- MARKET SECTORS
- Dan Holohan: Heating Help
- Morris Beschloss: The Beschloss Perspective
- Hank Darlington: Showrooms
- Jim Wheeler: HVAC
- Rick Johnson: Distribution Management
- Dick Friedman: Tech Tips
- Mike Miazga: In Closing
- Safety Columnists
- ASA President’s Letter
- Josh Brown: Generation Y Insights
- PVF OUTLOOK
- PB OUTLOOK
Based on warnings from major brokerages and within Wolseley, the big firm is in trouble and will likely come out of the housing collapse much changed. The question on my mind is, does the collapse of Wolseley Plc signal a change in the acquisitive business model and, if so, what will these changes be?
Wolseley Plc acquired Ferguson Enterprises in the early 1980s when the Newport News-based company was in the neighborhood of 150MM in U.S. sales and a Southeastern U.S.-based company. Ferguson Enterprises has supplied the last two Wolseley Plc Chief Executives including Charlie Banks and the reigning Chip Hornsby. For all intents and purposes, Ferguson Enterprises had a simple but successful formula that gave them significant organic growth in the early years and helped develop a culture for successful acquisition in recent times.
The Ferguson Enterprises model was based on recruiting motivated college graduates from well respected programs, training them on distribution, and working them long hours. The model was enforced by a culture that rewarded the high performers, developed top notch operating processes, and were tough negotiators with vendors. The result was a company that succeeded in the fragmented, slow to change, and rather low-key world of plumbing, HVAC, and industrial PVF distribution.
Ferguson Enterprises had exceptionally high labor productivity, higher than average earnings, and paid sellers, trainees, and branch managers more than they could have earned elsewhere in the industry. The mantra “pay a lot and expect a lot” applied and for many of the independent family businesses, Ferguson Enterprises was a name to both fear and envy.
However, in recent years, Wolseley Plc and the Ferguson Enterprise entity seems to have forgotten their formula for success or, more accurately, their formula for success has failed them. First, the parent company grew double in the last five years and their acquisitive appetite ran the gamut of distributors both large and small and across numerous industries. Secondly, the branch culture and strong local branch management model replete with willing college graduates seems to have run aground with the recent closing of 75 U.S. branches and consolidation of 15 Canadian branches. My belief is that Ferguson Enterprises and, in a larger sense Wolseley Plc, has become a victim of their appetite for growth and a change in the distribution landscape. I’ll try to describe these in the remaining space of this installment.
First, the size of a firm, at some point, becomes an encumbrance. Some years back I was a marketing manager of a sizable and well respected entity of a Fortune 100 industrial company. I was a newly minted MBA who thought I knew more than I actually did and, because of the attitude, was undaunted by the firm that just hired me. I quickly learned that this company, Emerson Electric, who is and has been a top performer in organic and acquisitive growth for a quarter century, struggled mightily with size. Despite hiring some of the best and brightest and having a revered planning and growth process, size was a real problem and the complexity of size was a real issue.
I left this company 12 years ago and it has grown in the ensuing years but nothing like the growth rate of Wolseley Plc. And, the management, processes, growth management and planning of Emerson Electric was, in my estimation, superior to that of Ferguson. And I should know this because I worked for Ferguson early career, sold to them as an independent rep and factory rep throughout the 1980s, competed against them in the 1990s, and consulted for many of their competitors for the past eight years.
In short, my career experience, knowledge of growth, and consulting work leads me to believe that Wolseley Plc grew way too quickly and simply outgrew the capabilities of people and processes that were largely modeled on the Ferguson Enterprise platform.
Secondly, Ferguson Enterprises was very much a branch manager and outside sales culture. These functions carried the decision making and the power to get local sales. Ferguson Enterprises spent beaucoup dollars training would be branch managers and outside sellers in their training programs. They were the fuel for the growth engine. In recent years and based on our research, we believe the full service branch and sales structure is slowly dying. Our surveys of both manufacturers and distributors find that there is increasingly less value in the sales call and marketing events. And, the branch manager is being replaced by a local office/inside sales manager and much of the branch management function is going to a regional level.
The problem with lots of outside sellers and branch managers is they cost big-time and their cost is way more than their perceived value to the end customer. The other problem is that while branch managers and sellers know they can’t “be all things to all people,” they believe they can be “all things to a group of core customers.” Our work in what we call Disruptive or Transactional Models of distribution finds that there is a new breed of distributors who stress being a low cost provider to many customers who want streamlined products and services at a very low price. In short, they drive transaction economics, deliver low cost, and their model self-selects customers. These distributors lean out the value chain, offer select sales support, don’t try to stock all products or be in all markets, drive transaction size, type, and mix, and have a minimum of fixed costs or branches.
In fact, these distributors avoid too many branches because they don’t necessarily want counter sales, non-stock sales and backorders, which too often cost more to fulfill than they produce in gross margins. If you don’t believe this, take a recent look at our White Paper, “Leaning Out the Value Chain” and remember that this work is research based and validated with causal analyses. It is not something we dreamed up to fear-monger the distribution base.
In summation, my belief is that Wolsely Plc outgrew their capabilities. And their success formula of sellers, branch managers, and full service branches and inventory is petering out. The world is moving toward low cost distributors who streamline services and inventory, drive transaction economics, and deliver a very attractive cost to the customer base. Wolseley Plc will come out of this malaise much changed.
Will they learn the lessons of their failure and adopt changes to drive the organization of the future or will they retrench to the branch manger, seller, gazillion trainee culture of times past? Our bet is they will change to the future but not necessarily with the leadership that got them where they are today.
Too often, those that got you where you are aren’t those that will get you where you need to be. I think Wolseley Plc has reached a point of significant and fundamental change and I am not altogether sure the Ferguson Enterprise culture, platform, and executives will drive the company into the future.