Distributor Profile: An M&A Plus
This article first appeared in Industrial Distribution's March/April issue. To view it, click here.
DGI Supply, the distribution arm of DoALL Company, brings 75 years of manufacturing and distribution experience to the marketplace with its primary goal of saving customers money. DGI Supply is a national/international company with revenues exceeding $300 million and inventory in excess of $30 million. DGI Supply provides customers with a selection of 1,000,000 SKUs from every category and from the highest quality manufacturers in the industry. In business since 1927, the company has 49 sales offices in North America and is the most recent winner of the Industrial Supply Association’s American Eagle Award.
For twenty years, I’ve continued to hear people say ‘The big continue to get bigger,’” says David Crawford, Senior Vice President of DGI Supply, the distribution arm of the DoALL Company. “I believe the pace of that is escalating right now.”
“Escalating” might be a gentle understatement for an industry that announces one or more consolidation deals nearly every day. For Wheeling-based DGI Supply, a full-line industrial distributor who itself was responsible for several deals in 2012, consolidation is more than just a buzzword — it’s a long term business strategy that integrates the needs of the organization with a technique to troubleshoot the challenges of an aging workforce in a still-thriving industry.
As an acquisition hungry company, DGI considers its strategy as a business consolidator to be a great way to support those smaller companies who are facing growth barriers — specifically targeting the aging demographic of small business owners.
Bill Henricks, COO of DGI Supply, sees many small business owners in this space who got into the business because they were excellent salespeople. Now, “some of these folks are in the twilight on their careers and are wondering ‘How do I get to the next level, and what do I do to cash out?’”
Increasingly, these companies face competitive pressures to offer significantly improved service capabilities and capital intensive technology investments. When customers become accustomed to automated vending and RFID technology, for example, the business owner must decide whether to put a large amount of money towards this initiative (meanwhile, often dealing with stingy lenders), or to tread water until retirement. “Many companies think, ‘I’ll be choosy with what I can do, and if I lose an account, I lose an account,’” speculates Henricks. “Because the industry is ripe for consolidation, the industry players that meet that demographic have to be thinking about some sort of merger/acquisition, because there are not many good options.”
Adds Crawford: “It’s a pretty scary position to be in when you’re in the twilight of your career and to think that if you lost one or two customers, it could dramatically affect the business. Because of this, they try to manage the business at a certain size, and it’s not always easy to do. They might wind up losing people if they can’t provide the services the customers are ultimately looking for. But if the principles aren’t willing to invest in that technology, then they’re going to have a stagnant organization that is now more at risk. So you see that and say, ‘I’ve got to do something different.’ The pressures of the (bigger organizations) are getting too great, and they need a different plan.”
And as more and more look to buy from fewer suppliers, some of these smaller organizations simply don’t have the resources to compete based on the service levels many customers have grown to expect. Another significant factor is maintaining the welfare of the company’s employees. This, coupled with the fact that many small business owners have a significant amount of their private wealth tied up in their businesses, means an exit plan can get tricky. “For them to actually retire, they need to turn those assets into some type of cash — and to make sure they’re getting a good, fair market price for what they are doing,” says Crawford. “We’ve got a pretty good program to allow the seller to maximize the value of the company.”
For DGI, acquisitions are a great way to fill product or geographic gaps while allowing for these small business owners to create a legacy strategy for their businesses, as well as to keep a hand in the business for the years leading up to their retirement. DGI’s motto? “Let them do the fun stuff again,” Henricks says. “The people we’ve done deals with are now part of the DoALL family and the DGI family. They get to do the fun stuff, and they don’t have to make deliveries on trucks, and they can piggyback off our logistics and take advantage of our integrated supply and our website. Websites and catalogs cost money.
“I think we’ve got a good platform and a fairly good strategy. We’re a bit of a hybrid, and if you look at our track record we’ve had a pretty good success rate for growing the business and keeping the legacy of these companies intact. That’s important for people who have worked 30 or 40 years at something; you want to make sure it lasts,” says Henricks.
A Look Inside
As these demographic pressures exist industry-wide, DGI too must develop its own strategy for generational succession planning. This family-operated distribution arm is integrating the third generation to come up in the organization as we speak. “We’ve got the same demographic, largely, as the U.S. population,” explains Henricks. “We want to make something that is lasting, much like the band saw.”
Henricks, of course, refers to the roots of this company — when his grandfather invented the first metal cutting band saw. “It’s a good metaphor. This brand took a long time to build, and we want to create something that’s lasting. So if you look across virtually every department, we’ve got a good influx of new blood that are being trained and brought up to speed by people with much more tenure, that know a lot about the product line, but also provide a fresh perspective and are generally more tech savvy and can get us into e-Commerce and social media and more ways to expand our value proposition.”
Mickey Davis, VP of Sales and Marketing, also notes some unique strategies the company has targeted in order to integrate solid, long term salespeople into the mix. “We’re looking outside of the technical background, for people who have good selling and sales management skills.” From Davis’s perspective, anybody can learn the product technology, but it’s hard to teach the skills needed to actually sell it. “You get the selling skills first; you can match any product against it.” Besides this, aligning with colleges and universities with applicable programs has allowed DGI to keep a finger on the pulse of the new crop of highly trained talent coming out into the workforce.
Often, says Henricks, acquisitions also bolster the workforce, and create a win-win situation for some employees who may have felt constrained in a smaller business setting. “Some of our rising stars were ones we gained through acquisition. When they join a larger organization, it may provide their career path more opportunities.”
A Look Outside
And as DGI shoulders the responsibility of keeping its own knowledge base intact, the company also makes sure to focus on customer retention as another important piece of the puzzle. For DGI, rooting out cost savings for its customers has been key to its value proposition, and it boasts more than $12 million in documented cost savings for its customers in 2012 alone. “We’ve changed our compensation plan so it rewards our people for documented cost savings,” says Crawford. “It’s a culture thing that’s been developed in the organization, and if you really want to affect people’s behavior, you tie it to their compensation. I feel like we’ve done a really good job of promoting those savings in the presentations we’ve done to our customers, so they see the value that we’re actually bringing.”
And as Crawford alludes to, the cost savings is only as valuable as DGI’s ability to highlight it — especially in a time where the average distributor feels more pressure to demonstrate the value it can provide as a partner, versus being a supplier simply competing on price. Some companies, according to Davis, have required DGI to provide documented guarantees on cost savings as part of the front end negotiations. While this is not something DGI will shy away from, “We’ve also become more selective with the business we’ve gone after,” explains Davis. “It’s been a higher focus on quality, not quantity. The reason is, there is still a lot of quality out there. You might have to work a little harder to find it, but once you find it, it pays the account manager better, there are better returns to the company, and – quite frankly – there is an ease of doing business with companies who understand value.”
The Consolidation Question
David Crawford and Bill Henricks discuss which types of companies are the best candidates to join the DoALL family.
Industrial Distribution: You’ve made a great case for the value you can bring to some of these companies. What kinds of companies bring the most value to you?
Bill Henricks: Good strategic fits — Geography and product type. Starting with product type, we look for the same kinds of core values. For us, it’s technical distributor salespeople; people who add a lot of value at the spindle. People who understand cutting tools and abrasives and have a good network of clients. That, at the end of the day, is what we’re after — as well as companies we can support reasonably well from a technical standpoint. And then we take care of the back office stuff. Geographically, we’re a national distributor, but there are some geographies where we are thin. So if you look at the three acquisitions we did in 2012, they were all geographically strategic, and they sold all the same lines. They had very technical salespeople and owners that are great salespeople.
Industrial Distribution: We’ve heard a lot about the pent-up demand and opportunities that came out of the recession. Has there been more volume?
Bill Henricks: There are probably three key drivers:
• The demographic.
• The fragmentation of the market – since there are no barriers to entry.
• A little bit of pent up demand. The balance sheets look a little bit better than they did in 2008-09. But there was still a fair amount of M&A activity in 2008-2009; we were fairly active.
I think the bigger drivers are that people are getting older. The statistic I find to be pretty powerful is that two years ago, Baby Boomers retired at a rate of 8,000 jobs per day. Last year, they retired at a rate of 10,000 jobs per day. In the next five years, better than half of the Baby Boomer generation is going to be retired. People lost a lot of wealth in the recession and some have the retirement plan of ‘I’m just going to keep working til I die.’ So, how do you do that? This is a way to do that — sell the company, and stay involved in the ongoing management.
David Crawford: And whoever has the most brand equity in a given market, we typically adopt their brand. For example, we made an acquisition of Midwest Industrial Tools two years ago, and MIT still operates under the MIT banner, as a DGI Supply company. Slowly, we convert the name over, but the brand equity – what was good for MIT – the customers saw a lot of value in that. And the customers ultimately see that DGI is the owner of the organization, and that it gets them more inventory to pull from and additional support. They’ve got the financial resources that, quite frankly, they weren’t able to afford on their own. It’s pretty compelling. A lot of these owners say ‘I’ve built this company.’ So for it to continue to operate for the next few years while they stick around under the brand they’ve developed, that is important — and it works well for us to not go in and make a lot of changes because it is disruptive to the customer. To slowly introduce our organization in, and to allow our resources to be implemented to improve the service to the customers in the marketplace — it just makes us a better organization.