Industry Consolidation: Roll-Up or Status Quo?

Go to any P-O-P industry meeting and it's not long before the topic of consolidation comes up. And with good reason. Since January 1999, there have been more than a dozen significant mergers and buyouts involving P-O-P producers. A whole host of "household names" in the P-O-P industry have become the key holdings of various equity groups, paper producing giants and store fixtures manufacturers. How this will ultimately affect the way P-O-P is bought and sold has yet to be seen.However, while consolidation is real -- companies are being bought and sold -- the P-O-P industry is far from being "consolidated." What's more, the specific strategies behind these purchases vary widely: some believe that in manufacturing, bigger is better; others seek to bundle related services; still others are looking to extend their global reach. Keep in mind that some industry observers believe that what is happening is nothing more than the normal business cycle of buying and selling companies.As the chart on Page 43 shows, there's been a flurry of merger activity over the past half-decade that has accelerated in the past two years. When P-O-P Times last analyzed the state of industry mergers and acquisitions in 1998, the majority involved forest products companies. For example, in 1995, paper company Rock-Tenn Inc. purchased Alliance Display & Packaging Co., also a paper company. Later in 1995, Tenneco Packaging (renamed PCA) bought The United Group and Deline Box & Display Inc. In 1996, Chesapeake Corp. purchased the display division of Dyment Ltd. and Triad Packaging. In 1999, temporary P-O-P stalwarts Jefferson Smurfit and Stone Container Corp. merged to form Smurfit-Stone Container Corp. Also in 1999, paper giant International Paper purchased Union Camp.But in the last few years, the scale of merger activity has broadened to encompass all types of P-O-P companies -- large, small, corrugated, permanent producers -- and involve new players such as equity groups. In 1997, Pentzer Corp. -- which a year ago sold to Heritage Partners Inc. -- reorganized its 10 affiliated companies into the Creative Solutions Group, which included Conocraft, White Plus, Graphic Communications and Target Woodworks, among others. At that same time, Union Camp bought well-known, full-service P-O-P producer, Phoenix Display.More recently, the pace has picked up. Heritage Marketing Corp. recently bought P-O-P powerhouse Advertising Display Co. Chesapeake Display and Packaging purchased Consumer Promotions International. Creative Solutions Group bought P.O.P. Displays International as well as one of Europe's leading producers, Group Diam.Why the shift toward the permanent end of the business? In the opinion of some industry experts, the large paper companies will eventually come to dominate the temporary end of the business. But more important is the profit potential of permanent displays."You get big projects, big bucks," says Courtlandt Gates, president of Vesper Investment Co., San Rafael, Calif., who served as a financial adviser to Beeline Group when it was purchased by Leggett & Platt. "Although, in the permanent end, revenue tends to be kind of lumpy."The irregularity of revenue streams does make the permanent end of the business more of an unknown. Marketers tend to invest in permanent displays only once or twice a year, says Gates, as opposed to temporary programs, which may be refreshed as frequently as every 60 days. The result is that the business is prone to peaks and valleys. Revenue can jump during a year when many marketers are updating their permanent display systems, and shrink in times when the market need for displays has already been met."Volatile revenue tends to lead to even more volatile profitability," Gates says. "If you have a company that makes $3 million one year, $5 million the next, and loses $1 million the next, it's really tough."Gates says that it is this profit volatility that spurs small- to mid-size P-O-P producers to seek out larger partners to help them take on part of the risks associated with the business.Some larger companies have a vision of taking on more business and fulfilling more of a product marketer's needs. "I think the general direction that we're moving in is that corrugated box plants and integrated corrugated manufacturers and paperboard companies are purchasing [permanent] display divisions," says Ron Elowitz, national manager, display design for Schering-Plough Healthcare Products, Liberty Corner, N.J. "I think that this is an attempt to achieve both deeper penetration into existing client bases and to go out and get more of the Fortune 500 and Fortune 1,000 clients that they have to count on to grow their businesses in big ways."Market FactorsA variety of market factors make the P-O-P industry ripe for consolidation, and those elements are unlikely to change in the near future. "There is no question that the point-of-purchase industry has two things going for it that consolidators look for -- number one is size," says Gates. "People throw around numbers between $12 billion and $13 billion a year. It's a big industry."Fragmentation is the other element that makes the industry attractive to investor and equity groups. The entrepreneurial history of the business has kept the marketplace populated with small to mid-size companies. "If you look at an industry like point-of-purchase, and not one company has 1% of it, in the world of investors, we're a natural for roll-ups," says Doug Leeds, chairman and ceo of Thomson-Leeds Company Inc.P-O-P industry consolidation is, in part, a reaction to consolidation within the retail world. According to an ACNielsen report, just six years ago, 20 companies accounted for 40% of supermarket industry sales. Today, the top five supermarket chains make up that same amount. As a result, the playing field appears to have shrunk for product marketer companies. They are now looking to their suppliers to design and produce display programs that will capture the attention of retail chain executives as well as consumers."There are fewer retailers and you just can't send stuff out to stores," says Leeds. "You have to sell it into the various chains and that's a complicated procedure. That's another reason for some of the size advantages that larger companies offer. You can have more relationships with more retailers because you're larger."The acceptance of P-O-P as a strategic tool in the overall marketing mix has strengthened the industry, says Gates, making it all the more appealing from a business standpoint. "It's a healthy industry and the bottom line on the P-O-P side is that it generally seems to work," he says. "With the advent of bar-coding [scanner data], P-O-P companies have been able to convince marketers that when they do some kind of in-store display or promotion and then track the revenue, it really does seem to work."From an operations standpoint, there are several factors that are giving the heads of P-O-P companies reasons to consider joining forces as well. Leadtimes for display projects have gotten both quicker and longer: quicker, meaning that the immediate need for tactical displays (that respond to changing market conditions) has increased to a point where producers may be required to generate some displays in a matter of weeks; longer, meaning that the overall planning time for complex, strategic display projects has increased, forcing companies to allocate resources for projects as far in advance as two years out. That can have a tremendous impact on the cash flow and cash outlay of small and mid-size companies."The leadtime is tremendous," says Leeds. "We're working on a number of projects right now that are for the Year 2002. That's far away. Clients will pay us a retainer fee, but that doesn't cover our costs, so we have to put resources against that today that we can't get a payback on until the order is placed."According to Schering-Plough's Elowitz, as brand marketer companies have scaled back the size of their internal staffs, they have begun to rely more on outside vendors. This puts P-O-P companies in the position of taking on more responsibility from marketers."We're looking at display companies as being very valuable partners in advertising and promoting products at retail," says Elowitz. "I think that in another five years, the better display companies -- the ones that have more depth, flexibility, versatility and resources -- will be called upon to act more as agencies."Part of that agency role, according to Elowitz, will be to provide an array of services including display design and production; package design; prepacking; inventorying; warehousing of both displays, display components and product for packing; assembly; drop-shipping; and field set-up."We don't need a company to come in here and just sell us displays because every one of them can do that," says Elowitz. "We want display providers that look beyond trying to sell us 'stuff.' We want them to tell us what we need and why we need it. Also, we want them to tell us when there are times that we don't need it and shouldn't have it, based on Nielsen data, category movement and those types of things."Julie Markell, vice president of creative resources for Fox Home Entertainment, Los Angeles, agrees that she is now relying on her suppliers more to handle a broader array of services. "[Our P-O-P suppliers] take us from the beginning of the concept all the way through the delivery date," she says. "There are only a handful of suppliers that I'm comfortable with that can do that, but they are becoming smarter."At Boston-based Gillette Co., Gino De Luca, director, permanent merchandising systems, likes working with suppliers that can provide a variety of different manufacturing services. As displays have become more complicated with more materials and a greater variety of components, De Luca has looked to reduce the number of suppliers he works with. "As we're getting more requests for endcaps, check-out displays and spinners, which combine plastic, metal and wood, we prefer to go to one vendor that can offer more," he says. "We would much prefer going to someone that has more than one specialty to offer. It's a lot easier to control the display building process, the production and engineering. Logistically, you only have to monitor one location."However, while bigger is seen as being better by some, other marketers say they still want suppliers to have an intimate knowledge of their businesses. Mary-Francis Faraji, director of public affairs for the Consumer Healthcare division of Pharmacia & Upjohn, Bridgewater, N.J., says that they are looking for suppliers who not only understand the display business, but who also have knowledge of the pharmaceutical industry. "We are looking for healthcare-specific experience in the pharmaceutical area," she says. "Obviously, the more that the vendor knows about FDA regulations, the better it is for us. In fact, suppliers have to be FDA-approved to handle some products."Global SolutionsDe Luca and his Gillette merchandising counterparts in Europe, Australia and Asia have been attempting to globalize at least some of their P-O-P efforts. As a result, when vendors are contacted, both domestically and internationally, they are asked if they have offices or affiliates anywhere else in the world."We're meeting more and more with our U.K. partners and trying to work on North Atlantic initiatives, rather than North American initiatives," says De Luca.Currently, Gillette's Duracell division is the only business unit to use common displays both domestically and in Europe. Part of the hold-up in designing displays for other divisions and products has been a matter of packaging. Different package sizes for the same product in different regions of the world have hindered the company's ability to design universal display pieces. But that may soon change."We're trying to push the manufacturing arm of our company to globalize the packaging. If we come up with a display solution that would be good in other countries, we could use the same equipment, the same molds and the same dies to address more of a global solution," says De Luca.Not all marketers are intent on expanding their merchandising internationally. At Atlanta-based Coca-Cola Co., merchandising decisions have been left to specific global regions. In part, this is due to the manufacturer-bottler relationship, which is unique to the soft drink industry. Local bottlers, who are more familiar with their region's merchandising needs, are thought to be in a better position to make P-O-P decisions.According to Steve Spetnagel, merchandising equipment manager, Coca-Cola's primary merchandising concern is to strike at a more local level. Thus, in order for a consolidated supplier base to improve his merchandising efforts, it would have to address this issue. "I'm getting the whole A to Z services anyway from my existing suppliers," he says. "The only place that I see consolidation really helping me is if it brings more local knowledge into the equation. Right now, all of my suppliers are east of the Mississippi. If consolidation will help me get a better knowledge of the West Coast market from a merchandising perspective, then I could see a major value there."Spetnagel concedes that working with a large base of suppliers can be daunting. "If you have too many companies calling on you, their areas of expertise and their specialties run together," he says. "If I were able to have one wish, it would be fewer companies with a greater geographic reach."Service ConcernsMonroe Alechman, vice president of merchandising and store presentation at New York-based Aveda Corp., is concerned that a large, consolidated supplier base won't be able to offer the services that smaller ones do. "A lot of companies think that bigger is better," he says. "For us, it becomes more red tape and a lot more of an obstacle. I've always enjoyed working with smaller companies that were able to service us one-on-one. I'm not convinced that happens where there is major consolidation."Alechman adds that in the past he has worked with single-source suppliers. But he encountered the same communication problems with the sales reps within one large company that he had when trying to coordinate meetings with the reps of a number of smaller firms. "Just because it's a big consolidated group doesn't mean it's going to have all of the answers in one or two people," he says.Many marketers add that even if P-O-P producers become more agency-oriented, it's unlikely that they would achieve the advertising industry's status of a traditional "agency of record." Standard practice within the industry is still to get multiple design and production bids for each display project. However, Thomson-Leeds' Leeds thinks that it is still possible to get effective creative in a large company environment. "The norm in the industry is to call two or three suppliers for every project," he says. "You're still going to get the creative whether you're small or large. It's like going to a small law firm or a large law firm. It doesn't matter -- it's who is representing you there. I think that is still going to be the name of the game."From a purchasing and manufacturing perspective, the idea of forming long-term manufacturer-supplier relationships may seem appealing. However, Schering-Plough's Elowitz has concerns about limiting his supplier base. "We prefer not to have one supplier be responsible for all of our display business because we feel that they can be very easily overwhelmed by work-in-progress requirements and requests, regardless of how big their infrastructure," he says. "There is a lot to be said for the competitive nature of the business. Getting creative, costing and design from three different sources with three different perspectives, viewpoints and experiences benefits the brand much better."At one point, Schering-Plough had trimmed its supplier base down to two companies and found that the workload and management of the details was simply overwhelming. "We had two suppliers and it was a disaster," says Elowitz. "For good reason, they simply could not handle the workload. With customization the way it is from our retailers, there are a lot more projects of varying intensity and complexity than there used to be. Therefore, to have one supplier would be setting anyone up for failure."Gillette's De Luca also finds that bidding out projects to multiple vendors is essential for getting the most effective design work. "Whenever we need designs, we go to three of our vendors and they come in with various designs so we don't limit ourselves to one vendor," he says.Strategic DisparityThough consolidation is occurring in response to a variety of market factors, the way in which businesses are banding together is anything but uniform. A look at four leading consolidated corporate entities illustrates the disparity among business strategies. Each has set goals to increase revenues, service offerings and client support, but each has chosen a separate route.P-O-P & Downstream ServicesCreative Solutions Group was brought together to combine a total display-oriented menu of services. As Luke Strockis, vice president of sales and marketing at P.O.P. Displays International, says, "We've come up with a total solution, from design and engineering to manufacturing to the in-store execution, literally setting up the displays at retail," he says. "We've found that to be a very appealing package to take to our customers who are looking to work with fewer vendors."Creative Solutions Group operates as a holding company for P.O.P. Displays, FieldFlex, Econopak and Group Diam. Each division maintains its own salesforce. "Nobody is going to call on a customer as Creative Solutions Group, per se," says Strockis. "They'll be calling on a customer as one of the divisions of Creative Solutions Group that each has its own brand name."Mark Sullivan, partner in Heritage Partners, which owns Creative Solutions Group, says that the company can now offer marketers both horizontal and vertical services. For example, when P.O.P. Displays designs and produces display programs, customers can utilize the FieldFlex force to actually set the displays up in stores. "There are also vertical services where a client will have us do their temporary displays and now with P.O.P. Displays, we could also do their permanent displays."P-O-P Promotions & Non-Media ServicesHeritage Marketing Corp.'s Wayne LoCurto, president and ceo, has a vision of forming a non-media, marketing services company. Though the company currently only owns the display company, Advertising Display Co., and the cosmetic sampling firm, Color Prelude, LoCurto envisions a company that specializes in nine marketing services areas: couponing, direct marketing, in-store media, Internet marketing services, point-of-purchase displays, promotion agencies, premiums and incentives, sampling, and brand identity agencies."The reality of the world is that corporate America is downsizing," says LoCurto. "Marketers don't have the people to do all of the things necessary to execute many of the programs that they would like to execute, particularly the ones that are extremely complicated. By putting together a marketing services organization that they can trust and that they know delivers quality programs -- that's the real synergy."LoCurto's strategic plan does not include providing a total turnkey approach to design, production and distribution services; rather, a network of marketing services that are common among large marketers. "No one will ever provide one-stop shopping," he says. "What we're talking about is doing certain sub-segments. If you define one-stop shopping as everything a marketer could ever want -- there's no such concept. But if you're talking within a selected realm, we can do different kinds of things."Store Fixtures & P-O-P ManufacturingFor manufacturing-driven Leggett & Platt, adding P-O-P design and production services was a natural fit, says Leo Franz, senior vice president, director of sales and marketing, P-O-P group. Since the company already had a strong business presence in the store fixturing world, the idea was to maximize its manufacturing capabilities by adding P-O-P to its product offerings."If the store fixture business is down but the point-of-purchase business is way up, they all use the same materials and processes so you have the benefit of scale that you can leverage those facilities to produce a major roll-out," says Franz. "Even though displays and fixtures are two different sales types, as long as the materials used and the processes are the same, there is the opportunity to leverage overall corporate resources."The Beeline buyout was designed to add further creative services to the company's manufacturing abilities. Ultimately, the company plans to cover the full spectrum of manufacturing processes. "Every base within P-O-P will be covered from a manufacturing and creative requirement, as well as store fixturing," says Franz.P-O-P & Distribution PowerAs part of its core business plan, International Paper has placed a significant emphasis on its industrial packaging division. Its merger with Union Camp, which then owned the display company, Phoenix Corp., further strengthened its position in the industry. Although the permanent display business isn't a strategic point for International Paper, integrating display services with its packaging and corrugated offerings is a goal. "There are an increasing number of companies that are looking to companies like International Paper to offer them a complete solution or an integrated solution," says Michael Amick, general manager, graphics and support services for the industrial packaging division of International Paper.For Phoenix, its association with International Paper has allowed it to strengthen its own product offerings by tapping into the specialties of its sister companies, as well as utilizing the satellite offices, logistical support and resources of its parent company."Before, when Phoenix handled retail distribution or contract packaging, that wasn't our main focus," says Andy Edelman, president/creative director at Phoenix. "Our main focus was to design and manufacture P-O-P. Now, we're able to team together different companies that have different core competencies from the same family."The Big AccountThough internal structures and strategies vary, there is one thing that all consolidated companies seem to have their sights set on -- the big account. Most of the companies that are consolidating have visions of account teams that can service their "key" accounts and provide advice on utilizing the services of their affiliate companies:Says P.O.P. Display's Luke Strockis: "As we identify customers who can benefit from our multidisciplinary approach, we will put together a sales team that will include a sales representative from P.O.P. Displays, as well as a sales representative from FieldFlex -- if we feel that the customer can benefit from the specialization that they can get from another one of our divisions.""We'll have a corporate sales and or marketing organization that will basically be responsible for dealing with the large clients and they will do all of the coordination," says Heritage Marketing's LoCurto."We'll coordinate with an International Paper representative," says Phoenix's Edelman. "They have what they call a 'department of synergy.' We'll go through synergy representatives to help us put relationships together."Ultimately, however, the success or failure of any consolidation will depend on the internal interaction of the companies and the business synergies that the consolidation can offer. "If you look at companies that have tried roll-ups in the past, they didn't integrate their companies," says LoCurto. "They didn't focus on the client -- they focused on themselves.""There will be plenty of cases where consolidations are not going to work because there is no plan and no overall management to keep them crisp creatively," says Leeds, who has experienced consolidation firsthand. Thomson-Leeds was acquired by Ogilvy & Mather only to later buy itself back. At the time of the purchase, Ogilvy also bought a number of other businesses, including a sales promotions company, an in-store detail force and a consulting firm. "The ability of the companies that all had different disciplines to work together with the same clients was difficult to manage," he says. "It sounded great on paper, but when you went out to orchestrate and make all of the players work together, there were different goals. Also, different companies were compensating the account people differently, so people had different attitudes."Effective synergies mean integrating the services that companies can provide to clients, but also integrating internal departments and administrative duties. However, administrative savings shouldn't be a driving force in a consolidation, says Vesper's Gates. "Doing an acquisition based solely on back office savings really doesn't make sense. Doing an acquisition with cross-marketing in mind definitely makes a lot of sense."The EndgameWhat will the industry look like in five years? That depends on whom you ask. All agree the industry is still in the early phases of consolidation and more large roll-ups are likely. However, there are obstacles ahead for would-be consolidators."It's not an easy industry to consolidate," says LoCurto. "You'd think it would be with all of the companies, but because of the egos and personalities that you're dealing with and a lot of family-held and controlled companies, there are many issues that have to be dealt with to get people to the negotiating table.""You'll find that relatively quickly the industry gets pretty picked over," says Vesper's Gates. "After the first phase of activity ends, things tend to slow down dramatically. I think it's still pretty early. I think the acquisition activity will continue. There are still some big players out there that haven't sold and they will be hotly pursued."Leeds, too, sees further activity ahead. "Right now, we're seeing $100 million P-O-P companies for the first time," he says. "I don't think we'll see a lot of them because our industry isn't big enough to support that, but I think somebody will get to the billion dollar level."Gates thinks that it is foreseeable that four or five large companies could eventually garner as much as 10% of the industry each.In any event, most agree that the industry will continue to support a broad base of midsize suppliers -- at least those who develop niche specialties. "If you are a supplier and you have something really incredible -- that either our current supplier base doesn't have or that you have a proprietary ownership of -- and you think that for good, solid business reasons it would be a fabulous application for us, the door is open to come in and show us those things," says Schering-Plough's Elowitz.

Industry Consolidation: Roll-Up or Status Quo?

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