Declaration of independents

By Jayne A. Pearl

In a consolidating industry, independent family businesses must contend with fewer, but stronger, competitors. Five business owners share their strategies.

Capitalizing on chaos

Scott R. Elkins
UAS Inc., Broomall, Pa.

Scott R. Elkins, president of UAS Inc., says consolidation has affected his security systems company tremendously—in a good way.

The family owners spotted the buyout trend in their industry in the early 1990s. Instead of trying to grow through acquisition or expand internally, they switched their focus from the residential market to national commercial accounts. That put them in direct competition with much bigger players, like ADT, Brinks and Honeywell.

Figuring that consolidation would create chaos, Elkins' family devised a system for capitalizing on that scenario. Larger security companies, he explains, operate out of regional service centers to put the response team close to the customer. But that means a national client—one with 30 or 40 stores throughout the country—must deal with 30 or 40 different sales centers, salespeople and executives.

That's bad enough. But when that large security company is merged into another company, the national client may have to deal with new security service and salespeople in each location. The customer gets shuffled from one office or service center to another, explains Elkins, 31. “Customers feel they, too, have been bought and sold, and that they lose touch with people they've developed a relationship with,” he says.

That's why many large companies—including Boston Market, Cumberland Farms, Hess, McDonald's, Papa John's and Shoney's —have turned to UAS's 55-person, 12,000-square-foot central operations station in suburban Philadelphia. These commercial customers don't learn about UAS through advertising, because the company doesn't advertise.

Prospective clients may find Elkins at a trade show; UAS attends shows in a few key industries, such as food service and convenience stores. Elkins also does his share of cold calling. But mostly, he says, customers hear through the grapevine about UAS and its centralized system. “That's a tremendous competitive edge,” he asserts.

Indeed, the company—which was founded in 1972 by Elkins' stepfather, 70-year-old Ronald Schwartz—has been growing at a 20% clip for the past six or seven years and now produces annual revenue of about $10 million, Elkins reports. His mother, Sandra Schwartz, 61, is the company's vice president of marketing. His stepbrother, Bret Schwartz, 38, is a project manager, while step-brother-in-law Bruce Greenbaum, 36, is vice president of operations.

Steering away from competition

Eugene Johnson
Rainier Dodge, Olympia, Wash.

A few years ago, large companies like AutoNation and Carmax were on a rampage, paying “crazy money” for dozens of dealerships around the country, says Eugene Johnson, owner of Rainier Dodge, a single-franchise dealership in Olympia, Wash. But Johnson, 59, says he was unimpressed—and unthreatened.

“I don't pay any attention to them,” Johnson says. “The large companies bring people from outside the market into the market, and they have their own groups and ways of doing business. They're not personally committed to the business like a private entrepreneur. I don't feel the competition from them.”

No wonder. All 11 dealers who share space in Olympia's auto mall remain independent. Johnson explains that most of the M&A activity has been centered in higher-traffic areas like Seattle.

“The biggest threat we have in the auto business, or in any business, is how we think about it,” he muses. “People in America are not going to walk. You'll get your share of business when you do what it takes. If you do a good job, they'll know it; if lousy, they'll find out.”

Johnson says he's never been approached by a potential suitor and would not be interested in an offer should one come his way. Nor is he interested in acquiring any of his competitors. But that might not be case with his son Casey, 26, who has worked full-time at Rainier Dodge for the past three years.

Eugene Johnson says Casey is “different than I am. He wants to buy other franchises and other businesses. If he wants to do all that work, fine. He's a good delegator and will take the company to another level.” In fact, Johnson hints that he and Casey are talking to some people now, but have no concrete plans.

Down to the wire

Beverly Gleaton Sterling
Plant Telecommunications, Tifton, Ga.

Though the telecommunications industry is consolidating wildly, deals like Verizon's $6.6 billion bid for MCI or SBC's $16 billion offer for AT&T have no direct effect on the local phone service that Plant Telecommunications provides in 13 counties of southern Georgia. For now, its customers—about six per square mile—have nowhere else to go for local phone service.

“We're in markets that local carriers don't want to be in right now,” says company vice president Beverly Gleaton Sterling. “They're concentrating on high-density areas. But they'll get to us one day.”

A carrier that wants to offer long-distance or DSL service in rural markets must rent time on land lines from the local company. Customers can choose MCI, Sprint, AT&T or BellSouth as their long-distance carrier in Plant Telecommunications' exchanges. “We can't compete with the big guys,” Sterling explains. “It costs more in a rural situation to provide the service. Therefore, our rates might be higher. In a big company they can even it out—if they lose money by going into our tiny area, they can make it up in their high-density areas.”

To compete, Plantel (the company's nickname) offers a full line of services. The $19 million company—founded in 1895 by Sterling's great-grandfather, Ben Gleaton—gets about 25% of its revenue from unregulated services like voice mail, a regional directory, web hosting and design, telephone business systems, teleconferencing, pagers and wireless broadband satellite Internet service. “Some of these little places had no Internet at all and were real happy to have us,” says Sterling.

In the regulated end of the industry, Plantel provides long-distance service to residential and business customers. And it began providing cell phone service in the 1980s, in a 50-50 partnership with another company. The venture was profitable, but when the FCC deregulated the wireless business in 1996, the family found it too hard to compete and sold that business.

Sterling, 58, and her husband, Dan, 61, the president and general manager, hope to pass the business to the fifth and sixth generations. Sterling's sister, Betty Chloe Gleaton Metzger, is vice president and co-owner. Jimmy Metzger, Betty Chloe's son, is outside plant manager. Sterling's daughter Ginger Sterling Nelson is human resources manager; her other daughter, Anglea Sterling Ringenberg, is administrative assistant. Mike Ringenberg, Angela's husband, is an engineer; David Nelson, Ginger's husband, serves as purchasing agent. In addition, one of Betty Chloe's grandchildren, 17-year-old David Metzger, does odd jobs for the company on a part-time basis.

But the future is not at all clear. In the mid-1960s there were about 4,000 independent telephone companies in the nation. Today only about 1,000 have survived. “A lot of these family businesses have sold out over the years because they couldn't stay in business and compete with these larger companies,” says Sterling, who adds that she receives about four or five solicitations a month from interested buyers. The only way she would consider selling, she says, is if her children decided to leave or if the company were losing money. “It hasn't happened yet,” says Sterling. “But it's getting real close.”

Drawing interest from competitors' customers

Will Schmidt
Mountain States Bank, Denver

Denver is an “over-banked” market, says Will Schmidt, the 36-year-old president of Mountain States Bank. Yet, notes Schmidt—who took the reins last year with his cousin, 34-year-old president and CEO Jeff Reder, after their grandfather passed away and a non-family president retired—new banks continue to open. Many are started by former owners of acquired banks who want to resume offering the level of service they delivered when they were independent.

Schmidt says he and Reder do not intend to devise dramatic counter-strategies. “Our continuing plan is to remain independent and deliver quality customer service,” he asserts. That simple approach has proved effective, he points out. Though larger competitors have more locations, more products and services, and perhaps even better fee structures sometimes, Schmidt says he hasn't experienced an exodus of customers. If anything, he says, the tide moves in.

“A year or year and a half after a bank gets acquired, we see fallout of people looking for what we offer,” Schmidt says. “A lot of individuals and businesses really want to know their bank and banker. As long as we feel there is an opportunity for customers who want the service and relationship we provide—who don't want to be treated as a number by revolving-door bankers—our intention is to stay independent.”

While Mountain States might not have branches in every neighborhood (in fact, it has just one banking location), the bank does have two mobile branches—courier cars that can drop off loan documents and collect deposits (credited that business day) from 150 outlying customers. “Now it's more convenient than the bank around the corner,” Schmidt boasts.

The bank is also looking to grow internally a bit. “In two or three years we may try to open another physical branch,” Schmidt says.

The biggest threat to staying independent comes from inside, not outside, Schmidt points out. When his great-grandfather, Gene Griffith, founded the bank in 1947, he needed outside investors to get off the ground. The family has always owned 43%. With 150 non-family investors controlling the other 57%, the family could conceivably be outvoted if an unsolicited buyout offer came along. But Schmidt doesn't seem worried. He notes that the largest non-family investor owns just 5%, so it would be difficult to stage a minority shareholder rally.

Yet he admits he would never say never. “If an aggressive bank offered us three times book, I'd have to present the offer to our shareholders,” he says.

Cornering the grocery market

Salvatore (Sam) Guercio
Guercio & Sons Inc., Buffalo, N.Y.

In the old days, recalls Salvatore (Sam) Guercio, president of Guercio & Sons in Buffalo, N.Y., small neighborhood grocery stores were clustered around each corner of the city. “We had three independent stores on our block in the 1960s,” laments Guercio, 61. “Now the whole city has 20 or 30.”

First the advent of giant supermarkets and then a wave of consolidation put hundreds of smaller Buffalo grocers out of business. Competing head-on with the big players without comparable financial resources was not an option. Most little grocers closed shop. Medium-sized competitors, those with annual sales of $30 million to $50 million, began gobbling each other up.

Guercio's strategy was to let those companies duke it out, while switching to higher-margin food items on the retail side and pursuing wholesale restaurant accounts. “To survive, we needed to do something different,” he says. “We started doing wholesale about 14 years ago and made it into a gourmet store, bringing in more imported food.”

The store no longer stocks staples such as cereals, soaps and household items that filled the shelves when his parents, Vincent and Nancy, first opened the market in 1961 after emigrating from Italy in the mid-1950s. Instead, fresh fruits and vegetables line the sidewalk and front of the store, and shelves inside display deli meats, cheeses, olive oils, nuts and fresh herbs.

Guercio runs the business with his four brothers: vice president Charles, 58; secretary Tom, 56; treasurer Louis, 52; and produce buyer John, 38. Their sister, Santina, works the register, while three nieces and three nephews track orders, load trucks and handle phones.

At first, Guercio's found its business contracting, from about $800,000 a year to $600,000 in the mid-'70s. But eventually, the strategy began bearing fruit. Over time the family found that any economies of scale their larger competitors enjoyed were offset by higher overhead. “I found out that a store our size could do business for a lot less than a supermarket with millions of dollars invested in brand-new stores,” notes Guercio.

Today about two-thirds of Guercio's sales come from wholesale business, including about 100 area restaurants. To serve them, the store recently bought a couple of new trucks and a built a 10,000-square-foot addition. This allows the company to separate its retail and wholesale operations. The brothers also moved their crowded administrative offices a few doors down, where they can enjoy tracking and managing their growth. Currently, they ring in $5.5 million in annual revenues.

Jayne A. Pearl, a freelance writer, editor and speaker (www.jaynepearl.com), is the author of Kids and Money: Giving Them the Savvy to Succeed Financially and a workbook based on her seminar, How to Gimme-Proof Your Kids.

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Summer 2005

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