2002 Distribution Giants
By Mitchell Schechter -- Foodservice Equipment & Supplies, 4/1/2002
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With 9-11-01 and the recession (that maybe wasn't) now mercifully behind us, U.S. dealers are striving to capitalize on new efficiencies and more productive systems introduced last year to return to ongoing sales growth. In addition to profiling the key plans, changes and statistics provided by our Top 100 Distribution Giants, and presenting snap-shots of their recent financial performance in our annual rankings, we also interviewed four of the country's fastest-growing E&S dealers to bring you the reasons underlying their recent sales success.
The softening demand that characterized the economic climate for the foodservice equipment and supplies industry last year moved like a tidal current from one channel partner to the next, starting well before the events of Sept. 11 and continuing, broadly speaking, well into the first quarter of this year. First, as long ago as Spring 2001, manufacturers had begun speaking privately about diminishing orders and declining sales, mentioning particularly a slowdown of unit openings domestically and abroad among their chain customers. Depending on their geographic location and local unemployment and consumer confidence figures, dealers and manufacturers' reps continued to report generally positive sales growth through the second quarter of 2001, buoyed by strong independent concept development, used equipment sales and the dining public's unwavering willingness to continue increasing expenditures at restaurants and foodservices.
Then came the terrorist attacks of last September and business conditions, operators' expansion plans and assumptions about the future security of our way of life all changed forever. Reps and dealers in the Northeast and major resort areas took immediate, major sales hits, with some seeing volumes shrink by 60% or even 70% (versus Y2K) during the third quarter. Consultants, too, faced severe circumstances, as many private-sector clients, including hotel chains and B&I foodservices, delayed projects or cancelled them outright.
The uncertainty that surrounded the early days of the war against Al-Qaeda and the Taliban cast a further miasma of gloom over the business landscape for many in E&S manufacturing, sales and specification. With the national economy contracting, layoffs surging and corporate earning reports uninspiring, the prospects for the beginning of this year hardly seemed robust. Surprisingly, however, military success overseas, historically cheap interest rates and a quicker than expected recovery of tourism and dining-out activity have helped to re-set the course for renewed growth, both in the general U.S. economy and our industry in particular. Again, much credit should be given to American consumers steadily increasing patronage of restaurants, supermarket foodservices and HMR concepts, for this has caused most operators to resume their growth or conversion planning and strengthened demand for kitchen E&S, as well as design and post-purchase support services.
Nonetheless, recent sales upturns and revised forecasts for the rest of 2002 and the beginning of '03 were not enough to prevent an unusually high number of our Top 100 Distribution Giants from showing a decline in '01 sales compared to their 2000 totals. Tellingly, of the 17 Top 100 Giants who reported a decrease in 2001's year-on-year sales, some 15 ranked in the lower 75 (representing fully 20% of this sub-category), while only two of the top 25 dealers listed highest declared smaller sales numbers.
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Despite last year's soft economy, however, nearly 30% of our Top 100 said they'd achieved gross margins of 16% to 25% (see Chart 1), with another 9% claiming gross margins above 25%; at the low end, some 10% of reporting dealers cited gross margins under 15%. Equally noteworthy is the fact that 22% of this year's Distribution Giants told us that their operating expenses comprised between 16% and 30% of their annual sales; by contrast, only 11% had operating expenses of less than 15% of yearly sales, and only 3% declared operating expenses in excess of 31% of sales.
Though their margins and operating expense outlays appear heartening, our Top 100 broadly reported increases in the cost of E&S they purchased last year. Fully 67% said their costs were between 2% and 4% higher, while a further 20% cited cost increases for E&S of between 5% and 10% last year. (See Chart 2.) When it comes to their size and stocking levels, the largest percentage of our 2002 Giants said they retained between 41 and 120 staff (23%), 25 to 40 staff (22%) and more than 121 employees (14%). Notably, only 8% said they employ as few as 11 to 24 workers. The most common SKU totals reported by our Top 100 were 5,000 to 9,999 (20%), 1,000 to 4,999 (17%) and 10,000 and over (13%). (See Chart 3.)
When this year's Giants responded to our query about which services they expect to provide more of this year, an interesting pattern emerged. Not only did some 40% select kitchen design, another 24% noted that they expect CAD services to grow and an additional 14% cited interior design (FOH) services. (See Chart 4.) When we also factor in such expected growth-producers as installation (30%), custom fabrication (26%) and online ordering for operator-customers (21%), it's evident that more of our Top 100 intend to defend margins by providing increased value-added support rather than selling more E&S. This view is supported by further responses provided by the '02 class of Giants Ñ only 1% intend to increase cash-and-carry services or broaden their equipment lineup this year.
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We also asked our Top 100 to list individually the three greatest challenges facing their dealerships this year, and their responses fell into two distinct categories. The first, expressed as top three concerns, was economic - 14% noted a need to increase sales, 12% were worried about competition and 11% intend to make defending profit margins a chief priority. (See Chart 5) The second group of responses, however, centered largely around labor issues, with top challenges including the need to find qualified help (7%), increase efficiency (5%), provide employee training (5%), improve customer service (4%), recruit qualified sales staff (4%) and retain current qualified personnel (4%). It therefore seems likely that as the current economic recovery begins to quicken, labor, training and productivity issues will all help separate the winning dealers from the less successful.
Finally, as our 2001 sales figures show, last year the Top 10 broadliners grew their combined sales to $5.34 billion, an increase of 28% over Y2K. By contrast, our Top 100 "traditional" dealers totaled annual sales of $3.79 billion, up about 4% on the year before. Though our largest dealer Giants continue to develop market share and national presences, the size of the biggest broadliners and the breadth of their product lines continue to make them our Top 100's primary external competitive threat.
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Notes From 4 On The Fast Track
Last year was a difficult one for foodservice E&S dealers. For many, sales
were flat and quite a few dealerships even lost sales. But for some in our
annual Distribution Giants survey, 2001 posed a challenge they were able to
overcome. To highlight their example, FE&S talked to four diverse dealers about
how they were able to achieve growth while most of corporate America was seeing
shrinking sales.
R.W. Smith & Co. was on the move last year, rising in the 2002 Distribution Giants ranking from 21 to 17, on reported sales of $48 million. The San Diego-based company saw sales growth of 17% over its 2000 numbers. Alan Keck, president of R.W. Smith, noted that the company is employee-owned, and that this contributed to its success because of staff's personal investment.
"Because we're employee-owned, our people are extremely motivated to do their jobs," Keck said. "As owners, staff feel accountable to solve whatever problems may arise."
Keck anticipates growth this year, as well. He noted that the biggest issue the company will have to deal with is the ongoing need to educate and train staff. "Training is what makes the difference for our business, and I think that is the case with any dealership Ñ it's all about your people," Keck said.
Growth strategies for this year will be similar to those applied last year, but one enhancement that Keck is anticipating is the yield from Smith's e-commerce-capable web site. "e-commerce is just starting to become fruitful for us," he confirmed. "A lot of customers still don't have the technology to use our site, but use is starting to ramp up."
Proctor Cos., Littleton, Colo., changed its whole customer base to increase its sales last year, said Bruce Proctor, president. He explained that for the first 25 years of the company's existence, its business focus was on designing and building concession stands for movie theaters. However, in the last few years, over-building caused financial problems for theater companies, and their expansions slowed.
This occurrence, however, did not stop Proctor from jumping from 53 to 43 in this year's Giants ranking. The company was able to grow its sales from $18 million in 2000 to $22 million in 2001 by switching gears and focusing on regional activities in Colorado.
Now, Proctor works on corporate cafeterias, convention centers and local school districts. "Currently, we have 20 active projects with schools," Proctor said. "In the last two years we've completed 50 projects in foodservice, rather than in movie theaters. We needed to make these changes to achieve growth, especially since our former core business is disappearing."
According to Proctor, the biggest issue for his company is how to grow quickly enough to seize emerging business opportunities. Getting bids out fast enough to respond to potential clients has been challenging, he said.
This year, Proctor is trying to expand the design and build side of the company even more. To do this, more in-house designers have been added. He noted that his goal is to make the foodservice side of his business produce half its total sales. Currently, restaurant sales account for one-third of the company's business, and Proctor thinks he will meet his goal in two years.
At Omaha-based Hockenbergs, this year is already showing promise for larger profits. "Now, customers are asking for quotes and we are seeing a lot of new construction," said Tom Schreck Sr., chief executive officer, "So we expect 2002 to be an even better year than 2001."
In 2001, the dealership had sales of $18 million, up from $15 million in 2000. Schreck attributed this sales growth, and the subsequent jump in ranking from 66 to 55, to Hockenbergs' acquisition of Deluca Co., a Minneapolis-based distribution company. The deal was closed on Nov. 13, 2000.
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"We thought the acquisition was a good move at the time because Minneapolis is a huge market that, because of the purchase, we could enter," Schreck noted.
Hockenbergs mainly serves the Midwest, but ships E&S all over the country and has some large customers on the East Coast. Not only does Hockenbergs not shy away from the location of a job, Schreck said the company is looking for work in any foodservice segment. He noted that it is going after every sale, from bids to negotiated work, and all types of markets, including schools and B&I.
While pursuing these accounts, Schreck said the biggest issue Hockenbergs will have to contend with is labor. "It's tough getting decent help," he said. "If we can get people into FEDA University it will help Ñ anything we can do to foster education is going to help."
Schreck added that, unsurprisingly, the importance of margins will continue to be stressed to his salespeople. It's important to get a lot of sales, he said, but a profit still must be made and Hockenbergs will not cut prices just to get a customer, a practice that he sees other dealerships engaging in.
Curran-Taylor Inc., McMurray, Pa., not only showed a mild increase in sales, growing from $11.97 million in 2000 to $12.45 million in 2001, but more importantly planned for long-term growth by adding square footage at its headquarters. In July 2001 the company, which rose from a ranking of 82 in 2000 to 76 in this year's Giants survey, opened a 40,000-square-foot facility.
The company's new headquarters features a 9,000-square-foot showroom and cash-and-carry store and, currently, a test kitchen is being installed. The company has two others located in Pittsburgh and Altoona.
Other steps Curran-Taylor has taken to improve its business, said David Curran, president, include upgrading software and adding in-house salespeople. "Every four salespeople now have one in-house salesperson who takes care of their customers when outside salespeople are on the road. This way, there is more of a personal touch. I'm adamant that customers should be able to talk to a person instead of voicemail," explained Curran.
Along with software upgrades will come the integration of computer systems at all three cash-and-carry stores, Curran said. The benefits of integration will include being able to check inventory of all three stores in real time from any location. Another factor in Curran-Taylor's growth is that it is beginning to expand into markets other than those it has traditionally served. This is mainly due to the growth in the company's cash-and-carry business.
"Until seven years ago, we were strictly an institutional house and were only getting business from operations such as hospitals and nursing homes, as well as colleges and universities," Curran said. "But once we opened our cash-and-carry stores we began going after the Mom & Pop restaurants."
Despite Curran-Taylor's success, there are still many challenges to overcome.
One concern, which many other dealers are also facing, is finding qualified salespeople. He noted that this difficulty has lessened for him since opening cash-and-carry stores because the skills necessary to work in the store are not as high as those required from traditional salespeople. He added that it is easier to replace an employee in a cash-and-carry position than an outside salesperson.
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