Distributors/Service Centers

The Future of the Family Service Center

March 24, 2014

Would you want to start up your own service center in today’s environment? The risk and rewards are much different than in the past and, more often than not, entrepreneurs are not opening steel distribution centers. Last week, Steel Market Update attended the Platts Steel Markets North America conference, where the challenges of service center operations were discussed.

In contrast to a discussion on mergers and acquisitions within the steel industry, Jim Bouchard the CEO of Esmark, addressed the Platts audience on the challenges of surviving and operating a family-owned service center.

Mr. Bouchard described the primary challenges facing privately held service centers today:

– Mills movement to a cost plus industry (which can pose a danger and put a cap on probability)
– A move to quarterly pricing vs contract
– Slow economic growth (moderate increases in steel consumption)
– Excess capacity at both mill and service center.

Considering these factors, “Many service centers face deteriorating balance sheets, restricted profit margins in the cost plus environment, and margins that don’t support investment into the business,” Bouchard told those attending the conference.

He posed the question what are family service centers to do? Liquidate and retire? That is one option. Other options include: diversifying (easier said than done for many), or find other value added strategies.

Mr. Bouchard told the group, if the small service center is to make a successful go of it, they will need to invest in training the next generation, modernize operations, manage inventories to 2.5 months, and invest time and capital into the customer base.

In today’s market, nothing is certain, and small businesses will have to face risk head on and make the necessary investments if they are to stay competitive.