I recently talked to a gentleman who buys and sells wholesalers. He is well-educated and is good at the task having done it for the better part of two decades. We were commiserating on what the future would bring for a consultant and equity fund principal and we agreed on a good many things so we must be right.
First, we believe that the US Economy is entering doldrums of significant duration. The commodity inflation that lifted all boats is not going to happen for a long time. The rampant over-building is out of the picture also. The financial wizards who over-hyped investment in these areas will have a much more difficult time of creating market frenzies. The current powers in Washington, D.C. have appointed a lot of Czars and enacted regulation to see this doesn’t happen.
Secondly, because of the doldrums, wholesalers that win will need to manage better than ever and, in our experience, the economies of 1992-1999 and 2003-mid 2008 didn’t require anything exceptional in management. You could win by just being around. And, because of this, there are not enough executives in distribution who have had actual and lengthy experience in managing in a slow growth economy.
Lastly, we figured that many wholesalers will have organizations that will run significantly below par unless they seek outside help and bring in new blood with better skills. We are convinced that many will run their outfits on a shoestring, hunker down, and hope the market will get better soon. They will be hunkering and hoping for a long time. The only way you get yourself out of this mess is to manage out of it. We also agreed that many wholesalers would let their ego get in the way and run their organizations on the edge rather than seek help.
Facing the Facts
I’ve stated repeatedly unless the distribution firm is earning a consistent 3% of sales as profit before tax, it isn’t performing well. This is true for most vertical markets but especially construction and industry based distribution. Anything much less than a 3% of sales before tax performance isn’t worth it for the shareholders who would be better off putting their money in the market and working for someone else.In other recessions and slow growth periods, it’s not unusual to have the average distributor earn 2% of sales or less before taxes. From a financial perspective, this type of performance is below market average, lacks diversification, and is less liquid than investing in the public markets. In short, it doesn’t make financial sense and why anyone would choose to do this over a long period of time is not working from a basis of financial gain. But sub-par financial gain is not a problem but a symptom and I’ll wrap up this entry with a significant problem that is facing much of distribution which is securing talent to change the business.
Tales from Consulting
I’ve consulted for distributors for close to nine years. It has been a great career decision and allowed me to do many things and meet many people I could not have done otherwise. Most of the consulting I have done has been a very positive experience and I have a cadre of clients who will willingly recommend my work. There are a handful of projects, however, that were less enjoyable and they all have the same dynamics.For these projects, I was called in, by the C-level execs, to help with profitability issues. In essence, the firms had been suffering low profits for a long period of time. Given that my expertise is in sales and marketing, I was called in under the clients’ assumption that the problems were sales and marketing related. Whether it was pricing, sales management, service quality, or market strategy, the clients had an assumption that their long running stream of poor earnings was due to their VPs or Directors or employees at large. In each case, the problem was not the underlings but the C-level execs themselves. They were the problem and, instead of admitting that they were the root of their profitability issues, they denied them and hired a consultant to straighten the problem out.
I am, as a consultant, paid to separate symptoms from problems. It is the first thing I do on a new project. In the aforementioned instances, after some study, I went back to the C-level people that hired me and relayed to them that their ability to manage the organization needed change. They could take several paths including hiring an interim executive to straighten out the situation while learning from them, step aside and let a better qualified leader take over, or deny that this was needed and keep up the same level of financial performance.
In two of these instances, when I relayed this message, I was told my services would no longer be needed and I was paid for my work in problem solving and left. In only one of these instances did the executive in charge take the advice. In this instance, the executive was entering his sixth decade and he said to me “I knew this day was coming and I’ve almost waited too long to do something about it. My mojo to grow this company is obsolete. I need to find a replacement.” And, I helped find a replacement while the CEO took a backseat to the business that his family owned. He brought in an executive from the outside who has been with the company for seven years and is still going strong.
Setting the Ego Aside
Many distribution firms are entering the third or fourth generations and most are privately owned. The dynamics of a generations-old family firm are interesting and challenging to growth. There are numerous shareholders in the firm after three generations and many are risk averse. These issues can be overcome if the family has leaders who stress performance and health of the business over giving in to whims of the shareholders.The single biggest mistake that many of these businesses make is that they choose a family member to guide the firm. Too often, the firm outgrows the ability of a particular family member to grow it and, in these situations, the family leader should set ego aside and admit that their “mojo is obsolete.” Outside of a poor earnings stream, the departure of key employees, loss of top vendors, and loss of key accounts usually surfaces. If these signs are on the increase, it’s time to inspect your “mojo” to see if it is still viable.
As wholesalers grow and consolidate, we will see more outside managers who are brought in to run the company. To be successful in this endeavor takes an agreement by family shareholders to bring in the best talent possible, pay them well, and give them a reasonable chance to change things. Trying to protect family still working in the firm, or draining the generated cash for pet projects are sure fire ways to lose a qualified executive and the annals of distribution are filled with these instances. Again, if you bring in an outsider, you will need to let them have considerable clout in changing the things that don’t work and moving out poor performers who very well may be family.
What Happens When You Don't Change
In the two instances where the C-level executives weren’t cutting it and I left, their demise came sooner than later and ended badly. In both instances, family shareholders and/or the Board called the C-level executive to the carpet, confronted them with their performance, and released them from the firm. Both instances happened within a year of my visit and instruction.If your firm was not performing well before the downturn, it will most likely not do well in the doldrums forecasted in the next several years. If your firm has outgrown family management or has too much family in it, it may be time to recognize this and bring in someone from the outside.
The worst thing you can do, if you are not succeeding, is to pretend that you are and not change. You don’t have to be alone in confirming this and making the change, but you do have to be honest enough to realize the “mojo” isn’t what it used to be and you need help. Without this step, don’t be surprised if others witness your poor performance and make the change for you.
