Expanding into new territories, either through acquisition or opening a new location, is often a natural course for most successful businesses to take. A distributorship that plateaus in revenue or market share may need to look at new territories if it plans on growing. It’s a decision that should not be taken lightly.
There must be a customer base in the new market to sustain your new business. The competitive landscape must be vulnerable to losing market share to you, or you must be able to exploit a niche not being served in this market. You must be in a financial position that is healthy enough to support an expansion, and you must be ready to put all the necessary resources into place, especially trusted, capable personnel.
MAXIMIZE WHAT YOU HAVE
Before considering geographic expansion, experts say it may make better sense to more closely examine the markets in which you are currently doing business. There may be plenty of potential to grow business in your current geographic area and it can be done at a much lower cost than going into a new market.
“I think the biggest thing to think about is to be sure you’re not just falling into the grass is greener syndrome,” says Bill Wade of Wade & Partners. “In other words, we’ve proven time and time again that the economic benefits of selling more of your existing product lines to more of your existing customers is something on the order of 15 times more profitable than new product lines or new territory.
“The one exceptional situation is when a competitor goes out of business and leaves a market naked,” Wade continues. “Failing that, the evidence is so overwhelming that sticking with your existing products and your existing customer base is by far the most profitable thing you can do.”
In addition to growing your business with existing customers and getting them as deep into your product lines as possible, there may be a lot of potential business with new customers going unnoticed in your territory.
Gary Meteer, account director for Commercial and Aftermarket at R.L. Polk & Co. says he has many examples of clients who claim they have maxed out their market, but after comparing their customer and prospect database against his company’s list, inevitably it isn’t fully tapped.
“What we often find is they don’t know what they don’t know,” says Meteer. “So the biggest problem is they think their sales team and the volume that they’re doing is the most they can do, when in fact what is really happening is there are people out there they need to find, they just don’t know how to get at them.”
Meteer says he analyzes vehicle density in the distributor’s area looking for fits with the product lines.
“If you’re hitting your goal of 20 percent share and that’s reasonable for you, then it’s time to move on,” says Meteer. “If you don’t know what your share performance is, then maybe it’s time to try and figure out if you are maximizing potential within each of your geographical locations before you start to expand.”
Peter Pasdach, president of Midway Truck Parts headquartered in Bridgeview, Ill., started with one store in 1978. The company has strategically expanded through the years and now operates 14 locations – 13 in Illinois and one in St. Louis.
Midway’s first expansion came in 1985 as a new startup in Mokena, Ill. Pasdach says they were sending up to three delivery vehicles a day to that general area and customers were requesting they just open up a branch closer to them.
Having a customer base already established in the market you plan to enter, as Midway did, can make the decision to expand much easier.
LOOK BEFORE YOU LEAP
After you’ve taken an honest look at your existing market and truly feel you have taken it as far as it can go, then it’s the right time to start looking at new geographic markets to mine. But that’s just the first step. Next comes doing your homework to see where your best expansion opportunity lies.
“If you’re going into a territory or an area that you haven’t been in before, you need to spend some time there,” Bruce Plaxton, president of BGP Marketing, says. “It’s not just simply, ‘OK, the financials look good, let’s do this.’ This industry, when you ask in a survey, everybody says they don’t do business because of personal relationships. But that’s BS. There’s a lot of personal relationships driving business out there.”
Conduct in-depth intelligence gathering. In addition to looking at industry data like vehicle registrations, go out and talk to customers, talk to competitors, talk to the employees at the business you’re considering acquiring.
“You can tell a lot about a business just sitting across the street in a parking lot with a cup of coffee and watching the activity,” says Plaxton. “Who comes to the front door and who doesn’t? How often are the parts trucks leaving with a delivery? If you’re there for two hours and see four different parts trucks come and go on deliveries, you can conclude this guy has four delivery drivers running routes so this guy must be selling a lot of something.”
Wade provides some clues to look for when evaluating competitors. If all of the trucks on the lot are of the same nameplate, chances are it’s a warranty-driven shop and not likely to be a strong competitor for all-makes parts. If the shop is only open 10 hours a day, it’s going to be a less formidable competitor than one open 24/7.
When considering an acquisition, leave no stone unturned. Pasdach says that after signing a confidentiality agreement with the prospective seller, you should have open access to all of the financials and should be free to speak to the employees.
By way of performing due diligence, Pasdach says look at how much revenue is generated from service and how much by parts, how much of parts sales is through the shop and how much is over the counter, the sales margins and what they’re paying for parts through suppliers. He advises doing a profit-and-loss snapshot of the business to get a realistic idea of the current and potential financial performance.
He also cautions that you will not retain 100 percent of the business that the company you are acquiring generates.
“You never hold on to 100 percent of the business,” Pasdach says. “So when you do sit down and you crunch numbers, don’t kid yourself. You can be the best company in the marketplace and you’re still not going to hold on to 100 percent of the business.”
One of the reasons for this, he says, is if you’re already doing business with some of the same customers as the company you acquire, they may not want to put all of their eggs into a single basket.
Of course, when taking on any business venture, you also have to know the state of your own financial affairs and the impact expansion will have on your financial well being.
“The first thing you need to do is look at your current cash flow and how much debt you may or may not have to take on,” says Plaxton. “I know in the last downturn we had, 2000 to 2001, a couple of larger distributors got themselves behind the eight ball and in serious trouble because they expanded and in the late 1990s it looked like the world was never going to end. They took on too much debt.”
Plaxton advises building a worst-case scenario and seeing if you can still afford to expand should that scenario come true.
But he also admits while it pays to be cautious, there is a danger in being too cautious. “You can get so overly conservative that you’re never going to expand anywhere,” says Plaxton. “But there are a number of distributors and dealers out there right now who are in trouble because they can’t service the debt they took on to expand when things were a lot better than they are right now.”
The cyclical nature of the industry can work both ways. If a distributor overextends himself and the market turns for the worse, his financial misfortune can be an opportunity for others.
“For somebody who doesn’t have a lot of debt and has good cash flow, despite the current economic conditions, now is probably not a bad time to look at expanding,” Plaxton says. “You can get a hell of a deal on a new car today, you can probably get a hell of a deal on buying your competitor out three counties over.”
LOGISTICAL CONSIDERATIONS
After deciding it’s time to expand and where to expand, next consider the many, many logistical details that will help make expansion successful.
Pasdach says Midway uses a new store checklist to help make sure all the bases are covered when they open a new location. The list varies depending on if it’s an acquisition or a new store startup, but accounts for just about every aspect of their operations.
On the list, he says, is everything from office and warehouse equipment to signage, and from delivery vehicles and parts inventory to the sales strategy and the required personnel.
Generally, distributors expand into new territories adjacent to existing territories, within 100 miles or less. That strategy may eventually get them spread across multiple states, but there’s a pattern to the expansion to get to that point.
“I think our business is singularly bad at non-contiguous expansion,” says Wade. “It’s not because our guys aren’t smart or anything like that, it’s just because of the hyper-local nature of our markets. I think of a guy in central Ohio who might have a lot of construction fleets or something like that while a guy in Toledo might have large fleets and truck stops.
So everything you know so well in central Ohio may not translate at all to northern Ohio.”
Again, expanding into new locations without fully exploiting existing ones can stretch resources too far, adding more in overhead expenses than new revenue generated. In addition to another lease or mortgage payment, more payroll, inventory and delivery fleet costs, the parts you carry may become a liability.
If you haven’t properly done your homework on the parts needs of the new market, you may be stuck with product on your shelves that won’t move.
“The other piece of it is obsolescence of the parts you are carrying because as you start to expand, if you’re not maximizing your market, what we’ve found is you’ve got parts sitting on your warehouse shelves and your retail shelves that don’t need to exist in the area because you’ve expanded so far without knowing really all that is in that area,” says Meteer.
It helps to consider everything you currently do at a given store and all of your expenses. Then double it.
“Every single function that you perform, whether it’s hauling back cores or whatever, it’s going to become that much more complicated,” says Wade. “Now you’re talking about not just stretching resources, you’re talking about duplicating resources. So you better be right on that one.”
You also need to consider how much longer you plan to be involved in your business and how your succession plan looks. Taking on new locations can not only require a great deal of additional focus and work, the investment may take at least a few months before it begins showing returns. That could leave your successors or potential buyers of your business with liabilities they do not want to take on.
“If you’re 45, your financials are in great shape and you’ve got an itch, it’s probably a great time to expand,” Plaxton says. “If you’re 62, your children aren’t interested in the business and you don’t have one or two key employees who have the management skill and the financial wherewithal to turn the business over to, you probably ought to think twice.”
PEOPLE, PEOPLE, PEOPLE
The real estate motto “location, location, location” has its place when considering new business markets, but even more important is “people, people, people.”
It’s the first item on Midway’s new store checklist.
“Whether you’re looking at new store startups or acquisitions, what is absolutely key are the people who are available in that potential acquisition or to staff a new store startup,” Pasdach says. “Do you have the internal people that you can put there? Because brick and mortar, putting the shelving up, laying out the pallet racking and putting the right parts in there are important pieces of the puzzle, but rudimentary compared to having the right people there to execute for you.”
Pasdach recommends having one or two operations-savvy managers who can be deployed to the new store to make sure it properly gets up and running.
Inheriting quality employees through acquisitions is a real bonus. He says you can know you’re getting good employees if you have done business with the acquired company before, for instance if a repair shop you are acquiring was also one of your customers.
Another way to know is through word of mouth.
“It’s really kind of based on the reputation of what kind of a business did the company run,” says Pasdach. “If they had a good reputation on the street with customers, typically customers will not be bashful. So we basically ask the customers, ‘what do you think of this person over at that business?'”
While Midway has successfully grown from one store to 14 spread across two states and about 300 miles, Pasdach cautions that expanding – whether it’s your first time or your 10th – should not be considered routine or taken for granted.
“Try not to get too excited about it,” says Pasdach. “Look at if the geographical area makes sense and what are the opportunities with the customer base. If the pieces fit, go for it. I will say one of the pitfalls you have to look out for is after you have put some successes under your belt, really be careful because you can get sloppy.”
