After 10 years of flat growth, things were looking up a few years ago for Custom Logos (asi/173183), when suddenly promotional product sales jumped by 50%. In 2014, the San Diego-based distributorship was boosted by an additional 25% sales growth in screen printing. Seeing so much consistent new business over several years, the company acted accordingly, says Jeff Golumbuk, the firm’s CEO.
Company executives expanded their sales force by 20%. They increased their total staff from 49 to 65. They doubled their screen-printing staff, acquired new equipment and added a second shift.
When sales are flat for a decade, sudden growth of 25% or 50%, as Custom Logos experienced in various aspects of its business, is a welcome change. Until it’s not.
Growth may be the holy grail of ad specialty firms, particularly those like Custom Logos, which, with such consistent growth, is poised to move from a smaller distributor at $2.5 million a year in sales to a more powerful industry player. But, as Golumbuk and his team discovered, growth can be fraught with challenges as well. The company’s IT infrastructure is being revamped to keep up, staffing is a constant struggle, and that all-important second shift “has been problematic to manage,” Golumbuk admits.
Certainly, growth of any kind is almost always a welcome event, and many in the market are poised for success this year. In fact, the industry posted its best-ever year in terms of revenue in 2014 – seeing a record-high of more than $21 billion taken in by ad specialty distributors. Further, those distributors have an extremely bright outlook on 2015, as the Counselor Confidence Index – a measure of distributor’s views on their ability to grow in the future – reached 114 in the fourth quarter of 2014, tying the all-time high.
Yes, opportunities abound for distributors right now, and confidence is as high as it’s ever been. But as many distributors have found out in previous growth periods, high growth years can present a host of headaches that can negatively impact companies if they aren’t careful with how they manage that expansion.
Here, we highlight some of the biggest challenges distributors can face in times of high growth.
Propping Up an Overworked Staff
Perhaps not surprisingly, one of the most notable strains on a company during intense periods of growth is among staff members, says Jen Lawrence, a Toronto-based management coach and business consultant, and co-author of Engage the Fox: A Business Fable About Thinking Critically and Motivating Your Team.
“When businesses are scaling, growth tends to outpace staffing,” Lawrence says. Obvious signs include longer lunch breaks, more sick days and absenteeism and increased tardiness among workers. “Employees who are feeling stressed tend to disappear and get ’sick,’” Lawrence says.
That may be the time to take employees to lunch, acknowledge the increased workload, and even promise time off or other incentives when business calms down, she says.
It may also mean it’s time to bring on additional team members. The first rule of staff expansion? “Be prepared to understand that hiring one person is different than hiring 10 people,” says Dennis Ceru, adjunct professor of entrepreneurship at Babson College in Wellesley, MA, and CEO of Strategic Management Associates LLC, a growth management consultancy. Most small-business owners, Ceru says, “don’t anticipate the lead time or training time for bringing on new employees.”
More to the point, he says, companies experiencing or anticipating substantial revenue increases should also be aware of when to hire, so that they don’t overextend their personnel needs and suddenly get caught paying for full-time employees should business dry up.
At Houston-based Bullpen Marketing (asi/150076), the company was careful to build an ongoing pool of potential full-time hires, first by bringing them on part time, says Colin Hageney, the company’s president. “We take baby steps toward the full-time position,” he says, adding that the company makes a point of emphasizing in job listings that part-time work at Bullpen can – and does – sometimes lead to full-time employment.
Even before recruiting and hiring part-timers, though, the company outsources services during an initial growth uptick. For example, when they started receiving more orders in 2014 than they had the previous year, they hired outside design firms to help create artwork, rather than bringing a designer in-house immediately. That way, Hageney says, they’re able to complete client orders in a timely manner, but aren’t committed to bringing on new workers until a pattern of consistent new business is established.
Reframing the Old Guard
Small-business owners often don’t realize the multiple roles they play within a company prior to hiring new staff. As a result, they sometimes struggle to readjust personnel roles and responsibilities as added business calls for additional staff, sometimes with newly needed job skills.
That was true for Linda Neumann, marketing director for San Diego-based Brilliant Marketing Ideas (asi/146083). After tiring of an industry that was limping along post-recession, Neumann decided it was time to shake things up. While she had worn a multitude of hats as the company’s founder, she decided to shift up roles and make her brother-in-law the company’s CEO after a three-year stint at the distributorship. Doing so allowed Neumann to focus her activities on sales and marketing. “Before, I was managing the staff, selling, dealing with HR issues and other corporate needs as they arose,” she says.
Freeing up her time to focus on nothing but sales accounted for the company’s 10% growth in 2014, Neumann says. “I think that helped tremendously because my focus was totally on marketing and sales, and I didn’t worry about all the day-to-day staffing, invoicing and other stuff that goes into running a business,” she says.
But even with those changes, Neumann adds, she still gets pulled away from pure sales and marketing, and struggles to tweak staffing needs as the company enjoys sustained growth. “It would be nice to have support that can jump in and do presentations, fulfill orders and deal with day-to-day customer requests,” she says.
For Neumann, realizing that the many directions she was pulled in wasn’t working is a market advantage, Ceru says. Not every executive has that perspective. “I knew one CEO who told me it took him over six months to realize he was unhappy in the corporate role he was playing,” Ceru says.
In addition, it’s important for distributor principals to realize that, even though they started the company, they may not be the right person to lead it through a time of high growth. And, successfully navigating intense periods of expansion often means rethinking employee roles, cross-training efforts and staffing needs from the CEO down.
Keep the Cash Coming
Too often, a small business expands like this: “They get excited over growth and revenue, and it almost becomes a drug where they want more,” says George Athan, chief strategist at MindStorm Strategic Consulting, a business management consultancy based in New York. An insatiable need to conquer new markets takes over, but “while they’re putting time and energy into expansion, they’re not putting energy into the infrastructure to handle it,” Athan says.
What’s more, he adds, small-business owners often fail to recognize gt differentials that may occur and can essentially become blinded by all the added business coming in – not necessarily recognizing the impact that extra revenue is having on profit and cash flow.
For example, a distributor might add some new large clients in a growth period and see sales jump markedly. But the profit on those particular clients may not be as great as with the clients that the distributor firm was fulfilling orders for previously.
“You might go from a 40% gross profit to 25%,” Athan says. “So, even though the number of orders is increasing and you see revenue and growth, it’s not real. The only thing that matters is profit.”
To that end, experts say that distributors in growth modes should always be aware of the margins needed to make additional investments in order to financially support that new growth. A new employee should never be hired unless his hiring generates enough revenue to cover his hiring expense, Athan says.
Too often, companies base new capital expenses, staffing hires and added infrastructure on an increasing workload. But that isn’t always the best indicator of a company’s growth. “There could be mismanagement when new business or orders start to come in,” Athan says, “leading executives to think the company needs additional support, when revamping of current tasks might accomplish the same level of work more efficiently.”
Play Nice With Suppliers
For many distributors, the key to supporting sustained growth comes from working with vendors that can meet sudden spikes in orders. That was certainly the case with AlphaGraphics (asi/373210), based in Kansas City, MO, says Haley Haar, president and owner. After the company saw 40% growth last year, up from 20% the year before, Haar realized it was in a sustained growth phase.
“We haven’t seen growth this large before,” Haar says. And one of the company’s first concerns was to line up vendors that could support that level of consistent expansion. It was an issue of not only finding vendors that could meet immediate needs for larger orders and greater volume, she says, but also for ongoing growth over time.
For instance, AlphaGraphics had a last-minute order for 300 counter mats last year during the World Series, something the client needed in less than four days, Haar says. Her usual vendor declined, unable to meet the timeline. So, Haar began contacting alternate vendors and finally found one that could meet the rushed timeline.
That’s precisely when it occurred to Haar that she may have more orders like this in the future, and she started strategizing about how she might line up suppliers for upcoming months or years at rates that would help maintain her growth and margins. The key, she says, was making her business relationship with them increasingly appealing. So Haar began approaching familiar and unknown vendors to say “we need better pricing now,” and, in exchange, “we can promise you additional business for the duration.”
A key factor, Haar says, was to leverage her company’s strengths when negotiating with vendors. One of her company’s greatest revenue streams is its printing side of the business. She may not be able to guarantee consistent counter mat orders, for example, but “people are always going to need booklets, envelopes and other printed materials,” she says. By promising increased orders in that area, as well as in steady promotional product items, such as drinkware and pens, Haar was able to negotiate better pricing among the suppliers she talked to.
The most important question to ask of suppliers, Haar says, is “how can we work together to make this advantageous for both of us?”
Keep Customers Informed
“When it comes to business and profits, the highest cost is acquiring a new customer,” Athan says. “Where the profits come in is when a customer comes back over and over. That’s why the customer experience is so important.”
Most companies grow by gaining new clients, enticing existing ones to spend more, or increasing the volume of orders with the customers they have, Athan says. Too often, business owners gravitate toward trying to drive new business with additional clients, which is the most expensive, time-consuming, resource-draining approach, he says. Instead, companies should focus on building relationships with existing customers to increase and sustain growth.
In all their struggles to manage growth, Custom Logos was able to retain its clients, Golumbuk says. That’s in part due to Custom Logos’ transparency with customers as they navigated growing pains. That’s a smart strategy, says Ceru. “At the first sign you’re hitting a spike – communicate, communicate, communicate,” he says. “Let them know about business increases and resulting strains on the company and ask, ’How can we work together on this?’”
It helped, Golumbuk adds, that the company overextended itself to clients and offered unprecedented services during their growth spurt to meet customer needs. “We ate a lot of freight costs and delivered orders ourselves that we wouldn’t normally deliver,” he says.
But the biggest key to maintaining customer loyalty as the company navigated its new growth potential and challenges was being “up front and transparent with customers,” Golumbuk says. For example, an overburdened production schedule meant lead times increased from two to three weeks on many orders.
“A customer who has been working with us for 20 years doesn’t want to hear that it will take another week to get the product out,” Golumbuk says.
So, rather than overpromise and under-deliver, the company decided to preempt customer frustrations by explaining the company’s current – but presumably temporary – predicament. The honesty paid off, Golumbuk says. “We didn’t lose a single customer.”