Taking the lead
IDG introduces distribution to the notion of consolidation
By Susan L Srikonda -- Industrial Distribution, 8/1/1998
Industrial Distribution Group is racing toward its goal of becoming a multi-billion dollar national player in the distribution channel, forever changing the distribution landscape with each acquisition.There is little doubt that consolidation is the future of distribution, but what remains to be seen is whether IDG will be heralded as a champion of the independently owned distributorship. So far, the response is positive.
Combining the best attributes of an independent distributorship with the access to capital and market reach of a national company is what the nine founding companies of IDG intended when they rolled up and went public last September.
"Our objective is that the name stays on the door and the management stays in place at the subsidiary level," says Douglass C. Smith, president and chief operating officer of IDG. IDG's founding principles were modeled after Sysco Corp., a consolidator in the food systems industry. "They had a lot of good guiding principles, and one of those was that the local business unit was still responsible to the local marketplace for the execution of their strategy and that these business units were highly incentified to produce results as a public company. Hopefully, we can be as successful as they have been."
IDG is a $460 million company with 19 subsidiaries -- figures destined to rise with the company's next acquisition.
"It's incredible the speed with which the organization is rolling up, and the amount of interest there is in joining this group is encouraging and exciting," says Sam Mitchell, president of E.C. Blackstone, an IDG subsidary.
Interest in the roll-up is demonstrated by the fact that some distributors have reached out to IDG subsidiaries and expressed interest in hopping on board the consolidation train.
And there is plenty of room onboard the train: IDG intends to acquire four companies per quarter for the next three to five years to satisfy Wall Street's hunger for profits and to meet its own rigorous growth objectives. The firm went public in September at $17 a share, reached a high of $23.25 a share, and at press time was trading at $16 per share.
"Wall Street looks at us as a consolidator, so acquisitions play a very key role in our success," Smith says. "Whether it takes three years or five years...what we intend to do is to consolidate this industry and to seek the level that we feel is most appropriate for our company and for the industry itself. There are 10,000 industrial distributors, so we have a long way to go."
The million-dollar question is "who will be next?"
"We're clearly looking to fill gaps in the geography of the U.S.," says Martin Pinson, IDG chairman and chief executive officer, who recently predicted that IDG revenues could approach $20 billion by 2003. "It's always been our objective to have the top distributorships in the top 50 to 75 markets in the U.S. We're looking at the geographic areas that are still open to us, some of which include Ohio, Texas, Florida, and some of the western states like Oklahoma. Those areas are important to us."
The state of independence
Each of IDG's acquisitions joins a network of once-independent companies that are now dependent upon one another to meet the demands of shareholders and customers.
Each must weigh the benefits of size with their desire for independence and the rapid changes in the market. The roll-up provides a way for small and mid-size distributors to survive in an uncertain market and still maintain a level of autonomy.
"We were at the mid-size that is talked about as being the most vulnerable," says Mitchell, whose company had $18 million in revenues in 1997. "We were competing with big players on many accounts and we certainly needed the best practices and the resources of IDG to compete. Since our acquisition, we still run our own operations, but we have the deep bench that comes from being a part of IDG."
IDG's June acquisition of Buford Brothers, Inc., the oldest member of the Industrial Distribution Assn. and the oldest for-profit company in Nashville, Tenn., attests that a long-standing reputation doesn't guarantee survival.
"Being part of a larger organization opens up a lot of doors for us in terms of our growth down the road," says Bill Young, president of Buford Bros. "With all the competition in this industry, we were constantly asking ourselves, "how are we going to fit? How are we going to compete with the MSCs and the Graingers?' This answered a lot of those questions for us."
The four New England subsidiaries -- which were already considering merging before IDG acquired them in May -- were looking for economies of scale to strengthen their positions in the market.
"The stimulus for all this has been the increasingly rapid changes going on in our channel, not just with our customers but increasingly with our manufacturers," says Mark Fuller, president of REFCO, Inc. "In total, our four companies were considered mid-sized. We believe that in the future you are going to need the economies of scale of being either very large or a very small niche distributor to survive."
Putting the pieces together
IDG is faced with the challenge of blending its subsidiaries on an operational level without inhibiting them at the local level.
To maintain this delicate balance, IDG works on the premise that anything to do with marketing, customer service, selling, logistics, or delivery is executed locally and that only operational initiatives like technology upgrades and financial reporting are centralized.
"The hubs of IDG operate on business practices that are most appropriate for that trading area," Mitchell says. "We're still Blackstone Co. and probably always will be. We run our own show down here in our area and tailor it to our customers in our market. A lot of IDG's companies are very different; many of them are specialists. It's not a cookie-cutter concept and that's the big difference."
The hub-and-spoke approach provides the basis for IDG's rapid acquisitions.
"We're buying companies that are $10 to $25 million in size and we have a highly decentralized model, so we don't have the same integration issues that most people talk about when they think of acquisitions," Pinson says. "So we're able to bring into our group a lot more companies, and then over the next several years we will integrate them into our business model as we develop it."
In the 11 months since IDG went public, the company has focused its operational initiatives on meeting financial reporting requirements. The next initiative will be to link the subsidiaries together with a single computer system.
Beyond those logistical issues, IDG places a priority on maintaining a high level of trust among the individual players.
"Four of the founding companies have representatives on the board of directors and their role is to make sure that we maintain the integrity and the vision of the founding companies," says Andy Shearer, one of IDG's founders and president of Shearer Industrial Supply Co. "We've selected individuals at our executive management level that represent the type of standards we want reflected in our organization. We're also being very selective in our acquisition process. And we are constantly communicating amongst the founders, the business unit presidents and the business units themselves to make sure we are doing what we set out to do."
High fives all around
Industry reaction to the roll-up has been primarily positive, though some players have expressed concern about its larger implication.
"Within the distribution community, the reaction has largely been congratulatory. Within the manufacturing community, the reaction has been one of surprise followed by congratulations," says Fuller. "Within the customer community... frankly, it's not a surprise. In all instances except one, it has been either a non-issue or they're very happy about it because it makes us bigger, better, and more capable."
"I think there's been some concern from other distributors," Shearer says, "and I think that concern stems from the reality of the dynamic changes that are occurring in our industry and that IDG represents a dramatic change. But I've also seen a lot of people view it as an opportunity to do exactly what we built IDG to do -- provide independent companies with an ability to maintain an autonomous, flexible, local organization while realizing the advantages of being part of a larger, publicly held organization."
Susan Pilcher, indirect channel specialist at Castrol Industrial North America, expresses a concern that further industry consolidation will create more channel conflict. "Manufacturers have to review their distribution strategies and ensure they are prepared to manage this conflict," Pilcher says.
However, Pilcher and other manufacturers like Kevin Boyle, director of distribution at Loctite Corp., Rocky Hill, Conn., recognize that their distribution partners gain market share and competitive advantage by aligning with IDG.
"The acquisition strengthens our relationship with them," says Boyle, "because we don't view them as our customer. They are our business partner and we both service the end user. It will strengthen their ability to service the customer."
Bob Gardiner, director of marketing and distribution at Norton Co., Worcester, Mass., says that consolidation is a reality in today's market. He doesn't expect the recent acquisitions to affect his relationship as a supplier to IDG subsidiaries.
"It's one of the realities of the marketplace that we are now dealing with multiple organizations that have common ownership," Gardiner says. "However our approach to working with and supporting those distributors has not changed. And we don't anticipate changes. We feel that through their association with IDG, these formerly separate organizations will improve their overall capabilities."
Considering the customer
Whether customers win or lose depends on how well IDG meets its goal of decentralizing the entire interface with customers. In an effort to retain customers of these local, service-oriented companies, IDG intends to maintain the autonomy of its subsidiaries and the personalized service they have traditionally offered.
"The thing that makes us different from other large companies is our commitment to the personalized service that the customer in that local community has been used to receiving," Smith says. "One of the reasons that we will be successful is because we have the ability to apply the local application and technical knowledge to solving customers' problems, in effect lowering their costs every day. It's much easier to do that at the local level than the national level."
Carpenter Technology Corp., of Reading, Pa., has been a customer of Shearer Industrial for more than 15 years. Dave Spadafora, a buyer for Carpenter, says understanding IDG's decentralized model and knowing that Shearer would remain as president alleviated concerns about the acquisition.
"Actual change that we have seen is limited at this point," Spadafora says. "Shearer has made some significant strides with Carpenter within the last year in becoming an integrated supplier in our operation...At this point, I can only think that IDG has helped them to do that by bringing resources, but I can't directly relate that to the IDG merger."
Jim Cunniff, materials manager for James Bury, Inc., a longtime REFCO customer, expresses a sense of loss mixed with the recognition that his company may benefit from REFCO's acquisition.
"It's always been very comfortable dealing with a small local company...and we're going to miss that. They've always had a lot of personal involvement with us. I'm not sure if that will change, but I'm sure that the service level will not deteriorate in any way," Cunniff says. "But it's a changing world and they're doing the things they have to do for them to survive and for us to survive. I think the benefit is that they're going to be bringing the products of other member companies with them. We expect they will be able to provide us with inventory management services. And we expect that as a unit they will have the power to give us technical support and also consolidated invoicing."
Market forecasts
What the landscape of distribution will ultimately look like is a question that even Doug Smith can't answer. He does predict further consolidation outside of IDG's efforts, though he hesitates to forecast how many leading players there will eventually be.
"We were the first public company to lead a consolidation move in this industry, but there are others who are working to consolidate too," Smith says. "Both JLK and MSC seem to be indicating and acting like they are going to be making more acquisitions for the future. So there will be more activity out there...There are so many product categories in MROP and there will probably be some very big players in all of those and clearly, there are surfacing very big players in at least three or four of those categories today. So while it's rapid consolidation in 1998, we'll have to wait and see how rapidly it continues into the future."
Each of the players affected by IDG's acquisitions recognizes that this is a critical time for the industry.
"I believe that the industrial distribution business will be forced to consolidate in order to remain competitive with large industrial accounts," Spadafora says. "Today's competition will come from larger, integrated, national distributors that sell to industrials. It's going to be key for anybody who is mid-size in the industrial MRO distribution market to either consolidate or become a niche marketer in order to survive in that environment."
Ah, the "niche marketer." It's a phrase that offers some comfort for small and mid-size distributors who can't compete with larger companies and don't see another option on the horizon. But in a final word of caution, Mitchell explains why the roll-up is such an appealing alternative to the niche marketing route:
"I think everybody understands that there is no reason not to be part of something like this if you're going to position yourself for the future," Mitchell says. "There's a dangerous misunderstanding in the industry that you will survive if you are a niche player.
"There are a lot of people in the industry who think they're niche players and they're really not. If you're going to be a specialist, you've got to be able to do something that the large companies cannot do or are not willing to devote the resources to do. And those large companies are able to sell cutting tools, for instance. The way IDG is structured, we can be a niche player in each market."
IDG TIMELINE
Feb. 1997 IDG was formed
June 1997 IDG hired Martin Pinson as chairman and CEO
Sept. 24, 1997 IDG's initial public stock offering. Merger of nine founding companies announced:
Industrial Distribution Group
Shearer Industrial Supply Co.
B&J Industrial Supply Co.
Tri-Star Industrial Supply, Inc.
Associated Suppliers
J.J. Stangel Co.
Cramer Industrial Supplies, Inc.
Grinding Supplies Co.
Slater Industrial Supply, Inc.
Oct. 1997 Stock hits all-time high of $23.25
April 1, 1998 IDG announces its first acquisitions:
Continental Air Tools
Northern Tool & Supply, Inc.
E.C. Blackstone Co.
May 7, 1998 IDG acquires:
REFCO, Inc.
Hawley Industrial Supplies, Inc.
The New England Group of Industrial Distributors (d/b/a Industrial Suppliers of New England)
Industrial & Tool Suppliers, LLC
June 8, 1998 IDG acquires:
L.D. Supply
Knox Industrial Supplies, Inc.
Buford Brothers, Inc.
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