This week Jim Shepherd had a series of articles about the Shooting and Outdoor Industry on The Outdoor Wire. Jim talked about things going on in the industry that have impacted the market especially the availability of capital and the future of distributors. In the 17 years, I have been involved in it, I certainly haven’t seen things quite like this and Jim makes some really good points. As companies look at how they grow their revenues, engage customers and service dealers, there is another topic altogether. (see Jim’s posts here: Nov 5, Nov 6, Nov 7)
By definition the word consumption means either 1) the using up of a resource or 2) a wasting disease, especially pulmonary tuberculosis. Lately, though, this term has become more of a term among many I worked within the Shooting and Outdoor Sports Industry. It refers to the phenomenon of large corporate conglomerations both public and privately held buying up smaller companies and systematically consuming them. What has happened over the years can be summed up in general terms to describe most situations. This post will be broken into two parts in order to sufficiently cover everything.
Global statistics show 75% to 90% of most mergers and acquisitions fail. Yet, companies continually buy other companies. Often there is an initial uptick in business propelled by the buzz and excitement around the completion of an M&A endeavor but typically they don’t last. In an article by Inc.com, four top reasons are listed for why they fail; 1) overpaying, 2) hubris, 3) agency reasons, and 4) execution problems. You can read the full article here.
I have certainly seen my fair share of this in the Shooting and Outdoor Sports Industry. There are many M&A examples from my own resume that come to mind as well as companies within the industry. I won’t name any names but will use examples backed by personal experience. Where nearly all of them failed were due to reasons 1, 2, 4, or a combination thereof. I have yet to run into a 3.
Most acquisitions I have witnessed, been a part of or had to manage afterward were done for one of two reasons. You might be looking to buy a company because they bring value to the organization and something in the brand aligns with your vision. If that vision is long term, you are probably okay. But if it is short term be careful. Too often, what I have seen; is the acquisition focused first on a target number for valuation. The acquisition made sense because it took the EBITA to a level that was desired for resale and subsequently profits to shareholders. There is nothing inherently wrong with that, it is part of capitalism. Issues will arise if you overpaid or bought a company in a growth period bubble and market conditions change. For instance, President Obama should have been voted top firearm salesperson of the year for eight years running. Buying a firearms company or one heavily related to firearms sales in a period like that is risky if you hadn’t done due diligence or know what you are getting into and looking to turn over for quick resale.
Second, if market conditions do change post-acquisition and there was no plan on what to do with the company you have another problem altogether. Figuring out the vision afterward is going to be wrought with problems. It can force a downward spiral of cost-cutting measures and overhead reduction which rarely leads to sustained growth. It becomes a short term band-aid for a bigger problem. If you are publically held, the stage gets much bigger and the stakes get higher. Managing your way out of a bad buy is not easy and a position no one wants to be in. Consumption happens here if you are ill-prepared, have an over-inflated investment and the competition takes advantage.
Often after an acquisition, the next move is new leadership of at least the acquired company. These can be handpicked by the new owners or an extension of the duties of current teams. Depending on the conditions, new leadership may be good or might have the task of making changes needed to get the balance sheet on the right path. With a recent history going as far back as 2004 in the Shooting and Outdoor Industry, it is likely the leadership talent came from outside the industry. This is especially true with respect to private equity firms and venture capitalists that have a system and process that works for them.
If you have ever taken a Ken Blanchard Situational Leadership course, you probably have heard of an S1, S2, S3, and S4 type of leadership style that need to be matched to corresponding employee development levels or D1, D2, D3, and D4. This system can be highly effective if used properly and part of the culture of a company. All employees of a company can and will have varying development levels. Leadership is supposed to match the style to development need. This is important to understand in relation to the M&A’s that have occurred in the Shooting and Outdoor Sports Industry. Most of us in the industry can point to a fundamental importation of highly competent teams from other industries that had very little transferrable skills to the market. The end result of this can be exemplified by a recent iconic brand who is now coming out of bankruptcy. Articles have been written about how they are rebuilding the brand and regaining America’s trust. Though it is refreshing to see such honesty and good to know things are back on the right path, what led them to this point isn’t a mystery.
The imported team naturally starts applying practices applicable from one industry which may or may not necessarily translate well across all products. These leaders are functionally D1’s themselves trying to be S4’s. In the case of the iconic brand referenced above, not only where they D1’s but they had no one able to or willing to give them the S1 direction they needed. Decisions after decisions were made that started a slow systematic decline with a very measured management philosophy. Applying this to shooting sports did not play out very well in this case. If they had taken some time, learned from those they managed and then combined the learning to the leadership, things might have turned out differently.
Using the wrong leadership style or one-sized fits all approach can have real negative impacts. For instance, let’s look at the product category mix as an example. You can put a 3-9×40 scope on multiple rifles. You can clean 9mm pistols with the same cleaning rods. These products have very easy often universal applications with relatively simple product life cycles. When a new rifle comes out or handgun, you don’t have to necessarily develop anything new. But you can’t do the same type of life cycle management with a product like a holster. People own handguns for a really long time and when new ones come out, they often buy more. In most cases, you really can’t stuff a Beretta 92 into a Glock 17 holster.
Holsters are in a category that is primed for nearly endless proliferation especially given how long handguns remain in circulation and the addition of varying laser or light combinations. Managing this requires a different approach than optics or gun cleaning. When launching a new holster series, you have to understand the high runners of the past as well as the future high runners yet to come. There is always a long tail and the best trajectory is to land somewhere in the middle of the bell curve. These are nuisances that make a one-size approach to varying product categories sometimes impractical. This is just one example from personal experience.
There are those within the industry who don’t even recognize it making someone outside of the industry even more at risk. Consumption occurs here when decisions are made counter to the consumer culture or product categories because the distinction wasn’t known.
To Be Continued…
- L. Yarbrough, Bucks & Beers
