Achieving growth by watching the details

Five Star Gas and Gear CEO Kirk Merica believes in attracting and inspiring the best people for his team.

The executive planning committee reviews possible sites for a new location. (l to r) Larry Boss, puchasing manager; Al Wilken, sales manager; Kirk Merica, CEO; Roy Renouf, controller; Brian Renouf, operations manager.

Filler George Palacios Jr. tests the manifold equipment at the firm's new pumping facility in Rancho Cucamonga, Calif.

CEO Kirk Merica has led Five Star Gas and Gear, Whittier, Calif., since its doors opened 10 years ago. Under his leadership the firm closed out 1999 with sales at $6.5 million while this year it projects nearly $19 million.

Today, its 52 employees service a tough territory that spans Los Angeles, Orange, Riverside, San Bernardino, and San Diego counties from five locations. Using 18 company-owned vehicles it distributes industrial and specialty gases, welding and cutting equipment and accessories, filler metals, safety equipment, and industrial tools and supplies.

"We mostly pursue small to mid-sized accounts such as fab shops working for the automotive aftermarket and recreational vehicle industries," says Merica, "and we also maintain a service department for warranty repair for all major brands of welding and cutting equipment."

Merica recently agreed to share some of his key concepts for a growth-oriented distributorship.

Maintain a professional image
A lot of decisions are based on perception. Five Star invested in a fleet of bright red trucks with polished aluminum wheels and highly visible stainless steel signs. "We wanted our trucks to be easy to see and remember. People associate clean looking equipment with a well-run business. We not only garnered a lot of positive feedback from regular customers, we gained new accounts just by driving down the street. As a bonus, it's great to hear accolades from the California highway patrol.

Go for the margin
Specialty gases are a rapidly growing segment and offer the highest margins. Five Star thinks it warrants investment. "We hired a second spec gas rep this week and we maintain our own specialty gas lab to assure customers regarding purity and accuracy," says Merica.

Customers include testing laboratories, sheetmetal jobshops with lasers, and anyone performing instrument calibration.

Although the firm does sell some medical gas, it tries to avoid those accounts. "They have the lowest margins, the greatest liability, and require the most record keeping," concedes Merica.

Look for the next big thing
According to Merica, laser gas accounts are growing by 15% to 20%/yr. "Even the mom and pop shops are starting to purchase $800 lasers that gobble up high purity oxygen and nitrogen bringing healthy margins."

Look for the hot button sales angle
As energy costs rise customers increasingly need to replace older units that are more power hungry and generally newer more energy-efficient equipment like inverters. Energy savings is another benefit distributors can mention.

Take good care of good people
It pays to attract and retain good people. "We pay our people more than our competition, provide training, motivation, and fringe benefits such as rewards for 100% attendance, and bonuses for good driving records," says Merica.

In return Five Star's employees deliver higher levels of performance. "Our annual sales per employee numbers bears that out. We typically run 40% higher than most distributors listed in GAWDA's PARR report," confirms Merica.

Use technology to speed workflow
The firm recommends using a bar code labeling system. "We are using barcodes on our hardgoods at two of our retail locations. We scan items at the point of sale and leave it to our computer to track and manage the data. It really speeds up the inventory process — we enter a part number and out pops the count quantity."

In addition, Five Star can instantly update prices by entering the change in the computer and never has to remark packages.

Avoid the growth trap
Merica believes a distributor could go broke if it fails to properly manage growth. "A distributor needs to make certain it can maintain service levels to its existing customer base before it adds new accounts and territories. Otherwise it will simply exchange old customers for new ones," says Merica.

Increased cash flow is a second trap. "Increased cash can tempt a distributor to expand — it looks like that's what it should be doing. However, once in a growth mode the distributor will have cash outlays for receivables, inventory, cylinders, trucks, and fill plants. It is extremely easy to expand the infrastructure faster than is truly justified."

Know the financial options
Five Star opted for a track lease arrangement with GE Capital, Eden Praire, Minn., thereby reducing its cost of fleet ownership. "The contract is considered a loan and is listed as an operating expense on our profit and loss statement. There is a zero balance at the end of term so the distributor eventually owns the truck without having to pay a huge lease buyout.

Follow your customers
The firm believes it's more important to be a strong regional player than it was 10 years ago. "Businesses tend to move into hot real estate markets," says Merica, "with rising costs associated with fuel, insurance, vehicles, and employees, added to the decreased availability of good drivers its increasingly important to have a nearby branch.

Five Star noted new growth zones in the surrounding territory and responded by merging on January 1 with its sister company, Imperial Welding Supply. "By adding Imperial's location at the north end of San Diego we were able to properly service new accounts within the developing geographic corridor and follow the customer base."

"Do it yourself" whenever possible
To expand its ability to follow and service customers, the firm designed and installed its own 22,000 ft. ² , 6,000 psi fill plant last fall. The job cost $300,000 including all related equipment, bulk tanks, pads, and electrical work. As a do-it-yourselfer, the firm estimates it saved nearly 40% in installation costs.

"We're proud of the fact we did that job in addition to the daily tasks associated with running a distributorship," says Merica.

Five Star installed the super structure to support the transverse fill manifolds as well as the high pressure and the liquid fill plumbing including vacuum pumps. It relied on Mark Daniels of Cryogenic Industries, Marietta, Calif., for advice on the plant's layout and technical issues, and it contracted with CTR, Charlottte, N.C., to build the fill panels and the manifolds. "We also asked Rick Davis and Jack Watson at Correct Cryogenics, Fontana, Calif., to handle the bulk tanks and plumbing to the liquid pumps."

Aside from savings, the firm believes another key benefit for any do-it-yourself distributor is acquiring the knowledge needed to quickly fix problems that might arise later.

Think outside the box
Logistics and the reliability of local cylinder testing facilities may mean distributors should consider installing their own hydrotesting equipment. "We hope to have one working within 8 months," explains Merica. "The facility we trust the most is located some distance away near the Mexican border. This is not a profit generator but it will help contain cost and give us the improved ability keep track of cylinders since they won't be at a third party location. We will also have a quicker turnaround.

That's important to Five Star since it has 28,000 cylinders in its inventory and needs to test 1,500 a month. "We will also invest in cylinder blasting and painting equipment to maintain a high quality professional image," adds Merica.

Safety pays
Stress safety in all aspects of the business and particularly with drivers. "Emphasizing safety pays off. We have had no lost time due to accidents for the last three years, and benefited from a low Workmen's Compensation rate."

Sell service and strengthen the relationship
Distribution is service and relationship-driven business. "For the most part ours are not unique products — argon is argon," notes Merica.

The firm's offers custom services such as managing inventory, installing custom gas distribution systems, equipment rental and repair, and training.

"However the primary focus on responding quickly to our customers' needs. If we do that right, we know the other aspects of our business will take care of themselves."