When Moore Is Too much
With more than 8000 products, the company provides one-stop shopping for almost 100,000 customers. Using four distribution centers it provides two-day service almost anywhere in the United States, allowing the company to penetrate up to 45 percent in key markets, according to company estimates.
At the end of 1997, Moore Medical realized that it was hemorrhaging because it was trying to compete in the wholesale drug market where it suffered from narrow profit margins. What did the company do? It dropped that business, which represented 68 percent of its revenues. The result is that while overall revenues dropped from $288.5 million in 1997 to $120.8 million in 1998 (FY December), net income climbed from a loss of $4.7 million to an income of $4.5 million.
In addition, effective Jan. 1, MMD realigned executive management by establishing a three-person office of the president, placing all CEO responsibilities with its chief finance, marketing and operations officers. MMD also made staff changes to focus on nonhospital practitioners, which resulted in staff reductions of about 120 people. MMD also expanded its e-commerce presence through online marketing and sale of the full line of its products at its Web site (www.mooremedical.com).
The significant positive cash flows generated from the restructuring, combined with the positive cash flows generated from ongoing operations, allowed MMD to retire all its debt outstanding in first quarter 1998. While many would applaud such a courageous decision, when observed over a two year span, Wall Street has neither endorsed nor penalized MMD for this decision. At the end of 1997 the share price was $11.12; at the end of 1998 it was $13.43 (an increase of 20.8 percent, which matches the overall market gain); and now it is down to $10.56 at end of May. Actually lower than when it was in trouble.
Products and markets. Most manufacturers of medical products do not sell directly to nonhospital practitioners because of the small quantities purchased and inefficiencies of calling on thousands of practitioners. However, most practitioners prefer the efficiencies of purchasing supplies from one or a few sources rather than from hundreds of manufacturers. Distributors such as MMD fill the void by selling a wide range of products from many manufacturers and achieve scale efficiencies by having a large customer base.
The overall market for healthcare products at nonhospital sites has been growing because of an aging population, increases in the amount and variety of products available for diagnosis and treatment and an increase in healthcare at nonhospital sites because of cost containment pressures. Medicare and Medicaid, HMOs, managed-care facilities and other insurance programs limit funding for healthcare products. Therefore, physicians band into groups and even into large practice organizations to economize on business management and other services. MMD markets to existing and prospective customers through catalogs and direct mail, outbound telesales calls and a small number of national account field sales representatives.
Competitors consist of large national distributors, regional distributors and local distributors. Some use primarily direct marketing methods, like Moore, and others make sales and deliveries to their customers with a dedicated sales force and fleet of delivery vehicles. Five large national distributors account for approximately 40 percent of the sales volume of healthcare supplies to the physician market. MMD ranks sixth.
MMD's point of distinction lies in its combination of a broad product line, delivery speed, price and order completion rates. As more healthcare practices consolidate into larger, more geographically spread organizations, Moore expects that there will be a growing number of large customers that will require service at many locations in numerous states and/or regions of the country but wanting to deal with a single source.
Catalog operations. Catalogs and other product literature are designed inhouse. Mailings are made to current customers based on buying patterns and to prospective customers from rented mailing lists. MMD does no significant trade advertising. It provides for electronic ordering through both a CD-ROM catalog and its Web site. Phone, fax, electronic, and mail orders are all processed by customer service representatives at a single call center. Representatives need a fair amount of technical expertise and are trained on product features, to respond to customer inquiries. In addition, outbound telesales representatives specialize in one or more customer groups and seek to promote sales and establish new customers. A small field sales force builds relationships and negotiates terms with larger customers in the industrial market.
Mail volume runs at about 2.2 million catalogs per year. The average order size is above $200 and returns are negligible.
Plans for growth. The company is focusing on growth in the next several years. First, the company is very much a niche operation servicing a variety of groups in its marketplace. To grow in this diverse non-hospital marketplace, it has developed targeted strategies for each group. Catalogs are central to the strategy, with a small sales force standing ready to help with larger customers.
Second, MMD plans to make a "significant investment" in its Web site this year. The site now permits direct ordering, which is convenient for customers and offers significant cost savings for Moore. Third, MMD is examining acquisition prospects. They view themselves as a distribution company with inventory and no debt, and thus can afford to acquire companies. The most likely acquisitions are regional distributors.
Outlook. MMD appears to be a case of "less is more." Concentrating on the higher-profit segment of its business it cut revenues in half, but made the company profitable. This is a good example of examining your businesses and pursuing only the winners, no matter what the volume. We believe that for MMD the move was correct, and we expect to see the company grow again to its former size, but this time much more
Bill Dean is president of W.A. Dean & Associates, San Francisco, which publishes monthly The Dean Report. His e-mail address is firstname.lastname@example.org.