When Manufacturers Merge...

Like its jan/san distribution counterparts, Corr Distributors Inc., knows the aftermath of a manufacturer merger all too well.

A few years ago, the Tonawanda, N.Y.-based company was blindsided when its main towel and tissue manufacturer was acquired — and eliminated — by a competing manufacturer.

“The brand we were buying was eliminated, and the pricing structure and everything else changed drastically,” recalls Ed Corr, the company’s vice president. “All of a sudden we were selling the same brand as another distributor.”

So, Corr found himself in a dilemma. He could either continue to purchase from the acquiring supplier who just stripped his company of its brand exclusivity, or take his business elsewhere. Corr jumped ship and tested the market — a decision that was heavily influenced on differentiating his company’s product offering in the marketplace.

“We knew that there was no way that we could co-exist with another distributor in the same market that had the same brand because if you’re selling the same brand it’s frustrating and more difficult to go to market,” he says.

Under the new supplier, Corr was able to negotiate favorable pricing and a preferred market arrangement — something the acquiring manufacturer wasn’t willing to offer. The decision to look for a new supplier turned out in Corr Distributors’ favor.

“The quality was equally or better than what we had been purchasing, so it worked itself out,” Corr says. “But it was not easy.”

For years, manufacturer mergers and acquisition announcements in the jan/san industry have been peppered with rosy promises. But as distributors like Corr can attest, not every arrangement has proceeded as smoothly as promised. In fact, it’s difficult to find a manufacturer merger that hasn’t negatively affected a distributor customer.

“For us to accept the fact that it’ll be business as usual is not realistic,” says Rick Hazard, vice president of marketing for Waxie Sanitary Supply, San Diego. “There’s always change and it always has an impact on distribution, and it can go one way or the other.”

The Waiting Game

Mergers bring together the dissimilar strengths of two manufacturing companies and when executed properly, can give their respective customers added benefits. However, for customers to reap those benefits, it requires some patience in the initial stages.

Distributors for the most part are forced to play the waiting game while the acquiring manufacturer is determining how it is going to go to market. This period of time typically can take several months for anything significant to happen after the merger announcement has been made.

During this period, the acquiring manufacturer is deciding whether if it should keep the two companies separate or merge them together, what product SKUs to keep, and which ones to eliminate. There’s also the possibility of rotation and elimination of account managers and customer service representatives. These decisions, depending on how they’re handled will determine the direct effect the merger will have on distributors.

Many distributors argue that during this long negotiation period that the lack of clarity coming from some manufacturers is causing mass confusion on how the distributor company should proceed.

“It can cause a little bit of confusion and disruption if the manufacturer doing the deal doesn’t quickly communicate to its own sales staff and to its distributor customers exactly how they’re going to go to market under the new organization,” says Tim Feeheley, president of JanPak, Davidson, N.C. “There’s a little bit of time where there’s that bit of confusion of, ‘oh boy, I used to work with person ‘A’ and now I have to work with person ‘B,’ or I’m still working with person ‘A’ but they’re not sure how I get access to this product yet.’”

So, when news of a merger surfaces, it’s in the best interest of a distributor to be proactive and stay in close contact with the acquiring manufacturer to avoid any confusion. Most importantly, a distributor should be asking questions.

“You go to whatever contacts you have at the manufacturer level and try to find out where it’s going, how it’s going to happen, how soon it’s going to happen and how it’s going to affect distribution,” says Corr. “You generally go down the list and try to gather as much intelligence as you can about it.”

In years past, manufacturers were inwardly focused and didn’t put too much thought into how a merger affected their distributor customers. However, nowadays manufacturers are more willing to listen to distributors’ wants and needs and take them into consideration during the shuffle.

“There has to be an openness to what we need,” says Hazard. “We also have to be open to what they need and what their objectives are and find a happy medium between the two.”

So, distributors can take advantage of this period to voice any concerns they may have and start negotiation talks pertaining to any market arrangements that they may have had prior to the merger.

Exclusivity

A distributor’s worst fear is when its manufacturer merges and they lose their exclusivity to sell certain product brands in the marketplace. The product they’ve been offering for years is now open to other distributors. It’s a gut-wrenching feeling.

Distributors are comforted by a sense of security when they have exclusive arrangements with suppliers in their marketplace. Their salespeople feel safe promoting the product line and don’t have to fear that they’re going to be undercut or that they’re going to lose that business to another supplier who suddenly has access to the line.

But as more manufacturer consolidation occurs in the jan/san industry, it is forcing distributors into more competitive roles. Distributor salespeople no longer have the protection they used to and are forced to stay in tune to their competitors’ prices in the marketplace, on top of their own offerings.

When a distributor is robbed of its exclusivity, it has an important first step to make — either try to negotiate favorable market arrangements with the acquiring manufacturer, or take its business to another supplier who falls in line with its business strategy.

“It’s never good when distribution is added,” says Hazard. “Particularly if I’m losing my exclusivity, that’s not a good thing.”

If a distributor’s current supplier is bought out by another company, and it has different distribution policies and pricing structures, the negotiation process is a distributor’s first line of defense before seeking out a new supplier. This is where distributors must take action and defend their preferred market and pricing arrangements and make sure they do not change.

But if negotiations are unsuccessful and distributors don’t want to invest in an unknown company, then they can stick it out with the acquiring manufacturer under non-exclusive arrangements and sell the same lines as the competition in the marketplace. For most distributors, it’s considered a disadvantage. But some find that staying with their current supplier after a merger has its benefits, including access to new product lines and the familiarity of the old supplier relationship.

However, selling without exclusivity requires that distributors train and educate their sales people on the new product lines and prepare them to be more price conscious while out in the field. That’s where a strong relationship with a supplier bodes well for the distributor.

Relationships

When there’s manufacturer consolidation, there can also be changes in the distributor-manufacturer relationship.

“Distributors feel like they lose their partner,” says Hazard. “The relationship changes and there’s always that unknown of what it’s going to be now.”

Distributors who once could depend on their manufacturer’s point of contact person are now left with a bit of insecurity as to how they are going to be treated under the new entity. Years of relationship building with their supplier, for the most part, vanishes when a manufacturer merges. Garwood, N.J.-based Spruce Industries Inc. knows the feeling. Three years ago the company saw its main chemical manufacturer merge with a similar, but larger company, says Daniel Josephs, the company’s general manager.

With the merger, Josephs says the company lost the uniqueness and great customer service that they had when the supplier was still a family-owned company. That’s because the larger company that it merged with had bigger aspirations.

“The company just got very large, very fast,” Josephs says.

The fast growth created problems such as backorders and late deliveries — issues that didn’t happen when the company was closely held. And, the relationship lost its uniqueness because the manufacturer sales rep now had more diverse products to sell and more clients to tend to, instead of focusing on a particular line. It put Josephs at a disadvantage because he relied on his sales rep to be there in times of need. But Josephs couldn’t afford to cut ties with his supplier, so all he could do was take and accept what was given to him.

Even though distributors like Spruce Industries experience disadvantages in customer service when suppliers merge, there are noticeable benefits in other areas, says Josephs. What’s one distributor’s loss is another’s gain. Distributors who are on the favorable side of mergers come out on top with more product offerings which in turn can lead to more customers and increased revenue. Those who come out on the bottom, in a sense, are left to start over again.

For example, if a distributor is only representing a product-specific company who gets purchased by a larger company who has a broad array of product offerings, then all of a sudden the distributor has access to a great new line of products — a definite windfall for the distributor, says Josephs.

Ultimately, what matters most is that distributors position their company to be in a position to prepare for the possibility of the shortcomings that may arise from manufacturer mergers.

“Quite frankly, you’re not really in control of your own destiny, but if you pick the right suppliers up front, who are strong and with good values, then the successful company that buys them out hopefully will take the same approach,” says Corr. “Sometimes that’s worked out for us, other times it hasn’t.”