The Decline Of The Branch Manager
Our forecast is that the U.S. economy is in for a decade of slow growth and, while some years will be better than others, it will take many years for households to burn off their debt, housing to recover, and unemployment to fall. For distributors, who largely follow GDP growth, this means that growing the business at historical rates will dictate running the business better and more efficiently than the competition and thereby taking customers away in the market, and/or growing in the Darwinian mode with better-managed firms running the acquired better.
In either growth scenario, the common constant is more talented management and this is where distribution will change dramatically. For three decades I have worked in the wholesale sector of the North American economy. One constant for this sector has been that growth is largely sales and branch manager driven. While entrepreneurialism will be important, the effects of consolidation for the next decade will require a more managed, centralized, and balanced type of growth. It will be growth from the executive team and upper level managers that dominates.
Consolidation and Challenges of ScopeThe effects of consolidation in distribution markets have been significant. Distributors, especially the movers and shakers, are now large and complex organizations with significant assets and lots of employees. It’s important to note that when I talk consolidation I’m not referring to the financially-driven roll-ups or “strip and flip” strategies we’ve seen in the last decade. Most of those growth structures don’t work in the long run. They last as long as the business cycle lasts, lending is favorable and the cost of capital permits it.
Reliable and sustainable growth, in my definition, comes from two primary areas: 1) Giving the market what it wants and where customers are willing to pay for it, and 2) Acquiring businesses that can be substantially improved by the acquiring company – as opposed to financial wizardry and pell-mell acquisitive growth of the previous decade.
The effects of consolidation can be seen in the American Supply Association. ASA, as of 2009, had 375 members and six regional associations, as compared to 1,100 members and 13 regional associations in 1985i . The primary change agent was consolidation. As firms consolidate, their challenges to growth become increasingly difficult due to size or scope. Decisions that were easy when the firm was smaller are now much more difficult because of numerous employee layers, variations in practices and differing perceptions.
The growth challenge will come from the regional firms who can’t navigate their growth. In my consulting experience of the last decade, these firms outnumber the regional firms that have their stuff together and can lift it, by a 3:1 factor. Hence the challenge will be for these companies to develop managed growth or sell out before they lose out.
The Branch Manager is No Longer SuperheroIn my early days of working in the wholesale sector, the branch manager was regarded as a Superhero. Branch managers had control over their local markets, including sales structure, pricing, operations, credit/accounting and vendor relations. Over the years, the vendor relations and credit functions were moved to the home office and largely followed computerization.
There was simply no need for representatives of these functions to staff the branch. The information for these functions, and their control, was best handled by one central office. Over time, operations have become centralized, which means that more of the work in moving material and managing the physical space is driven by corporate hq. This leaves the sales management, pricing and service functions done at the branch level.
My work in the past five years has been to help regional firms pull these functions into corporate and develop managed growth plans for all functions of the firm. The work is long-term, up-close and personal, and not without changes both in processes and people. Three years ago, I surveyed the electrical and industrial sectors for the role of the branch manager in controlling sales, pricing, and services, and the results were that much would remain unchanged and they would continue to be directed at the branch level. The last three years have brought about changes in these responses as the Great Recession caused top management to grab the reins of their companies and begin, as best they could, a centralized process for managing all aspects of the firm.
As GDP growth returns, however, there are now a sizable group of regional players whose growth efforts need to turn from command and control to recognizing, funding, and executing market opportunities. And this is where the great challenge to the wholesale industry resides in the next decade. Many of the regional companies don’t always have the experience and talent for long-term managed growth. And managed growth won’t be the purview of local managers in the next decade.
Why not? Partly it’s because, as mentioned earlier, the competition is now larger and sophisticated and can bring much better pricing and value propositions to the local market than branch manager-led efforts. Part of the reason is that technology is available to anyone with Internet connectivity. As technology has expanded its reach, differences in marketing and sales capabilities become less variable in commodity industries.
Buyers do their comparison shopping online and don’t have to experience the pricing/sales/service platform to understand the combination that best suits their needs. Like the credit and vendor relations functions of two decades ago, the market information flow in the last decade, from the Internet, has reduced the need for local decision-making. Much, but not all, of pricing, account management, and operations decisions will be planned from corporate HQ, and the need of branch managers to drive these functions is reduced.
Where Growth Will Come From and Who Will Drive ItIn the past five years, I have worked on helping regional firms achieve centralized, managed and reliable growth. Most of my clients are in the 100MM to 600MM range. Somewhere around the 75MM or so range in size, the typical wholesaler becomes less of a sales entity and more in need of managed growth. Managed growth means the firm develops a planned growth routine where executives and upper level managers plan and execute growth across all functions, including operations, marketing and sales. IT and finance (not accounting) supports growth in delivering needed information and funding growth projects. The output of successful planning is increases in operating profit specific to capitalization and traceable to growth plans. This is the tangible financial metric of valueii and, over time, the firm’s shareholders can sell the firm or transfer ownership for more than asset value where, today, most wholesalers settle on.
Managed growth requires a new and different understanding of driving growth and the following areas and capabilities are required:
A team of executives and upper level managers must be created to drive growth.
Areas such as operations, marketing and sales, are crucial and they must be
supported by top notch finance and IT functions.
The managers need capabilities that are beyond the typical branch trained,
sales-led executives that dominate today’s executive ranks. They often have
outside experience in managing complex firms, are well educated and cost more.
If not from the outside, they must be exceptional in capabilities and willing
If the firm does not have capable executives, it should hire the needed talent
and engage in outside help from those who have made the transition from a
locally managed firm to planned growth.
Functions such as marketing must be respected and staffed with professionals
who understand pricing, service development, fee basing services, cost of
service accounting and general marketing management.
- Regional sales and operating manager positions are often created and manage the sales, marketing and operations of local branches. They are the best managers, administrators and planners from the branch pool.
These, along with patience, are the major requirements for managed growth. Too often, family-held businesses don’t hire the needed talent to drive a larger, more complex business and the firm begins a slow, agonizing decline; full of excuses and infighting among shareholders. My advice to firms in this cycle is to change or sell. It’s better to admit failure than watch generations of value creation fetch no more than asset value.
What there will be less of are “lifestyle” businesses where family members staff the executive ranks with any and all family, milk the firm, and don’t properly invest in people and capabilities. The market dynamics won’t allow for much of this Shangri-La existence.
In conclusion, wholesaling in the coming decade will be big business, and it will be riskier and much more complex than anything many have experienced. Branch managers are still an important part of the organization but their control over many of the marketing and sales decisions will be muted in favor of planned growth. Firms can’t afford to have large variations in practices of pricing, service provision and sales support that differ by every brick and mortar location.
The branch manager/superhero, doing his own thing and in his own way, is a thing of the past; made obsolete by consolidation, commoditization of product, and 24/7 information of the Internet. Managed growth for regional firms, however, is on the rise and a must-have in the consolidated, commoditized and increasingly competitive environment of wholesale distribution.
i Martin, M.J., “Conversation With Inge,” The Wholesaler, pg. 111, July, 2009.
iiKoller, T., Dobbs, R., Huyett, B., Value, McKinsey and Company, Wiley Press, pg. 121.