Diversification: Doom Or Boom?

Many VARs have attempted diversification of the vertical markets they serve or the products they offer, to catastrophic ends as they lost focus and failed to build the expertise necessary to do their jobs well. Others praise diversification as a means of finding a profitable niche. The American Eagle Companies fall into the latter category, and the VAR is beginning to realize the full reward of diversifying. The core business, which was founded by President Terry Satterfield, began as a food processing equipment dealership and has gone through much change over the course of its 22-year history. The company has accumulated many divisions and invested in complementary technologies and industries. It now offers food equipment sales and service, mechanical construction in the HVAC (heating, ventilation, and air conditioning) and refrigeration trades, and design and build consultation to architects and engineers of restaurant, grocery, convenience store, and general retail establishments. This evolution has also resulted in the company's finding its most recent profitable endeavor; it's now a POS (point of sale) VAR. As a matter of fact, when asked why his father's company achieved 54% sales growth in 2002, American Eagle VP and COO Chris Satterfield responds, "We started to sell POS."

POS: A Profitable Part Of The Big Picture
The fact that focusing on POS helped a long-surviving business boost its revenue by more than half might shock pure-play POS VARs who are struggling right now. But when Satterfield approached POS systems vendor TEC America (Atlanta) in 2000 and requested the opportunity to serve the greater Knoxville, TN, market, he knew he had what it took to make a run at reselling POS equipment. (The company had been a TEC dealer for years prior to entering the PC-based POS fray, selling TEC ECRs [electronic cash registers], and scales as part of its offering to restaurants and grocery stores.) For one thing, American Eagle had an "in" with its clients. The company was already handling the integration of food processing and cooking equipment, HVAC units, and refrigeration systems. It also manages new hospitality and retail development, from coordinating new building construction projects with subcontractors to handling layout and design of restaurant, grocery, and retail establishments. With this product portfolio and existing market penetration, Satterfield was inundated with requests for POS technology from end users in the hospitality and retail sectors.

At the same time, hospitality VARs in Satterfield's territory struggled to stay in business. One software dealer went out of business, leaving customer support and maintenance to its vendor's out-of-area headquarters. "Another dealer," Satterfield says, "was selling one of the highest-priced products on the market." These factors considered, American Eagle decided to oblige its customers' demand and began integrating TEC-based POS systems in 2000. "What we have now is a marriage between our equipment and construction divisions and the POS technologies we offer," says Satterfield.

Considering its clients' growing desire to integrate operations equipment with back office IT and POS systems, the marriage between POS and operations equipment sales seems a perfect match. At the POS, American Eagle takes advantage of open system architecture to mix hardware and software components, creating custom configurations. "While many customers are just looking for stability, ease of use and flexibility remain the most important features to end users," says Satterfield. For that reason, American Eagle customizes its system per the application. "Bars, nightclubs, restaurants, drive-thrus, and cafeterias require unique systems and interfaces," he says. Satterfield cites a recent installation that included TEC touch screens, an IBM OS (operating system) and file servers, and Comtrol serial networking equipment. "We can put these solutions together, put any software product we choose on them, and tailor them to the client's need, and do it more economically than our competitors," he says.

Stretched Resources Require Cross-Trained Employees, Outsourcing
While a diversified product line might create more sales opportunities, it can also cause internal headaches. For starters, a multiservice VAR must have the skills to install, service, and support everything it sells. In American Eagle's case, this means employing consulting, sales, concept design, and implementation staff. A VAR looking to add a nontraditional offering like kitchen design consulting to its POS technology lineup might need to bring qualified people on board immediately to do so. But even when employees are qualified, supplying end users with a vast product mix can be labor intensive. This is known well by Satterfield. "When we're given the opportunity to take on a turnkey project, we do. Sometimes our human resources are stretched to do it, but we do it with success," he says.

This labor challenge has prompted Satterfield to analyze the company's business management structure. "We're trying to service customers with the employees we have, rather than hire and fire in reaction to the usual ups and downs of business," he says. Outsourcing certain elements of projects is one method American Eagle has employed to that end. "When we look at new technologies, we assess various means of bringing them to our customers. We strive to select products and technologies that allow us to use a limited staff resourcefully. We also sometimes allow a vendor to perform certain aspects of the installation and support." Another objective at American Eagle is to cross-train employees. Rather than hire workers with very specific expertise, Satterfield wants his employees to be versed in two or more technology areas. A network technician, for instance, who can service hardware and peripherals and knows POS software as well, would be a must-have employee. "This is more efficient than wantonly hiring when we have a demand for labor or the need for new knowledge," he says.

Outside Resources Also Help VAR Management
While diversification can mean growth, growth creates the need for the infrastructure to support it. For that reason, American Eagle has also outsourced business management education. American Eagle has turned to resources from local colleges and hired consultants to help company executives better understand the company's needs. These outside resources have helped American Eagle recognize that its growth has created the need for new internal management systems. As a result, the company is in the process of upgrading its Best Software Peachtree accounting and financial systems with a more mid-range product to support its growth. "We're going with a system that will produce reports and help establish key performance indicators, one which will allow us to access and monitor vital information in real time," says Satterfield. To date, the company has invested thousands in internal systems upgrades, with plans to continue the momentum with Windows 2003 server software running on IBM and Dell hardware.

Diversification Is Marketing-Intensive
Gaining market share and creating a billing menu is particularly challenging for VARs in the process of diversifying. In a bid for rapid market share expansion, American Eagle has all but eliminated service contracts from its offering. "We've found that in our market, customers are turned off by service contracts. They've been gouged by them," says Satterfield. Instead, the VAR promotes a flat, hourly billing rate for service calls, as well as a zone charge depending on the travel required to perform the service, plus parts. "This is a sales advantage, because it's less expensive for the end user than paying maintenance fees on the total cost of the installation on an annual basis," he says. "The integrity of modern systems coupled with training minimizes service calls, allowing business owners to focus on running their business, not their POS systems." Instead of depending on service contract fees to make up for small hardware margins, Satterfield says his company profits by offering design and management expertise. Aside from calls to service printers, troubleshoot files, and integrate systems like payment processing, accounting, and payroll, American Eagle also gets many calls for management advice. "Customers see service contracts as an additional operating expenditure that they may or may not need," says Satterfield. End users with tight budgets don't have the luxury of spending money on supplementary insurance. Charging for service and consultation a la carte, however, assures customers they're paying for the service or consultation they need and nothing more. "We do have some customers who want service contracts, and we oblige them," says Satterfield. "It's just not part and parcel to our sales offering."

Satterfield says a diverse mix of products and technologies can sometimes work against the American Eagle Companies. "Some customers looking for POS think a company that specializes would be better," he says. "It's our biggest challenge to prove to them that we have the resources, staff, and technology to specialize in each area." But his value proposition and the logic for diversifying remain. While Satterfield stops short of calling the American Eagle Companies a one-stop shop, the VAR's philosophy of diversified equipment and technology offerings puts it in a position to make the sale.