Rolling up fragmented industries is an age-old strategy. Sometimes it works. And sometimes better than others.
The Merger Verger was involved once in leading a series of roll-ups in the industrial packaging and crating space. Chick Packaging (now a part of the Swedish global packaging concern, Nefab) began life in 18-something in rural New Hampshire and grew through acquisitions to be the largest industrial packaging company in the US. While the strategy was highly successful, it never achieved one of the its fundamental underpinnings.
The cornerstone business – and in fact most of the bolt-ons – had deep customer relationships with one or more of the Fortune 100. The roll-up strategy called for leveraging those relationships into national contracts as the operational footprint of the company grew. It didn’t happen, not to anywhere near the degree it seemed like it should have.
The reason offers a cautionary tale for anyone contemplating a consolidation strategy.
Industrial packaging and crating is an extraordinarily fragmented business. Almost any schmoe with a saw thinks he can build a wooden crate. In our target analysis, we found more than 700 prospects around the US alone, many of which were key suppliers to companies a thousand, ten thousand times their size.As a result of that industry structure, a corporate purchasing structure had built up over decades and decades. It too was fragmented (or what they probably would have referred to as “decentralized.”) No matter how hard Chick worked to demonstrate a value proposition to its national customers, they could not get traction with the purchasing agents.
Here’s a bit of what we found about local purchasing agents:
- They like their jobs and have little interest in promoting centralization.
- They have no incentive to make improvements for their company outside their immediate P&L spheres.
- In fact, keeping mum about quality suppliers that other units don’t use solidifies their reputation and their value.
Chick Packaging found many value-creating avenues in building a national crating business. And one day it may contribute to the revision of customer purchasing practices that will enable it to achieve its ultimate goal. But it will be a long time coming.
So, which came first, the fragmented supplier or the fragmented purchaser? If you’re thinking of consolidating an industry, that question should be at the top of your due diligence list.
BTW: I’m not kidding; the business really was called Chick Packaging. A hundred years old. Named after some guy named John F. Chick. The marketing team came up with an amusing giveaway: Chick magnets … which I will leave to your imagination!