Distributors Speakout! Part 2
Most of this industry’s leading distributors gathered in Chicago last October for “Network 2010,” the annual convention of the American Supply Association. ASA Executive Vice President Mike Adelizzi helped Supply House Times recruit a blue-chip panel of distributors representing a cross section of the PHCP industry to discuss the industry’s present and future. Participants included:
- Richard Amaro, General Plumbing Supply, Walnut
- Jeffrey Beall, American Pipe & Supply,
- A.J. Maloney, Coburn Supply, Lafayette,
- Colin Perry, Rampart Supply, Colorado Springs,
- Jeff Pope, F.W. Webb Co., Bedford, MA
- Rick Waters, J.O. Galloup, Grand Rapids, MI
They addressed a wide array of topics. The first part of our roundtable discussion appeared in Supply House Times’ January 2011 issue, read here. The rest of our discussion continues.
Topic: Attracting young talent to our industry.The question posed was, what advantages are there to the distribution industry that distributors can sell to young talent?
“That’s an interesting question,” commented Coburn’s A.J. Maloney. “I would say that what’s different than 30-40 years ago is how much information technology has changed our industry. That’s an attraction to young people, as opposed to the nitty-gritty stuff we grew up with. Also, with our company, an intelligent young person who is motivated has a lot of opportunity to move up. They’re not stuck in one spot for a whole life. Also, the pace of product change for somebody young and talented is attractive.”
“This is a hands-on, essential business that will always be around as long as things are built,” said Waters of J.O. Galloup. “The PVF business we’re in is not sexy, so we sell the culture of our organization instead. We make it a fun place to work.
“We as an industry must be doing something right,” Waters added, “because when you look around you don’t see a lot of people leaving this business.”
Jeff Beall, a CPA who bought into the industry as an outsider, nodded in agreement, noting, “I got into it 14 years ago and can’t get out! It does pull you in.”
“I have a difference of opinion with your premise,” Richard Amaro chimed in. “I think we are glamorous and fashionable. Look at what Kohler’s done to make people style conscious about plumbing products. We’re also all about energy savings, protecting the health of the nation, process systems and the potential to help the environment. Why wouldn’t you want to be in this industry!
“Some of the products out there are marvels of engineering, some of the finest in the world,” Amaro continued. “A tankless water heater might have 250 engineers working on a modulating gas valve that can spit water out at 120 gpm. Why wouldn’t a young person be fascinated by that?”
Colin Perry quipped that instead of talking about toilets and copper tubing, “We sell fine china and precious metal!”
“Distribution is a valuable function,” said F.W. Webb President Jeff Pope. “With our company, a selling feature is the opportunity to grow and work in different places. Someone in upstate New York can end up in Vermont. Also, something new happens every day, no matter what position they have. Plus, being on the Fenway Park wall has helped us in recruiting.” On a practical level, Pope also noted that “a lot of kids find it hard to get a job these days, and they’re willing to talk to people they weren’t willing to talk to earlier.”
An interesting phenomenon occurred as this discussion progressed. As these distribution veterans spoke it brought about an upwelling of industry patriotism. A. J. Maloney grew solemn in reminding everyone of the devastation wrought by Hurricane Katrina in parts of Coburn’s trading area and noted: “Electricity, heat and refrigeration all went down for an extended period of time. Municipal water systems and sewer systems wouldn’t work. This shows how essential our industry is for civilization to function.”
“We’re a valuable industry,” concurred Waters. “Every day we live in a world of gas and oil lines, refineries and so on that nobody thinks of until an explosion or leak makes the news.”
Topic: What's Obamacare doing to your business?This topic generated less discussion than anticipated, mainly because of all the uncertainty. Nobody really knows how this landmark legislation will shake out, or what changes might be brought about by a new congressional lineup. (This session took place a couple of weeks before the Nov. 2 election.)
“Most businesses are sitting on the sidelines with a lot of cash waiting to see what the future is going to be,” offered Maloney.
“The bottom line is it will cost money even before the final stuff kicks in, and I think it’s going to have a large impact on the whole country,” opined Waters. “We’ll respond like everyone else. We can’t keep absorbing costs.”
Getting more specific, I drew attention to one of the more notable provisions of Obamacare, which calls for a $2,500 per employee fine leveled at employers who fail to provide health care, starting in 2014. That of course is a small fraction of the cost most distributors pay for their employee health care programs, which led me to ask: Would anyone consider dropping health care once that $2,500 fine kicks in?
Amaro spoke for most of the group in doubting his company would drop coverage just to save money. “I’m afraid we would lose good personnel if we did that.”
“It’s not just the employee, but his kids and family that need to be covered,” said Pope, who also viewed dropping coverage as unrealistic.
“In 2014, who knows what this will look like,” said Waters. “At some point it becomes a business decision whether to pay the fine, or offer a plan that’s an asset in helping to attract top people.”
Waters then went off in an unexpected direction by addressing a subject that many distributors and businesses in general are wrestling with - legalized marijuana for medicinal purposes in the states that allow it, which includes Waters’ Michigan.
They are caught between a rock and a hard place in view of drug testing mandates often demanded by insurance carriers, especially for drivers and operators of potentially hazardous equipment. Marijuana notoriously stays in the blood stream for many days after usage, making it impossible for tests to distinguish between recreational and medicinal use. In any case, it’s universally understood that the vast majority of medical marijuana “patients” are just regular folks out for kicks. Cooperative doctors frequently set up shop next door to the authorized dispensaries to provide convenient prescriptions for various pseudo-ailments.
This topic generated more shoulder shrugging than dialog. All of our panelists hoped common sense would prevail, as it has with restraints against alcohol consumption on the job. Yet a sense of foreboding lurked just under the surface. On the one hand distributors have a responsibility to provide safe working conditions for everyone by making sure people are not high on the job; on the other, it’s only a matter of time before some headline-seeking lawyer argues that a “patient’s” right to medicinal marijuana trumps that concern.
“Unfortunately, this is an issue we have to deal with that takes focus away from more productive activities that make us better at what we do,” said Colin Perry of Colorado, another state where medicinal pot is legal - and where seemingly every strip mall has a dispensary.
Topic: How to cope with a “new normal” era of greatly reduced housing starts?Maloney responded, “Our approach is we know we’re going to have fewer houses built, so we need to get more out of those houses. We’ve upgraded our showrooms, just got into cabinets, gotten deeper into the appliance business, as well as some lighting and so on.”
“New housing is not central to our business in New England,” Pope commented, “yet at the same time we’ve added 27 bath showrooms in the last 10 years or so and have added lighting and ADA products to the mix. There are still opportunities for growth, but not like there used to be. I’ve never seen the market like this before.”
Colin Perry and Richard Amaro also cited barrier-free products as a new direction to pick up some of the slack. Said Amaro, “We have an aging population larger than the entire population of Canada, so we’re trying to cater to that market.” He wondered, however, how long housing starts will remain depressed.
“I’m hearing about that ‘new normal’ across the board, but it’s hard for me to get used to because I don’t see the population decreasing. Are we really overbuilt by as much as everyone says?” Amaro asked rhetorically.
Topic: Will consolidation resume as the economy picks up again?Amaro noted, “Consolidation got overheated with companies paying ridiculously high prices (to acquire distributors). But chickens came home to roost. Distributor mindsets got used to those high multiples, which aren’t there anymore.
“Independent companies have very strong value,” he continued. “The problem is succession planning has become more difficult, and if Congress reinstates the death tax it will be a huge problem.”
“I think some of it will come back but not as rapidly as before,” said Waters. “Companies that have gone through the trial will be much more selective and have to have the money guys behind them. Future acquisitions will be more strategic.
“A huge issue that people forget about sometimes is company culture,” Waters continued. “Part of my life was in the U.S. Flow fiasco, so I watched how that unfolded and it makes me appreciate the role of personalities in this business. How you run your business when your name is on the side of the truck is different than the way some of the big supply chains look at it.”
“I suspect there will be some new consolidators out there,” advised Maloney. “Plenty of private equity money is out there looking around. Right now they’re just sitting there, but the more the economy drags on and you don’t have young people coming into the business, and no succession plan ….” Maloney left it to the group to fill in the rest.
“The reason our company got sold to us was the former owner knew the big boys would come in and break it up and destroy the culture,” Jeff Beall revealed. “I think we’ll see more companies being selective in selling to someone who shares their culture.”
Topic: What are the biggest issues keeping you awake at night?“I guess it’s things I don’t know,” A. J. Maloney stated succinctly.
“For me, it’s trying to find the right people who view this as a career and not a job,” offered Rick Waters.
Richard Amaro responded that “government is creating a lot of issues for us, and not only with health care. It’s gotten to the point where it’s pretty hard to function without being in violation of something. I’m concerned with my ability to follow what’s going on in the minds of government officials and how it will impact our business.
“I’m also concerned about quotes coming from all over the Internet. Customers we’ve always sold with typical margins are starting to ask why we charge what we do when they can buy cheaper from some other place,” said Amaro. “It’s amazing what’s out there. Even inventories of products three or four years old can have an impact on us.”
Jeff Pope said, “We have 1,300 humans employed and humans will make errors. I keep watching how we can screw up. Did we not communicate properly? Did we train them enough? We’ve been giving them information for years, but what they need is curiosity. What keeps me up at night is hoping I have enough curious people asking how can we be better? What are the things our customers want us to give them solutions to?”
Jeff Beall commented, “I worry about things I can’t do anything about. For instance, not one thing I can do tomorrow will affect what a competitor is doing. But there are things that I can do something about, like communicate with employees, invest in employees, build customer relationships. So when I’m up at night I put things in those categories, things I can and can’t do something about, and try to focus on what I can change.”
Colin Perry noted, “It’s a matter of keeping abreast of the changes taking place, and asking what we need to do to adapt.”
Topic: What's down the road? What do you see happening to your business in the next five years or so?“In the short run I see more of the same,” said Beall. “Our business model has changed and we have to adapt to it. At the same time I think there will be some fantastic opportunities over the longer term from continued innovation. The Internet and all the other information available to us help us make decisions and become better managers, better leaders and more accountable to our organizations. And I think that will take some uncertainty out of our business.”
“I see an awful lot of opportunities, and don’t think there’s ever been a better time to be an independent in this business,” said Perry. “It’s a matter of understanding the changes taking place and choosing systems to take advantage of them. We’re still trying to get a handle on social media, for instance. How do you use that to benefit the wholesale distribution business? We’ve got wholesalers in our part of the country selling directly to builders. We’ve got to figure that out and how to combat it.
“Technology and the Internet will play an increasingly bigger role,” Perry continued, “and will impact prices. We have better informed customers than ever before. It used to be they wanted to start at ground zero and choose something. Now they have a spec sheet and tell you what they’re really interested in.”
“I echo everything that’s been said about the Internet,” said Pope. “It’s going to continue to get bigger, and marketing over the Internet via Facebook, Twitter, etc., will be a big challenge.”
Amaro commented, “I agree with what everybody said - just more chaos and change!”
“I’m cautiously optimistic in what I see,” concluded Waters. “As I said early on, it boils down to basic blocking and tackling. If we put our best efforts forward, I think we’ll be fine. One downer is that at some point our country will have to deal with all the debt we’ve taken on, and inflation coming down the line, but that’s a matter for another day.”
I offered the opinion that inflation can be good for distributors. Perhaps because it was late in the day nobody chose to respond - except with gleams from the eye.
Thank you, gentlemen, for a most enlightening discussion.