Smaller companies: Riding high on a rush of adrenalin
Sunday 05 May 1996
Two which look particularly exciting are Ideal Hardware, at 598p, a supplier of computer storage products, and newly floated MSB International, at 234p against an issue price of 190p, which provides contract personnel with IT skills. Both companies are gaining share in markets with high growth rates.
Distributors of computer-related products like Ideal have to run fast to stand still because prices of the goods they supply are falling so fast. Price wars have become endemic but, rather like dogs fighting, seemingly ferocious confrontations inflict only minor wounds. Relentless pressure on costs, new products and dramatic volume gains mean that well- run companies can absorb heavy price cuts while maintaining margins and driving sales and profits steadily higher.
But to succeed in such an environment the successful companies have to be quick on their feet in ways undreamt of by earlier generations of British businessmen. Ideal was founded in the early 1980s by 34-year- old businessman James Wickes, who realised that as the computer revolution unfolded there would be huge demand for products such as disk drives. The only hiccup came with a near-disastrous flirtation with the fax-modem market. Lessons were learned and the Ideal which emerged from that debacle was a formidable competitor which now dominates the data storage wholesaling market with a near-25 per cent share.
The company is a far cry from traditional ideas of distribution businesses. The atmosphere is like the dealing floor of a big City firm. Ideal has over 60 salesmen who spend all their time on the phone talking to clients and doing deals. They are paid on a commission-only basis: star performers enjoy six figure incomes.
However, the approach is based on service rather than a counter-productive hard sell. Ideal makes a huge effort to keep staff and customers abreast of the latest developments in a world where there are 200 new products hitting the market every week. As well as the traditional hard-copy catalogue and an in-house magazine, the group supplies customers with a catalogue on CD-Rom with 35,000 pages of information including interactive-video demonstrations. It even has its own in-house TV station which broadcasts weekly to 500 key customers with programmes including new-product announcements and interviews with key industry figures.
A dedicated sales force and user-friendly information gives the group a competitive edge. Not surprisingly Ideal is regarded as a key supplier by global manufacturers of data-storage products and has close ties with resellers. Profits are expected to move ahead from pounds 6.1m last time to pounds 7.5m in the year ending April 1996 and pounds 9.5m-plus for the current year. That implies a prospective p/e multiple of around 20; not dear for such a well-run and fast-growing business.
MSB has an advantage over Ideal in that the product it supplies - highly qualified computer personnel - is unlikely to suffer price erosion. The company is the vehicle for an energetic 32-year-old, Mark Goldberg, who says he is a great salesman but is less sure about running a business. MSB effectively went bust under his leadership in the early 1990s and was relaunched with the aid of two businessmen, Nick Parker and Peter Flaherty; the latter is now joint managing director with Goldberg.
The combination of flair and cool business acumen is producing spectacular results. Since 1993 sales have grown from pounds 7.4m to pounds 38.6m, with profits up from pounds 504,000 to pounds 3.4m. They are forecast by one stockbroker to reach pounds 5.5m this year. The supercharged progress reflects a combination of sales drive and service. The 46 salesmen on MSB's dealing floor are organised in teams with a resourcer (to check availability of contract staff) and a team leader to help the sales staff who may have been estate agents in a former life. Good salesmen can earn pounds 60,000 a year; team leaders make pounds 90,000 and divisional heads, responsible for three teams, make pounds 225,000. This, plus Monday meetings to set targets and Thursday meetings to assess results, makes for an adrenalin- charged atmosphere.
But the service has to match the sales pitch. Contractors are checked not by interview but by taking references from three companies. Sales staff and resourcers spend evenings and weekends talking to their contractors to make sure that when they offer their services to clients (a Who's Who of large British companies and facilities management groups) that the contractors really are available.
MSB now has 900 contractors, against 450 a year ago, and wants to become the UK market leader overtaking its biggest rival, Delphi, with 2,200 contractors and itself growing fast. If MSB achieves its goal the shares will rocket.
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