ABC Supply Co., Inc.

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ABC Supply Co., Inc.

One ABC Parkway
Beloit, Wisconsin 53511
U.S.A.
(608) 362-7777
Fax: 608-362-6529
Web site: http://www.abc-supply.com

Private Company
Incorporated: 1982
Employees: 2,300
Sales: $789 million (1996)
SICs: 5033, Roofing, Siding & Other Construction Products, Wholesale; 5039, Prefabricated Nonwood Structural Assemblies, Wholesale

ABC Supply Co., Inc., the largest roofing and siding wholesaler in the United States, is the brainchild of Ken Hendricks, a building industry veteran and son of a Janesville, Wisconsin roofing contractor. While Hendricks was still a boy, his father Joe had channeled hard work and a devotion to his trade into a reputation as a do-it-all roofer. Despite his father’s prosperity, Ken Hendricks was initially unenthusiastic about following in his footsteps. Hendricks Senior’s working life had been marked by 12-hour days and six-day weeks and a business that, while profitable, never grew because Joe Hendricks did not believe anyone could be trained to do the job as well as he did. Ken Hendricks wanted something different for himself.

International Roofing Company: 1963-79

Hendricks dropped out of high school in his junior year, working briefly at a General Motors auto plant and then at Wisconsin Power and Light. To fulfill his dream of becoming an architect, he also worked another 40 hours a week in the drafting department of a Janesville conveyor company and, to earn extra money, started roofing houses on the weekend. Only the roofing work survived, however, and, using the money he had saved from his 80-hour work weeks, in 1963 the 22-year-old Hendricks founded International Roofing Company. Within four years International Roofing had 500 employees and sales of $45 million a year. It had become the roofer of choice for many of the K-Marts and Arby’s and McDonald’s restaurants rising up in the midwest, and it had won contracts to roof a number of military bases around the country. By 1968 International had become the eighth largest roofing company in the United States.

Hendricks’s success came at a steep price. He later admitted that in his early years, “I was not an ethical person. . . . Back then I was out there to get more money. If that meant cheating a little bit, I didn’t feel there was anything wrong [with that].” To maximize profits he cut corners wherever possible and permitted his employees to do the same. If International Roofing could save money by fastening shingles with only three nails instead of four it did. Hendricks paid his employees the lowest wages he could get away with and, like his father before him, refused to delegate authority or expertise to any but the four or five superintendents he regarded as friends. Because he trusted no one but himself to oversee International’s projects, he had to travel constantly. The hours and cut corners began to take their toll. “Eventually,” he later told Inc. magazine, “I just got sick of what I was doing, so I phased the business down.”

After about a decade at International’s helm Hendricks reduced his involvement to spend more time with his family. International remained in business but focused only on projects in the Libertyville, Illinois and Beloit/Janesville and Madison, Wisconsin areas. In 1968 Hendricks had met his future second wife Diane, the daughter of a northern Wisconsin farmer and the recent recipient of a real estate license earned in night school. After dating for several years, they married in the 1970s and began buying up rundown or condemned homes. While Ken renovated them, Diane managed their rental. The couple soon had 200 renovated homes on the Janesville area market. They quickly learned, however, that property management could be a frustrating business, and tenant problems forced them to let several properties fall into disrepair.

They decided to branch out into the purchase and leasing of commercial and industrial properties and formed Hendricks Realty to formalize this new business. Hendricks also began buying asphalt shingles, which he then sold back to International Roofing, his back-burnered business. Soon other roofers were coming to Hendricks for supplies, and Hendricks began devoting more time to his young supply distributorship than to International Roofing.

ABC Supply Company: 1979-86

Although by the early 1980s Hendricks’s real estate business had been his primary focus for more than ten years, his burgeoning roofing supply business was taking center stage. In June 1982 he purchased three supply centers owned by Bird & Sons, a century-old roofing manufacturer based in Walpole, Massachusetts. These first three ABC centers, based in Muskegon, Michigan and in Belleville and Springfield, Illinois, had been losing money for Bird & Sons but offered Hendricks the same “renovation” opportunity he had learned to exploit in the real estate industry. The makings of an entrepreneurial niche began to crystallize: if the customer service and product knowledge of the small independent roofing supplier could be combined with the buying power of a national chain, Hendricks’s new business—American Builders & Contractors Supply Co.—could grab a serious slice of the national building supply market.

With his wife Diane heading ABC’s finances and bank loan efforts, Hendricks acquired a headquarters location in Beloit, and by the end of its first full year of operations, ABC’s sales had reached $4.5 million. In 1983 ABC purchased a building supplier in Green Bay, Wisconsin, and in the first five months of 1984 added five former Aluma building supply stores, 13 former GAF stores, and two former AA Distributors stores. Only two years in existence, ABC Supply earned a number three spot on Inc. magazine’s “Inc. 500” listing of the fastest growing U.S. small companies, with Hendricks’s other company, International Roofing, placing 30th. Because International Roofing was now competing with ABC’s customers, Hendricks decided, essentially, to give it away to his largest customer to ensure that company’s continued business. The liquidation was not only an unusually generous demonstration of the philosophy of“pleasing the customer,” it also marked Hendricks’s final comment on the destructive ptofits-über-alles philosophy by which he had built International Roofing.

Hendricks’s acquisition spree continued in 1985 with the purchase of seven independent building centers and another seven former Genstar stores in November. By the end of the year ABC had made its first acquisition in Texas and had moved up to second place on the Inc. 500. In 1986 ABC acquired six former Nichols-Homeshield building supply centers and opened another eight new stores through purchases or internal store launches. In the space of less than 34 months, Hendricks had opened or acquired 48 stores (or roughly one new center every three weeks). By the end of 1986, ABC’s empire stood at 600 employees and revenues of $183 million, earning it first place on the Inc. ’s prestigious list.

“The Biggest Small Company in America”: 1987-89

In the three years that followed, the general health of the U.S. economy offered Hendricks fewer opportunities to buy new stores at bargain-basement prices and ABC’s torrid growth pace slowed. It acquired two new stores in all of 1987, five in 1988, and then seven in 1989 to expand its network to 70 centers. In 1987 Hendricks and his wife Diane were named Ernst & Young’s “Entrepreneurs of the Year” and stepped back to consolidate their gains. They began developing wholly owned subsidiaries to manage crucial aspects of the operation such as trucking and construction and created 13 new “satellite” centers near existing ABC stores to absorb the high demand of large urban markets.

ABC’s success was in large part due to the lessons Hendricks had learned while “winning ugly” at International Roofing. Instead of cutting expenses by cutting corners, he instituted a rigorous cost control structure based on the notion that the difference between successful and failed businesses was only three percent of sales. To recover that three percent, Hendricks adopted a simple three-pronged approach: use economies of scale to purchase products from national vendors at a discount; use benchmarking standards to reduce operations costs such as real estate and corporate overhead to industry-leading levels; and motivate employees through bonuses and open book management techniques.

The first strategy, economies of scale, could be achieved simply by aggressively acquiring failing but potentially salvageable building suppliers. By adding new stores to ABC’s network every year, Hendricks strengthened his leverage to negotiate better deals with vendors. To find these target stores, he relied on his contacts in the industry. Calls to vendors, competitors, and credit managers told him which suppliers were late on their bills, facing bankruptcy, or looking to sell their businesses and retire. Partnerships that were splitting up, widowed wives trying to sell off their husband’s assets, companies crippled by weak local economies—all gave Hendricks the opportunity to buy potentially healthy businesses at an affordable price.

Company Perspectives:

At ABC, we are committed to helping you stay profitable. We believe in individual “entrepreneurship.” That is why we use all of our buying power with suppliers to bring you a quality selection of materials at the right place and time, at a competitive price. I have learned over the years that the best way to keep our customers is to keep our promises. That is why we are America’s leading full-service roofing, siding, and window supplier. We look forward to being your dependable supplier!

Hendricks also reduced the waste companies traditionally accumulate in everyday business expenses. He bought used trucks and office furniture and refurbished them, for example, and found dilapidated but still sound commercial properties in inner cities where he knew most of his business would be found. Rather than build expensive new stores in outlying suburbs, where the relative newness of the surrounding properties mitigated against the need for his products, he focused on the remodeling markets in older sections of town where aging properties were being bought up and restored (three-quarters of ABC’s roofing and siding was being sold to repair houses that were at least 50 years old). Hendricks also made sure that ABC’s inventory costs were low by keeping only enough stock on hand to meet existing orders. Because of these cost-cutting measures, by 1991 ABC’s annual inventory turnover rate was a healthy six times per year, its rent as a percentage of sales was 1.8 percent (versus 3.5 percent for the industry), and its truck expense was less than two percent of sales (versus 4.75 to 5.5 percent nationally).

Finally, Hendricks made sure all of his employees were enthusiastic, informed participants in the company’s program by rewarding them for reducing expenses and pleasing customers. When adding a distressed supplier to the ABC chain, Hendricks gave the store’s manager a chance to adapt to his system, preserving the fellow’s job while saving himself the cost of hiring a new manager. He also gave the store’s existing workers the choice of taking on more responsibility in exchange for a slight pay increase but also the promise of outsized bonuses when the store’s bottom line improved. Each month the employees of every store were given a two-page report that detailed ABC’s and the individual store’s current profit-and-loss and expenses (sales, cost of goods sold, rent, vehicle repair costs, etc.) compared with the previous year as well as its ranking for each cost category vis-a-vis the other stores in the ABC network.

This “open book” management approach enabled even the lowliest ABC delivery driver to see that because ABC’s profit margin on an order of shingles was slim a simple two-hour delay delivering the shingles wiped out the store’s profit from the order. A crucial component of Hendricks’s monthly report was the estimate of how much of a bonus (if any) the store had earned for the year. At the end of the year, each store manager received 40 percent of the store’s bonus (sometimes amounting to $80,000), with the remainder divvied up among the store’s employees at the manager’s discretion. For employees making $18,000 to $20,000 a year this bonus could run an additional $3,000 to $10,000 a year. With such incentives dangling before them, by 1991 ABC’s employees were generating a prodigious $450,000 a year in sales, more than twice the industry average.

“A Huge Market Share”: 1990-97

By early 1990 ABC’s work force had grown to 850, its sales had climbed to $280 million, and it had yet to experience a year in which sales grew less than 25 percent. The recession in the northeast presented Hendricks with new buying opportunities in that region, and by the end of 1991 ABC had expanded to 92 stores in a network that now reached coast to coast. By September 1992 sales had vaulted to $750 million and Hendricks announced that, in keeping with the reclamation impulse that fueled ABC’s sales, its new corporate office building would be erected in an abandoned manufacturing plant in downtown Beloit. Meanwhile, Hendricks’s wife Diane had built an insurance company, American Patriot Insurance, that though initially designed only to handle the workers’ compensation cases of ABC and its customers was on its way to outpacing even ABC in sales. By 1993 ABC was the twelfth largest private company in Wisconsin and by 1995 had climbed to 295 on Forbes magazine’s “Private 500” ranking of American businesses.

In 1995 Hendricks began to strengthen ABC’s position as the largest roofing and siding supplier in the United States by moving into manufacturing. Hendricks’s purchase of Mule-Hide Products Co., a maker of commercial roofing (founded in 1906), and Amcraft Building Products Co., Inc., a manufacturer of vinyl siding and windows, symbolized his desire to increase ABC Supply’s market share by “vertically integrating” it. For most companies, vertical integration meant entering each stage of their products’ life cycle—from raw materials to distribution—by branching out from the products’ manufacture backward into raw materials production, for example, or forward into marketing and distribution. But in what Hendricks joked was “a reverse philosophy of integrating,” ABC had grown in the opposite direction: it had made sure it had its customers first by amassing a huge network of local stores and only then created the sophisticated distribution network to tie them together. Finally, by moving into manufacture by acquiring roofing accessory manufacturers ABC also could begin stocking its stores with its own merchandise.

In April 1996, ABC acquired R. and W. Hawaii Wholesale, Inc., a large roofing and waterproofing material supplier, and by the end of the year could boast a work force of 2,100 employees and sales of $762 million. ABC now owned 25 percent of the building products industry and had the infrastructure to prove it: it had a fleet of 2,500 delivery vehicles alone in 1997 and in 1996 supplied enough materials to shingle 500,000 U.S. homes; side another two million; cover eight million square feet of flat roofs; and install 60 million square feet of soffit, gutter, downspout, and fascia. Moreover, it had nearly doubled in size since 1990. In 1996, Hendricks spoke optimistically of breaking the $100 billion sales mark in 1997 and then reaching $2 billion by the end of the century. “If you think about it,” Hendricks told the Beloit Daily News, “every roof, every house and business and wall in the country, we’ll have been involved with 26 or 27 percent of those at that point [1997]. That’s a huge market share.”

In 1995 Hendricks hired Jeff Stentz to head ABC’s acquisitions program. Stentz convinced Hendricks to change his focus from buying up troubled suppliers at a discount to paying more for healthier businesses that could offer ABC immediate returns. In 1996 ABC acquired some 15 companies, adding $100 million to its sales. Roughly seven more acquisitions—adding another $150 million—were planned for 1997. In June, ABC acquired Viking Building Products, a Connecticut-based distributor of home building supplies with sales of $85 million. As the second largest building supply chain in the northeast, Viking’s 12 stores brought ABC’s network to 210 locations in 41 states, comprising some 3.5 million square feet of inventory.

By the fall Hendricks had announced an aggressive new expansion program that would grow ABC at the rate of one new store a week. In October it purchased five building supply companies from Champ Industries, Inc. that added 31 stores in Texas, California, Oklahoma, Kansas, and Missouri and $198 million in sales to the ABC network.

Although ABC remained a staunchly family-run affair (five of Hendricks’s children worked for the company in addition to his wife), it committed itself to adopting the new technologies and product lines that promised to protect its industry leadership. The computer technology that Hendricks had once decried as too expensive now managed not only ABC’s administrative, bookkeeping, and inventory functions but in 1997 grew to include a home page on the World Wide Web and a database that integrated the inventories of all the stores in a particular region. Moreover, Hendricks began monitoring possible applications for satellite technology at ABC and began introducing videoconferencing in each of his stores so managers could help solve each other’s problems.

The residential roofing products that had once dominated ABC’s sales were now giving way to a new emphasis on increasing revenues from siding, windows, and commercial roofing as well as new product lines like insulation, building tools, and accessories. “Our goal,” ABC’s director of purchasing told Construction News in 1996, “is to be able to frame the entire exterior portion of the house.” The inner city building remodeler who had once been ABC’s bread and butter would now be joined by architects, plant engineers, building maintenance technicians—whoever needed roofing and siding for a structure, regardless of type.

By 1997 ABC was also offering customers new value-added services like free next morning deliveries, on-site product training seminars, customized catalogs, electronic ordering, and usage and trend analysis reports. Now in his late 50s, founder Ken Hendricks was still fighting the impulse to manage every aspect of the firm’s operations and began looking for a chief operating officer to free him to plan for the company’s long-term future. “Somebody in the company has to think about what this industry is going to look like in five years and get ahead of that,” he told an interviewer. “I like to say we’re the biggest small company in America. . . . We still pay attention to the details, and we know what it takes to do the job.”