In July of 2008, I penned a blog entry1
on the pending changes in Wolseley Plc and if they signaled a change in the
existing model of distribution. The entry garnered much interest and was one of
the top e-mailed installments for Supply House Times for many months. It also kept me busy answering emails and
phone calls from current and ex-Wolseley Plc employees and Wolseley watchers
across North America. In all, I had some three dozen correspondences/phone
conversations from insiders, outsiders, and former and current executives and
managers regarding my commentary. This blog entry will capture the thoughts of
these watchers on the future of Wolesley Plc. I’ll try to, from this commentary
and my own experience, detail the options for rebuilding the company as relayed
to me, over the past year, from my conversations and correspondences.
In July of this year, Ian Meakins was appointed CEO of the
corporation replacing Chip Hornsby. As Mr. Meakins closes in on the end of his
100-day honeymoon, he is charged with perpetuating the dominance of Wolseley
Plc in PHCP distribution. My conversations and correspondences lead me to
believe that the future can be bright for the global leviathan. The feedback I
engaged was illuminating and not only from the stance of what’s good for Woleslely
Plc but also pertaining to what other distributors need to do to thrive in the
years ahead. The lessons should be considered by all who want to make it in a
much different, slow growth and price sensitive global marketplace.
From Organic Growth to Acquisition
The original growth model for Wolseley Plc was heavily
influenced by Ferguson Enterprises where green-field sites (new branches) were
established and the reigning branch manager got a substantial piece of the pie.
In the old days, branch managers had their names on the local branch. Names
such as Peebles Supply and Dunn Supply still exist in my gray matter as past
evidence of the new branch/new town model. The culture was an outside
seller/branch manager/gazillion trainee driven model where managers in training
were put into many of the support functions until they could be moved into a
branch manager or outside salesman role.
As the company grew, Ferguson Enterprises acquired
companies and was itself acquired by Wolseley in the early 1980s. At that time,
Wolseley management appeared content to let Ferguson do what they knew how to
do which was grow branches across the U.S. Over time, Ferguson Executives were
tapped to help guide Wolseley from its headquarters in the U.K. During much of
the 1990s, Wolesley began a series of acquisitions to drive their growth. (See
partial list at
http://www.ukbusinesspark.co.uk/wolseley.htm)
These acquisitions were well-placed, well-timed, and of a reasonable pace. In
the new millennium, the acquisitive nature of Wolsely Plc took a steroidal
turn. According to one source, the company made some 70+ acquisitions from 2000
until early 2008.2 Wolseley Plc was the most
acquisitive company in 2005/06 outside of General Electric.
The pace and scope of the acquisitions were astounding and
the expert economic forecasts and equity markets supported the decision. Housing
values were skyrocketing, money was inexpensive and available, and the need for
building and construction materials showed no signs of stopping. Of course,
some two years into the housing collapse, we know that many of the assumptions
and forecasts were wrong. When the market crashed, Wolseley was hit especially
hard as its building materials acquisitions had a difficult time downsizing
commensurate with the pace of the market collapse. Hence the stock tanked,
creditors became anxious, and employees were shed by the thousands.
The question arises should Wolesley Plc have anticipated the
market decline? If one looks at companies who anticipated the pending collapse,
the list is very short. As distributors go, there were few, that I am aware of,
that did not get caught unawares and had to make immediate and significant
cuts. Going forward, much of the conversations and correspondences, generated
by my original blog, regarded the balance of acquisitive growth versus organic
growth. The response was mixed in that many felt there were significant
opportunities for acquisitive growth while others stressed the need to push
organic growth. If one looks at the Wolseley site, the Ferguson entity is
listed as gaining share which would imply organic growth.
(See forecast at:
http://www.wolseley.com/media-centre/news-releases/2009/27-July-2009.aspx)
From a long-term strategy perspective, Wolesley Plc may be prudent to slow the
pace of acquisition for several reasons.
First, it is generally accepted that organic growth benefits
shareholders more than acquisitive growth. A 2007 study done in the UK by
Deloitte M&A and the Boston Consulting Group found that “…poor execution of
mergers and acquisitions can destroy shareholder value. …50% of company
failures are attributable to poor M&A with 80% of those failures
subsequently disposing of the business they acquired.” Another study done by
KPMG in 1999 found that “…83% of mergers were unsuccessful in producing any
business benefit as regards shareholder value.”
These studies do not mean that all mergers and acquisitions
fail to enhance shareholder value but the majority do. As it regards Wolseley
Plc, their long history with successful acquisitions and rising share price,
until the housing collapse, would indicate the company had a, more than less, successful
process for buying and integrating companies.
I have had personal experience in guiding distributors
through acquisitions and helping them enhance revenue streams for selling the
business. Done right, acquisition can be a superior means to grow. But, I’ve
never believed that acquisitive growth was as good or lasting as organic
growth. Organic growth means you have to beat out a competitor in the battle for
customer mindshare with a better product, service or value proposition. Organic
growth requires cementing a bond with the customer who is the ultimate buyer of
your product. It means you anticipate what the customer needs or wants and
create a solution to a
problem. Simply put, organic growth means you win by beating out the
competition and it is much closer to a marketing orientation than anything growth
by acquisition can muster.
Acquisitive growth can be a dark temptress and it comes with
a lot of unintended consequences. After the big bump in sales is over, post
acquisition problems emerge including combining cultures, rationalizing
approaches to the market, and uncovering and dealing with unwanted stuff that
always seems to be hidden in the discovery process.
Repeated acquisition often weakens the base culture of the
acquiring company. In addition to this, the cost structure of distribution is
semi-variable which means that acquisitions don’t scale all that well and
eventually scale diseconomies result including redundant assets, people, and
clashing cultures. In the current economy, acquisition opportunities are rare
and firms should consider driving organic growth with a top notch marketing
strategy that creates new value streams.
Driving Market Growth
When Lew Gerstner turned around IBM in the 1990s, he quickly
discovered that the company was a sales culture and not a marketing culture and
the rah-rah sales culture landed Big
Blue in severe trouble. Selling is about developing a relationship with an
account and influencing a buyer to purchase. Marketing, at its core, is putting
the product, service, price and promotion together before the seller hits the
street. To quote the bumper sticker, “Marketers do it by segment,” and, if you’re
not driving your growth by segmentation, you’re not “doing it” very well.
Most wholesalers are sales cultures and, hence, they often
don’t understand or appreciate good market strategy. When I asked about the
marketing orientation of Wolseley Plc, the response was mixed. Many felt Wolseley’s
existing model was market driven but others conceded that the emphasis was
still on sellers and branch managers who came up through the sales rank where
marketing was mostly foreign.
Based on my experience, I am of the opinion that a marketing
orientation can help the organic growth of any distributor as it did IBM a
decade ago. In particular, a solid market strategy can be used to:
- Segment the business and focus organic
growth efforts on parts of the market with the best combination of growth and
profits.
- Reduce inefficiency by discouraging sellers from
procuring all types of business; especially segments with limited growth and
bad transaction economics.
- Research and create services that can be sold to
existing customers.
- Cement partnerships with key manufacturers,
maximize joint marketing funds, and bring new product technologies to market.
- Hone strategic pricing to capture value and avoid
the sales mentality that all orders are good.
- Develop new models of business that reduce cost
and enhance the value to price paid ratio.
The drive toward a marketing orientation follows the
maturation of the plumbing industry. As companies expand and seek competitive
advantage, they mine new knowledge and use it to increase performance. The
evidence for this in distribution is the increased interest in pricing as a
functional discipline. Eight years ago, I and co-author Jane E. Baynard penned
the first pricing text for wholesalers. Since then, there have been two other
publications and several software packages that tout enhanced pricing
capabilities.
Pricing is a subset of marketing and can be a powerful
discipline. But lasting pricing gain eludes many wholesalers because of
implementation. Why? Wholesaling has always been a decentralized industry and
branch managers and sellers control much of the go to market strategy. Strategic
pricing, however, is largely set at the home office with the field operatives
implementing the goals set by marketing. Branch managers and sellers can have
influence in and some control over pricing but, time and again, empirical
evidence shows that sales control over pricing drives margins lower. The issue
in distribution, as illustrated by pricing, is how does one mine new functional
knowledge, break it down, and get it implemented in a decentralized
culture?
Wolseley Plc. and especially the Ferguson Enterprise entity
has traditionally been a branch centric culture. Mining new functional
expertise and getting it to the field is, in my experience, difficult in a
decentralized organization. Often, multi-branch wholesalers will try to get the
branch manager to absorb the extra knowledge and “up their game.” Too often,
this fails because the appropriate control systems and feedback loops are not
available. Also, it is typically not practical to dump a new functional
discipline, such as pricing, entirely on the head of a branch manager. There is
only so much one person can master.
For Wolseley Plc, or any wholesaler with multi-branch
operations, the challenge in driving gain from new knowledge is often not what
to do but how to get it done. This will require establishing functional
expertise, breaking the knowledge down into usable chunks, and creating control
and measurement systems to make sure it is used. This takes administrative
genius and a will to break away from the branch manager as super –hero model.
I have seen many wholesalers lose pricing gain because they
did not understand how to design an organization that perpetuated the new
knowledge and instead adhered to a decentralized, local entrepreneur,
organization. The title of “Branch Manager, CEO,” may be catchy and swell the pride
of the field operatives, but it is less practical in a far-flung organization
that is mining new knowledge for competitive gain. Having every branch manager
“doing their own thing” is a nostalgic pollyanna and downright dangerous in a
large, complex organization.
A final, but necessary piece, to driving market growth in a
large organization is the need for better educated managers. In the early years
of its history, Ferguson Enterprises recruited from top colleges in the
mid-Atlantic. The company got high potential graduates, trained them and
indoctrinated them in a culture of long hours. The final result was a blossoming
of labor productivity that was essential to organic growth.
As Wolseley goes forward, it will be essential, for organic
growth, to attract the best and brightest. This means hiring managers not only
from top colleges but with also those with graduate degrees. I have witnessed a
slow but steady growth in graduate degrees in the management ranks of
distributors and, for the most part, advanced educations and experience are far
more potent combinations than the four-year degree and experience.
Currently, wholesaling is a woefully low achieving industry
in educational attainment. Our 2006 White Paper, “I Can’t Believe I Ate the
Wholesale Thing,” found employees with graduate degrees were 8% of the U.S.
workforce at large, but only 3% of employees in the Wholesale Trade had a
graduate degree. My experience finds that the complexity of running a large
organization is made much better with the perspective of a graduate education.
Managers with graduate educations aren’t inexpensive, however, and the ability
to attract these employees will be a test for Wolseley which is in a rebuilding
mode.
Globalization and International Supply Chains
Two years ago, I and co-author Steve Griffith, did a
research study and book on the changes in distribution due to the globalization
of manufacturing.3 The research found that
distributors were flocking to foreign sourced “off-brand” products that were an
average of 30% less in landed cost than domestic brands of which many were made
off-shore. Our financial modeling showed that, at a 30% saturation rate,
companies not buying “off-brands” were at a competitive disadvantage and there
were six distinct sources of “off-brand” products.
Today, two years later, the move toward “off-brands” is
well-underway, pervasive, and generally accepted. From my conversations, Wolesley
Plc has a strong global supply chain effort. The company was lauded for having
a strong logistics organization and global reach.
A targeted, well-funded, and global sourcing effort for
“off-brands” can propel growth and profitability in many ways. From our survey,
“off-brands” are perceived as having comparable quality and features to most
domestic brands and at a better price point. “Off-brands” were also used to
attract new customers and keep them buying due to their low price. The e-mails
and phone conversations I had were almost unanimous in that Wolesley’s
international sourcing and supply chain were competitive strengths.
While the sources of supply for “off-brands” are
increasing for all distributorships, controlling an internal global supply
chain is, from our research, a hefty advantage. Don’t be surprised if Wolseley
Plc recognizes this and takes advantage of international manufacturing and it’s
low cost, high quality products. A recent survey of large company CFOs found
that 62% expected “global sourcing activities to increase over the next three
years.”4
Currently, there is little public information about
distributors’ efforts to source from foreign shores. Our book on the subject
was the first empirical study to quantify the move to source foreign “off-brands”
but the message was difficult to get into trade magazines and the marketers of
industry knowledge. Many were afraid of the repercussions of domestic brands.
Whether or not the fear was valid is, in our view, beside the point. The point
being that international sourcing and globalization of supply is a competitive
necessity, is here to stay, and many domestic brands may end up competing with their
distributors.
The old designations of distributors and manufacturers are
not always clear in the flat world of instant information, international supply
chains, and global manufacturing. WW Grainger, the leading industrial supplier
based in Chicago, has released information that they have funded a global
supply chain effort with executive and managerial positions and “private label”
products represent a substantial portion of branch sales.
Global reach or scope is a tremendous advantage in a local
market industry such as wholesaling. Recently, I have worked with two importers
and their businesses, in a down economy, are booming. Why? It’s simply a
function of their knowledge of scope and the allure of low cost/high quality
goods. Wolseley Plc’s scope can offer tremendous advantage to the internal branch
organization and, possibly, spawn other business models. In several instances,
I have witnessed large wholesalers with scope that have created import
organizations that sell to local distributors and buying groups.
The Levels of Cost and Managing Size
Most PHCP products are mature and their applications are
well-known. The industry is over 100 years old having formed its roots when a
Chelsea, London plumber, Thomas Crapper, placed a modern design ballcock on a
siphon-type fixture. While plumbing products continue to change with
applications becoming easier, the price points of these products, like most
industries, continues to fall.
In the late 1980s, I sold state of the art, brass body,
ceramic valve faucets for the Kohler Co. with price points (if memory serves)
at $50 to $100 wholesale. Today, I can buy the same technology retail, as an “off-brand”,
for $19.95. I put one of these “off-brands” in a spare bathroom in my parent’s
coastal condo eight years ago and, today, it works as well as it did the day I bought
it.
As cost in product comes down, the products become more affordable
and markets expand. However, the margin dollars earned on any one sku decline
because of lower cost goods. If product
costs decrease faster than markets grow, as it appears to have in the PHCP
industry, the challenge for distributors is managing cost to serve or operating
expenses.
The first level of cost management is controlling purchasing
or material for resale cost. Most wholesalers I deal with are dialed in on a
competitive purchase cost with smaller companies being ardent supporters of
co-operatives, “marketing groups” and a panoply of master distributors,
importers and private buying organizations to survive. Managing the cost of
material is a first level of cost management.
The next level of cost management is budgeting and setting
levels of operating expenses including salaries and bonuses. Again, most wholesalers
budget reasonably well and, in today’s Great Recession, have visited their
operating cost structure many times. In good times, the lifestyle managers, can
get a bit sloppy with their operating expenses but, for the most part,
wholesalers are a frugal lot.
The third level of cost management is process documentation
and streamlining. The most formal part of this discipline is the ISO processes
created in the 1990s. ISO has a well-established program of mapping and
managing processes which is essential to consistent quality and cost
management. Many wholesalers take a more ad hoc approach to processes and
benchmark them with other non-competing wholesalers, use accounting ratios for
guidance, or plain old Yankee ingenuity to drive out redundant costs. My
experience is that many wholesalers are familiar with these disciplines and use
them to varying degrees. Several top PHCP wholesalers have specialists for
process management.
My conversations over the last year lead me to believe that
Wolseley Plc has a keen understanding and robust management of the first three
types of cost management. However, there is a fourth level of cost management
that is creeping into distribution and it has potential for great change and
competitive advantage. This understanding of cost begins with the realization
that
financial accounting and
accounting ratios are, at best, crude instruments to managing strategic costs.
Financial accounting is a time period based discipline but the step cost
structure of distribution is influenced less by time and more by types of work
and transactions. In essence, cost behavior is greatly determined by the types
of transactions, customers, segments, sales territory configurations and solicitation
choices.
It’s not just about ledger costs but how the costs contained
in the ledger are used to serve the customer. In essence, the market and sales
strategy of a wholesaler can greatly determine its costs and cost
competitiveness and this is not something you can get from standard accounting reports
or from the previously mentioned tools.
To understand how market and customer decisions can
influence a low cost platform, wholesalers need to develop and use a costing
methodology that allocates costs by transaction type or activity. The discipline of activity costing has been
around distribution for close to two decades. Several PHCP wholesalers are consistent
users of an activity-based costing logic.
More recently, activity costing has taken a backseat to
hybrid models of costing that use transactions or work definitions as an
allocation method. In a recent conversation with a top 20 PHCP wholesaler, the
company has invested heavily in understanding market and sales costs as driven
by customers, segments, and sales configurations and is working the kinks out of
a transaction based model. The results from the efforts are premature but hold
great promise.
Our experience with Transaction-based costing or a similar
work-based methodology is that they will become increasingly useful for
multi-branched and multi-market companies. The understanding of operating
profit and how to maximize it is limited with financial accounting reports and
ratios. For instance, our work with Transaction costing finds that rewarding
outside sellers on margin dollars has little correlation with operating
profits. And, certain transaction types such as non-stock orders, counter
orders, and branch transfers sap the operating capacity of most distributors. Armed
with accurate Transaction costs, a wholesaler can accurately target areas of
loss, eliminate or curtail losing transactions, and even develop low cost
models of distribution that can lower the market price by 20% or more.
As the firm becomes sizable, managing costs takes new
learning and a certain genius. Far flung and diverse markets cause complexity,
managers develop fiefdoms, people want the latest gadgets and costs rise
accordingly. This type of cultural inertia can be slowed and managed by
understanding and attacking costs.
Purchasing costs, budgeting, and process documentation
and streamlining are all necessary for cost management. Developing advanced
costing allocations and understanding how marketing and sales choices drive
costs is the great frontier of cost management for distribution and the
interest is nascent but strong. Sixty to 70 percent of operating costs are in
people and a significant amount of their costs are taken up by transactions,
processes, and customers who don’t contribute to the fixed cost of the firm. Knowing where the waste is, from a
marketing and sales perspective, is essential to a low cost platform and the
only way to get there is by using advanced costing measures.
What Won't Work and Making the Elephant Dance
Successful companies that stumble badly have a tendency to
get back to the roots of their success. For the most part, however, getting
back to one’s roots doesn’t work. Why? The firm and its markets have changed
too much to accept the old ways of success. In the past, Ferguson attracted
newly minted graduates with promises of big incomes, running one’s own branch,
and making it big if they performed. The hours were tremendous but the rewards
were substantial.
If Wolseley Plc tries to recover the glory of the past with
the branch manager/outside sales/gazillions of trainees culture, it’s my
estimate that this will not be as successful as it was in the past. Our
research, over the past five years, says that sellers and branch managers will
be trimmed back. Much solicitation will go to other, lower cost models and many
of the branch manager duties will be absorbed at the home office. If you are in
doubt about our work and theories, read the interview (
Sept.’09-Supply
House Times Cover Story) about incoming ASA president Frank Nisonger and the
changes he made to the branch centric culture of Slakey Bros. If Wolseley Plc
is to provide superior returns, it will need to take the
appropriate pieces of the
past and quickly develop new value streams.
In turning around IBM, Lew Gerstner quickly moved the
company into services as a new and important revenue stream. He picked the best
and brightest and gave them marching orders and where he didn’t have the
talent, he quickly recruited it and put it to work. He mercilessly cut losing
ideas, turned on a dime, and searched for new revenue streams.
When Gerstner finished his turnaround of IBM, he penned a
classic business text on the subject titled “Who Says Elephants Can’t Dance?” The
charge for Ian Meakins is to make the elephant dance again. There is a great
potential for Wolesley Plc to remake itself and leave the troubles of the
recent past far behind. Recent press on the company’s troubles has been a popular
read partially because of its tremendous past success and because it was the envy
of competitive wholesalers. Having an unchained Gulliver in one’s midst is both
exciting and terrifying and, when the giant stumbles, the envious come out from
hiding to wag their fingers before the giant rises again.
The conversations and correspondences over the last year
have led me to believe that strategic marketing, further development of
international supply chains, and developing and using advanced cost management
techniques will be areas of advantage to the making the British-based company a
fearsome entity as it dances into the future. In my estimate, this would be a positive
move for the industry just as the Ferguson Enterprises of yesteryear moved the
industry forward and made us all perform better.
1
Benfield, S. See “Do the Current Troubles at Wolseley Signal a Change in the
Distribution Model?” Supply House Times, July 2008 at: http://www.supplyht.com/Articles/Blog/BNP_GUID_9-5-2006_A_10000000000000390554.
2 Cudzik, J “Are
the good times gone?” Supply House Times, May 2009 at: http://www.supplyht.com/Articles/Feature_Article/BNP_GUID_9-5-2006_A_10000000000000586524.
3 Benfield, S.,
Griffith, S. “Disruption in the Channel,
Power Publishing, 2008.
4
Banham, R., “Supply Chains and Demand,” CFO Magazine, September 2009, pg. 60.Links
