Case study: How to keep the energy when your growing company starts moving beyond the mid-market

Case study: How to keep the energy when your growing company starts moving beyond the mid-market

Published 18 November 2013 10:08, Updated 18 November 2013 10:09

Brendan Swift

Tom Roche, managing director of SNP Security, says the company excels at embracing technological changes. Photo: Rob Homer

When it comes to security services, SNP Security has its market covered: security officers, mobile patrols, alarm response, disaster-proof monitoring and electronic security form just part of its offering.“We’re very good at identifying – from an innovation point of view – market trends in technology, embracing it quickly, and delivering it to market,” says SNP Security managing director Tom Roche, whose family founded the privately held business in 1923.

However, fostering growth in the security business – a low-margin, technology-centric one in which clients can easily shift to a rival – is no mean feat. It was a question high on the agenda of SNP, which was one of six companies to attend a University of NSW Australian Graduate School of Management mid-market consortium (sponsored by GE Capital), aimed at developing leadership, understanding customers, bolstering innovation and meeting strategic challenges.

SNP Security’s general manager of people and partner strategy, Darlene Winston, says the company’s attendees were about to present their recommendations, focused on its extensive work in the aviation sector, to SNP’s senior management group.

That strategy involves expanding its traditional security services – SNP provides passenger screening services at Sydney Airport and other terminals around Australia – into related services. For example, travellers could elect to book an SNP service officer via the company’s website to accompany a traveller with higher-care needs (such as an elderly relative) through the check-in process.

“We’ll have someone who is service-oriented – they don’t necessarily need to have a security licence – pick that person up from a designated area at the airport, take them through check-in, take them through the screening services and take them right to the boarding gate.

“So there’s peace of mind for their loved ones because once you get to customs you can’t go any further,” she says.

It is a concept that blends a strategic vision with innovation, through the use of new web technology, to foster growth – a challenge many mid-market companies regularly face.

The sector (loosely defined as companies with revenue of $10 million to $250 million) comprises just 1.4 per cent of all Australian businesses but is a major employer, accounting for one-quarter of all full-time jobs, according to GE Capital’s March 2013 Australian mid-market report.

However, it is a sector which can also be overlooked, with small business represented in cabinet (the portfolio now held by Bruce Billson, a bona fide small businessman) and big business having the lobbying power to have its voice heard loudly within the halls of government.

Many companies in the mid-market sector, still driven by that initial entrepreneurial energy, remain privately held, giving them a longer-term outlook that allows them to see through downturns without having to make radical changes to keep shareholders happy.

“They’re last in to a downturn and first out of one,” says Aaron Baxter, managing director, commercial, of GE Capital Australia and New Zealand, which firmly targets the sector. “They’ve been deleveraging their balance sheet over the last few years so as things pick up, they’re in a good position to go after growth here and internationally.”

Many mid-market companies also have low overhead structures, which gives them an initial competitive leg-up, and management, including the owners, often retain close customer relationships. But maintaining those strengths in a growing company remains an ongoing challenge.

Make technology work

SNP, with annual revenue of about $260 million, is at the upper end of the mid-market, while online retailer Booktopia (which did not attend the UNSW AGSM symposium) is at the lower end but growing rapidly. The company, founded in 2004, has doubled its annual revenue over the past two years to almost $30 million by using innovative technology, as well as traditional customer service. Booktopia chief executive Tony Nash says a key turning point came in 2008 when the company started holding stock to speed up customer delivery times.

“In the world of ebooks, where people can download and be reading a book in a few minutes, if someone if going to opt to order a physical book it has to be with them really quick,” he says.

“What happens then is the coefficient relationship between the number of calls to our call centre and service centre drops proportionally because the customer has the product, therefore you don’t have to invest as much in call-centre people.”

The higher cost of holding inventory (the company has a 4000 square metre distribution centre in Sydney) has been offset by the use of technology. Nash wrote algorithms that help predict customer demand, which keeps average stock turnover at just over 30 days. “The algorithms are recalibrating the stock minimums and reorder values every day based on customer demand,” he says. “We’ve also got algorithms that manipulate the price if it looks like the product is sitting around for a bit too long – it drops the price.”

However, no system is perfect and the first Christmas after the algorithms were implemented resulted in too many orders of titles no longer in demand, from January to March. “The next year we had to build compression into the algorithms.”

Getting social with wine

In terms of size, McWilliam’s Family Winemakers sits between SNP Security and Booktopia, with annual turnover of about $160 million, although revenue has been flat in recent years as it faced a difficult wine market. The 135-year-old company appointed Rob Blackwell as its first chief executive from outside the wine industry, in 2011, and he has been leading a strategy that recognises the importance of marketing.

It has forged a closer relationship with the two dominant retailers, Coles and Woolworths, and rebranded its wines.

“From a labelling perspective, [it means] becoming more pictorial and using stronger communication to consumers and creating greater shelf presence,” he says. “From a very traditional wine company with very traditional labels we’ve made some very bold steps in terms of redesigning labels.”

The strategy also includes a greater focus on digital marketing, such as social media and video content. “We’ve moved the dial from a very traditional ‘above the line’ media to one which is very heavily focused in terms of communicating to all our consumers via a digital format.”

McWilliam’s is also hoping to boost its exports (it generates about one-quarter of revenue from outside Australia) to countries such as the US, the UK and China.

The export strategy is one many mid-market companies are successfully pursuing. For example, Transtar International Freight Holdings, which has opened nine offices across Asia since 2008 in an effort to tap into China’s growth, and Longwarry Food Park, a Victorian-based exporter of milk products.

It can also prove a stumbling block with profitability from offshore operations often taking several years to flow through (if at all). Booktopia’s Nash says the company remains focused on Australia and also waited until it had achieved scale before expanding into newer product lines, such as DVDs.

“The issue you have is you still have to put the same amount of energy in to do that,” he says. “My thinking was to keep building books to be as big as it possibly can and when you bolt on something else it’s just so much easier to get momentum because you’re leveraging off a larger customer base.”

The DVD business is now generating revenue of about $1 million a year.

TOP 5 CHALLENGES FOR MID-MARKET COMPANIES

The patchy state of the Australian economy presents a challenge to the mid-market sector, which remains a small but important driver of the economy. Doug Stace, a professorial fellow visiting professor at the Australian School of Business, UNSW, and visiting professor at Cass Business School, City University, London, says the sector has a number of strengths, such as a manager-owner’s clear energy and vision, low costs, and strong ties with loyal customers. However, those early strengths can often become weaknesses as a company grows and there are a number of challenges to meet.

1. Accessing capital

Few mid-market companies can continue to grow at a rapid pace, such as Booktopia, without an injection of outside capital. “We’re always hitting a cash flow crunch,” says Booktopia CEO Tony Nash.

“You’re spending as much as you can afford and still have money left over to pay all your bills.” The choices are many: traditional bank financing, private equity, or specialist lending facilities such as asset-based lending. But with outside investors often comes a lack of control about strategy and higher expectations for profit.

2. Succession

Many mid-market companies begin as family-owned businesses but there comes a time when the founder has to step aside. The founder’s children are often groomed for years in divisional roles with the expectation that they will take over – a situation which can create tensions with other executives within the company and may not always lead to the best appointment.

“The company does need to take professional arms-length advice on this but sometimes you have to take a punt and if it doesn’t work you need to call it for what it is and move to a different leadership structure,” Stace says.

3. Avenues for growth

Spectacular early growth often slows markedly or hits a wall as companies corner a market. The next stage is crucial and is often multi-pronged: improving efficiency, offering related services to existing customers or launching their existing product and services offshore.

Stace says many companies have stumbled when pursuing offshore growth, which can take five to 10 years to pay off. “Don’t build an offshore strategy on a weak domestic business,” he says. “Many companies do this – their home market is suffering and they see the hundreds of millions of middle class in India, China and the Asia-Pacific and say ‘let’s go’ but they haven’t got the cultural sensitivity to do it or the management systems back home backing them up.”

4. High Australian dollar

The Australian dollar has spent much of the past few years at around parity with the greenback, hurting exporters (and boosting importers). The US Fed’s signal that it will begin winding back its quantitative easing program has brought the dollar back to the 95¢ range but, while many economists predict further falls over the next few years, currency markets remain volatile.Currency hedging programs may not boost value directly but can take away the havoc that erratic currency swings can wreak on profits.

5. Risk management

As companies grow, the entrepreneurial energy and risk-taking that propelled them gives way to the bureaucracy of a bigger organisation. Nonetheless, efficient processes and procedures are crucial if a company is to continue growing.

“Sooner or later you need to put in risk-management systems and that is a big challenge because you start to build up your overhead structure and perhaps cut into some of your cost competitive advantage in the marketplace,” Stace says.