Building Future Leaders

How can you develop the next generation of leaders in your company?

Maybe you should emulate George Pattee, CEO of The Parksite Group, a 100 percent employee-owned distributor based in Illinois.

George has been a fan of the Facing the Forces of Change® series for many years, but was frustrated that the information never made it out of the executive suite. So, taking a page from Oprah, he set up a virtual book club for more than 30 executives and managers at Parksite's many locations around the country. (I found out about George's book club on Monday when he called to ask me a question from the last group discussion.)

As George described it to me, he wants to create a broader dialogue within his company using the industry-specific educational content in the book. His goal is straightforward: Develop future leaders for Parksite.

In the introductory email to his team, George wrote: “Facing the Forces of Change can provide strategic value to The Parksite Group as a starting point for substantive management discussion and leadership development and training. As such, to enable you to gain the most from this report, we are scheduling conference calls to review each chapter in the next few months.”

Think about it -- all of these executives and managers now get to engage directly with the CEO as well as hear the CEO's unfiltered ideas, thoughts and vision. The calls also create a new level of interaction between the managers across Parksite’s three business units and multiple locations at limited cost.

And the best news? George told me that the first two conference calls have already spun off some new initiatives.

What a cool idea! I wrote Facing the Forces of Change®: Lead the Way in the Supply Chain to help executives make better decisions and grow their businesses. George’s call is one of the reasons that I like doing my job. I hope his example inspires you to use the report as a tool for building the next set of leaders in your own business.

Is M&A Peaking?

Modern Distribution Management just held a great audioconference on M&A trends in wholesale distribution. Read the provocatively titled summary Is the Market Too Hot?. (You can order a transcript and CD from MDM here.)

As I document in Chapter Five of my new Facing the Forces of Change®: Lead the Way in the Supply Chain wholesale distribution trend report, announced acquisitions have more than quadrupled in the past 2 years for wholesaler-distributors in construction, and industrial and commercial markets. (See Exhibit 5-1 on page 92).

In light of these trends, wholesale distribution executives should have a strategic plan for their business that recognizes the reality of acquisition activity, yet maintains a focus on profitable growth.

ARE WE PEAKING?

Wholesale distribution remains one of the top targets for buyout investments by private equity firms. These financial buyers are displaying a far greater ability and willingness to pay premium prices for leading distribution companies. They are being attracted by the ongoing need for wholesale distribution to end markets insulated from global competition, such as facilities maintenance, construction, or health care services.

The recent sales of HD Supply to a trio of private equity firms (Bain Capital, Carlyle Group, and Clayton, Dubilier, & Rice) shows the strong appetite for wholesale distribution. (See Home Depot Agrees to Sell Supply Unit for $10 Billion.) All three firms have made multiple investments in wholesale distribution over the years, although Chapter Five only discusses CDR.

However, the MDM panelists believe that this activity may have reached a peak. Brent Grover, a fellow Fellow of the NAW Institute, made some pointed comments about the market, stating: “I think there are some pretty unattractive companies that have been dressed up and the market figures out pretty quickly that it’s not the kind of firm they want to buy.”

Jim Miller of Vetus Partners, who I consider to be today’s leading expert on M&A in wholesale distribution, sees the market “…at or near a plateau.” Strong words from a major player. (Full disclosure: I am on the Advisory Board of Jim's new venture called Supply Chain Equity Partners.)

PLANNING YOUR FUTURE

The courage to face the future honestly often leads owners to look for a profitable exit strategy or even favorable terms for a recapitalization. However, acquisition dynamics should play a role in the decision, because industries do not consolidate forever, as evidenced by the sharp slowdown in acquisition activity after the peak in 2000.

Well-run, independent distributors continue to thrive even in consolidating industries due to their great skill in maintaining high levels of customer service and generating customer loyalty. One distributor summed it up in a comment that I include on page 94 of Lead the Way in the Supply Chain:

“I think [consolidation] will increase the value of the independent distributor related to servicing the customer and providing value to the vendor. The progressive independent will have a distinct service advantage. We will be more nimble and more reactive to local market conditional changes. It will raise the bar on the independent, however.”

Well said.

Private Label Static from Electrical Products

The growth of private label brands is the very first major trend that I present in the new Facing the Forces of Change®: Lead the Way in the Supply Chain report. The electrical industry shows just how controversial and disruptive this trend will be for wholesale distribution channels.

The Distributors' View

Private labels are less common in electrical wholesaling than other wholesale distribution industries. Our research found that 43% wholesaler-distributors currently sell their own private label products using the entire wholesale distribution industry sample from Lead the Way.

In contrast, our study discovered that only 14% of electrical wholesalers offer a private label. One well-known example is Rexel, which offers private label fasteners, exit signs, and emergency lighting fixtures. (Rexel is now #2 on Industrial Distribution’s just-published list of electrical distributors.) About one-third of electrical wholesalers will offer private label products by 2012.

However, not all electrical wholesalers support private labels. Last month, Bob Reynolds, Chairman, President, and CEO of Graybar Electric, boldly announced that Graybar would not offer private labels. (See Graybar Takes a Stand Against Private Labeling.) Graybar is #6 on ID’s electrical distributor list, so Graybar’s announcement shows just how important this issue has become.

The Customers' View

Contractor preferences are a major barrier to private labels faced by electrical wholesalers. Some contractors use premium brands to communicate the quality and reliability of their services to their customers, thereby increasing the importance of carrying high-quality national brands. Product liability issues also limit the willingness of wholesalers to enter certain categories.

Electrical Wholesaling has been running an excellent multi-part series on the private label trend. In the May issue, David Gordon and Allen Ray provide some data from a survey of 600 contractors in Customers Speak Out on the Industry's Five-Ton Elephant. Some key findings:

• Almost 20 percent of the end-user respondents said they know at least one distributor selling private-label products.
• In some categories, contractors are “brand apathetic” – the customer will accept any manufacturer’s brand or a distributor’s own brand. The product categories with the greatest apathy scores were cable ties, fasteners, chemicals & lubricants, and metal fittings.
• Brand preference is alive and well for mission-critical electrified products such as breakers, switchgear, and controls.

These results match up well with the six questions for assessing private label potential on page 27 of Lead the Way in the Supply Chain.

Channel Conflict

As I point out in Brand Killers, private labels will continue to grow in categories where the manufacturer's brand does not add enough value to the customer. Sometimes, private labels can even strengthen channel relationships.

But make no mistake – suppliers and their distributors will be battling over private labels. Private label brands shift the balance of power away from manufacturers and toward customers.

For consumers, private label brands are moving out of groceries into higher-profit categories such as clothing. The losers have been manufacturers of mid-range brands lacking either consumer loyalty or the lowest costs. (See Private Lines from The Economist for more on this dynamic.)

EW editor Jim Lucy, quoting noted management theorist Paul Simon, advises manufacturers to keep innovating so that their brand equity doesn’t start slip slidin’ away. Good advice for manufacturers who also don’t want their distributors to start singing “50 ways to leave your supplier.”

Our Brave New Ad World

Two weeks ago, I discussed Microsoft's $6B acquisition in the context of how customers are searching online for new distributors.

Learn more by reading Will the New Online Advertising Models Click?, a very good analysis of online ad models from Knowledge @ Wharton.

A key point: the online ad model is based on accountability -- Did an ad deliver the intended reaction? Online ads can be measured using criteria such as the number of people who "click through" an ad or the number of leads generated from a particular search query are readily available.

Unfortunately, it's virtually impossible for traditional media (trade magazines; newspapers; yellow pages; NASCAR sponsorship) to correlate spending to new leads or incremental sales dollars. Thus, business trade magazines are getting thinner and thinner as B2B moves online.

If you are still skeptical, look at the following searches inspired by my visit to the ISA meeting two weeks ago:

Cutting Tools (google) or Cutting Tools (froogle)
(I discuss Froogle in Chapter Four of Facing the Forces of Change®: Lead the Way in the Supply Chain.)

Pay attention to the ads -- "sponsored links" -- on the right hand side because these keyword ads probably feature your competitors!

At the same time, heed the words of one Wharton professor who said: "I wouldn't walk away from TV. Instead, I would allocate some budget to non-traditional ads, buzz marketing and the Internet. This is the time for a lot of experimentation." (Hey, just like Exhibit 4-4, page 77, of Lead the Way!)

Your next step: Try something new. Buy some Google keywords for your business, see what happens, and let me know.