Uncertain futures
Today's volatile marketplace complicates the future for many young industrial distributors
By Susan L. P. Srikonda -- Industrial Distribution, 5/1/1999
Today's young industrial distributors face an uncertain future as they watch the ranks of family-owned distributorships dwindle. In 1998, less than half of industrial distributors considered themselves family-managed, down from 65 percent in 1997 and 61 percent in 1996, according to Industrial Distribution's 52nd Annual Survey of Distributor Operations.In an industry where businesses have been largely transferred from generation to generation, the idiosyncrasies of working with family are further complicated by today's rapid-fire consolidation.
"This kind of environment produces anxiety. The world is moving so fast and the consolidations are so big, the old idea about controlling our destinies is just not nearly as strong as it used to be," says Gerald LeVan, a family-business consultant from Black Mountain, N.C., who has worked with family-owned distributorships.
Issues related to consolidation, technology, family business relationships, management struggles and more are represented here by the stories of four young industrial distributors - Mike Morse, Jason Zenger, Karl Floody and Jeff Hatt. Their stories provide a glimpse into how their experiences and perspectives differ from those of their parents and grandparents and why, in an industry facing a sea of change, they've consciously chosen a career in distribution from more options than their parents ever imagined.
No hand-outs, please
Young industrial distributors constantly have to fight the stigma, often closely held by non-family employees, that the family business is being handed to them.
"You have to work a little harder than most people would, so that you can prove yourself on your own merits," says Karl Floody, 35, who is vice-president of his family's fluid power distributorship, R.R. Floody Co., Inc., in Rockford, Ill.
"It's a process that has to continue as you take on more responsibility for the company, because you have to prove yourself at each level," he says. "Also, all our [suppliers] are always concerned with the succession plan that's in place in the business and who the next owner will be, and it's extremely important for me to prove myself to those people as well."
Floody's transition into the family business -- which is still owned by his semi-retired father, Roger Floody, who started the company in 1956 -- was made easier by the presence of the current company president, Verne Winter, who served as his mentor.
LeVan strongly advises young people entering family businesses to have an objective, non-family mentor. He also suggests that they demand a paper-trail including job descriptions, performance appraisals, and career path objectives that mimic "all the concreteness that anybody else in a job with a comparable company would want."
Winter's role as mentor has provided a buffer between Floody and his father.
"Ever since I started [in 1987] I reported directly to Verne," Floody says. "Essentially, he's the one that's been grooming me and teaching me about the day-to-day operations of the business. Since he's not a family member, that allowed him to be more patient with me than my father might have been."
Floody's efforts to develop a written strategic plan for the company included getting input from employees, which helped him to earn their respect. With plans to own the business one day, Floody says it has been important to earn that respect and to learn all aspects of the business.
On the sensitive topic of compensation, Floody says he was able to resolve that issue when he started in outside sales by earning his salary the traditional way: on straight commission.
"The hard thing [regarding compensation] is if the owner or founder doesn't want to feel like they're giving preferential treatment to their family. I think the best way to do that is to try and compensate them based on what the other people in the company are making at that level," Floody says. "The hard thing is that there's always going to be the perception that because they're a family member they're probably paid more. But if the second generation person has the respect of the other employees, and if those employees are being treated fairly, then it's probably less of an issue."
Facing change
The short career that Mike Morse, 29, has had in industrial distribution exemplifies the circuitous nature of consolidation.
In 1996, Morse started working for Morse Industrial Supply, his family's industrial and steel distribution business, which Morse's great-grandfather began in 1884 as a small hardware store. The company is headquartered in Bellingham, Wash.
Today, Morse's future with the company is uncertain.
In December of 1998, the company sold the industrial portion of its distribution business, which was run out of its Tacoma branch, to a local competitor, Stellar Industrial Construction Supply. Morse, who at the time was managing inventory for the industrial business, was involved in the decision to sell.
"The best reason for selling was that as we looked at that piece of the company, there appeared to be two options: grow it a lot or find a home for it," Morse says. "So we decided to sell and it became a great deal for both places. It was a good match for us because it was such a good fit ... there were only six jobs lost which was very important to my dad. And nobody had to be relocated."
In the transition, Morse Industrial Supply became Morse Distribution, d.b.a. Morse Steel, and Morse's career took an interesting twist. He's currently managing the inventory on a contract basis for their former competitor.
"As we finished the deal, the stuff that was happening [at Stellar] looked pretty exciting, so I talked about staying with them temporarily and doing some of the things for them that I was doing for us with the inventory," Morse says. "There's a very positive atmosphere in the new company and it's been fun to be part of that."
But Morse is nearing the end of his contract work at Stellar and his future in industrial distribution is unclear. The family business in Bellingham, 120 miles north of Tacoma, now concentrates on the steel industry, with which Morse has no prior experience. To move back into the family business would involve relocating, learning the steel industry, and building relationships with the Bellingham employees.
Morse says the pressure he feels as he's making this decision doesn't come from family expectations.
"[The pressure] comes just from recognizing that this is an opportunity for me to get involved in the company, but also that there are other opportunities," Morse says. "It's knowing that this isn't something I can get involved in and decide eight years later to walk away from. If I become part of the [company's] plans for the future, the longer I'm involved the harder it becomes to plan for the future [of the company] without me."
The honeymoon phase
In the year and a half that Jason Zenger, 23, has worked at his father's business, he has hit a few snags in trying to build a business relationship with his family, but so far has rebounded with youthful enthusiasm.
Zengers Inc., in Melrose Park, Ill., was started in 1951 as a hardware store by Zenger's grandfather. Zenger says he was never expected to join the family business, and that his decision to sign on came just as he was interviewing for other jobs following four years of college.
Not one for being idle, Zenger's ideas for the family business are running full throttle.
"When my dad took over the business, he turned it from a hardware store to an industrial distribution business. He was very innovative when he started in the business," Zenger says. "I'll be innovative in different ways."
Among Zenger's ideas for the business are improving procurement processes, opening a branch operation, upgrading the company's computer system, starting a chemical maintenance side of the business and, of course, someday taking over the reins.
Zenger's focus on change has moved his relationship with his father, the company president, into a process that LeVan describes as learning "to manage differences [between generations] and not letting those differences get out of hand."
"I'm very different from my father; he's a lot more laid back than I am," Zenger says, "and I have an engineering background which increases my interest in technology and streamlining operations. My focus is on finding new and better ways for our customers to do business with us. My father's focus has always been on forming relationships with customers, and that's something I'm learning from him."
Zenger is also learning how to draw boundaries between work and family, which LeVan says is important.
"So many times in family businesses, you look for the boundaries and they just aren't there," LeVan says. "But for the family, I think it's very important to have those boundaries."
One major step Zenger made toward creating that boundary was to move out of his parents' house, but he says the process is ongoing.
"Originally, for the first six months of working, it was difficult to work together and to go home to the same place. Since I moved out of the house, that's eased off a little," Zenger says. "But we definitely still have our moments. My dad jokes around that this is the first time in 40 years he's had to take his work home with him because he says that's all I ever talk about. The thing is, it's old hat to him and it's all new to me."
Conscious commitment
Jeff Hatt, who assumed the presidency of his family business -- Hatt's Industrial Supplies, Inc. -- in 1998, has watched his competitors shrink from 12 to three as other family-owned companies in his region sold. Hatt says his remaining competitors all have more than $100 million in annual revenues.
Numbers like that could make any young professional reconsider joining the family business, even as LeVan stresses the importance of ascertaining the younger generation's commitment to a business.
Perhaps the reason that Hatt, 36, was able to commit to the business, which was started by his grandfather in 1958, was that he spent eight years in the Army before joining Hatt's.
"We favor work outside the family business for a significant period of time," says LeVan, the family business consultant. "It's important to work where, without any kind of support, you'll be subject to downsizing and transfers, you'll have to worry about politics and promotions. To really get an idea about who you are, because for many younger generation members there comes a day of reckoning when they wonder whether they're there because of their merit or because of their genealogy."
Hatt credits his background as a military officer with readying him for entering the family business, where he shares major decisions with his father, Donald P. Hatt, CEO.
"With a military background, as a very young man you develop people skills and managerial skills," Hatt says. "I don't think I'd be as good or as happy as I am right now if I hadn't done that."
However, Hatt acknowledges that it was difficult to accept the financial obligations that came with his commitment to the family business.
"Obviously, before you have money invested in the company, you're doing things that directly affect the company but financially you're not obligated for," Hatt says. "You have to grow into the financial obligation along with the rest of the family and that is a big issue. With the benefits of the financial obligation there are also non-benefits. And you learn that your mind changes about some things when your name goes on the dotted line."
The changes that face Hatt and the rest of the next generation of industrial distributors will require them to make decisions differently than the generations that have preceded them. But first, they'll have to decide how committed they are to the future of the business.
Hatt admits he can't say he'll never decide to sell the business. But he also says he wouldn't want to rush into such a decision for the short-term benefits and then regret it a few years later.
"I always knew that I'd be in this company and that's what I wanted to do," Hatt says. "And I'm thankful every day I come to work to my grandfather for starting the business."
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