Shifting course at Fairmont Supply

A downsizing Fairmont may focus less on integrated supply in the future

By -- Industrial Distribution, 10/1/2000

Newton, Mass.-Fairmont Supply is changing direction, and the venerable distributor appears to be focusing again on mining and general MRO supplies, rather than on integrated supply.

The 79-year-old distributorship faces several challenges converging at once. First, Fairmont Supply lost nearly a third of its revenues in 1999 after DuPont, a major customer for more than a decade, sold most of its half-interest in Fairmont's parent company, CONSOL Energy, Inc. and moved many of its MRO orders elsewhere. A slumping oil industry and other energy-dependent markets in 1998-99 dampened sales. Competitors in the hotly contested integrated supply market also have taken a bite out of sales.

The company's challenges aren't just external, however. Observers and some former employees say the company has yet to set a clear strategy nearly three years after its longtime president, William Todd II, retired.

Fairmont Supply's troubles surfaced with recent retirements and layoffs of senior managers and employees in the field. That began in earnest after CONSOL set a corporate goal to cut its administrative workforce by 20 percent. Fairmont, which earlier this year had 33 locations from Alabama to Alaska and 600 employees, was also expected to close a distribution center in Grove City, Ohio, this fall.

The firm's revenues have plummeted from a high of $294 million in 1997 to a reported $225 million last year. It is on pace to reach perhaps $220 million this year, based on results reported by CONSOL through June. That's quite a turnaround from a few years ago, when company executives espoused reaching $300 million and Fairmont's integrated supply programs were widely lauded by DuPont and other end users. Fairmont's net income has also fallen, from a high of $2.1 million reported by CONSOL in 1996 to a loss of $1.9 million from July of 1999 through last March.

Those figures tell only part of the story, however. Industry observers and former Fairmont employees say the company has shifted course, abandoning the expansion plans of Todd, its longtime CEO and a widely respected distribution leader. Todd wanted to add new product lines to integrated supply operations and sought new ownership for Fairmont. Instead, sources say Fairmont now wants to sell its chemical industry operations, perhaps under mandates from CONSOL Energy, and is focusing once again on the mining supplies operations.

Fairmont was formed by Consolidation Coal Co. to save its mines from carrying inventory and to distribute mining supply products at a lower cost. The company's products range from electrical and safety supplies to piping systems, rubber and power transmission components.

"The loss of the DuPont business dramatically changed the scope of operations. It appears they're going back to the '70s strategy of emphasizing the coal mining business," said Todd.

Recalling the mid-90s, when Fairmont grew rapidly as an integrator, Todd said, "there was a period when we substantially expanded, but it was not supported."

Fairmont CEO Charles Whirlow declined to discuss changes in Fairmont's strategy or layoffs. Charles Beam, Fairmont communications manager, acknowledged that some corporate staff has been cut, and said the company would make an announcement about other changes in the near future. Beam would not discuss whether Fairmont's move from Washington, Pa., to new corporate offices in Canonsburg, Pa., this summer was related to downsizing.

Sources name Cameron & Barkley as an interested buyer of Fairmont's chemical supplies assets, along with McJunkin-CamBar, the inventory management company co-owned by pipe, valves and fittings distributor McJunkin Corp. and CamBar.

Cameron & Barkley CEO Jim Warren would not comment on his company's potential interest in Fairmont. Rory Isaac, a senior vice president at McJunkin, said he was not aware of potential interest by McJunkin-Cambar, but said, "We're aware that there possibly could be some changes" at Fairmont.

One industry analyst, who asked not to be named, recalls that Fairmont declined to participate in a recent study, unlike in past years. "I took it as they were unsure strategically where they are headed," the analyst said.

However, at least one observer believes Fairmont's moves demonstrate that it is adjusting to the marketplace. Wally Price, a manufacturer's rep at ITW Devcon, one of Fairmont's suppliers, said the company is showing it is not "shackled" to pursuing integrated supply accounts and is refocusing on its traditional base.

Meanwhile, some Fairmont employees are uncertain about their future and the company's plans.

"There are rumors that the company is downsizing and part of it is for sale, but we don't know which ones are involved yet," one branch manager said. "We're sitting on pins and needles right now just waiting to see what's going to happen."

Bob Wotring, a customer service center manager at Fairmont Rubber Products, a central rubber house that supplies mining operations across the country from Fairmont, W. Va., said his unit "fortunately is probably one of the ones that are doing very well."

"There's things changing, everyone admits it, but it doesn't always get communicated at the time," Wotring said.

Losing DuPont

Ownership changes at CONSOL Energy, the largest bituminous coal producer in the U.S., have contributed to Fairmont's instability. CONSOL, which went public last year, is owned by German utility giant RWE A.G., known through its subsidiary as Rheinbraun A.G. Fairmont's sales of industrial supplies made up less than two percent of CONSOL's $2.2 billion in revenues last year.

During the fall of 1998, RWE increased its ownership of CONSOL to 94 percent, buying most of DuPont's shares. Fairmont soon felt the loss of revenue as DuPont turned to other integrators. Fairmont had contracted with DuPont since the mid '80s, managing MRO inventories, taking over procurement of OEM products and also doing continuous improvement and quality documentation. Fairmont's cost-cutting success generated widespread interest in integrated supply; in one case, it cut inventory by $4 million at DuPont's Belle plant in Charleston, W. Va.

Sales to DuPont made up 32 to 35 percent of Fairmont's revenues during 1996-98. Compounding matters, Fairmont's sales to companies outside of CONSOL declined 17 percent during the nine months from July 1999 to last March compared to the previous year, according to a quarterly report filed by CONSOL earlier this year.

Peter Ward, an industry analyst at Lehman Brothers who tracks CONSOL, says Fairmont's recent revenue woes stem mainly from the CONSOL-DuPont ownership change.

In the past, "I was concerned that (a good portion) of Fairmont's sales were to DuPont, and what happens when your customer isn't your owner any more?" said Ward. "They don't talk about it at all.

"The trouble for me is understanding why this fits in the portfolio of an energy producer," he said, referring to CONSOL. "I think [Fairmont] would be more of a fit with someone who specializes in distribution."

Fairmont has retained contracts at some DuPont locations, while competitors have moved into places like Wilmington, Del.

Continued kudos

Despite these changes, Fairmont Supply continues to win praise from some customers. Richard Lissa, director of procurement and logistics at OCI Wyoming, a mine and refinery, says that after running integrated supply programs since 1996, Fairmont's contract was renewed this year. OCI Wyoming also turned over a warehouse operation to the distributor.

"They're helping us transition some parts and supplies to lower cost vendors. They're doing a great job managing the warehouse," he said. Fairmont manages inventories of safety equipment, mining supplies, motors, pumps and more. Lissa said the demonstrated savings last year was three percent.

"They've been willing to put some top flight people in this account and that makes a difference," he said.

In Alaska, Fairmont has supported BP Exploration's oil and natural gas operations on the North Slope for more than five years. BP supply chain manager Mike Wilson says Fairmont delivered the anticipated savings for safety and drilling-related equipment. BP's vendor was also rewarded for its consistent timely deliveries. "I don't think they ever paid a cash penalty," Wilson said.

Early in 1999, Fairmont helped form a consortium of BP suppliers called Alaskan Supply Chain Integrators, which is developing its own information systems to handle BP's procurement and warehouse management. A former Fairmont controller, Ron Reismier, is the company's president.

Still, employees at some of Fairmont's competitors along with industry observers see the company withdrawing from petrochemical accounts, particularly in the Gulf region, and wonder what the future holds.

"Since going public, it seems like CONSOL has been reluctant to spend any money on [Fairmont]," said a former employee who took early retirement recently. "I'm surprised more people haven't left. I've heard it's the beginning of layoffs." Managing Editor Victoria Fraza and Associate Editors Sheri Qualters and Lisa Connell contributed to this report.