Is Bigger Better?

Consolidation in the jan/san industry — the formation of conglomerates often resulting from the purchase of smaller companies — has been a major concern for distributors for more than 10 years now. Independent distributors have had to react to big guys moving in down the block, encroaching on business territories and forcing business to new levels of competition. Jan/san is not unique — roll-ups, mergers and acquisitions are being seen in almost every trade, at every level. The thinking is that consolidation streamlines business processes, removes redundancies among the companies and compensates for increasing costs, helping businesses do more with less. And it can work.

Even though buying up companies comes with its own set of challenges, such as merging company cultures, easing customer worries and capitalizing on the intended efficiencies, consolidation must make for successful entities — it wouldn’t be so widespread if it didn’t work.

Those interviewed for this article, however, lead one to believe that consolidation and consolidators aren’t necessarily a threat to smaller independent distributors. In fact, often they can create and enhance business. Large, national chains are built to service larger accounts more easily and effectively than small accounts. The local or regional independent is the perfect candidate to pick up that remaining business and handle it with the personalized customer service they desire. Again, this is where the local distributor excels. As distributors’ business sizes move toward different ends of the spectrum, markets are more widely divided, providing an ample customer base for any well-run distributorship. Maybe the pie is getting smaller, but it seems everyone can have their piece.

The word “consolidation” fits the trend on many different scales. It can apply to the AmSans of the world (American Sanitary Inc.) — a major player in jan/san consolidation — or to the area independent who purchases his biggest competitor. In either case, the goal is the same. Consolidation is a growth method intended to lead to greater efficiencies, less redundancy and higher margins, and it also can give an acquiring company the access and ability to service large, multi-location or national accounts. Its intended benefits extend to operations, buying relationships and more, but the acquisition must be handled correctly to be successful.

“There’s always going to be, in a dynamic economy, economic opportunities that can be reaped by consolidating companies,” says James Mulick, president of Ameridan Resources LLC, a mergers and acquisitions consulting firm in Pittsburgh. The jan/san industry’s extensive fragmentation makes it a prime grounds for consolidation, he explains.

Mulick believes that private equity groups, like the one behind the formation of AmSan, are finding tremendous economic opportunities in buying up a number of companies, then turning around and selling them or making them public. He predicts that private investment is going to be prevalent in coming years, and jan/san is a likely target for these investments.

The model appears to work. AmSan’s sales now exceed $400 million annually. “Today, we are the largest distribution company dedicated to this channel in the United States, which has exceeded our expectations in every way,” says John Muthe, the company’s CEO. In its four-year lifetime, AmSan has completed 42 acquisitions, and now operates distribution centers in 41 states.

Increased value can be achieved through acquisitions, agrees Mulick.

“If you have a company that’s $30 million in sales, it’s worth a certain multiple on its earnings. A $500 million company might be worth seven times its earnings. By creating mass, you create value,” Mulick adds.

Making it Work
Successful acquisitions require that companies address a number of issues, from personnel to payroll, and develop strategies to deal with them. If they don’t, the newly created company risks alienating the customer base and losing much of what made the acquired company attractive to the purchaser in the first place.

One way acquiring companies prevent disruption is by keeping much of the acquired company’s staff on the payroll. This stability is important to wary customers who worry the acquisition will mean sweeping change. Keeping customers happy requires that the transition be as smooth and painless as possible.

“AmSan’s strength in leading this industry’s consolidation has to do with our commitment to the industry, strong financial backing and a willingness to meet the changing needs of customers,” Muthe says. “We have been very careful to preserve the cultural independence of our divisions, their local names and identities, unless we have merged a number of companies together, as we did last year in Florida and New England. Today, each of those divisions is dominant in their respective markets.”

“One challenge is that once you go out and buy companies during a three to five-year span, over the next five you’re going to lose some of that company’s owners and staff,” Mulick says. Not only does the acquirer then lose that talent and leadership, they have to find a suitable, capable replacements if they want to maintain the value the acquisition gave them in the first place, he adds.

When AmSan purchased Nogg Chemical in Omaha, Neb., in 1999, customer Sandy Hammers, of Sparkling Clean, a building service contractor in Omaha, had her doubts, but feels the transition went well. She has consistently been happy with Nogg’s service.

“We were dealing with Nogg before they were purchased by AmSan and we had excellent service then and excellent service now. The services have remained the same and we’ve been very pleased,” she says. Sparkling Clean is now taking advantage of the expanded product lines offered by the national distributor, and is ordering office supplies, too, on a more regular basis. “It’s just so easy to go through one company.”

Hammers agrees that sudden changes in sales representation can create frustration and confusion among end users, though, and that acquiring companies need to address that concern.

“You get acquainted with someone and you’re working with them often and they get to know your needs,” she says. These relationships and good communication are important in getting the job done efficiently, she adds.

“If it’s not done properly you have great potential to lose customers,” says Ronald Kent of acquisitions. Kent, whose metro-Atlanta based company, Associated Paper, has purchased three businesses in the past six years, is a proponent of consolidation and the increased efficiency it can provide, but says it must be done with consideration to the the customers’ best interests.

“If you’re consolidating, you’re buying relationships and customers — you’re not just buying sales. Customers still need the level of service and the personal attention they’re accustomed to. If you’re looking at them as just a sales figure, you have the potential to lose those customers real fast,” he says.

“Distributor consolidation does not necessarily impact customers negatively, says Muthe. “Our experience is that most customers welcome the longer-term security offered by a larger company, as opposed to the limitations of regional or local independents.

“However, some customers can feel ‘left out’ as industry consolidation changes the rules, such as increasing order minimums, narrowing your market focus and changing productivity expectations,” Muthe adds.

Across the Board
Consolidation has been prevalent in almost every industry at every level, but not many industries have seen it take off as extensively as it has in the paper industry, specifically among towel and tissue producers.

With the consolidation of Fort James (which resulted from the merger of Fort Howard and James River) and Georgia-Pacific, and Kimberly-Clark/Scott, the field has narrowed considerably, but that hasn’t changed the breadth of product lines available to distributors, says Don Kellermeyer, chair of the jan/san advisory committee for the National Paper Trade Association, Great Neck, N.Y., and the president and CEO of Kellermeyer Co., Toledo, Ohio.

What has changed is who can buy from manufacturers — they are selling larger volumes to fewer, bigger companies, and directing smaller distributors to buy through redistributors or wholesalers.

“What is happening is that the mills really only want to do business with the larger distributors and they’re giving them more business,” Kellermeyer explains. “What they really want the larger ones to do is redistribute the product to the smaller distributor that can’t buy in that quantity.” More business is then going through the large distributors and wholesalers, he adds.

Industry consolidation does redirect product flow to an extent, and wholesalers, or redistributors, are seeing increased business because of it, says Eric Peabody, director of marketing for Bunzl Distribution, based in St. Louis. Consolidation has worked very well for his company, he says.

Technology, such as fax machines, computers and now e-commerce, is responsible for making consolidation the success it is — national companies can communicate quickly and directly, and service other national companies. He says smaller and regional distributors don’t have the resources to service national accounts like a national wholesaler or distributor does.

Wholesalers themselves are consolidating, and small and large distributors will benefit. Wholesaler competition will become more fierce and the wholesalers left standing will have more efficient operating systems, more services and lower costs. “Wholesalers will be able to provide all that to the distributor at the same or lower price because of the economies of scale,” he explains.

Bunzl has grown organically, through consolidation, and through new start-up businesses, says Peabody. He feels the lowered operational costs will allow his company to pass savings on to the distributor.

Narrow it Down
Sell, diversify or buy? Consolidation forces distributors to consider what they want to do and what’s in their best interest. They need to decide where to concentrate their finances and efforts in a super-competitive marketplace.

Distributors have three choices, says Roger Claus of Claus Management Associates, a Milwaukee-area management consultant specializing in sales and distribution. One option is being the biggest in your arena. One example is the distributor who buys up the main competitors in his area. Another option is to take the money and run. The market is still ripe for sellers, Claus says. Even if there aren’t as many ready buyers as a year ago, they’re still out there.

“The third option is to niche yourself,” he adds. He says this is where customer service on a 24-hour-a-day basis is a necessity to become indispensable to that customer. He also suggests becoming a provider of specialty items, and moving into product lines more obscure and service-intensive than some of the regular jan/san commodities, such as toilet paper and brooms.

Adding value for the customer and providing top-notch customer service will make you an invaluable asset, Claus says, rather than just a product supplier.

“Consolidators, in their quest for scale through standardization, inevitably end up under-performing for certain customers,” says Adam Fein, president of Pembroke Consulting, Philadelphia, and author of Winning Strategies for a Consolidating Wholesale Distribution Industry, published by the National Association of Wholesaler Distributors. This is where smaller distributors can excel.

“Smaller, more nimble distributors can exploit these market opportunities with a focus strategy aimed at particular customer segments,” Fein continues. “For example, small accounts often get left behind because they are too expensive for a large company’s cost structure. Local distributors can emphasize responsive, personalized service to keep these customers.”

Armchem International realizes just that, and Armchem’s president, Andy Brahms, isn’t intimidated by competition. His Fort Lauderdale, Fla.-based company simply capitalizes on what it knows best — customer service. AmSan recently bought five companies in his local area, but Brahms says his company is still the strongest. He believes it’s because of his ability and willingness to diversify, as well as his high levels of customer service and training.

“We have no proof that these business models are working,” says Brahms, referring to consolidators. “From an independent standpoint I look at this as an opportunity for getting more business.

“We’re certainly more in-tuned and a step ahead of some of these big companies because we’re more proactive, reactive and flexible,” says Brahms, whose company has grown 30 percent yearly, compounded for the past 10 years.

So there are benefits seen by smaller distributors when companies consolidate, and there are also ways to minimize any negative impacts. Distributors who develop their niche markets and continue to provide the hands-on, individual customer service some accounts crave can bypass some of the corporate uniformity and inflexibility consolidation can breed.

Distributors can also become acquirers themselves, and build viable competitive companies through their own growth.

Others choose to align with alliances and buying groups, more ways for giving large groups of distributors leverage and buying power in the market.

Master wholesalers and alliances benefit because they provide smaller companies with the access to fulfillment, technology and other services that are typically unavailable to small companies, Fein says. The smaller companies — as they face tighter competition — are seeking these options more and more.

One such alliance is Afflink, an organization of more than 350 independent distributor locations in the United States, Puerto Rico, Japan and Great Britain. The organization serves its supply-chain members by providing them the technological, business and administrative tools they might not be able to justify on an individual basis. The organization attempts to enhance relationships between manufacturers and distributors, as well as end users and distributors, and helps them secure buying relationships and agreements by reducing the overall cost of transacting business via tailor-made e-commerce tools.

This type of arrangement has given independent distributors the ability to compete by providing them the leverage the national chains enjoy.

The alliance does much more, too, than secure national contracts for distributors.

“We provide very specific programs that meet their marketing and operational needs that will ultimately get their business to the next level,” says Dick McGann, executive vice president of Afflink, Tuscaloosa, Ala. “For instance, we offer tailor-made, low-cost e-commerce tools to distributors needing to develop or re-engineer their current IT platform.

“We level the playing field between the little guy and the large chains across the country,” adds McGann.

The independent distributor, McGann says, is familiar with its local markets and is many times more flexible in serving end-user needs.

“We become the low-cost alternative to them, and assist them in accessing suppliers who might not otherwise have access to.” By aggregating the product demand of its distributor members while decreasing their cost to market, Afflink has been able to give independent distributors the ability to compete against the national corporations.

Brady Industries, Las Vegas, has both grown through acquisition and diversified its offerings to make it more appealing to customers.

“One of our biggest tools for growth — and what’s going to continue to be important — is being able to bundle more services for our customer,” says Travis Brady, vice president of sales and marketing.

The company, which serves many of the city’s hotels and resorts, recently added laundry and linen services to its list of offerings. It’s also in the process of taking on warewashing and linen services for its customers.

“There’s always going to be a market for that smaller independent company, but it might not be in some of the businesses that they focused on in the past,” Brady says.

Survival for the Fittest
Most agree that consolidation will not continue at the feverish pace evident in recent years. The prices companies are willing to pay will come down a little bit, predicts Brady, not to mention there’s not as many companies available.

The sluggish economy, too, will affect the pace of consolidation, Muthe says, despite the fact the driving forces are still there.

Survivors of jan/san consolidation will be those who define their niche and excel at what they do best. Dee has defined its customer as the one the consolidators don’t necessarily care to service.

“We’re going for a market that they’re kind of ignoring right now,” says Kevin Ervin, sales and marketing manager for Dee Janitorial Supply in Chicago. “The big companies are going after a bigger nut. It’s kind of working out for everyone in that way.”

Kellermeyer Co., is in that position: some smaller companies aren’t worth his salespeople’s time anymore. His company acquired four companies in 1996. Ideally, these acquisitions would benefit customers; however, Kellermeyer agrees that the smaller customer sometimes can’t be justified. Although he wants to service every customer, it’s not always feasible. After an acquisition, Kellermeyer Co. looks at all accounts to determine the profitability of each. In Kellermeyer’s case, if an account isn’t making them money, they’re not worth a salesperson’s time and they go straight to a telemarketer’s list. The better margins achieved through acquisition allow the company to aim for and secure larger accounts.

The cost of servicing an account can’t outweigh the return, says Kellermeyer.

“Some go to the very small distributor and that’s fine with us. We don’t like losing them but we can’t end up writing them a check,” he quips.

Flexibility, employee ability to make split-second decisions without a lot of red tape, and the willingness to serve the smaller customer keep Dee competitive despite the far-reaching consolidation in the Chicago area.
“We’re like a squirrel — small and wiry. We get in there, get the job done and get out,” Ervin says.

Fein feels there is plenty of room for the successful independent distributor even in an increasingly consolidated arena. Not only are they able to service customers that are less desirable to consolidators, they have a certain flexibility and individual touch the big guys don’t.

“Well-run, independent companies are thriving thanks to their skill at maintaining high levels of customer service . In my opinion, consolidation is benefiting smaller distributors,” Fein contends.