Contractor’s Corner: Thinking about joining a buying group or cooperative? - Aug/Sep 19
By Dave Stafford
If your business has plateaued on growth or you experience one of those 2:00 a.m. panic attacks that strikes the best of owners, you might think, “Maybe I should consider one of those buying groups or flooring co-ops. I’d like to talk with somebody without an ax to grind for a change.” Then you begin to consider all the possibilities of pricing advantages, product offerings, marketing and advertising help, peer group feedback and those extra dollars to the bottom line through purchase rebates.
What follows is based on experiences with two large cooperatives as a residential and commercial dealer/contractor. This is not meant to provide current, direct information about any specific entity or to recommend them. Do your own research with groups like CCA Global Partners, Starnet Worldwide, Fuse Alliance, Abbey Carpet & Floor, Alliance Flooring and others to see if one might be a good fit for you. Having provided this disclaimer, I will say that my business received many tangible benefits from joining Carpet One and Starnet. For us, it was a great decision.
DOES A CO-OP OR BUYING GROUP MAKE SENSE FOR YOU?
There can be safety in numbers, but if the herd is headed off a cliff, you’re sunk. Ask around among those you know and trust, regionally and nationally. I’d recommend having a list of prepared questions that include some of the following:
• What groups are active in your area?
• What is their reputation?
• What changes to your business name or product assortment do they force you to make?
• What has been your experience with those members and suppliers?
• Have you considered joining a group, and, if so, why did you make that decision?
• What was the deciding factor for or against each particular group?
• How do you feel about the choice you made?
• What is the group’s selection process, and is it looking for members?
Most groups will proudly list members on their website. This website is a treasure trove of information and will tell you what is important to them. The member list will also give you a starting point for finding the inside scoop on the group. It may be difficult to get succinct information from those in your geographic area because of potential competition; however, the same questions may be readily answered by those located farther away from you. Use your association membership contacts through FCICA, the World Floor Covering Association, International Certified Flooring Installers Association and others. Based in Virginia, I used contacts in Alabama, Minnesota and New York to get an insider’s opinion.
After you’ve narrowed your focus among groups, if you have not already been approached by someone from those groups, reach out and express your interest in membership. They may be coy and tell you that “your region is currently closed,” or they will set up a time to discuss your interest. If you’ve been diligent in your review, you should have an idea of the number of members within your geographic region. Does it make sense to become a member when there are six other members within your area? Most groups consider a member saturation level by zip code or within a metro market area. Equivalent population levels are needed to support a member’s business for it to make sense for everyone. The group’s internal policy and whether it’s a retail or commercial focus will often dictate these decisions. Frequently, current co-op members are asked for input if the parameters were close to maximum numbers.
Assuming the group in question has sufficient interest in you and membership is a possibility, gauge their interest and discuss timelines, cost, agreement details and implementation. If all seems to make sense, then what about a visit to one or more of their member locations out of your immediate area to talk with them on a dealer/contractor level? This type of visit will help you make the best final decision for you. The sales pitch by the group’s membership team may not address the entire framework of your agreement or subsequent cost, so trust your gut. Are you comfortable sitting down with the members, or do you cringe when you are in the same room?
Have your attorney, accountant and CFO review any group agreement before committing. What are the hidden or indirect costs from such a membership? Given your volume, how much value will be added to your bottom line? There are always quirks in such a change, particularly with reporting requirements, supplier updates, rebate credits and so forth. How long will it take to incorporate the new group’s requirements into your company? Will your current accounting software and internal communication system be compatible with the group’s reporting protocols? That is a big potential issue!
One new member struggled to integrate his antiquated software system for reporting; he could not get reliable results and finally had to install a new software package and it “took me months before I could trust the data,” he reports.
Look carefully at any upfront fees and the potential cost during the first year as a member. Are there any upcoming member assessments? If so, will you be exempt? For those on the retail side, are there potential sampling costs that you will incur automatically when new introductions are made? If rebates are a prominent factor in the value of a membership for you, how are they calculated and paid?
What are the specific, tangible benefits to your company with integration of a new supply chain, products, pricing, spiffs and terms? One huge benefit may be that you now have access to certain product lines and pricing levels that were heretofore unavailable. I’d advise a careful look at that potential for your specific geographic area since there are usually variances and exceptions for vendors to make. For instance, I found that although I could now buy an exclusive product line, I was at parity with other dealers in the surrounding area. My only advantage was in the overall rebate calculation, and that didn’t really help against local competition.
WHAT ARE THE REQUIREMENTS?
Typical requirements for your company will vary but generally include support of group vendors, reporting of sales and supplier purchase volume, participation in education and training, attendance at several meetings during the year, and maintaining volume and financial criteria as well as above-average flooring installation standards.
Any group will be judged by the performance of its members-good or bad. Mistakes and lapses in any area may bring warnings from the group’s management. There have been cases where serious shortcomings led to member expulsion. Nobody wants that scenario because both sides have invested time and money during the selection process.
It is for that reason that most groups have a detailed selection process that investigates a company thoroughly, including financials and reputation, before offering the opportunity of becoming a member. Unlike some “pay your money and become a member” organizations, the process can extend for a number of months. And it is not just a written application, financials and a Dun & Bradstreet report but also includes interview criteria with industry contacts or members.
Multiple conversations may be had to develop a real-world picture of a prospective member’s business practices and standing within the area. Harsh comments from us and others were a tipping point against membership for a particular company. Conversely, a later application was accepted based on comments such as, “Honestly, we’d like to avoid having more competition (from another member), but since the area is not full, they are a good competitor and would fit well within the group; therefore, we have no objection.”
Group suppliers and approved vendors may be asked, Does this prospective member already have an account with you, and/or how has your experience been with them? If key product suppliers have had an unpleasant history of too many claims, slow pay or non-payment and closed accounts, then that’s a red flag.
Are there going to be conflicts with the prospect’s current vendors? Are they doing a large portion of their product purchases from mills that are not aligned with the group? Is the prospect willing to transition their purchases to approved group vendors to hit purchase volume goals? If not, then it’s a loss for both. Perhaps the prospect is looking for a new niche or is hoping for a long-term upgrade of suppliers.
THE INTEGRATION PROCESS
Company integration into a new group is a journey and should be thought of as such. In most cases, only upper management is involved with the details of the decision to join a group.
Then comes the “rollout to company personnel” that will explain why the decision was made and revealing both immediate and long-term features, benefits and changes. Make no mistake, this is a selling job for you to get everyone on board. I’d advise a special meeting with suitable fanfare and a well-crafted visual presentation to keep you on track. Allow time for general questions but don’t get hung up on minute details. Take note that there will be certain changes, such as reporting and purchase requirements, but emphasize the positives: better pricing, terms, delivery, coordinated training, education, a better regional sales opportunity and stability for the firm.
If you’ve been successful with the company-wide meeting, then schedule meetings with each segment for more indepth information and questions. Here is where you establish timelines for each department. With accounting and office administration, establish purchases, tracking and reporting criteria. With sales, a glimpse into new products, pricing and which mills may be target vendors, including spiffs. Operations and installation will be in for new or remedial seminars, handling displays, product choices and installation techniques.
After your introduction internally, the external promotion begins with changes in company brochures, signage and advertising. Here is where your group membership becomes visible to all. Most have certain signage standards that must be met when there are retail showrooms. Some require that the group’s public moniker be included in the member company’s name in some way. And here is where the advertising clout and scale of a large membership can help with all the cost of media from print, radio, cable and company brochures. Something as simple as all those “delightful phone messages while you’re on hold” are part of the group’s offering.
Your initial foray into the new group is so important. Real orders and purchases will demonstrate that the transition is beginning, and your training was successful. A small mistake or glitch may result in a data quagmire when reporting is flawed. Mistakes will happen and group rules and procedures will be painful at times. Just keep thinking about your reason for joining and remind others with a smile on your face.
THE POWER OF A GROUP
Features, advantages and benefits from membership in a buying group or co-op will be in direct proportion to the effort you, the company owner, have put into your selection. There is no “one size fits all.” An astute manager once said, “Joining a co-op is like going to a banquet; you can’t eat everything there, but you’ll have a terrific selection from which to choose.”
The power of a group is that the large costs of management, education and training become smaller in scale when spread out among 200 to 600 members. There is strength in numbers, and the collective clout of many strong companies with a common goal will result in better pricing and delivery, and a selection of cutting-edge products available only to the group.
One benefit harder to define is that of networking among members. For me, that was important. I knew if I spoke with another member in Florida, Minnesota or Washington and identified myself as a group member, they’d always take the call and do their best to answer a question or give an opinion. In multiple cases, other members helped me with installation nightmares or technical issues. When it made sense, I used installation labor from them or got a great regional recommendation. With a particularly thorny issue, I reached out to the co-op office and posed a question, “Who do you know that might have some answers for me?”
Invariably, the feedback was, “I know just the guy! Let me get his direct number for you. I’ll even give Jim a call right now and tell him you may be calling.” You can only imagine how helpful that was to a relatively new member and how that made me feel.
As I began to get more involved with the groups as a member, there were committee assignments that expanded my knowledge of the flooring industry and the group needs. As you participate, you raise your profile. That in turn provides benefits, personally and professionally. You and your company will gain from this extra effort
Whether it be products, pricing, education, networking or local and regional competitive advantages, there is something for everyone in a cooperative or buying group. Choose wisely. When it’s a good fit, it can result in millions of dollars in extra sales and profits, and a valuable legacy. Naturally, groups are not for everybody so do your homework before making a commitment.
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