Frontier -- Cover Story
Big corporations are actively helping small, minority-owned suppliers join forces
Woodrow Hall, 49, doesn't take anything he has achieved for granted--not becoming one of the first black engineers at Kaiser Aluminum Corp. (KLU) in the 1970s, not building and managing a packaging plant in the early 1990s, and certainly not surviving in this economic environment as a minority owner of a small business.
That's why Hall--a tall and imposing man with a linebacker's build and the confidence of a movie star--has been working 16 hours a day, seven days a week, trying to make his plastic-packaging business, Film Fabricators Inc., a success. The Atlanta company, with 140 employees and two plants, has grown to $25 million in sales since 1993--with over half of that business making plastic wrap for Procter & Gamble Co. (PG) products such as Charmin toilet paper and Pampers diapers. (In fact, it was P&G that encouraged Hall to buy his first plant.) But growth has stalled. As Hall knows all too well, big corporations are reducing the number of suppliers they use in favor of bigger, better-capitalized players, regardless of race. Unless Hall expands Film Fabricators' capabilities and beefs up its research and development, he says he won't have a very bright future with P&G or anyone else.
Meanwhile, in Memphis, another black entrepreneur, Robert Johnson, 65, owns and operates Johnson-Bryce Corp., a $25 million manufacturer and printer of plastic bags that employs 80 people. Johnson moves slowly and speaks quietly--as low-key and unassuming as Hall is larger than life.
Despite their differences, Hall and Johnson have much in common. Like Hall, Johnson rose through the ranks of Corporate America. He was a vice-president for merchandising--and the highest-ranking black executive--at Sears, Roebuck & Co. (S) when he retired in 1990. Like Hall, he bought a packaging plant with the support of a big company--in his case, Frito-Lay Co. The snackmaker even helped him form a joint venture with white-owned Bryce Corp. to make packaging for Dorito's and Lay's potato chips so he could have access to cutting-edge research and technology. Still, his little company's growth is plateauing in a low-margin, cutthroat industry. And, like Hall, Johnson is overly dependent on one customer.
Until two years ago, Hall and Johnson had never met. But any day now, they'll be closing a deal to merge their companies. It may seem like a marriage made in packaging heaven, but it's actually the result of corporate, not divine, intervention. The matchmaker? Procter & Gamble, which announced the merger last October in New Orleans at the annual convention of the National Minority Supplier Development Council, a trade group that promotes minority contracting. To make the deal happen, P&G arranged an expense-paid trip for Hall and Johnson to a luxury resort near Atlanta. It even offered a fat dowry--a $100 million, three-year contract to produce packaging for five P&G brands. "A company like Film Fabricators, one of the smallest in their industry, was just not going to be able to keep up," says Howard D. Elliott, head of minority-supplier development for P&G, who first encouraged Hall to contact Johnson.
Increasingly, big corporations like P&G, concerned about reaching their federal targets for contracting business to minority companies and eager to be good corporate citizens--are encouraging the growth and development of minority suppliers, particularly in manufacturing. In some cases, corporations are introducing potential partners to promote joint ventures or helping a minority-owned company buy a plant from a nonminority supplier (table). Often, they're promising lucrative contracts to jump-start the deals.
Experts say the merger of Film Fabricators and Johnson-Bryce takes corporate involvement to a new level. This may well be the first time a big corporation has actually led two small minority businesses to the altar for a full-fledged merger. Harriet R. Michel, president of the National Minority Supplier Development Council, says minority companies "have been told so often they have to merge or do joint ventures, and nobody's given them a playbook." This deal, she says, "is where everyone needs to go--especially if the smallest of the small are going to survive."
Even so, arranged marriages are risky. In the long run, will they result in businesses that are less dependent on a single customer or affirmative-action programs? Will they be financially sound? Those aren't idle questions. When the deal closes, Hall will own a 51% stake in the new 220-employee entity, dubbed the Hall-Bryce Alliance. Hall will buy out Johnson, who will retire after a year. Bryce Corp. will stay on as Hall's partner. The merger will enable Hall to increase dramatically the variety and amount of packaging his company can pump out for P&G. He'll add on new print processes and more than double his annual revenues, to $60 million. But despite this great upside, he'll also be saddled with $20 million to $30 million in debt.BUSINESS CREATION
As minority entrepreneurs in manufacturing, Hall and Johnson are still somewhat rare. To be sure, companies owned by minorities are gaining ground (chart). But they control just 12% of the nation's businesses, even though all minorities together represent 28% of the U.S. population. And the vast majority of these companies are still small and under-capitalized, capturing at most $2 billion of the $85 billion in venture capital handed out each year. Why so little? Overt racism undoubtedly plays a role, but there's also a subtle interplay between race and equity. Venture capitalists demand a big chunk of stock in return for their financing--and that could jeopardize a minority company's classification as a minority-owned business. The designation is crucial when little companies bid directly for federal business, and it's also important to big companies like P&G, which must demonstrate to the Small Business Administration that they are meeting their annual targets for minority participation in their contracts. Under old guidelines from the National Minority Supplier Development Council--whose standards are widely accepted by private industry and often by government--minorities needed to hold 51% of the equity for a company to be considered minority-owned. (Recently, the council passed a still-controversial "growth initiative" that allows firms to count as minority-owned with just a 30% equity stake.)
To preserve their status, many minority-owned companies must rely on debt financing--a strategy that's both risky to execute and a drag on profits, says Steven Rogers, who teaches entrepreneurial finance at the Kellogg Graduate School of Management at Northwestern University. "That makes it tough to grow into a huge company because you're so focused on servicing debt," he says. "A company with very thin margins needs to miss just one payment to really start floundering."
When it comes to winning contracts, minority-owned businesses also lag behind woefully, garnering just 3.4% of supply dollars from corporate purchasing, according to a 2000 survey by the Center for Advanced Purchasing Studies. Out of convenience and habit, purchasing managers are more likely to outsource to people they know, notes Film Fabricators board member Andrew Young, ex-mayor of Atlanta and U.S. ambassador to the U.N. Progress has been slow. Michel says that 10 years ago, 2% to 3% of corporate-purchasing dollars went to minority businesses. "We'd like to see the needle move a little more aggressively," she says.
Corporations say it's difficult to find minority suppliers big enough to handle their contracts, especially in capital-intensive industries. That's where most of the corporate-sponsored business creation has taken place. Bank of America (BAC) says it has helped create or expand six minority-owned companies since 1992, while Ford Motor Co.'s (F) director of minority-supplier development, Ray Jensen, says his company plays midwife to three or four new companies each year. Jethro Joseph, DaimlerChrysler's (DCX) head of special supplier relations, says his company doesn't "force marriages" because of the risk the mergers will tank, but instead "actively supports minorities who are looking to buy majority companies."
In some high-tech industries, such as telecommunications, minority entrepreneurs are more plentiful, thanks to the exodus of telecom execs of all races to startups. But corporations still have to work to bring them into the loop, says Jeannie H. Diefenderfer, senior vice-president for corporate sourcing at Verizon Communications (VZ). "We make sure we don't send out the request for proposals to the same old list. You have to have a process where you scrub the list, pay attention, and make sure you include newcomers."
Granted, there is a PR angle: Companies that contract minority suppliers can burnish their public images. But there are social goals as well. Research by Timothy Bates at Wayne State University and others shows that minority-owned businesses, with a total workforce of about 4 million, tend to employ a higher percentage of minority workers than majority-owned companies do. That's good for business: "If we buy from minority suppliers, they will hire minority employees, who will have the wherewithal to buy our products," says DaimlerChrysler's Joseph. "We look at it as a never-ending wheel."COME TOGETHER
An engineer by training, "Woody" Hall would probably have never become an entrepreneur if it weren't for P&G. In 1990, he was recruited to be general manager of an Albany (Ga.) packaging plant serving P&G. Hall did so well getting the plant started and meeting production and quality goals that, in '93, P&G urged him to start his own business. Before long, Hall was leveraging a $15 million contract from P&G to raise $4 million to buy Film Fabricators, a little Georgia company that fashioned sheets of plastic film into bags. To boost his production capabilities, Hall later bought a Marengo (Ill.) plant that manufactures and prints film. To buy it, Hall raised $35 million by selling a stake in his company to Miami-based H.I.G. Capital. Then Hall could make plastic film and do high-resolution rotogravure printing, but he still couldn't offer the cheaper flexographic printing, which has lower-resolution.
By 1998, P&G, which accounted for roughly 80% of Hall's sales, was concerned that Film Fabricators couldn't provide the top-notch technical capabilities or the research and development that it needed. But it didn't want to lose a good minority supplier, either. P&G's Elliott suggested that Hall call Robert Johnson, who had proved equally successful in handling large orders for Frito-Lay. By combining the two companies, he suggested, Film Fabricators and Johnson-Bryce could each grow stronger, enhancing their chances of competing against bigger, better-financed players. When Hall first called, Johnson admits he was "probably rather blase." Even so, Johnson was curious enough to hear Hall out. They met several times, first at Hall's Georgia plant, then at Johnson's Memphis plant. "Many times during the process, I thought it was probably not a good thing," says Johnson. "You know what your own problems are, but you don't know exactly what theirs are."
Finally, in September, 1999, the two CEOs took a big step--they agreed to spend a few days together. P&G picked up the tab and arranged the whole thing. P&G's Elliott was there to facilitate. So was Gladys Hankins, a human-relations specialist with P&G. The venue: Chateau Elan in Brazelton, Ga., a posh resort with a world-famous golf course. As it turned out, the executives never got to enjoy the amenities. "We were in a conference room working with a facilitator for two-and-a-half days straight," recalls Hall. "We had meals together. It was a working, bonding type of effort."
And not an entirely smooth one. "We found there were some major differences," recalls Hall, whose strength, observers say, is as a salesman and marketer. For starters, Johnson really wanted to retire, but it was clear his management expertise would be needed, at least in the beginning. Finally, they agreed that Johnson could retire after a one-year transition period. Another problem was that Film Fabricators already had 50% of P&G's business in Pampers packaging, and P&G wasn't going to entrust more than that to a single supplier. That meant other product lines had to come on board. In May, 2000, P&G finally came up with a $100 million contract for Hall and Johnson, pulling together business from Pampers, Luvs, Bounty, Charmin, and Always. That clinched the deal.
Once finalized, the merger will catapult Hall's Film Fabricators from the ranks of P&G's smallest, or Tier 3, contractors, into the midsize Tier 2 group. To join the largest contractors in Tier 1, Hall will have to earn $100 million to $200 million in annual revenues and be able to handle global accounts. Hall has big expectations. He thinks revenues can double within five years, and he is already planning to add 15 jobs and $3 million in equipment to Johnson's Memphis plant. "Now, we're playing in the real game," says Hall. "We've got the process capability and the scale to do that." He also thinks he can attract other big customers who will view his contracts with P&G and Frito-Lay as signs of stability.
Hall hopes to know in five years if the merger is a success. Assuming all goes well, he'll have shed much of the debt used to buy Johnson-Bryce, and his customers will consider him a strategic partner. In that case, look for other big companies to start playing matchmaker, too.Return to top