Chrysler was ‘bailed-out’ for billions, ‘laid off and cut back’, sold to Daimler for 36 billion, and proceeded to loose a similar amount of money, and was recently separated back out for 7 billion by a private investment group. Hewitt-Packard and Compaq decided that it was in the best interest of ‘stockholders’ to merge and ‘be acquired’, as well as Alamo & National, and now, in my favor sport, NASCAR, with the merging of Fenway-Roush, Ginn and DEI, and just last week, Gillette and Evernham, one should be getting the picture that M&A, along with Consolidation, is the way of the world, for 'good or evil', 'better or worse'.
One has to wonder as to the state of our industry and its outlook for the future. What follows is a look at consolidation and its impact on the industry, customers, manufacturers and distributors based on my two decades of experience in the door and hardware industry, and now founder of a private labeled architectural hardware company.
There are essentially three types of integration that have been taking place over the years: 1) financial-driven integration, with financial companies buying door and hardware companies to wit no successful outcomes have occurred over the long run, just more good money following bad money to keep the 'house of cards' erect; 2) door companies that are buying distributors and other door companies to wit another ‘blood trail’ of financial losses; and 3) hardware companies that are buying more lines of hardware, as well as door companies, to wit smaller more defined lines of distribution, and more control of pricing for the ‘giants’, with less opportunity for the Independent Entrepreneurs attempting to survive industry consolidation.
Financial-driven integration started several years ago when a couple of financial consolidators entered the marketplace and recognized the high degree of fragmentation, particularly at the distribution level. Not unlike a lot of players within many other industries, these businesses initiated a rollup campaign to raise capital market funds.
The whole strategy was premised upon building critical mass as quickly as possible and using it to improve purchase discounts and leverage their buying power with suppliers; today taking place with the ‘Giant from London', Stock, using both the residential and commercial distribution channel as their vehicle. Profitability was enhanced by consolidation functions such as sales, general and administrative costs (SG&A), manufacturing overheads, purchasing and engineering. Several of these financial companies, which started seven years ago when the capital markets were much more receptive, have proven to be flawed exercises. Not only did the capital markets turn a cold shoulder to these types of endeavors, regardless of what industry they’re in, but additional problems arose while integrating the former independently run companies with the door and hardware industry into one cohesive operating unit.
The flaw in this structure is now and will always be, if one of the businesses in the portfolio is doing well in creating equity value and another business is not doing well and detracting from equity value, the overall value of the company is neutralized. The result is a conglomeration of companies which, in return, have tended to create significant cultural strife; the value of horizontal integration versus vertical integration.
As I’ve state in previous articles, and is now realized by some door companies, simply rafting together a mix of door companies to be a dominant player with cost savings isn’t enough. It takes more than that in today’s “value added” competitive marketplace. This would be true of consolidating any type of distributor for the sake of simple consolidation.
It seems that the so-called successful consolidators, particularly at the manufacturing level have done little to nurture the entrepreneurial spirit of the acquired company; and, certainly have failed in their attempt at creating a variety of products and services while matching up corporate cultures. With regards to the distributor side of the coin, they have only limited and, in most cases, disrupted the independent distributor network. This is now becoming a market of not only captive distribution but limiting distribution with skeptical pricing practices with regards to large projects. This is becoming more apparent everyday with large hardware companies buying specialty brand hardware lines, and then limiting the distribution of specific products within the distribution channels as to not only product but price.
Unfortunately, the end-user (including the Owner-Developer-School Board-Architect-Specifier-Designer-Builder), as well as the most important link in the supply chain, the ‘expert’ that actually adds value, distributor (Locksmith and Contract Door Hardware house) have diminishing values to the large manufacturers and consolidators. It has ALWAYS been the ability of the distributor, contract hardware house or locksmith, to take a product, add value to it, keep the customer in focus and build the relationship.
This should not be a surprise. The key to the successful future of our industry is, and will continue to be, independent, entrepreneurial distributors who can take product, of their choosing at competitive pricing, add value to it, maintain a customer focus and build relationships. Too bold a prediction at a time when the M&A pace has quickened? Not at all, because, contrary to the others who view the distributor as the last step in a necessarily “evil” process, our business always has been one of strong distributor-customer trust relationships; and, a successful future holds the same whether you are a locksmith or a NASCAR team.
