The name tells a lot about this business. Interline Brands is an amalgam of distribution companies serving different markets. Their administration is intermingled, but each has a different marketing plan based on distinct customer segments. Also noteworthy is that Interline regards its operating units as brands unto themselves. Thus, the name Interline Brands rather than “Interline Companies … Interline Group … Interline, Inc.”
The Interline Brands name is only four years old and not as well known in the PHCP industry as some of its constituent companies. They include:
-- Barnett - a national plumbing, HVAC and electrical distributor that heretofore has done business mainly via direct mail and telesales, although this is changing. More about this later.
-- Sexauer - a well-known distributor of plumbing and other maintenance supplies to institutional facilities and office markets.
-- Wilmar - Interline's largest unit in volume, is a distributor of plumbing, appliances, maintenance and janitorial supplies to the multi-family MRO market.
These three brands combine for about 70% of Interline's revenues. Two smaller companies, Hardware Express, servicing independent hardware stores, and Maintenance USA, targeting the low-end facilities maintenance market, also sell some plumbing supplies. Collectively, about 49 per cent of Interline's sales come from plumbing products, with another 3 per cent from HVAC. The latter is a sector Barnett only recently began servicing and is targeted for growth.
Interline's remaining units serve the security hardware industry (U.S. Lock), propane suppliers (Leran) and electrical contractors (SunStar).
Each brand segment has unique skus, of course, but Interline derives efficiencies from stocking many items sold by more than one brand. A picker in one of Interline's 56 distribution centers may not know whether a given fixture or fitting is a Barnett or a Wilmar product until the label gets slapped on at the shipping desk. Interline also sells 14 private-label brands within its brands. For instance, Trayco is a regional offshoot of Sexauer popular in the South and Southeast.
What all the brands have in common is a focus on MRO customers. Interline participates in very little residential or commercial new construction bidding. Its business model targets repair and replacement contractors (Barnett in particular), building maintenance personnel and other MRO users. Company-wide gross margin of more than 37 per cent speaks volumes about its MRO-only mindset.
Interline was born with a consolidation strategy in mind. Its predecessor, Wilmar Industries, then a public company, started the ball rolling with the purchase of Sexauer in 1999. In May 2000, the company was taken private in a leveraged buyout, and the Wilmar corporate identity gave way to Interline Brands, although the Wilmar brand name was retained. In September of that year, Interline bought Barnett.
Ownership resides in an investment team that includes Interline executives and the prestigious equity firms Parthenon Capital, J.P. Morgan, General Motors Pension Fund and Sterling Investment Partners. President/CEO Michael Grebe is the former CEO of an industrial supply firm purchased in 1996 by Airgas, a major consolidator in that industry. He served as a group vice president for Airgas before joining Wilmar in the fall of 1998. Executive Vice President and CFO William Sanford, who worked with Grebe at Airgas, came aboard in 1999 and also has an ownership stake.
Consolidation Without A QuagmireTheir game plan has resulted in revenues more than tripling from around $200 million five years ago to $640 million in 2003. Most of that growth came through acquisitions. Net income came in at $7.15 million last year. (Although now privately owned, Interline abides by financial reporting regulations because of public bond issues to finance its acquisitions.)
Grebe, 47, and Sanford, 44, share a vision of the business that evolved over scores of acquisitions while working together at Airgas. In Sanford's words, “To make any acquisition work, one plus one has to add up to two and a half.” The central dilemma is how to make the whole greater than the sum of its parts without destroying the qualities that made a company worth purchasing.
“Many consolidators that have tried to merge numerous companies together have gotten stuck in the IT quagmire,” says Sanford. “The key difference between Interline Brands and most other consolidators is that our predecessor, Wilmar, addressed the IT issue very early and beat it by developing an IT platform that allowed them to integrate acquired companies very quickly, with minimal disruption to the business.”
Interline has 55 people in its IT department and, according to Grebe, spends several million dollars a year on information technologies. “We want to make sure all of the companies can interact with all the product lines throughout the network in every distribution center,” says Grebe. “So we have multiple best-of-breed software packages running the business. We purposely choose systems that can easily be integrated into other systems.”
The other aspect of the dilemma is that in trying to shape a single corporate culture out of acquired companies, many consolidators end up lobotomizing their personalities. “Mike and I have found that if you change a name from Joe's Maintenance Supply to your company name, about twenty per cent of the customers will go do business with someone else,” Sanford said.
So, the business model developed by Interline is to integrate the back end of the business - purchasing, warehousing, accounting and other administrative tasks that customers don't care about - yet leave intact the front end where customer interaction takes place. That means paying homage to the brand equity of the acquired companies, and retaining as much as possible the sales and marketing relationships built up over years or even decades.
“It's often said of a distribution company that its most important assets go home every night,” Grebe comments. “So when you buy a company, hopefully you're acquiring good people who have good relationships with good customers. Any time you change the name, you change the relationship. So we integrate in such a way as to apply the full power of Interline Brands - our buying power, distribution network, products, proprietary systems - without interrupting that relationship.” Interline has also done numerous “tuck-in” acquisitions over the years, which have been integrated with existing brands.
Keeping the name is only part of what it takes to preserve business relationships. The various Interline brands have multiple types of customers who want to be serviced in multiple ways. Sexauer, for example, sells many complex specification products and thus relies more heavily than other brands on a technically astute outside sales force. At the other extreme, the Maintenance USA unit specializes in selling low-cost products to mom and pop hotels/motels, schools and other penny-pinching accounts. They go to market exclusively through catalogs and monthly sales flyers. In between is Barnett, which sells mainly to PHC contractors and employs a mix of field sales personnel in some metropolitan areas, along with catalogs, flyers, telesales and counter sales.
Lousy service also will drive customers away, and servicing a national market of diverse businesses requires sophisticated logistics. Interline in 2001 opened a 319,000 sq. ft. National Distribution Center in Nashville. This gigantic facility uses state-of-art warehousing systems, including a three-story pick module. It houses a sku count of more than 30,000 products valued at around $31 million.
The NDC supplies 56 local distribution centers coast-to-coast. Interline claims this system provides same-day delivery to 45 per cent of the U.S. and next-day service to 98 per cent, with a company-wide fill rate of more than 97 per cent.
The Barnett BrandBarnett, with some $180 million in sales spanning PHC, electrical, tools and some other building products, is the second largest Interline brand next to Wilmar and the one most in tune with this magazine's audience. Thanks to their predominantly direct mail and telesales marketing, they are one of the few PHC wholesalers with virtually a national presence. They have built a loyal following among many plumbing contractors via private label brands, such as their Premier and Pro Plus faucet lines.
Another thing that endears them to the trade is Barnett's almost unheard of practice of publishing catalogs that show net contractor prices, updated twice a year. This eliminates the need for customers to do arithmetic, and contractors take comfort in knowing prices are firm until the next catalog comes out. (Unpriced versions of the Barnett catalog can be purchased if contractors wish to show them to their customers.) A disadvantage, of course, is that competitors can easily pinpoint Barnett's prices for everything they sell, but Interline feels the pluses outweigh that minus.
Barnett was an early pioneer with Asian imports and now buys from over 50 factories overseas, especially for its private-label lines. Quality being of prime importance to a trade audience, they have a full-time staff of quality assurance personnel. The low-cost imports give Barnett a cost structure similar to that of manufacturers and enable them to generate significant sales to other wholesalers. Company-wide, about 15% of Interline's revenues come from distributor sales.
Company executives clearly regard Barnett as a jewel among the Interline brands. This has encouraged them to embark on a program to capture business that had been largely written off in the past.
Direct mail and telesales are good for planned purchases, but Barnett traditionally had limited means of getting day-to-day pickup business from its customers. Barnett sales counters exist in most of Interline's distribution centers, but that still leaves large gaps in coverage. Most customers around the country don't have convenient access to Barnett products right this minute.
To capture that business, Barnett is in the process of building - or buying - “Pro Centers” around the country. These are mini-supply houses of a few thousand square feet that function strictly as pickup facilities. They stock basically “A” inventory items and rely on overnight fulfillment and replenishment from nearby Interline distribution centers. Only eight of them were in operation as of this writing, and still in something of a test stage. If the experiment pans out, it's anticipated Barnett will open 10-20 Pro Centers a year. “It's a bit like a retail expansion plan,” explains Sanford. “First you get one running, then go open another one.”
Barnett would prefer to turn existing single-location supply houses into Pro Centers, and are on the lookout to buy such businesses. However, they aren't looking to expand willy-nilly through the purchase of multi-branch wholesalers. Their business model doesn't allow for the overhead burden of maintaining big supply house branches everywhere. They just want to plug some holes in their marketing. Buying single-location wholesalers would give them an attractive volume base from the start, but where such opportunities don't exist, Interline will look to open Pro Centers anew in areas with a high density of Barnett customers. “Because we do so much direct marketing, we have a good handle on our customer demographics,” Sanford says.
Barnett also has begun to capitalize on national marketing opportunities that have arisen with contractor affinity groups and franchises in the residential service and repair sector. These organizations function as something akin to buying groups and are avidly wooed by Barnett. “We can do programs for them that recognize their national buying power,” comments Sanford. “I think that will be a bigger part of our business over time.”
Database MagicHeading up Interline's marketing effort for all brands is Vice President of Marketing Pam Maxwell, another Airgas veteran. She spent 17 years with the industrial distributor, and had been president of one of its subsidiaries prior to joining her former colleagues Grebe and Sanford in 2001.
Maxwell oversees the production and distribution of an eye-popping 300,000 catalogs and 5.8 million mailers a year for the various Interline brands. “When you're marketing to the entire country, you need a shotgun approach, and direct mail is a much more cost-effective way to do it than the traditional field sales of most distributors,” she maintains. “Mailers aren't as effective as field sales one-on-one, but you get far more touches for the money, and on average will get more kills from the shotgun.”
Each brand uses the mailers to promote monthly specials. They are targeted flyers with constantly refined messages and offers. Some Barnett customers might receive separate mailings touting plumbing, HVAC and electrical specials, if the customer is involved in all three trades. Maxwell also is in charge of a telesales force of around 120 people, split about 80/20 between outbound solicitors and inbound order fulfillment/customer service reps.
Interline does employ a field sales force of over 400 representatives for certain brands, including Barnett in some areas where customer density can justify it. That effort is headed by Vice President, Field Sales Fred Bravo. But flyers and phone calls comprise the bulk of Interline's marketing, as the staggering numbers reported a couple of paragraphs ago attest.
Flooding the postal system is the routine part of Maxwell's job. She gets most animated talking about the information flow from the other direction. Interline has some 140,000 active customers in its database - about 30,000 for Barnett alone, most of them plumbing contractors. Over time Interline extracts ever more detailed information about the buying habits, wants and needs of that massive audience, plus new prospects.
“We do a very good job of measuring things such as customer acquisition costs, customer migration between segments, lifetime value of customers and so on. Watching those trends and seeing how they improve each year is pretty exciting,” says Maxwell.
Interline's database marketing runs through a sophisticated software system devised by NuEdge Systems. “It has taken us to a new level,” she continues. “When a business gets this large, you can no longer run it by intuition. Someone like me without a plumbing background needs data analysis to benchmark, and to understand where we've been, how we're doing and where we want to go.”
The human touch isn't entirely removed from the equation. Maxwell credits Bill Pray for outstanding guidance in helping her to understand Barnett's market. Pray had been Barnett's president and CEO for 25 years before the acquisition. He now serves on the Interline board and as senior vice president and chief merchandising officer.
“Everyone has computers and they provide plenty of hard data, but you can drown in all that data,” Maxwell observes. “You need to know how to convert it to useful information. It's important to be able to look at a big spreadsheet and understand what it means.”
Looking AheadInterline's explosive revenue growth has been mostly due to acquisitions. Operating results for Barnett have been positive but not spectacular for the past several years. Partly that's due to the sluggishness of the U.S. economy in general, and because the company has spent most of its energy digesting acquisitions and merging operations to reduce overhead. For instance, when Wilmar first bought Barnett, the two companies operated a total of 76 distribution centers. Over the past four years the company has painstakingly eliminated redundancies to bring the total down to 56. Likewise, vendors got reduced from around 1,200 at the time of the Barnett purchase to 700 today.
That winnowing process has pretty much run its course. Interline now is focused more on strategies for internal growth, of which the Pro Center program is a prime example. They are also looking to grow Barnett's sales to HVAC contractors.
“This company has always been a fast growth company, and I see that continuing,” says Grebe. “We've been able to triple in size the last five years. Our five-year plan takes the same approach, although it may is a little too aggressive to say we'll triple again because of the law of large numbers. But I don't think it's too aggressive to say we'll double in size.”
He indicated they are still very much on the lookout for new acquisitions, but had no specific targets in mind, except to say, “We don't think we can be a distributor of, say, golf balls. We will stick to our customer segments and what we do well.”