I recently highlighted the industry consolidation trends that could pose a threat to owners in the converting industry. I was discussing these trends with a friend in the business, and answered with what you’d consider natural skepticism. Natural, but when you consider consolidation history in the US, not healthy.
The consolidation that is taking place in the converting industry is following the path of older, more established industries such as metal or glass. Converting and plastics is relatively young, borne of necessity during World War II. It’s only logical that it would follow the path of older, similar industries.
When I mentioned this to my friend, he shrugged. “Everyone tells you the sky is falling when they’ve got something to sell,” he said.
That’s a natural reaction, as I help people with mergers and acquisitions. But I’d contend that it’s usually the people who deal with services on a daily basis that become experts in how and when they should be used. But in this case, a historical perspective is all that’s needed to understand the impending consolidation.
Consolidation: How Fortunes Were Made (and Lost)
In this post, I’m going to refer to a brilliant paper on industry consolidation from the Tuck School of Business at Dartmouth. The paper was created to provide a strategy for successful consolidation of fragmented industries (i.e. the converting industry).
As background, the paper focused on two major historical waves of consolidation.
The First Wave: Rise of the Moguls
In the “rise of moguls,” entrepreneurs such as John D. Rockefeller and Jay Gould seized on the changes of the industrial revolution, gobbling up “unsophisticated industries” to build large industrial empires.
“Beginning in the 1870s and continuing until antitrust enforcement and public sentiment turned in the 1910s, entrepreneurs were able to identify industries (generally related to heavy manufacturing) in which mergers and acquisitions could create significant economies of scale through combined operations and superior management. Economies of scale were made possible through the capital intensity created by the industrial revolution. Among the entrepreneurs were household names like Rockefeller, Morgan, Vanderbilt, and other characters like Jay Gould.”
These entrepreneurs led the “strategic development and subsequent dismantling of the Union Pacific Railroad, the Standard Oil Trust, and the United States Steel Corporation.”
The railroad system, for example operated “under a principle of local management for small railway system,” which were very similar to today’s fragmented, regional converters. International shipments were accomplished through a loose network of alliances.
Railroad mogul Jay Gould’s consolidation efforts led to a “self-contained system,” and this competitive expansion drove many lines to financial failure. In the end, 25 leading lines survived.
The oil industry followed a similar path. Standard Oil achieved “monopoly power through regional consolidation and vertical integration.” John D. Rockfeller scooped up local refineries in the “oil region” around Cleveland, and eventually had 90% of the refining capacity in the United States, resulting in “substantial economies of scale and scope.”
The Second Wave: The Cons of Being a Conglomerate
During the 1960s, the second wave of consolidation began, in which large corporations built conglomerates, often stepping outside of their traditional lines of business. It proved to be a disastrous strategy for companies such as Beatrice.
Beatrice began in 1898 as a creamery, expanded through regional consolidation and innovation, but remained a dairy company. Then it attempted to position itself as a broader food supplier, acquiring La Choy. The acquisitions continued, as the company scooped up Avis, Playtex and Tropicana.
All these different cultures and customer bases proved too difficult to sustain. Eventually, the diverse acquisitions were turned into divestures, and Beatrice returned to its roots as a tightly-focused consolidation of consumer foods companies.
Beatrice’s attempt at consolidation was also replicated by ITT and Westinghouse, with similar results. So much for consolidation via conglomeration.
What Consolidation Looks Like Today
The Dartmouth paper was published in 1998, but what’s occurring in the converting industry seems to mirror their description of the “next wave” of consolidation.
“The newest wave builds off of the prior waves, but includes fundamental changes. Entrepreneurs and corporations are still active consolidators. This wave is again driven by underlying market forces. However, consolidators are now better focused on the creation of a competitive advantage, as opposed to size or growth. In addition, the players involved include a new mix of financial and strategic players.”
Today we see a wide range of Financials (private equity firms and banks) and Strategics (companies in the printing and converting business) who are actively driving the consolidation trend. Just like Jay Gould and the railroads, they are looking to bind together regional players to provide a more efficient, streamlined distribution source for global brands.
If anything, the consolidation is more of a threat than ever before. Remember my friend, and his assertion that someone is always sounding the warning bell? That may be true, but today’s consolidators are smarter and wiser to the historical blunders of the past. It’s why last week’s post talked about the need for companies to grow toward $100 million in revenue.
It has often been said that those who ignore the mistakes of the past are condemned to repeat them. It’s my hope that you’ll heed the warnings from last week’s post and forge a strategic plan that will allow you to profit from the current trends.
We’re at a critical juncture for the converting industry. Take action to ensure you’re on the right side of history.