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FE&SEditorial Archives2004 — February — Web Exclusive

What Keeps You Up At Night?
Web supplement to the EAB Roundtable discussion

FE&S: Overcapacity is an issue that's been widely discussed. However, we still have to ask the basic question: Why do we have overcapacity in the industry? What is causing the situation to be perpetuated as the economy goes through various fluctuations?

BYRNE: There are really no barriers to entry into this industry. There's no technology that is unique in the sense that other industries cannot overlap into it. And I note that when we have eight range makers, approximately, all based in California, there is not a lot of problems for someone who wants to establish a 30,000-square-foot facility to enter into our marketplace. So there's really not a technology barrier, in my opinion.

WHALEN: We've got to look at why we still have so many factories. And the thing that makes our industry different is the fact that our dealers are not the parts and service guys, because that lowers the barrier to entry at the dealer level. That means there are too many dealers and that, in turn, lowers the barrier to entry at the manufacturers' level, because there's no lack of people to sell to.

If we understand that dynamic, it helps us figure out how we got into the mess we're in. There's a whole bunch of manufacturers, the entry-level guys, who are looking at any channel possible to get their goods to market and that also adds to the mess. So, I agree that overcapacity is a concern. What do we do about it? I think the choices available to us are tough. We've got to look for ways to differentiate ourselves. We can market our products' feature sets, but it's tough to get customers to pay for what you do to differentiate yourself.

FE&S: Carl, how is overcapacity affecting your rep business?

BOUTILIER: As we look forward, there's growing potential for line conflict. At this point, it seems like it's minor, but it could be a growing problem for us in the future as companies expand their line offerings.

FE&S: Okay. Bruce, what do you see from your CFESA perspective?

PEELING: Dealing with manufacturers from our point of view leads me to think that a lot of manufacturers feel as if there are too many service agencies. However, I also think that they feel there's not enough quality service agencies. And I would say the same thing about reps or dealers: I think the problem begins, though, with the fact that we don't have enough full-line dealers. And that's due in part to the fact that anybody can become a dealer. I think that's the problem. There's not enough true and good partners to be involved with. I think that's what the manufacturers are trying to do, find partners that are going to support them and have the financial wherewithal to do that.

In our particular profession, of course, such a firm would be a CFESA-certified company. That's the designation we have come up with for service agencies that are making the financially com-mitment to have the inventory, to provide the training.

EGNOR: Personally, I don't see overcapacity. I don't see competition as an issue. I don't worry about competition on my end; I just see business as being about the survival of the fittest, because the one who can make the best arrangements, have the best relationships is going to survive. And if that happens to be a new guy coming in, then the guys that were there before didn't do their jobs; that's why the new guy's there. And it's likely that he's an entrepreneur and we can't stop that, so we have to figure out ways to deal with it. We've got to build those relationships: manufacturer to dealer, manufacturer to consultant, consultant to dealer.

At the end of the day, it's all about our client, the end-users, and whether they think they are getting value from what we provide. However they perceive us, it's a domino effect. It starts with one person, whoever's the first contact with an end-user, and then it moves down the channel.

The service side is a good value to provide afterwards but, again, that's all relationship-driven. A simple example: I believe in a single-source spec, which is what I think everyone in the industry should support. We're working towards that position at FCSI, we have some things that we're trying to develop internally to get to that end. A single source spec is important because that's what drives relationships. It gives me a solid place to start because, after the sale, if there's a problem, I can continue to support my client. This helps to differentiate me, maybe, from my competition, and I can do that because the manufacturer that I specified, that I stood by, that I made sure was included on a job, stands behind me when there's a problem.

FE&S: So is that how you're going to make your choice of manufacturer-partners? Bill pointed out in his opening remarks that there might be eight manufacturers of a particular category of equipment available to you, and you have to explain to your client why you spec'd one or the other.

EGNOR: No question, there's all these values that go into making a decision like that -- who I would use and who I wouldn't use. Probably the most important factor in that decision is our prior relationship, and then comes the quality of the equipment, the history of the equipment, what it can do compared to other products in its category.

But far and away, the most important factor is still relationships. You have to believe in what you specify for a client, you have to know it's going to work. That's why we can add value when we align ourselves with good quality manufacturers.

FRISHMAN: Way back when, between 1960 and 1985, the chains were growing. Now, we're in an era when the chains have stopped growing, which means we now have all this capacity, because everybody geared up for the chains. So, that has really influenced where we are now. And I agree with John, because today it really is survival of the fittest. We have to know our market better, we've got to have the strongest relationships; all those things have to take place.

Now, where we go from here and how we get there, that's going to be the adventure. I don't think anybody at this roundtable knows for sure; I think everybody's got their point of view. That is the challenge. But if everybody's got overcapacity, as a result of over-investment in anticipation of chains growth, then what do you do with all our resources? People have got to feed the dragon, we all have overhead.

HAWKINS: I'm in a business where the cost of entry is a telephone and a desk and attending a few trade shows, so I can't stop any competitors from coming into business. And that means that all of us with strong market share can't afford to become complacent. What we've got to do as leaders is to stop complaining about it, because we can't do much about the low entry cost. That, and make sure that we're changing, evolving, innovating and not becoming complacent.

FINK: I'd like to echo Michael's thoughts. To me the whole answer is, we have to add value. The low barriers to entry have made everything about price; price for manufacturers, price for deal-ers and price for reps. So, at the end of the day, there's so much overcapacity that our wafer-thin margins are becoming more and more eroded. And we certainly can't sustain that since the ongoing consolidations mean that people are going to go out of business in all facets of the industry.

From my perspective, we have to figure out how we can provide value to end-users while working in conjunction with the dealer community and our reps to see who can provide the most value. That's going to help determine who the fittest is.

LICHT: On the dealer side of the business, the low margins caused by overcapacity are an in-credible hardship for us. Right now, our margins are at an almost historically unheard-of level, and it's affecting our survival rate. Nonetheless our industry is also still characterized by a lot of inde-pendently owned companies. Many of them are family-owned businesses and, yes, many of them are lifestyle businesses, in that they provide a living. There's very, very, very little opportunity, though, for many of these businesses to create wealth; they are not vehicles for the creation of wealth.

I think what we are witnessing is a generation of transition right now. This is a period where a lot of dealerships, especially the small to mid-size ones, are going to have to wrestle with whether they get to the next stage of their business growth. I think that in the next five years, we will start to witness the results of those transitions. Some dealers won't necessarily be closing their doors and locking it, although that might occur in some cases, ending in liquidations, but there will be some consolidations and some mergers. I expect that that will bring the dealer side to the next generation.

FUCHS: I want to make a few points. First, I agree with the comment about anybody being able to get into our market because the entry level is so low. Everybody can get into any one of our segments. But somewhere along the line somebody's got to authorize new companies to sell prod-ucts, somebody's got to approve them as distributors and somebody has to give them the authoriza-tion to go to market, regardless if they have any money invested in their businesses. I think that one of the problems we have is the fact that, over time, because there are so many dealers getting into this business, somebody will eventually sell to them. However, sometimes the reps and the facto-ries really have to take a stand on who they want to go to market with and who they're willing to sell products to.

Then, when factories do sell products generally, they need to create a differentiation in pricing points that at least gives a benefit to the people who have invested in their businesses over the long run, so they have some type of advantage over all of these entry-level people.

I applaud you, John. The fact that you endorse that single source spec and dealers holding that single source spec, that's one of the biggest issues our industry has right now. That is because there is no bottom to the process, otherwise, and it becomes a three-bid system: Get the order, then go and see how you buy it and then go see how you place purchase orders. There is no bottom to what we do, so there's no opportunity for the dealer community to make a profit first time out.

Also, in regard to what Gary said before about the extremely low level of profitability in the dealer community today, it was never much to start with. It was always between 2% and 3%, so if a dealer was making $100,000 and now they're down to $70,000 or $80,000, it's still a lot of money. And, I also think that, to a small extent, buying groups have helped to sustain such smaller dealers, because a lot of them could never have survived if it wasn't for the buying groups creating a financial platform.

FE&S: Do you believe that buying groups have some responsibility for the current overcapac-ity?

FUCHS: In a sense. But I'm not sure how the market will eventually shake out. I'm actually surprised that we have seen hardly anybody go out of business in the last two years.

KAPLAN: There are a couple of issues that I think are relevant for consideration. Number one, the reason nobody's business has died in the last couple of years is because management has cut expenses, and as everybody knows, you can survive that way for a while. You can do it for a year, you can maybe do it for a second year, but at some point you've cut as much as you possibly can.

I visited a factory recently that had a couple hundred people there maybe six, eight months ago, and now they employ under 70. They're still around, but they're a very different company. Also, sometimes we need to look at other industries. If we look at the automobile industry, we see how many manufacturers there were in the 1920s. Consolidation occurred because that's what always happens as an industry matures. As an industry, we are starting to mature. We've just had the early stages of growth, which John defined as the chain restaurant era, but now we're maturing. And, as we mature, we have got to grow up.

When firms in an industry grow up, it means they've attained two things: management expertise and the necessary skill sets to run their operations successfully. However, too often, the founding owners don't have the ability to take their companies to the next level, even though they've been successful as entrepreneurs. I see that as a very real part of our problems. Fortunately, there are also large numbers of wonderful, talented people in our industry who brought companies to where they are today, but it is my belief that many of them don't have the skill sets to take their firms to the next level and are not passing on the reins as they should be. This will lead to further consolida-tions.

I also see the next five years as offering some of the greatest opportunities for us in this industry, because as consolidations occur, there's going to be need for new services. For instance, those dealers who haven't been able to cut sufficient expenses might look to consultants to handle their plumbing and electrical and other drawing documentation because it will be less expensive to outsource.

One of the other problems I keep hearing about is that people can't find good installers. Who's going to install this project the way I want it done? Well, guess what? People are going to say, 'I think I'll start up a company. I don't need to be a rep, I'll be an installer.' The marketplace is going to create a whole set of new needs and there are going to be talented people from this industry that are going to leave their current jobs and form new firms to fulfill those emerging needs. So, I think there will be a renaissance for certain companies.

FE&S: David, do you see the next few years as a time of growth and opportunity for consult-ants or will conditions prove more challenging?

DRAIN: Probably both, but mostly, I expect we'll see a period of opportunity. First of all, there are still a lot of jobs that are being done without a consultant, so there's still a lot of room for po-tential business growth by consultants. Now, what I see happening is that consultants are fighting over the same 10% pool of business, particularly in the noncommercial sector. And, I think there's a lot of other operators out there that are not employing a consultant.

FE&S: Michael, let me ask you this: With all the efforts the associations are putting into educa-tion and certification programs, do you think we have enough people with the right skill sets working now in the industry?

HAWKINS: When I look through the 30,000 candidates that I've got in our computer and I walk around these trade shows, I would have to conclude that 80% of the people I see can't sell anyone anything. Now, do they work hard? Sure. Have they got good product lines? Some of them do. Do they travel a lot? Yes. Can they sell -- can they go for the throat of their competitors? No way. And that's the problem.

I also see very little training going on to improve selling skills. I see a dire need for new talent. And if manufacturers and dealers are complaining about new entries coming into this industry, the first thing they should be doing, other than innovating and bringing new products to market, is to find people who can gain new market share can't afford to become complacent. What we've got to do as leaders is to stop complaining about it, because we can't do much about the low entry cost. That, and make sure that we're changing, evolving, innovating and not becoming complacent.

DAVIES: From the dealer perspective, I agree that there is going to be a shakeout. In many cases, founding dealers' lifestyle needs have been met, but now their businesses are coming under the management of the next generation, and either the children have been educated to a point where they don't enter the industry or they're not trained to lead. If we look at the dealers and the others that have created this industry, the distribution channel, they're not a young crowd of kids. I mean, it is not a young crowd anymore.

BYRNE: If I were a U.S. E&S manufacturer, I think I'd be losing some sleep over the whole is-sue of imports. Even now, the whole issue of jobs migrating offshore is upon us, it's real and it's af-fecting a lot of the factories in this room. From our buying group standpoint, the amount of compe-tition from offshore, particularly from the Far East, is not limited just to tongs anymore. Foreign factories are truly getting into equipment. And when they can have a product made for $2 or $4 a day offshore and the quality is comparable in many cases to what's being made here for $15 an hour, we have something to worry about. What's more, the trade barriers foreign factories face when they try to get into this country are pretty low now, so I have a concern for the industry on one level and also a concern for our nation being able to return to prosperity as a manufacturing power any time in the next couple decades.

FE&S: What can you, the people who run the companies represented in this room, what can you do to get your customers to pay more for your products? How can you deal with overcapacity and low margins by earning more revenue?

FUCHS: We need to continue to stay focused and educate our customers on the value differen-tiation we provide. For example, and we just had this happen recently, we figured out how much a year we do in special order items in our company. Then we thought about it and asked, 'Which customers are placing special orders? Are they regular customers or are they customers that usually buy from somebody else and use us on occasion only because we do special orders so well?' In the latter case, we decided to re-evaluate those customers.

PEELING: I think that bundling services, including the total installation and support services, at one price would be a way that maybe we could put more value into our sales.

EGNOR: Based on experience from my former life as a dealer, we went through this transition years ago, and we either bundled or completely unbundled our services. We said to customers, 'If you're looking for the cheapest price, come in pick out the products you want, but you do the in-stall, you make sure it's working right, we don't want to hear from you anymore.' On the other hand, if a customer wanted all our post-sale services, we offered a price-value proposition and we were able to charge accordingly. You know, the operators have enough other things to worry about besides a small percentage increase to make sure that their people are trained right and the rep firms are doing their part and the factories are providing the products on time. We have to make sure that operators understand that our services help them to be efficient and economically viable.

PEELING: From the service end, we don't deal with any of the sales community, but we see that the price pressure on sales reps is so great that they have had to become more involved on the higher-value installation and maintenance side, as well as educating the customer. And maybe some people don't want to hear this, but I don't think most dealer sales reps do a good job of explaining that it is a better value for the customer to have key services provided properly.

FUCHS: Not every customer will understand what you're saying, Bruce. The reality is that if just the majority of your customers understand that, then you're far ahead of the game. We often don't realize all of the little stuff we're doing, and that has to change because that's where all our expenses are. I mean, how do we become profitable today? Well, we're not able to do it from our top-line revenue anymore; we're doing it by cutting costs and becoming more efficient. I think that's the way to become more efficient.

FINK: There are a couple of things we can do to add value to support increased prices. We can start by going back to basic marketing, understanding what customers value and what they're willing to pay for. And once you determine that, you can change your equation. Right now, though, it's the low-cost providers that have the best chance to survive. They may not thrive, but they'll certainly stay in the game for another year.

Also, despite Bill's concern, which we look at every day, too, about products coming out of the Far East, we can play in that game, too. There are all sorts of things you can do to keep your costs down but, at the end of the day, if we can't innovate and find new ways for people to get excited about our products and give them reasons to spend a few extra dollars on them, then we can't suc-ceed in the long term.

HESSEL: This is interesting to me, because I've never sat in on a roundtable where I've agreed with every single thing that was being said. What I think we all agree on is that there is oversupply, which does create tighter margins, and that the oversupply flows downhill because when there's an oversupply of reps there's going to be an oversupply of dealers, because everybody's going to use their own entrepreneurial spirit to find a way to bring products to market.

But despite this overcapacity, one reason we've seen so few business closures is because buying groups really have helped to maintain many smaller dealers in business. It used to be that there were only two or three big buying groups that the M. Tuckers of the world could get involved in. Now, though, the little guys have more, smaller buying groups to become involved with, which helps to prevent a wider shake-out.

From a rep's perspective, the bottom line is, it all still comes down to identifying and appropri-ately servicing your customers. There are going to be reps that have high-end customers, there's going to be others that have the middle and there's going to be some that call on the low-end op-erators. Everybody's going to have to identify their customers, cut off as much fat as they can and try not to serve all the markets. The real bottom line, however, is that we're all entrepreneurs. We all have to learn to do what we do better. We all have to provide better services and that leads to one last thing: There's going to come a point in time where, in trying to get better at what we do, to appeal more to the market, there's got to be either some price unbundling or higher prices for basic services. Not a change in channel distribution, not a change of partnerships, just more things that we do to please our target markets.

FE&S: What I want to ask next is, what can your professional associations do to help members educate end-users better, so that they value the services and products you provide?

FUCHS: Our association is not set-up to educate end-users, its role is to educate dealers so they can educate the end-users.

FLYNN: I think our intent is to bring the channel together and educate all members at the same time in the same way in the same place, so that the focus is all on the customer, however they get to those customers. Our challenge is to make sure that we do it cooperatively and together, as opposed to four or five separate entities trying to educate with and repeating the same message.

DRAIN: Certainly, we have to arm members with materials and information that they can share with their clients and potential clients. First of all, we have to address, at a very basic level in some circumstances, why an operator would even use a consultant. And then, if operators are trying to decide which consultants to hire, we try to support our members with information about why po-tential clients should employ an FCSI consultant, rather than a non-member.

PEELING: From CFESA's point of view, we have always done an excellent job of marketing ourselves to the manufacturers; they all now know what CFESA is. During the last couple years, though, we've begun to realize that we've been marketing ourselves to the wrong people all along. So, now, we're marketing to end-users what we're really all about so that they'll see the extra value of working with our certified companies.

Another thing that seems so simple that we've just discovered as a company and which we'd never done is we are now sending our training people out with reps. This helps inter-profession re-lations because whenever we get together with a dealer or a rep, one of the top three things they are going to say to us is, 'Your guys say the wrong things.' It's either that or 'You don't have the parts' or 'You didn't come when you said you were going to come.' So, we're going to go out with DSRs and reps, so that we can actually see how they do their jobs and learn how to support them better.

FRISHMAN: I think the goal of coordinating educational value-enhancement efforts to improve our common focus on the end-users is going to be a tough one to reach because NAFEM comprises 650 different manufacturers. One of the things that we've done at our company is to increase our emphasis on training. We've created CDs, we've become competitive in training and we spent a lot of money recently on training our reps, because I believe that's one way we can add value. I think everybody shares that view, because if you train, you can ramp up the knowledge level. There's a trick to this, though, and that's why this is tough. Sometimes, I sit up at night and think about how do we get the end-users, our customers -- whoever the customer is and that includes different people in this room -- to pay for the value that we add. That's the trick. And I'm not sure that everybody has the answer.

KAPLAN: I've got an answer for you: Solve customers' problem, not yours. I'll give you an ex-ample: If I'm the head of a healthcare facility, do you know what my bonus is predicated on? Cus-tomer satisfaction, the Press-Gainey scores. I don't necessarily care about an oven, I don't care about a refrigerator, but I will support you and your E&S company if you come in and help me get my customer satisfaction scores up so I can get my bonus.

WHALEN: Mitch, when you asked before how we can get people to pay more for our products I realized I don't know that you can. I think there's a limit to what we can actually charge for what-ever we're selling because there's 55 different choices in fryers and there's 40 different choices in ovens and so forth. We've got to focus on lines of products that we can make better than anybody else and customers we can serve better than anybody else, and we can't be all things to all people. I think if we focus our efforts and figure out what we're best at and stay with it, that's the way we're going to become more valuable for all our customers.

FE&S: You bring up a very interesting point, because you guys, as well as dealers, of course, have been scrambling all over each other for market share. It's a mantra I've heard from those of you in the manufacturing community since the day I took this job. Now, you're talking about finding the single most profitable and effective niche to serve. Can you really change your mind-set? Can the manufacturers in this room work on targeted marketing rather than general growth in market share?

WHALEN: Many of us don't have any choice; that's the corporate mandate we're facing. Our job is to figure out what we're clearly best at and then find the best ways we can to be the low-cost producer. Driving down costs never ends, that and investing back in your processes. Once we get there, then we can work on taking our products to the next level.

FINK: I agree with Mark, but I also want to add another point. We've got to take another look at how we're working on forming new relationships and the ways we're going to market with our service agents, our representatives and our dealers. We've got to find ways to be different to pro-vide value. If I want to work with dealers like Marc [Fuchs] effectively, I need to find incentives that are interesting to his company, so his employees will want to support our other companies that have different customers and provide the solutions to them.

In the year 2003, we reduced our dealer base by about 40%. My expectation is that we'll cut the remainder in half [during 2004]. We've decided to do business with just the dealers who are working to provide value for the end-users of our products; those are the people we want to partner with. The dollars we spend on marketing and rebates and related programs, we're going to focus all of our investment on those dealers. Everybody else who falls by the wayside, we're going to do without.

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