President & CEO Rick Schwartz winced at the term as if it was chalk screeching across a blackboard. I didn't use the word in a literal context, but it's common parlance among industry citizens to describe the WinWholesale organization as a “franchise” operation. Schwartz wishes we'd all stop.
“Equity partners is a better term,” he insisted. “Franchise implies there are fees tied to revenue, and there's not. Our presidents have more autonomy than franchisees in how they operate. Franchises have lower stature. Our companies are true business partners.”
The companies he refers to at last count numbered 433 spread across 40 states and eight industries. (See “Win Group of Companies” box.) Better not refer to them as branches in the CEO's presence, either. Each is a separate corporation in which the individual presidents have a substantial equity stake. It's the only organization of its kind in the PHCP industry, and maybe anywhere else as far as we know.
“Our unique business model is the key to our success. It drives our growth and inspires our management,” said Schwartz.
In their fiscal year ended last January 31, the “Win” companies generated collective revenues of $1.22 billion and are on target to close in on $1.4 billion when the present FY is over. The chart on page 58 attests to an impressive growth record dating back more than three decades. It coincides not so coincidentally with Schwartz's tenure with the company, which began in 1971 on the IT side of the business.
It seems that whenever a management MO proves successful in the business world, imitators spawn around it. Playing devil's advocate, I asked if WinWholesale's model is so good, why haven't more organizations copied it?
“It's quite complicated, for one thing,” Schwartz replied. “It involves separate ownerships, payrolls, taxes and so on for upwards of 400 corporations. I've presented this business model to people in different industries, and many agree that it works great, but they are never able to overcome the critical mass of issues it takes to get it done.
“We had the luxury of our founders seeing it as important. It was their way of implementing a philosophy of stimulating small businesses with the advantage of big company efficiencies. So we built the support function back in the early 1970s, when we were much smaller. It's not easy to do.”
Chief Financial Officer Jack Johnston added, “I think the main reason people don't follow our model is they don't want to give up the large percentage of ownership that we do.”
Schwartz continued, “The other side of it is not everyone wants to be an entrepreneur. In the Win organization, there is an owner under every roof. We truly promote an entrepreneurial attitude we call 'the spirit of opportunity.'”
That spirit and organizational structure largely came from Dick Schiewetz, former president of WinWholesale's corporate predecessor, Primus, Inc., from 1956 to 1998. Still alive but not healthy enough to participate in this story coverage, Schiewetz is spoken of with reverence by his protégés in the current management team.
“Dick saw the wholesale distribution industry as filled with good people, but who were lacking financial acumen,” said Chief Operating Officer Jack Osenbaugh, who joined the organization the same year as Schwartz, in 1971. “His motive was to help people, and he recognized that a main reason for small business failure was the expense of physical services.”
HORSES BEFORE THE CARTTo understand WinWholesale, you have to put out of your mind that it's a billion-and-a-half dollar corporation. Simple arithmetic tells us that its 433 operating units average a little over $3 million in revenues. This is a confederation of predominantly small supply houses, many in rural markets. Some generate less than $1.5 million in annual sales. The largest operations are in the $15 million range.
However, the company's overall net profit margin is above PHCP industry norms, and Win companies return ample ROI for the risks undertaken both by the corporate parent, and by the presidents and sometimes other employee investors at the local level. The main reason is that the Win companies operate in a rarefied atmosphere of efficiency. Divide WinWholesale's revenues by the approximately 3,600 employees who work for the Win Group of Companies, and you'll get a sales-per-employee number way up in the industry ranking. A big reason is only 85 people staff the company's modest corporate headquarters in Dayton, OH. That's uncommonly lean for a billion-dollar-plus organization.
The people in Dayton view themselves as the cart to the operating companies' horses, and think it is their job to lighten the load being hauled. Schwartz estimates that the overhead burden assigned to the Win affiliates is only about half what a typical PHCP wholesaler would charge its branches for central support services. Moreover, overhead is assigned on a variable basis tied to gross margin rather than as a fixed cost. This means those who can least afford it pay a little less, and that overhead expense decreases during market downturns. “We don't load our companies up with overhead,” said Osenbaugh. “This way, when things get tough, the presidents can peel back expenses quickly.”
Schwartz got involved from the ground floor in helping to develop the home-grown IT system that enables WinWholesale to operate so lean. They were among the earliest PHCP wholesalers to computerize, establishing a relationship as an IBM business partner more than three decades ago that continues to this day on the hardware side. Software consists of a multi-platform, customized system affectionately known as WISE.
“When I joined, overhead cost was probably four or five times what it is now percentage-wise,” said Schwartz. “A big advantage is that our company presidents have a great say in how systems get developed. They are not dictated to by the software.”
Headed by Jeff Dana, the IT department employs 12 programmers to continuously upgrade and improve the system. They work closely with Win presidents and other field operatives to tailor systems for a precise fit with local needs. Example: a priority project underway at the time of my visit was to develop a self-contained warranty and credit memo system to record inventory adjustments up to and through general ledger, eliminating some intermediary steps that proved cumbersome.
This is the wrong journalist to report on the nuts and bolts of computer technology, but I do know how to say gee whiz when something extraordinary smacks me. One eye-opener is a payroll department that takes care of more than 3,600 employees with three persons - one of them a part-timer. Then there's an aggressive EDI push in which around half of all payables currently are handled electronically. Merely two people run that operation.
Also, my visit coincided with a lot of high-fiving in the accounting department for getting out month-end financial statements in record time - two and a half days after the close of the previous month. Keep in mind these statements incorporate detailed data from all 433 companies, and are loaded with arcane benchmarks and ratios that tell the presidents how their companies are doing in relation to one another and guide their decision-making. This in an industry where some wholesalers wait for months after the fact just to find out if they've made any money.
CFO Johnston has been with WinWholesale since 1977 and became chief accounting officer in 1979. It's a good thing other people in the company told me how good he is at his job, because Johnston is about the most soft-spoken and self-effacing individual one is likely to meet in such an elevated position of responsibility. “We sit in the background, because we want the local companies to be in the foreground,” he whispered.
VIEW FROM THE FIELDMost businesses with a compulsion for efficiency have MBA degrees tacked all over the walls. WinWholesale employs a lot of brainy people, but its corporate culture reflects the nitty-gritty of the supply business. Most executives and managers started out as warehouse workers or truck drivers. A new recruitment program starts trainees on a career development path that begins with hands-on warehouse stints. “We don't hire truck drivers,” remarked Osenbaugh. “We hire presidents who drive a truck for a while.”
Whether they came up through Win companies, from other distributors, or sometimes even other industries, the overriding characteristics of Win presidents are grassroots training, entrepreneurial desire, and the willingness to back it up by investing their own money. WinWholesale expects its presidents to invest in their companies an amount approximately equal to one year's salary, topping out at 40% of the firm's equity.
This arrangement gives Win presidents/co-owners the best of both worlds. Thanks to their sizable ownership stake, they can make decisions with the flexibility and authority of an independent wholesaler. At the same time, they benefit from a vast array of centralized business services delivered at a cut-rate price. Corporate support spans human resources, accounting, financial services, the computer network, e-commerce, marketing, training, insurance, purchasing and more. The extensive support frees the presidents to focus on core distribution concerns such as inventory management, sales and relationship building.
Win presidents have leeway to make their own purchasing decisions in light of local market conditions and vendor relationships, although some compromise is expected. WinWholesale's collective size enables it to act as its own buying group, and it operates five distribution centers around the country to feed its affiliates. They are moving along with the rest of the PHCP distribution industry toward greater vendor consolidation to maximize purchasing power and gain efficiencies. They use more carrots than sticks to nudge the Win presidents toward product conformity, but greater conformity is unmistakably the goal.
REGIONAL MANAGEMENTThe organization chart on page 51 depicts rather streamlined management for a billion-dollar organization. On the operations side, the three regional vice presidents and nine area leaders are full-time positions. Each regional vice president is responsible for about 145 local Win companies. Each also oversees specific industry groups, i.e., plumbing, electrical, HVAC, etc.
Area leaders also hold full-time positions. Each has responsibility for about 40 Win companies in their areas.
The area coordinators are drawn from the ranks of successful Win presidents who lend part of their time and talent to help out cohorts who might be starting up or struggling. They have responsibilities for only four or five companies. They are expected to visit the companies under their wing quarterly, and may spend weeks at a single location if needed to straighten out a problem.
These regional and area managers have no line authority in the companies they oversee. Local presidents remain the boss when it comes to day-to-day business decisions. However, the regional vic presidents, area leaders and coordinators sit on the board of directors of the companies under their tutelage. These companies typically have a five-person board, the other two members being the local president and Osenbaugh or another member of WinWholesale's executive management.
FUTURE PLANSA corporate restructuring last year (see box on page 51) created the position of Vice President Acquisitions & Development, filled by Calvin Grout. He started with the organization in 1973 as a truck driver with a then N.O. Nelson company and had risen to a regional management post before being tapped for the A & D position. He's an important cog in WinWholesale's long-range plan to reach $2 billion in revenues and 585 locations by 2010.
Acquiring a company has added complications in WinWholesale's scheme of things. It's not enough to find a supply house for sale at an acceptable price. It must be a supply house for sale with a sharp No. 2 person or some other employee who wants to take a crack at ownership - and be able and willing to back up that desire with his or her own money. “First we will look inside the organization we're looking to acquire,” said Grout, “but if we can't find someone there, we'll look around our own organization for someone who wants the opportunity.”
Sometimes, when a Win company employee is chomping at the bit to run his/her own operation, they have been known to start a new supply house from scratch. However, according to Grout, the acquisitions market has been good in the past year and looks promising for the foreseeable future. “More and more people in this industry are approaching retirement age,” he noted.
WinWholesale also is looking to considerable internal growth to propel itself toward the $2 billion goal. There are no grandiose plans for expansion, just a mind-set toward steady, profitable growth for all of its affiliates, resembling the growth curve in the sales chart on page 58. “Our companies are evolving into more sophisticated versions than they used to be,” said Osenbaugh. “For example, we now have 91 showrooms, whereas fifteen years ago there might have been only three or four.”
And Rick Schwartz threw in the reminder, “There aren't any of our large companies that didn't start out as small companies.” <<
Sidebar: The WIN Group Of CompaniesWinWholesale Inc. is a privately-held umbrella organization for a group of more than 430 wholesale-distribution companies spread across 40 states and serving eight distinct industries. Collectively, they are known as the Win Group of Companies, or “Win” companies for short. They are:
- Winnelson: This is the plumbing wholesaler group of companies, and by far the largest in WinWholesale's confederation, accounting for about two-thirds of sales. They serve predominantly residential markets, although some branches are involved in commercial work, or a residential-commercial combination.
- Windustrial: Industrial PVF.
- Winlectric: Electrical supplies.
- Winair: HVAC/R supplies.
- Winwater Works: Waterworks and utility supplies.
- Winfastener: Industrial fasteners.
- Winpump: Water well equipment and supplies.
- Wintronic: Electronics.
The fastener industry was the most recent entrée for WinWholesale. Other distribution industries remain a possibility for the future, where synergies exist. Inventory compatibility is a major consideration, since WinWholesale's distribution centers handle inventory for all industry sectors. An industry dealing with perishables would be ruled out, for example.
Sidebar: About That Extra “W” In WinWholesaleEagle-eyed industry veterans may think our proofreaders are not on the ball when they see WinWholesale's name spelled the way it is. Not so. The second “W” was added to the name in 2003.
The name change was part of a corporate restructuring that took place last year and is still not quite complete, although light can be seen at the end of the tunnel. Prior to that, Winholesale had been the operating arm of an amalgam of companies under corporate parent and holding company Primus, Inc. Business services were delivered by a subsidiary called Dapsco, the distribution centers operated as Distro, and financial services were offered by Valuation Co. All have been subsumed under the WinWholesale identity.
“We had too many separate pieces, and we were determined to meld everyone into a single organization that is more typical of the business world,” explained CEO Rick Schwartz. “Also, we used to spend a tremendous amount of time explaining our organizational structure to employees, bankers, the trade press and so on. That was unproductive.”
The restructure was devised to be revenue-neutral, and minimal tinkering was done with the operational side of the business. There was some revamping of regional management, resulting in the creation of the regional, acquisitions, and national sales vp positions, and the winnowing of area coordinators, which had grown to an unwieldy 78. For the most part, though, the “horses” in the field were unaffected. Now as before, Win operating companies continue to do business under the names designated for their respective product specialties - Winnelson, Windustrial, Winair, etc.
Sidebar: A Brief History Of WinWholesaleWinWholesale is a company with a special place in the heart of Supply House Times' staff. The very first edition of this magazine, published in March 1958, featured a cover story titled “The Rape of the N.O. Nelson Co.” It detailed the saga of how one of the plumbing industry's distinguished plumbing and heating wholesale chains had been gutted of its assets by a couple of financial manipulators, who ended up getting called to task by the SEC for their activities.
Descended from a manufacturing company, N.O. Nelson had industry roots going all the way back to 1876. In 1955, it had 22 branches in 15 states, with annual sales upwards of $15 million and a $5.5 million cash surplus. By 1957, it was forced into bankruptcy, thanks to the hustlers who had taken it over beginning in 1955.
Under new ownership and management, N.O. Nelson emerged from bankruptcy in 1958, but as a shadow of its old self. That year, an N.O. Nelson branch in Pueblo, CO, burned down, and the company decided not to rebuild it.
The plight of its employees drew the attention of Robert Kuhns Jr., of the Dayton-based Kuhns Brothers foundry. This company had sold malleable iron fittings to N.O. Nelson since the turn of the 20th century. Kuhns was an investor in a venture capital firm, Primus Inc., headed by Dick Schiewetz, which specialized in aiding small businesses, including wholesale-distributors. Primus assisted employee investors in buying out the Pueblo branch, and several months later did the same for the entire N.O. Nelson Co.
N.O. Nelson thereafter operated as a company jointly owned by employees and Primus. While the individual companies grew steadily, the organization as a whole didn't really thrive until the early 1970s. That's when a group of company presidents and managers that included current president/CEO Rick Schwartz began employing modern technology to achieve efficiencies and productivity that led to the company becoming one of the industry's handful of billion-dollar giants.
In 1980, Primus restructured the organization. Winholesale was spun off as the corporate parent of a string of distribution companies in different industries. The N.O. Nelson name disappeared but its memory was kept alive in becoming Winnelson, the name adopted by Winholesale's plumbing supply houses. This corporate setup lasted until last year, when another restructuring occurred with Primus and all subsidiaries consolidated under the WinWholesale name. See “About That Extra W In WinWholesale,” on page 52.
Sidebar: Making Ownership MEANINGFULThe presidents of WinWholesale affiliates are expected to make a significant equity investment in the companies they run. Yet, minority ownership in a privately-held company often amounts to less than meets the eye. With no regular trading to establish stock prices, the value of minority shares frequently can't be determined until it's time to cash in. Moreover, their value may be subject to manipulation by majority owners whose vested interest lay in paying out as little as possible.
WinWholesale's top management wants its investors to have confidence in the value of their holdings. So the company has long supported a financial services arm that aims to establish realistic market prices both for parent WinWholesale shares and that of the individual Win companies.
Vice President of Investor Relations Bob Guiney heads a two-person staff that provides valuation and a variety of other capital management services to employee owners. Guiney advised that they use valuation formulas similar to those applied to small cap public companies, in effect creating a market for WinWholesale and Win company shares. They do this on a regular basis for WinWholesale stock, and upon request for any of the operating company investors.
Sidebar: SUPPLY HOUSE TIMES Wholesalers of the Year1959 - Robertson Supply
1960 - Noland Co.
1961 - EMCO, Ltd.
1962 - Raub Supply
1963 - Atlas Supply Co.
1964 - A. Y. McDonald
1965 - Horne-Wilson
1966 - Taylor Companies
1967 - Palmer Supply
1968 - J. Levitt
1969 - Kiefaber Co.
1970 - None
1971 - None
1972 - None
1973 - Hajoca
1974 - Ferguson Enterprises
1975 - Standard Plumbing Supply
1976 - CSC, Inc.
1977 - Trumbull Supply
1978 - Harry Cooper Co.
1979 - F. W. Webb
1980 - Slakey Bros.
1981 - RAL Corp.
1982 - Familian NW
1983 - Moore Supply
1984 - Apex Supply
1985 - Noland Co.
1986 - Familian Corp.
1987 - Hughes Supply
1988 - Davis & Warshow
1989 - LaCrosse Plumbing Supply
1990 - A. Y. McDonald
1991 - RAL Corp.
1992 - Columbia Pipe & Supply
1993 - LCR Corp.
1994 - Ferguson Enterprises
1995 - Hughes Supply
1996 - Familian NW
1997 - F. W. Webb
1998 - Apex Supply
1999 - Torrington Supply
2000 - Wolff Bros.
2001 - Lehman Pipe & Supply
2002 - Todd Pipe & Supply
2003 - Davis & Warshow
2004 - WinWholesale