Profits from polyester

King of Prussia, Pa. (FSB Magazine) -- At 15, when most boys are dreaming of becoming racecar drivers or shortstops, Patrick Methven was cutting grass and unloading trucks for a firm that supplied linens to restaurants and hotels. By 23 he was general manager. Six years later, in 2002, he started his own company, Pinnacle Textile Industries (pinnacletextile.com), in King of Prussia, Pa. Then business really took off.

After four years of double-digit growth, Methven has clients all over the country. He expects 2007 sales of $15 million and earnings in the low seven figures. There's turmoil - and opportunity - in his industry these days. A big competitor recently sought Chapter 11 bankruptcy protection. Methven hopes to snag some new customers in the fallout, especially in the booming West. But Methven also has concerns. The Internet has made it much easier for hotels and restaurants to shop around for cheap linens. Foreign competitors are offering lower prices and making inroads in the market. Most of Pinnacle's sales are to distributors; Methven would like to cut some of those middlemen out of the equation and sell directly to his biggest customers, but he's worried about alienating the distributors who handle his smaller accounts.

"This is a quirky industry," says Methven, 38. Supplying the hospitality industry requires two key skills. One is absolute reliability. "If the buttons fall off a shipment of chef's coats," he says, "you send another box without question." Second, a good supplier sniffs the prevailing winds and stocks his warehouse with whatever he thinks customers will want tomorrow. Chartreuse dinner napkins for summer brunches? No problem. Chef's pants with a 72-inch waist? They're on their way.

To grow, Methven will probably have to invest substantially in technology. Can he afford it? And more to the point, what kind of technology should he buy?

We enlisted three top business experts to help Methven plot a sound course for Pinnacle. First at bat is Lawrence Gelburd, co-founder of a successful building-controls company and a lecturer at the University of Pennsylvania's Wharton School. Gelburd arrives early at Pinnacle's unglamorous offices in an industrial park at the end of a road full of potholes. Methven's sanctum is decorated with family photos, a putting machine, and a couple of golf clubs. After listening carefully to his description of his business issues, Gelburd urges him to cut out the middlemen and sell directly to the biggest customers. Methven is all for it. He mentions that Pinnacle recently lost a big contract with a restaurant chain because his distributor wouldn't come down on the price. "I had no say in the negotiations," he says ruefully. "I can't let that happen anymore."

What about distributors who serve smaller customers? "Buy their allegiance," Gelburd snaps. "Give them a percentage of direct sales to bigger customers in their territory, then decide whether or not to phase out the payments over time." Methven should also propose a joint-marketing deal with key distributors, he says, in part to have a say in pricing decisions.

Methven confesses that he's been frustrated in his efforts to lower costs by using cheaper polyester fabric from foreign mills. American-made polyester for table linens is 30% more expensive, but some buyers think the quality is better. Methven disagrees. "I have test results saying mine is better," he says. "I want to say that." But he fears a lawsuit by a powerful polyester manufacturer in the U.S. Gelburd's solution: Enlist customers to test the quality of linens made with foreign polyester. If they approve, use their comments in marketing campaigns. Methven is intrigued.

For technology advice, we brought in Ashleigh Barnett, 46, a native of South Africa who runs Advance Design Interactive, a web-design company in Fort Washington, Pa. Barnett listens patiently to Methven's presentation on the linens industry. But when the entrepreneur mentions that he's thinking of investing in automated ordering systems for his bigger clients, she starts grilling him. Why does he need to spend money on electronic data interchange software, or EDI? Some big customers insist that suppliers use EDI, he explains. Methven has already spent $25,000 to install an EDI system for one of them. Should he mount a big push to get all his customers online?

Barnett pushes Methven in a different direction. Many of his smaller customers are not particularly computer-savvy. They still prefer to order by fax or phone and are likely to be overwhelmed by the complexity of EDI. Why not set up a simpler web-based ordering system for those clients? Pinnacle could also tap into the power of search-term advertising services from Google, Yahoo, and their ilk. By buying key terms such as "restaurant napkins," she points out, Methven could attract the notice of linens buyers all over the U.S.

Methven is skeptical. "I don't have to be on Google," he protests. "Every linen-rental company knows me." Barnett politely but firmly disagrees. "Companies change purchasing managers, and they're getting younger all the time," she retorts in her lilting South African accent. "Younger buyers are more likely to order online." Methven concedes the point. But he worries that search-advertising fees could burn up his marketing budget quickly. Barnett advises him to set a daily limit on pay-per-click spending. "Once you've used up your daily budget, you'll disappear from Google for the rest of the day."

Pinnacle can create a custom online-marketing program for about $30,000, she continues. A more sophisticated website will allow the company to direct customers to appropriate distributors. On its home page, Pinnacle could query potential customers on their size and requirements. With that data in hand, the website could steer big customers to an in-house sales team; smaller customers could be channeled to regional distributors. (Caveat: Pinnacle must follow up on all web inquiries to make sure distributors handle them properly.) Pinnacle could even create private sites for important customers. If tech-phobic distributors balk at new technology, she adds, lure them online with enticements such as automated invoicing or web-based order tracking.

To help Pinnacle map out an expansion plan, we enlisted Dwight Carey, 65, the president of American Productivity Group (apgllc.com) in Bensalem, Pa., which sells industrial robots, and a professor at Temple University's Fox School of Business. Carey brings a briefcase crammed with research data. (Among other things, he has analyzed the intensity of linens competition in key hospitality markets such as Las Vegas.) Methven tells him Pinnacle's stronghold is in the Northeast and the upper Midwest, regions where it has a market share of about 25%. A Houston warehouse gives the company a foothold in the South and Southwest. But Methven is eager to supply the restaurant chains and hotels of California and Nevada. Big buyers there prefer to bypass distributors and deal directly with suppliers, which means more profits for Pinnacle. Problem is, Methven is caught in a classic catch-22. He doesn't want to pitch new customers until he has a warehouse in the region, because he knows customers will demand quick delivery on their orders. On the other hand, he's reluctant to buy or even lease a warehouse until he has a few orders in hand.

Carey cuts Methven off. "Please don't take this the wrong way," he says, leaning forward. "But what do you do all day?" Unruffled, Methven replies that he discusses orders with foreign mills and sets production levels. From time to time he attends conferences, and sometimes he visits major customers. Carey shakes his head and offers this blunt assessment: "You're wasting time." Turn the detail work over to an administrative assistant, he says, and become the company's über-salesman. "Don't let distributors do it," he cautions. "A CEO sells better than anyone," adds Carey. "Be the ground-breaker. Get the account. The client appreciates a senior officer who takes the time to sell. And he'll know whose house to call at 3 A.M. when there's a big problem."

Methven is intrigued, albeit taken aback. "I've always been the inside guy," he says. But he warms to the idea, even boasting about the time he played golf with a big prospect, took him out to dinner, and made a sale. On the other hand, Methven worries aloud about spending time on the road away from his family. "Once you've gotten things going, you can have a salesman take over," Carey reassures him.

METHVEN IS THINKING OF buying a 51% stake in some of his key distribution companies while keeping the owners in place to run the business. Good strategy, Carey says, bad execution. Buy 100%, nothing less, he advises. "I don't trust your distributors to help you grow Pinnacle," Carey explains. "People get old. They want to play golf. They won't have the energy or the inclination to make five sales calls a day after you buy them out." But Carey also urges caution. "Buy only the linens business," he warns. "Don't get into selling kitchen knives and golf shoes and whatever else is in their catalog."

Move into the new territories and start acquiring the important distributors, Carey tells Methven. "Eventually you'll look at a map and see all the sites you control. You'll be the biggest dog around." We'll keep an eye on Patrick Methven and Pinnacle. We suspect all those other hounds will be howling soon.

THE EXPERTS

ASHLEIGH BARNETT is president of web-design firm Advance Design Interactive in Fort Washington, Pa. (advancewebdesign.com)

DWIGHT CAREY teaches strategic management at Temple University's Fox School of Business. (sbm.temple.edu)

LAWRENCE GELBURD teaches entrepreneurship at the University of Pennsylvania's Wharton School. (wharton.upenn.edu)

YOUR TURN

Help Patrick Methven craft an expansion strategy for his linen-supply company.

COMPANY: Pinnacle Textile Industries (pinnacletextile.com)

LOCATION: King of Prussia, Pa.

2006 SALES: $13 million

BUSINESS: Supplies linens and chef's clothing to hotels and restaurants.

CHALLENGES: Founded five years ago, Pinnacle has had rapid growth in the East and Midwest. Now CEO Methven wants to expand into California and Nevada. One consultant suggested automated ordering and tracking features for his website. Another told him to bypass distributors to reach big clients.

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