Tipping Points and FSMA: Part 1

Tipping Points and FSMA: Part 1 An editorial by FSMA President Rick Abraham In   science,   a   “tipping   point”   is   a   point   in   time   at   which   a   system   is   displaced   from   a   state   of   stable   equilibrium into a different state. Malcolm Gladwell, in his best selling book The Tipping Point: How Little Things Can Make a Big Difference, described the process of how and why a series of small changes can ultimately lead to a situation where the status quo is no longer viable and change is inevitable. Putting Gladwell’s  analysis  into  a  foodservice  context,  our  industry  had  been  in  a  state  of  mostly  stable   equilibrium for many years. Little changed. But then a series of small changes over time led to tipping points that resulted in our industry changing to a different  “state”.    The  result  is  a  foodservice  industry   that looks very different from the past. So   what   happened?     First   a   little   background:   In   the   late   1980’s,   foodservice   manufacturers   and   distributors reached their tipping points, leading to significant industry changes, including a wave of unprecedented mergers and acquisitions which ultimately and radically changed a highly fragmented landscape into a mix of 2-3 dominant players, 10-12 large regional players, and then hundreds of specialty or niche manufacturer and distributor companies spread across the supply chain. Similarly, foodservice operators reached a tipping point a few years later, once again beginning the process of radically changing a highly fragmented industry into one with a mix of large dominant players and smaller specialty companies. In the opinion of many, the foodservice sales agency community reached a tipping point a few years ago, also leading to a wave of consolidation. Since 2005 we have tracked at least 105 separate mergers/acquisitions, and industry analysts estimate that there are 35% fewer foodservice agencies today than there were just a few years ago, and predict the trend to continue. So  how  has  consolidation  changed  FSMA’s  membership  since  2004?    Check  out  the  chart below, which is based on information self-reported from our members. FSMA Agency Membership Changes

# OF MEMBERS AVERAGE REVENUE # OF EMPLOYEES

2004 125 $2.5M 20

2011 60 $4.9M 52

I’ve  always  believed  that  averages  are  difficult  to  apply to sales agencies as each are unique businesses operating in mostly unique markets. So applying averages like those in the chart might lead you to draw the wrong conclusions. The chart does not indicate that sales agencies (or FSMA) are becoming less important. Rather, it indicates  that  the  “missing”  agencies  merged  with  others  to  create  the  much  larger  agency  companies   that now exist. To   validate   that   point,   let’s   look   at   the   number   of   agencies   within   FSMA’s   membership   that   earn   at   least $10M in annual revenue. For 2011 we estimate 18-20 agencies over $10M. We believe there were less than 5 in 2004. As is typical in the initial phase of any consolidating industry, we end up with a blend of very large companies mixed with smaller companies as the middle sized agencies merge with others. This polarization of the membership challenges FSMA as the larger agencies now require a new set of services, some of which are in conflict with services required by smaller members. Also typical in this climate is increasing friction between the larger and smaller companies as they jockey for position. What used to be a friendly and collegial industry transforms into increasingly bitter competition. And unfortunately many seek to place blame for the changes that have occurred. Some blame particular individuals or companies or consultants or even trade associations like FSMA. In truth, a fair evaluation makes it obvious that no one person, company or group is responsible. A combination of external and internal factors  starting  as  far  back  as  the  late  1980’s  has  created  the  environment  that   exists today. And I believe these conditions have set FSMA on a tipping point. In short, FSMA has to decide how it can bridge the gaps between our smaller and larger members and keep the community together rather than let it split apart. In part 2 next month, I will share with you the rest of this story, including: - our view of the next phase of agency consolidation and a peek at what the agency community will look like as consolidation concludes - our opinion on why all agencies, large and small, will greatly benefit by keeping the community together rather than blowing apart - our plans on how FSMA can be the organization that bridges the gaps between large and small members and how that will increase business opportunities for all Stay tuned.

Tipping&Points&and&&&&&&&&&&&&&& FSMA:&Part&2& An&editorial&by&FSMA&& President&Rick&Abraham& ! Let$ me$ briefly$ go$ back$ to$ the$ 30,000$ foot$ level.$ $ If$ you$ study$ most$ any$ mature$ industry$ like$ foodservice,$you$will$find$consistent$patterns$that$are$predictable$and$almost$universal.$And$these$ patterns$can$help$us$understand$what$has$and$what$will$happen$in$foodservice.$$These$patterns$ include:$ •

periods$of$organic$growth$and$high$margins,$followed$by$little$to$no$growth$and$negligible$ margins$

•

relatively$ little$ interest$ in$ efficiency$ and$ effectiveness$ during$ growth,$ followed$ by$ allA consuming$interest$as$growth$slows$

•

advances$ in$ technology$ and$ productivity$ solutions$ that$ drive$ efficiency$ and$ help$ organizations$reduce$headcount$and$shift$costs$

•

a$period$of$strategic$growth$through$mergers$and$acquisitions$that$starts$slowly$and$gains$ steam$ over$ time.$ $ The$ consolidation$ activity$ runs$ in$ cycles,$ with$ periods$ of$ rapid$ merger$ activity$ followed$ by$ periods$ of$ rest$ as$ acquirers$ digest$ the$ acquired$ companies$ and$ company$ valuations$ adjust.$ Then$ a$ new$ cycle$ begins$ again$ until$ the$ industry$ is$ fully$ consolidated.$$$$

•

an$intense$battle$for$share$that$further$erodes$profitability$

•

emergence$of$The$Rule$of$Three’s$where$most$industry,$market$and$product$categories$are$ characterized$ by$ three$ dominant$ generalists$ mixed$ with$ many$ niche$ specialists.$ Underperforming$ companies$ sit$ in$ a$ “ditch”$ in$ the$ middle$ between$ generalists$ and$ specialists.$ see$ this$ Wiki$ link$ for$ more$ detail$ on$ the$ Rule$ of$ Three’s.$ http://en.wikipedia.org/wiki/Rule_of_three_(economics)$

So$ does$ any$ of$ this$ look$ familiar$ to$ you?$ Can$ you$ see$ these$ trends$ applying$ to$ foodservice?$ $ I$ certainly$ can.$ $ Yes,$ some$ of$ you$ will$ want$ to$ argue$ the$ details,$ but$ the$ overall$ trends$ are$ undeniable.$Manufacturers,$distributors,$operators$and$sales$agencies$must$be$aware$of$and$plan$ for$the$impact$of$these$trends.$$No$company$escapes.$ And$the$end$result$of$this$is$uncomfortable$and$risky$and$dramatic$change$for$all$of$us.$Those$that$ have$successfully$managed$their$businesses$when$times$were$easier$are$now$required$to$become$ leaders.$ $ Hard$ choices$ need$ to$ be$ made.$ $ Do$ you$ want$ your$ company$ to$ be$ part$ of$ a$ large$ and$ dominant$generalist$or$are$you$more$comfortable$as$a$niche/specialty$player?$$Neither$choice$is$ wrong.$Every$industry$needs$large$and$small$players.$$But$you$have$to$choose$or$you$end$up$in$the$ underAperforming$ditch.$ So$at$the$risk$of$ticking$off$many$of$our$members,$let$me$now$directly$address$where$I$see$all$this$ going$for$FSMA$and$its$members.$

Tipping$Points$A$Page2$ First,$ let$ me$ applaud$ those$ of$ you$ that$ have$ picked$ your$ strategy$ and$ are$ reinventing$ and$ reinvesting$in$your$company’s$future.$$That$takes$courage$and$that$takes$outstanding$leadership.$$ You$already$know$it$can$be$very$painful$being$on$the$leading$edge$of$change.$$You$risk$losing$long$ time$friends$and$employees;$you$risk$losing$long$term$business$relationships;$you$risk$no$longer$ working$for$yourself;$you$risk$being$excluded$from$long$time$membership$in$agency$share$groups.$ But$you$see$the$future$and$you$are$driving$hard$towards$it.$$Whether$you$have$decided$to$be$large$ or$ small,$ you$ are$ the$ companies$ that$ will$ lead$ us$ to$ the$ future,$ and$ you$ are$ the$ companies$ that$ FSMA$wants$to$represent$in$our$membership.$$I$sincerely$congratulate$you$all.$ And$to$those$of$you$that$long$for$the$good$old$days$and$resist$change.$I$understand$the$sentiment$ but$you$now$should$know$that$it$is$no$longer$a$survivable$strategy$given$the$trends$I$described$at$ the$beginning$of$this$article.$$It$pains$me$to$say$that$if$you$haven’t$already,$you’ve$waited$too$long$ to$decide$your$future$and$now$you$risk$being$in$that$underAperforming$ditch.$$Selling$your$agency$ will$most$likely$not$return$the$money$you$need$to$exit$the$business$and$reinvesting$to$keep$pace$ has$become$prohibitively$expensive$unless$you$merge$or$get$acquired.$$Sadly,$the$days$of$running$ a$business$to$support$a$lifestyle$are$over$for$most$companies$and$the$chance$of$a$savior$riding$in$ on$a$white$horse$are$slim.$You$are$faced$with$difficult$and$often$undesirable$choices.$ Will$all$middle$sized$agencies$perish$in$the$ditch?$Of$course$not.$The$Rule$of$Three’s$is$not$absolute$ and$ some$ smart$ leaders$ will$ figure$ out$ a$ way$ to$ survive$ and$ thrive.$ $ But$ staying$ in$ the$ middle$ might$be$the$riskiest$strategy$of$them$all.$$It$won’t$be$for$the$faint$of$heart$and$the$odds$of$success$ are$low.$$$$$ So$what$does$this$all$mean$for$foodservice$sales$agencies?$$I$think$it$clearly$spells$out$that$we$will$ end$up$with$three$national$sales$agencies,$several$super$regionals,$and$dozens$of$specialty/niche$ companies.$ $ The$ three$ national$ agencies$ will$ be$ generalists$ that$ will$ represent$ a$ large$ share$ (upwards$of$75%)$of$products$sold$through$broadAline$distribution.$$The$specialists$will$represent$ the$balance$of$the$foodservice$volume$and$provide$an$alternate$choice$for$those$manufacturers$not$ comfortable$ otherwise$ or$ for$ those$ that$ prefer$ a$ hybrid$ approach.$ Both$ the$ generalists$ and$ the$ specialists$ will$ thrive$ and$ both$ will$ be$ necessary$ for$ the$ agency$ model$ to$ remain$ as$ the$ most$ efficient$ and$ effective$ go$ to$ market$ strategy.$ Few$ if$ any$ manufacturers$ can$ afford$ or$ sustain$ a$ direct$ selling$ model$ and$ the$ outsourced$ agency$ model$ must$ include$ a$ mix$ of$ generalists$ and$ specialists$to$be$viable$to$the$majority$of$manufacturers.$ I$ believe$ foodservice$ agencies$ have$ only$ completed$ the$ earliest$ (and$ easiest)$ phases$ of$ consolidation$ thus$ far.$ $ For$ the$ most$ part,$ the$ mergers$ already$ completed$ have$ been$ between$ agencies$with$contiguous$markets$and$common$large$principals.$The$next$phase$is$much$harder$to$ complete$ as$ the$ risks$ of$ losing$ large$ principals$ increases$ and$ competition$ among$ the$ larger$ regionals$becomes$intense$and$the$costs$of$merging$larger$businesses$increase.$ It’s$possible$that$in$order$for$agencies$to$further$consolidate,$an$outside$catalyst$will$be$needed$to$ provide$ the$ substantial$ monies$ required$ to$ smooth$ over$ the$ bumps.$ This$ funding$ would$ most$ likely$ come$ from$ venture$ capitalists$ and/or$ retail$ sales$ agencies$ looking$ to$ expand$ into$ foodservice.$Some$agencies$have$already$secured$third$party$funding$that$may$move$them$ahead$ of$ their$ competition.$ $ However$ it$ happens,$ agencies$ seeking$ to$ move$ from$ regional$ to$ super$ regional$or$national$will$need$to$take$larger$risks$and$spend$considerable$money$to$get$there.$This$ may$ be$ one$ of$ the$ reasons$ many$ agencies$ haven’t$ taken$ that$ next$ step.$ $ But$ once$ the$ first$ true$ national$agency$emerges,$the$rest$will$follow$quickly.$$

Tipping$Points$A$Page$3$ Finally,$what$about$FSMA?$$$What$will$we$look$like$in$the$future$and$how$will$we$deliver$value$to$ our$members?$ If$my$above$analysis$is$valid,$then$the$FSMA$agency$membership$will$consist$of$2A4$national$sales$ agencies,$ 2A3$ super$ regionals,$ 4A5$ regionals,$ and$ several$ dozen$ specialty$ companies.$ $ While$ the$ number$of$agency$members$will$shrink$due$to$consolidation,$this$group$will$represent$the$major$ share$of$foodservice$volume$sold$through$broadAline$distribution$in$food$and$nonAfood$categories.$$ So$how$will$we$serve$this$new$membership?$$We$will$focus$on$three$major$areas:$ AFSMA$ will$ continue$ to$ be$ the$ only$ national$ voice$ and$ advocate$ for$ all$ sales$ agencies,$ providing$ industry$standing$and$credibility.$Other$loosely$knit$groups$may$try$to$fill$this$role,$but$it$requires$ a$trade$association,$not$a$special$interest$group$to$have$legitimate$industry$standing.$$FSMA$will$ promote$the$agency$go$to$market$concept,$defend$the$members$right$to$do$business,$and$provide$ an$ agency$ voice$ on$ critical$ industry$ issues.$ And$ this$ voice$ can$ be$ stronger$ than$ ever$ with$ the$ largest$foodservice$agencies$having$the$critical$mass$to$lead$the$charge.$$$ Want$ proof$ this$ is$ critical?$ After$ a$ few$ years$ wandering$ in$ the$ desert,$ retail$ sales$ agencies$ are$ restarting$their$trade$association,$ASMC.$$They$realized$that$not$having$a$dedicated$national$group$ to$ protect$ their$ interests$ was$ hurting$ their$ business$ opportunities$ and$ they$ lament$ the$ fact$ that$ they$didn’t$keep$ASMC$active.$$And$they$want$ALL$size$agencies$in$ASMC$as$they$know$that$their$ voices$are$much$stronger$together$and$that$new$business$opportunities$will$increase$if$they$stay$ together.$They$don’t$want$ASMC$to$promote$the$nationals$or$regionals$or$independents.$$They$see$ that$as$their$job.$Rather,$they$want$ASMC$to$promote$all$options.$ ASecond,$FSMA$will$retain$expert$legal$counsel$to$bolster$and$add$teeth$to$our$national$voice$and$ advocacy.$ $ This$ allows$ FSMA$ to$ publish$ legal$ opinions$ that$ have$ clout,$ to$ legally$ object$ to$ bad$ customer$ policy,$ and$ to$ offer$ affordable$ legal$ services$ to$ all$ our$ members,$ such$ as$ industry$ standard$contract$reviews$and$confidentiality$agreements.$$Agency$members$may$have$their$own$ legal$ counsel$ for$ their$ business,$ but$ in$ order$ to$ play$ at$ the$ industry$ level$ a$ legitimate$ and$ respected$national$trade$group$is$required.$$ AThird,$FSMA$will$also$focus$on$keeping$the$agency$community$together,$rather$than$letting$it$split$ apart.$$There$are$many$issues$common$to$all$agencies$that$need$attention$and$FSMA$is$the$group$to$ spearhead$ change.$ $ While$ competition$ (and$ bitterness)$ is$ intense$ right$ now$ between$ larger$ and$ smaller$agencies,$once$the$dust$settles,$all$will$benefit$from$bringing$the$community$together$at$an$ annual$ conference$ to$ showcase$ our$ skills$ and$ expertise$ and$ to$ network$ with$ manufacturers$ and$ customers$alike.$$ So$there$you$have$it,$one$man’s$view$of$the$future.$I$certainly$don’t$expect$all$to$agree$with$me,$so$ [email protected]$with$any$comments$or$questions.$ I’ll$ end$ with$ a$ request$ for$ your$ continued$ support$ as$ all$ of$ us$ transition.$ We’ve$ spent$ 7$ years$ building$up$FSMA$as$the$one$true$voice$of$foodservice$agencies.$Let’s$continue$to$all$work$together$ to$make$it$even$better$for$the$future!$