adding value is central to the P&H growth strategy. Julian Hunt reports When Christopher Adams talks about the future, it's well worth listening to what he has to say, particularly when the chairman of Britain's biggest privately owned company ­ and the country's biggest delivered grocery wholesaler ­ is explaining the reasons for, and the implications of, Palmer & Harvey McLane's £172m management buyout. That buyout was completed in February of this year when P&H found itself, coincidentally, transformed into a Plc. Not listed on the stock market, mark you; it is still proudly independent. But by virtue of the fact the buyout has resulted in the company having a shareholder base of more than 1,500 people, it has now achieved Plc status. Ironic, really, given that the biggest criticism often made against publicly quoted Plcs is that they cannot afford the luxury of long-term planning. Not something you could accuse P&H of. It's almost 10 years ago that the company began the process of transforming itself from a niche wholesaler of tobacco and confectionery into a full service delivered wholesaler. Today the business is serving 10,000 independent retailers, offering them a choice of 9,000 product lines. It runs four symbol groups ­ Mace, Mace Express, Your Store and Supershop. And it offers distribution services to multiple grocers and multiple convenience chains alike. There's more. P&H generates sales of £3.2bn a year ­ accounting for about half the UK's entire delivered wholesale sector. Its business grew last year by 7.8% compared with the 3.3% growth that IGD reckons the wholesale sector enjoyed or the 6.5% growth experienced by the delivered wholesale element of that industry. Impressive stuff, especially when you remember that in 1992, P&H was still serving mostly CTNs and smaller forecourts. But back then the management team recognised that massive changes were afoot in the market. "We took the decision in the early 1990s as to where P&H would be in five to 10 years' time," says Adams. "We recognised this niche market would cease to exist. We needed to be a full range convenience supplier if we were to be a player in the wholesaling sector of the 21st century." The transformation was not easy, as Adams readily admits, pointing to the disruption caused in the aftermath of the Booker Wholesale Foods deal or the money spent putting P&H's frozen and chilled operation on "even keel". He adds: "For the past year, P&H has had a proper platform on which to develop. But the decisions we were taking in 1992 only really came to reality in 1999. And during that time it was a painful process." The route from 1992 to 2002 has been marked by a series of acquisitions that saw P&H buy Snowking (in 1995), Booker Wholesale Foods (in 1999), and Winerite (also in 1999). It has also been busy building up complementary businesses through the acquisitions of YP Electronics and the Snacksdirect van sales operation. All of which has provided P&H with a solid base on which it is now growing says Adams. Which begs an obvious question: if that's the case, why did the previous shareholders wish to sell? The answer lies partly in the fact that the bulk of P&H's shares were held by those involved in the previous buyout in 1988. But only a handful were still actively involved in the business ­ Adams among them. "As time went on they felt less close to the business. But businesses change. P&H was getting more aggressive in its acquisitions strategy. And while the Booker Wholesale Foods deal was understood by our shareholders, YP and Winerite were less easy for them to get their heads around ­ although they were supportive." The company was in any case due to discuss with shareholders the future ownership of the business in 2001, but throughout 2000 it received a number of approaches, mainly from private equity groups. That focused minds and led eventually to this year's management buyout (see box). Adams says the deal works on a number of fronts. First, it has allowed P&H to retain its independent status while clearly not leaving the business over-stretched. It has also allowed the company to increase its employee shareholders from 33 to more than 1,000 ­ about one-quarter of its total staff ­ giving it a wide shareholder base of 1,500. That's hugely important for P&H. "We feel direct ownership gives people a huge boost," says Adams. "They feel that this company is something they own ­ albeit partly ­ and if the company is successful they will get a slice of the wealth creation that brings. And that is motivational." But before the new shareholders start receiving dividends, the company has to pay back its £136m of debt. "We have a 15-year repayment plan on the totality," says Adams. "But that's not the aspiration ­ that's the safety valve. Our immediate aim following the MBO is to repay £30m of bank debt in year one." P&H plans to do that by increasing net revenues through a combination of growing sales and taking what Adams calls the "screwdriver approach" to costs and cash generation ­ essentially tightening up anything in the business that is loose. For starters the company has taken a close look at its property portfolio as part of a general "financial re-engineering" of its business, and has generated £10m through a sale and leaseback deal on two facilities. Adams also points out that £300m of cash flows in and out of P&H each month and says there are clear areas for savings here too. At the same time, P&H is increasing sales on all fronts. Its business with the multiple operators ­ such as Shell, Forbuoys and Sainsbury ­ is growing, as are its symbol group operations which have recruited 200 stores in the past year. However, it's in the independent sector that P&H is seeing positive signs of life. "Last year there seems to have been an arrest in the decline of the independent retail sector primarily as a result of an increase in tobacco sales to that sector, which is having a pull-through impact in terms of the non tobacco sector right across the board," says Adams He reckons that's down to Customs and its efforts to cut down the amount of smuggled tobacco getting into the country. All of which is encouraging news not just for P&H but the industry as a whole. Adams and his colleagues are also looking beyond this year, as they draw up the phase two strategy for the business. "We are almost in the middle of formulating our plans to look at all aspects of our business in more fundamental depth in terms of where we want to find ourselves in three years' time," says Adams. "We will be looking for a growth strategy in both multiple and independent retail trades and we believe we can achieve that through many of the things we have been doing over the last few years." In short it's all about adding value, says Adams. Witness things such as YP Electronics which has seen its sales of EPoS equipment growing by 50% year-on-year, albeit from a low base. Another star performer for the business is its Snacksdirect van sales operation. "Our sales within independent retailers were up 40% last year ­ which in the wholesale trade is quite staggering. I would not have believed we could achieve growth like that and it is continuing," says Adams. P&H is also working with suppliers to provide the sort of real time information that can help build sales. And it is in dialogue with suppliers about the implications of factory gate pricing. At the same time, the company is investing the infrastructure it needs if it is to hit the internal growth targets now being set by the business. "Wholesaling will remain a very low margin operation and you can't go throwing money around like it is confetti," says Adams. He points to the Snowking operation which since 1995 has opened new chilled and frozen depots in Coventry and Fareham with a third due to open in Aylesford this month. "These are major investments and you can't do that every five minutes. But as our chilled and frozen operation grows we would like to see the number of state of the art centres increase from three to five. But it will take us three years to achieve that." Ambient volumes are also growing apace, so P&H is investing here too, most notably by moving into a 200,000 sq ft operation in Dunfermline next month. Another multi-million pound facility. But again, it takes two to three years to reap the rewards of such investments. Little wonder Adams is at pains to stress that "you can't do these things every five minutes no matter how tempting it may be". That partly explains why acquisitions are off the agenda at P&H. But that is also partly to do with the fact Adams believes that the company has built a solid platform for the future and feels organic growth is key. Further acquisitions would be a distraction. For now the focus is very much on ensuring the existing P&H business continues to outperform the sector. n {{COVER FEATURE }}