%Vo. A11 of us who have been through this period know tle impossibility of reducing expenses below a certain point. Certain fixed expenses, such as taxes, depreciation, salaries of employees, etc., went on just the same. Dollar expenses are now daily increasing. Our cornpany recently, along with other companies, put into efiect a wage increase, which increased wages on ihe average aboat 25Vo. Otrr expenses are lurther increased by the time and t half system at the harbor for overtime. Salaries are on the increase, although not in the same proportion as wages. All commodities having to do with expense, such as stationery, etc., are higher. The piice lists in efiect make it much more expensive to fi.gule tickets. The cash discount system, although a fine thing, makes it more expensive in figuring and handling tickets----especially so on credit memorandums, etc. We are in favor of the Sales Tax,