After a number of years of steady annual-sales growth, many electrical distributors hit a plateau where the company stalls in terms of increasing annual revenues. The question is, how do you get your company past that threshold?
Take a close look at the annual sales of the electrical distributors listed on Electrical Wholesaling's Top 200, and you'll see at least three clear groups.
National or multi-regional companies like Graybar Electric Co., St. Louis; WESCO Distribution, Pittsburgh; GE Supply, Shelton, Conn.; Consolidated Electrical Distributors, Westlake Village, Calif.; Rexel Inc., Dallas; and Sonepar USA, Berwyn, Pa., each have annual revenues in excess of $1 billion.
Large full-line electrical distributors such as CLS, Hartford, Conn.; United Electric Supply Inc.; Wilmington, Del.; and McNaughton-McKay Electric Co., Madison Heights, Mich., have over $100 million in annual sales.
The majority — more than three-quarters of the Top 200 — have annual revenues between $25 million and $100 million. Making the transition from a large small company to a mid-sized enterprise is one of the greatest challenges a leader can face.
“I vividly recall the night I rolled out the $100 million goal,” says Bob Compagna, president, CLS, Hartford, Conn., a company that grew from $22 million in annual sales to $100 million in a seven-year period in the 1990s. CLS currently has $170 million in annual sales.
How do you grow your company to $100 million in annual sales? This article offers tips for taking your company to its next milestone.
Manage the extended gap between generations
Let's play out the growth scenario for a typical electrical distributor. Because it takes several years to grow a business, a company's founders will probably be 50 or 60 years old by the time the company has a major hub with several branches. By that time, after they have worked 25 to 30 years nurturing the business, owners need to know that the next generation of leadership will follow through and have the energy to continue growing the company — establishing more branches, investing in a second hub, expanding product lines, etc.
With more than 90 percent of electrical distributors family owned, the decision to coast along at the same sales volume or invest aggressively usually depends on the age of the founder's children, their intelligence, abilities and interest in participating in the family business.
Many electrical distributors were founded in the 1940s, often right after World War II. If still living, the founders are now in their 80s or 90s. For these companies, the baton of leadership probably passed to the second generation by the 1970s, and that second generation will now be in its 50s. They are now probably facing the same family succession planning decisions as their parents.
An owner can feel very conflicted facing the decision to either invest in nonfamily or wait until his or her children are old enough to show their potential as future leaders of the family business. When owners take a long-term view of their businesses, they are often more willing to invest in experienced nonfamily members for roles that will still allow the business to offer competent family members sufficient opportunities.
Be willing to take on debt
With hard work and some luck, an electrical distributor can grow to $25 million in annual sales without making a major investment in new business software, but I don't know of any $100 million distributors that haven't made a software investment.
The profit margins and cash flow of electrical distributors typically don't support the outright cash purchase of such software, so owners must be willing to take on more debt while wondering why they are still working so hard.
Software isn't the only investment that involves debt. For instance, distributors growing past $25 million in annual sales may need to invest in a second (and then a third) distribution hub, bar coding or other warehouse management systems, more extensive marketing programs, or process-improvement programs like ISO (International Organization for Standardization) or Six Sigma.
Tom and John Isenberg of Kansas City-based Western Extralite, which is ranked No. 71 on EW's most recent Top 200 with $67 million in annual sales, say they invested in ISO certification when their competitors were still trying to figure out what the acronym meant.
Be willing to expand the definition of your market
The typical electrical distributor grows its business around a core group of small contractors within a metropolitan area. Larger competitors have more industrial, OEM, and MRO accounts, and they may get most of their purchases from larger contractors. Owners of small electrical distributors usually believe they have a major portion of the available business in their markets, but that's a reflection of how owners view their marketplaces.
If their market is defined as small contractors within a specific geographic area, the company may well get a significant share of available business. But many owners are reluctant to expand the definition of their market because it becomes discouraging — and perhaps downright overwhelming — if they learn they have an insignificant share of what's available.
Visionary leaders will see opportunities to take away accounts from larger competitors and be willing to consider hiring an account manager with experience selling to industrial, OEM, or MRO accounts.
They will also consider the possibility of taking on new product lines and offering services like spool rental or tool repair to bolster their positions in these market niches.
It can be an enlightening process for owners and managers of electrical distributors to analyze their market share with an eye to expansion opportunities. This is a turning point for key managers every time I analyze the market share of electrical distributors hovering in the $25 million annual-sales range.
When they do this analysis, the need for sweeping changes in their company become apparent:
The common excuses from outside salespeople that they can't crack a new account suddenly don't seem credible.
The best salespeople begin to identify specific accounts they want to target.
Managers of project departments realize they aren't prepared to handle the level of business the company should or could have.
Warehouse managers rethink what type of manager has the background to handle a shipping and receiving department that will need the capability to process a dramatic increase in orders.
Owners realize their controllers may need additional training to analyze scenarios and help guide investment decisions.
“One thing that holds companies back from expanding their markets is that salespeople are more than ready, willing, and able to tell you the 10 reasons (excuses) why they can't break into an account,” says CLS' Bob Compagna. “The next thing you know, the entire room buys in and no one even tries anymore. It takes a rare leader to give you the 10 reasons your company can break into an account or new market, fight off the naysayers, and then execute. I am a firm believer that even the best of companies only have a very small handful of these ‘doers.’ They leave if senior management doesn't encourage and nurture them.”
Be willing to invest in real managers
The majority of owners of distributors believe in the laudable strategy of promoting people from within, but the practice also leads to “The Peter Principle,” where people are promoted above their level of competence. An employee who can oversee a warehouse usually doesn't have what it takes to be a true director of operations or chief operating officer.
Simply put, one is clearly a “doing” job and the other is a “thinking” job. An active person who has enjoyed solving problems and fixing things will not be able to embrace a desk job that involves delegating to others, timing when bar coding would make sense, evaluating layouts, overseeing the establishment of a second hub and interviewing software vendors.
It's very difficult for a distributor to grow beyond $25 million in annual sales without true delegation of important decisions to real managers. People who defer decisions to the owners simply encourage the owners to slow down, keep the company small, and not accept more risk.
The owner of a family-operated distribution company faces additional challenges in this arena. What if the sons or daughters aren't management material? Should the second- or third-generation be asked to work at other companies for a while or earn their MBAs before being offered a position in the family business? Can the owner actually face the need to place his or her offspring in a low-level position that reports to a nonfamily member? Or worse yet, can the owner face the need to fire a son or daughter? We all know at least one example of a distributor who avoided such decisions and stunted the business's growth.
Be truly interested in the needs of your customers
The owners of every distribution company for which I have provided consulting services has said that customer advisory councils, focus groups and surveys have been their best investment in the growth of their businesses.
If you are accustomed to serving smaller contractors, how can you realistically expect to understand the needs and buying patterns of larger contractors or nationwide industrial corporations without research?
The best research is direct communication. The needs of your customers change over time. Contractors are also struggling to grow their businesses. Seek to discover what your distributorship can do to help customers grow during recessions, when they hit predictable plateaus, when they lose key employees, or when they lose a major account.
Granite City Electric, which has doubled annual revenues from $35 million to $70 million in the last few years, strives to do what's right for its customers. Steve Helle, president of the Quincy, Mass.-based distributor, brings out the best in the people around him. Helle doesn't want to hear anyone play “the blame game.” He encourages everyone to fix what's wrong and do what's right for the customer.
Deal with the human element of a growing business
At a $25 million company, the managers of individual branches can still get away with what's called a “silo” mentality.
Former business owners who sell their companies to larger distributors and continue to work at the firms are particularly susceptible to an insistence on doing things their own way. I have seen them refuse to incorporate the corporate image in the branch location or locations they manage, ignore personnel policies, and resist participation in management meetings, research projects and committees. Owners who permit each branch to maintain separate rules and cultures can stunt the growth of their business.
Another aspect of human nature is the fear of the unknown. A hard-working employee with little or no college education can run a warehouse for a small distribution company. But a business with a few hubs and over a dozen locations requires the use of software, analysis of significant ratios (turn rates, order accuracy, fill rates) and an understanding of what impacts gross and net profit, etc. The introduction of complex equipment, computers, and reports can be pretty scary, too. It takes constant communication about the logic behind the company's vision and to reassure worried employees.
The owner of a distribution company successfully growing from $25 million to $100 million will feel more like a teacher than a decision maker. Western Extralite's Tom Isenberg says the leader must, “Find the best people you can and then get out of their way. But for many of us, that is easier said than done.”
Summary and a warning
Electrical distributors can grow past the plateau that exists around $30 million, but it requires long-term vision, an interest in continued learning, an ability to make tough decisions, and a willingness to invest.
One warning: If you decide to take the journey from $25 million to $100 million, remember that it's important to have a vision and mission that transcends hitting the $100 million goal. Otherwise, hitting that goal can feel anticlimactic.
The author is owner of Ambler Growth Strategy Consultants Inc., Hammonton, N.J. She has helped more than 800 organizations achieve accelerated growth with sustained profitability, and can be reached at (888) 253-6662, or [email protected].