Ferguson's Key to Growth

President and CEO Chip Hornsby Discusses Integrated Supply, Training and Keeping Talented People, and How Change is Both Inevitable and Essential

By Joe Nowlan, Associate Editor -- Industrial Distribution, 6/1/2005

Ferguson Enterprises, Inc., a distributor of plumbing, HVAC, industrial PVF safety supplies and tools, enjoyed a strong year in 2004 while starting 2005 on a bit of a buying spree.

Earlier this year, Ferguson and its parent company, Wolseley plc, based in the United Kingdom, purchased the integrated supply division of Kennametal (Full Service Supply.)  The acquisition made Ferguson the dominant player in plumbing/PVF distribution.

It was another in a series of acquisition by Ferguson. Earlier this year, it bought J.D. Dad-dario Co., Inc., a distributor of plumbing, hydronics, appliances, lighting and electrical supplies and fixtures.

They also acquired Meckco Supply Co., a wholesale plumbing distributor, as well as R Supply Company, Inc., a distributor of plumbing, heating, air conditioning, waterworks, irriga-tion and industrial tools.

In an interview with INDUSTRIAL DISTRIBUTION, Ferguson president and CEO Chip Hornsby analyzes these acquisitions as they pertain to Wolseley’s plan for future growth.
In addition, Hornsby (who is also CEO for Wolseley/North America) discusses the com-pany’s continuing enthusiasm for integrated supply as a business model as well as Ferguson’s formula for attracting, training and keeping talented people.

INDUSTRIAL DISTRIBUTION: How was 2004 for Ferguson?
Chip Hornsby: “Very strong. The unique thing about us is we do have a very ‘odd’ fiscal year. Our fiscal ended on July 31, so we’re about half way through the [next] fiscal year by the end of January. Last year, our top line and bottom line growth was solid, in the range of about 18 percent for the top line, and about 40 percent for bottom line. Almost all of that was or-ganic, meaning we did very little acquisition during that period. “Since that time, we’ve contin-ued on a very strong pace. We’re very encouraged by where we are. There’s nothing on the horizon that makes us say, ‘Uh-oh. Get ready.’ Obviously, there are plenty of things that could occur, but even the hike in interest rates has not had tremendously negative impact, because of the low base compared to what we have experienced over the last 20 years.

ID: Are there any specific reasons why things have been going well—beyond your being the president of the company, of course?
C.H.: (Laughs). Well, first off, you can’t discount the fact that the economy has been solid, housing in particular, for the past couple of years. Most of that is being driven by two factors: interest and mortgage rates, but also the demographics. There’s an enormous demand that will likely continue for the next 10 to 15 years or so for housing. We’ve been fortunate enough to participate in that area.

The reverse side of that is that non-residential or commercial construction, even prior to Sept. 11, had really begun to taper off due to over-building and over-capacity. Certainly since Sept. 11, the travel industry has been hit very hard, and the hotels, motels and even offices were impacted. We envision that commercial construction will begin moving back to a reason-able pace…. So we’re pretty encouraged from that aspect.

We’ve had an enormous focus on growth and have really tried to position ourselves to gain market share. We’ve [also] focused a tremendous amount of time on people and people de-velopment.  To prepare for additional growth, we will bring in more than 1,000 college gradu-ates over the coming year. We also put a tremendous amount of time and emphasis into re-taining associates by developing their skills through extensive training programs.

ID: Distributors talk about the importance of the relationships they’ve cultivated with vendors as well as customers. How does a company as large and vast as Ferguson maintain some semblance of a personal touch?
C.H.: Well, you can’t do it sitting here in this office [all the time]. For example, I spent only one day this past January in the office. I get out in the field as much as I possibly can, not only to see our associates, but also to see our customers.

I’ve been in this industry for 27 years. It’s certainly has had changes and it continues to evolve. But this is a pretty simple business. All you have to do is ask customers two questions: “What are we doing well?” Many times, that [results in] a short statement. And then ask, “Where can we improve?” And that’s where you really get your information. You don’t want to overreact to a single situation or individual, but you can pick up on trends very, very quickly.

ID: You use the expression “out in the field,” but these days that “field” is pretty global, isn’t it?
C.H.: It is. Ferguson is a subsidiary of Wolseley. I’m on the Wolseley board, so I’m over in the United Kingdom about once a month. But for the most part when you say “global,” it’s probably more from a sourcing standpoint where so much is being manufactured offshore and then brought in. The global customers really haven’t developed to a large degree to be a huge percentage of the construction market…. For the most part, your homebuilders are either local or regional. You have some national players evolving. Particularly with mechanical contrac-tors’ and water works, there’s still a lot of local and regional influence to a large degree that impacts our business.

ID: What are some of the things you might learn on these trips?
C.H.: Just understanding the role we play in distribution. We’re a logistics provider. The key thing is to have products our customers want, where they want them, when they want them at a competitive price. And it’s easier said than done.  I mean, sit at home one day and just wait for UPS to arrive, and, as good as they are, you could have a four-hour variable.

Here’s an example: If we arrive at a job site two hours late and we’re holding up, say, $250 an hour—somebody’s upset. If we arrive two hours early, and no one’s there [yet], it’s likely that material won’t be there when they do arrive. Faucets, tools, or whatever can have “legs,” so to speak. The timing and everything else is critical.

So the more we can understand how we can coordinate our efforts with the contractor or the installer, the more value we can provide. And a lot of the material we sell, they could also come and pick up. But in other situations, say, when you ship out five commercial water heat-ers—those will take up the better part of a 22-foot truck.

So how we get better at that and have the products that they need at a timely basis is criti-cal. There’s always room to improve.

ID: How much of a growing role will the Internet play for Ferguson?
C.H.: In the late ‘90s, things obviously got off to a ridiculously accelerated pace before the [Internet] bubble burst, and things settled down the past 3 to 4 years. But we envision [the Web] to be an enormous avenue that will have an impact in the future. We’re engaged in that now, spending a lot of time and effort at a more reasonable pace [than the ‘90s] to understand it. We envision the Web as the great equalizer. It can make a small company look big. And we need to understand that as we continue to grow.

You can put something on the Web and make people think you’ve got all this product and really not have the mechanism and the supply chain to be able to support it. So we see it as being an avenue as well as a threat that we need to be certain we’re staying in tune with…. We could never—or I couldn’t, anyway—figure out what “virtual distribution” was. That was over my head, and so far, no one’s been able to do that. But we’re very in sync with what’s continuing to change, particularly in the distribution end of the business, so that we can under-stand where we fit in and the role we can continue to play.

ID: Ferguson recently purchased Full Service Supply from Kennametal. What has that brought to Ferguson?
C.H.: It’s about a $130 million-plus business. FSS is integrated supply but a little different format than what we have had. They’re focused primarily by product, particularly in the area of cutting tools. We sell cutting tools at our integrated operation but also sell everything else you might consider as “indirect spend.” ...It doesn’t have to be an industrial material. If it’s some-thing [the customer] want to stock, were capable of doing that, depending on their customer base. Most of what we’re selling is industrial supplies, but it could be office supplies, for ex-ample.  What we’re able to do [now] is take the service aspect, i.e. the process we have to supply different products and services—with [FSS] expertise around products, and blend the two together and hopefully strengthen the whole organization on both sides.

It gives us a higher level of expertise. More customers to be associated with. So we’re be-ginning to look for ways we [Ferguson and FSS] can work together. I just got back from Can-ada. FSS has an operation in Canada, and we’re going to be able to work with our Canadian operation to support FSS fully.

We’re beginning to see, particularly from a distribution process, that there’s a lot of oppor-tunity for us to leverage the supply chain even further.

ID: Are these acquisitions a reflection of the Ferguson/Wolseley philosophy?
C.H.: Absolutely. We’ve indicated that, from an acquisitions standpoint—and this is for all of Wolseley, not just in North America—that we hope to be able to spend around 250 million pounds [roughly $450 million] on an annualized basis [on acquisitions. And some years we’ve exceed that, other years we’ve fallen short. But on average, we’ve been pretty close to that for the past five years or so….

But we also have a huge emphasis on organic growth as well. It has to be a combination…. We envision there are three ways to grow the business. Same store sales or organic growth, meaning doing more out of existing locations. Then, acquisitions. And the last piece is what we call business development—going into markets where we don’t operate today, getting that market information and determining what the competitive environment is and then going in and opening from scratch if an acquisition is not available. Chicago was a perfect example. We did that in the past 15 months. We went in there cold turkey and it’s been very successful for us….

The businesses and services we provide for our target, our market—we’re still in the single digit range of market share, say, 8 to 9 percent. So the way we look at it, for everything that was sold yesterday, we didn’t sell over 90 percent of it. We didn’t touch it, so to speak. So there’s a lot of opportunity to grow.

For us, it varies greatly by geography, depending on our presence. We’re very strong in the Southeast. But we don’t have a strong presence in the Northeast. So there’s enormous room to grow in New England, for example. It depends on the particular area you’re looking at, and you also have to look at the intermediate term and the longer term. What are the demograph-ics telling you? There are a lot of people migrating to different areas of the country. If there’s no one there to buy materials, no matter what happens, you can have great market share but still not have anything. We’re constantly evaluating that and looking where the demographics are headed as well as where the projected construction spend is.

We can’t really influence exchange rates or interest rates. We can just respond and react to them. For example, if Arizona is going to be an enormous growth opportunity, you’ll want to play in Arizona. If people are leaving a particular area, we need to be positioned to react.

ID: Not long before the FSS announcement, Grainger began phasing out or de-emphasizing its Integrated Supply efforts. Ferguson, on other hand, upgraded theirs.  Obviously, Wolseley and Ferguson still like integrated as a business model.
C.H.: Absolutely. [Integrated supply] is all part of Ferguson, but it’s a complete separate en-tity. It does not operate through what we call our standard wholesale distribution operations. It is a stand alone and therefore it operates with a different business process; meaning a differ-ent expense basis and a different gross margin basis, etc. It truly is an extension of the cus-tomer. We go in and we work with tem to find ways to take costs out of the supply chain….

ID: Grainger and Ferguson are two hugely successful companies, enormous growth over the past several years.  But you’re going in two different directions on integrated supply.
C.H.: You’re right but their business is very different from our business anyway. Putting in-tegrated aside, Grainger is primarily MRO. They do a tremendous amount through print and electronic catalogues. They have extremely high gross margins. Their routine business is not what ours is. I’m not saying we don’t sell what they do but it’s a different customer base. Most of ours is job work. They do a tremendous amount with repair and maintenance and that type of thing that goes on with different customer base than, say, new construction. I’m not saying they don’t participate in any of that, and we do participate in some of the MRO business, but we’re really not direct competition on every order, every day. We make deliveries to job sites at 5 a.m., for instance, for a high rise, when they guy has the crane time from 5-6:30 a.m. And you better have it all packaged and ready to be lifted off and taken up there.

We envision ourselves as much more of a logistics company, to be able to provide the right products at the right time.

ID: So what is the future of Integrated Supply at Ferguson?
C.H.: We still see it as a separate division [of Ferguson], a unique business model. The way we envision integrated—instead of being associated directly with Ferguson, [integrated supply] is associated directly with the customer. What I mean by that is, they go in and focus on a particular customer and begin to get involved with all aspects of their indirect spend.

They’re not involved with what we do traditionally every day—buying and selling, quoting and shipping. They’re looking at ways to acquire product at the lowest cost possible and the most efficient format…. We don’t see this business dying off. It may not be growing at rapid rates but we think there are a lot of opportunities to expand it even beyond the industrial mar-kets.

ID: What role do national contracts play at Ferguson these days? Are there more na-tional contracts than a few years go? Fewer?

C.H.: It varies greatly. Most of the national contracts have been in the industrial sector, the paper companies or chemical companies or whatever. We participate to a certain degree in that area although I wouldn’t say we do so extensively. 

With the other national contracts, when you get into the contractors, certainly the national homebuilders are playing a larger role. The big thing there, where Ferguson is concerned, is that most of our material is still sold to sub-contractors. So you may have a national home-builder who is doing homes in Denver or Orlando or Washington, D.C.—but very rarely will you find an installer of the products we sell, be it HVAC or plumbing, who is the same contrac-tor. That’s all done locally. Those things can certainly change but to this point, it’s been influ-enced nationally but really bought locally.

ID:  Housing still seems to be going well in a lot of areas, despite the interest rates going up.
C.H.: Well, we expect housing to taper off some. But not drop off enormously. Even with the Fed increasing interest rates … you can still go out there and find a 30-year fixed mort-gage rate near 6 percent. Compared to 20 years ago, it was a different set of circumstances when mortgages were in the high teens.

ID: Isn’t a certain amount of large construction inevitable as housing developments grow, the need for schools, malls, etc., begin to be seen?
C.H.: It wasn’t until the fourth quarter of 2004 that we began to see a significant increase in commercial construction. There was a real lull there for about three years. But we’re encour-aged now particularly as you look at 2005 and into 2006—maybe not at the pace we saw in the ‘80s and ‘90s, but certainly better than what we saw the first half of this decade.

And with government spending … the states were in disarray for a couple of years and they seem to be recovering. So you’ll see more statewide spending for government facilities.  Now the federal—that may be a while, with the deficit situation we have, I think that will be pretty challenged, at least for the next year or two….

ID: The Ferguson Web site says “Change is inevitable.” What changes and modifica-tions do you anticipate down the road for the industry in general and Ferguson in par-ticular?
C.H.: We envision that every year the expectations for higher level of service will be raised. Everybody wants it at a lower price.  So you have those two dynamics there that are working against one another. Organizations who can figure them out will be the ones who are going to be able to really have an impact.

And you need to understand the types of services you can provide. For example, look at the airline industry and take the big airlines, which are all struggling and may not even survive. But then look at Southwest Airlines. They had a different business model. When they put it to-gether, they weren't figuring on how to compete with American or United. They were trying to compete with Greyhound Bus. People were paying $69 to take a bus from Dallas to Houston in five hours or however long it took. But then Southwest said, “We can put you on a plane and get you there in 20 percent of the time at the same price.” So you have to constantly be evaluating who your market is and who is willing to pay for what....

The thing for us is that we are involved in so many different customer types. For example, I look outside my window here and I see a fire hydrant. And above my head on the third floor is a rooftop unit for air conditioning. Two completely different customers. The only thing they have in common is they just happen to be on the same job site. So we have to go in and un-derstand the needs of the guy who put in that hydrant, which in most cases is an excavating contractor. Part of his responsibility is to run the water and sewer lines. He's got different ser-vices he wants us to provide. Then you have a contractor who sets up the rooftop air condi-tioning unit. He's more of a technician and a mechanic.  So understanding all that is a chal-lenge.

The biggest thing we're focusing on is continuing to provide leadership and talent that will allow us to perpetuate this growth—bring in enough talent to understand the changes occur-ring in the market. And for the most part, we obtain this from our customer or a customer's customer.
 
ID: Ferguson has developed a solid reputation for its employee training program. You’ll be hiring more than 1,000 people during this year, for example.
C.H.: Yes, over 1,000 people this year. Our [training] program was put in place over three decades ago by my predecessor’s predecessor, David Peebles. It started in the late ‘60s, and Charlie Banks, who I succeeded, was one of the first trainees who went into that program. I’m a product of the class of ’78. Three of us [from that class] are still with the organization. The class that year was only 12! At that time we were a much, much smaller organization.

But what [training] does is allow you to bring individuals in who are smart and talented. We teach them the business from the floor up, meaning they work in the warehouse and begin to understand the distribution business. We then move them through the organization. This al-lows us to perpetuate our growth.

In my opinion, the key thing in any aspect of distribution is related to people—very people-oriented…. There are a lot of relationships, particularly on the contractor and sales sides. By having people on the bench, hollering “Put me in, Coach!” it becomes a continuous cycle where one supports the other. If you bring in all this talent, you have opportunities to grow but you also have a responsibility to grow or these people will move on to other businesses be-cause they didn’t get an opportunity.

ID: After the warehouse, where does a trainee go?
C.H.: They learn shipping and receiving. They go then to counter sales which is a big part of our business. That's really their first face-to-face involvement with customers. They'll need to have a certain degree of product knowledge or they'll feel foolish standing there trying to wait on somebody.

From there, they'd go into inside sales for a period of time and possibly into purchasing or operations. And then after three or four years, on the average, they'd go into an outside sales role.
So they're pretty well trained by the time they get out [to outside sales]. From there they could go to various areas. They could become a career outside salesman. They could move into management, which would include managing smaller Ferguson locations. If they were successful there, they could move to larger locations. Some would go on to senior manage-ment and regional roles, etc.

ID: Do college graduates feel like “rebelling” when they realize they and their degree are going into a warehouse?
C.H.: We tell them during the recruiting process to bring their diploma, then take and face it against the wall for the first six months! (Laughs) We tell them that if they go out to socialize with their friends at night, they'll have completely different [work] stories to tell than anyone else.

But to learn the business, the opportunities here are remarkable. The year I was recruited by Ferguson, we were doing a little over $30 million a year. Last year, we broke $6 billion and we're on a much higher pace than that now. So it can provide enormous opportunities.

ID: One hears the lament “It’s hard to find good people” in various industries, but a thousand people is an impressive amount to hire. How difficult is it to find that many “good people”?
C.H.: It’s part of what we do. It’s not a secondary thing or just a necessary evil. It’s where we put a tremendous amount of time and energy. And it’s not just a matter of acquiring or bringing these people in. It’s a matter of obtaining them and the being able to retain them.

I would envision in the last 18 months that I and many others in Ferguson’s senior man-agement have spent more than 10 to 15 percent of our total time involved in training—not really on product, but as it relates to leadership development. That’s done here internally at our headquarters as well as through several colleges. Virginia Tech is one, as is the University of Virginia. We’ve used Duke in the past as well as University of North Carolina….

So [training] is not just something where we say “Let’s do that this week and be done for the year.” It’s essentially an everyday or weekly occurrence for a large majority of us.

ID: How long does the training at Ferguson last before “graduation”?
C.H.: Oh, you never graduate (laughs). I’m still doing it, after 27 years. We do programs in-ternally but we also send our top management people off to fast track MBA programs at Whar-ton, Harvard, Stanford, Dartmouth, where they will literally clock-out for a couple of months and get engaged in this process. So it’s non-stop.

The other part [of Ferguson training] is an organization we’ve become associated with and that we’ve found to be phenomenal: National Assn. of Wholesaler Distributors. The bench-marking we have exposure to is extremely beneficial.

So I don’t think you ever finish. Or maybe you finish when you retire and move on to other initiatives.