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Do The Current Troubles At Wolseley Signal A Change In The Distribution Model?

July 30, 2008
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In this inaugural installment of the Benfield Blog, I am contemplating the recent woes of Wolseley Plc, the distribution giant that owns companies such as Ferguson Enterprises and Stock Building Supply. Wolseley Plc is a 32 billion dollar behemoth that has grown by a compounded 20% rate over the last five or so years. But recently, the housing collapse has caused the company to stymie growth plans, close branches, layoff thousands, and, recently, trim two directors.

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. 

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Marketing % of Sales

Fred Scheel
August 13, 2008
Hey Scott, Do you know the % of sales spent on Marketing say the TOP 100, have you ever determined the productivity gains a catalog provides the distributor

Top 100 Items, Catalog Productivity

Scott Benfield-Response
August 19, 2008
Hello Fred: It's hard to know exactly the promotion dollars spent on the top 100 items in the sales mix. Typically, the sales cost is a constant as sellers are credited and paid on all items. From a marketing standpoint, some distributors promote their top 100 aggressively because, without them, the order economics don't work. Other distributors market only the new products and technologies. What typically does not happen, but Transactional Distributors have found, is that if you rid yourself of a lot of the slow moving items, non-stock items, honoring all backorders, and counter sales, you save a bunch of money on your service and warehousing costs as many of these transactions and products don't make money unless they are coupled with a sizable transaction in margin dollars. By not performing or performing less of the money losing transactions, you have a cost advantage in service costs and can take it(cost advantage) to the street on the A&B items and promote them with a low price which works quite well. As far as catalog distributors go, Grainger and MSC Industrial have returns on sales in the 10% to 12% range which is 5x to 6x the typical full service, no catalog distributor. These companies have sales forces and branches but they are fundamentally catalog distributors and their earnings are far better than many full service, sell everything, everywhere distributors. Scott Benfield Benfield Consulting (630)-428-9311 www.benfieldconsulting.com

Wolseley's woes

Timothy Lee
December 31, 2008
I am part of the "wolseley woes" quick fix. I have been with the for just under 22 years. I started with a local company called Lawson supply and after many aquisitions ended up working for Wolseley NA(I have stayed in the same building through 5 company names changes)back in November 2008 i was "let go" to serve to greater purpose,that of ensuring our stock holders get their paycheck. 6 years ago when we started the change from FNW to Ferguson i noticed a dramitic change in attitude to those of us that helped FNW grow strong and stay strong at this time i knew my days were numbered. Ferguson, as you so stated cared only for the manager trainee who knows nothing of the market conditions and customer mentality in our little part of the vineyard.Ferguson was willing to hire these "smart people" to build their future and make Wolseley a power house. but then they had to get rid of the "older" associate to offset the cost.they decided to cut those who have a working knowledge of both customer and business market. How shameful. This single handed action on Wolseley NA will be the ultimate undoing for this business monster. Just as Rome collapsed in its hey day so shall it be with Wolseley NA. You will see a strength and come back in the Ma and Pa supply houses surely the "little guy" will soon gain strength. people are leary of Corporate America and are looking for more home town kindness and honesty in their dealings.

Wolseley's Woes

Withheld by request
January 15, 2009
I wish I could attach my name to this but unfortunately politics is still very much alive at Wolseley branches. This organization abuses their personnel and many go elsewhere after being burned out. I will always remember ex Ferguson CEO Charley banks letter to the wholesaler magazine about companies who hired "their" employees and how Ferguson viewed this as unacceptable and would not hesitate to cease doing business with such companies. One anonymous reply stated that if Ferguson did not burn their people out in 10 years (or less) they wouldn't leave. Additionally they beat up the vendors with constant threats and head squeezing that would make accusations of torture at Guantanamo Bay seem minor. They are arrogant and pompous and except for the fact that they still have some good people, deserve whatever happens.

It Doesn't Work Anymore

Stanley Dreyfuss
March 26, 2009
I have worked for two independent distributors during my 37 years in the industry. It is not hard to see why bigger is not always better. Ferguson only cared about size, not about customer or vendor relationships or the industry (they dropped out of ASA). Ten years ago, there was a lot of talk how Ferguson would put us all out of business. Today, strong independent wholesalers are still the cornerstone of our industry. I think the future of Ferguson and HD Supply is not the industry's future. It's independents and companies like Hajoca and Winwholesale who allow their stores to act as independents. We will survive!

They just don't care

MAANDPA
June 29, 2009
I just went through and aquisition from a "ma nd pa shop" to Ferguson. Let me tell you that Ferguson promised the world and did the exact opposite. They cut positions, people and branches. Now with another company, I do not see Ferguson and the way they do business growing in the future.

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