Finding growth in sparsely populated areas of the U.S. can be challenging, but Dakota Supply Group, with more than $500 million in annual revenue, has found a way to thrive anyway.
Dakota Supply Group CEO Paul Kennedy sat down with Distribution Strategy Group to talk about how the 124-year-old company drives value for customers in rural markets across the Midwest.
One driver of their organic growth: a diverse offering and targeted services. Dakota Supply Group has expanded its products and services into plumbing, HVAC, electrical, automation, waterworks and more.
Though Kennedy has had a diverse work life – starting as a carpenter, joining the Navy as an intelligence analyst and eventually serving in leadership roles in multiple distribution companies – his most rewarding role has been his current: as CEO. There, he’s been able to affect the company’s direction and collaborate with its 867 employee-owners (they’re an ESOP company) to better service their customers.
DSG: Taking out inflation, you’ve grown 20% over the past couple of years.
Kennedy: Our overall growth was 37% in 2021. We calculated about 17% inflation baked into last year’s number, which takes us down to about 20% growth. I’ll attribute about 2% of that to acquisitions, and the rest would be organic growth, segment expansion and new branch openings.
DSG: You probably have one of the most sparsely populated geographies of any distributor in the country, except for the Minnesota Metro area. What are some of the challenges of serving such a diverse set of sectors? What are some of the synergies, and how do you make it work?
Kennedy: You’re dead on as it relates to our areas being sparsely populated. We acquired a company in Michigan in the middle of last year, and just the state of Michigan has a higher population than most of the rest of our territory combined. Looking at the Dakotas and Montana, there are fewer than 3 million people in those three states; there’s more than that in the Minneapolis Metro area.
So it really is a diverse and sparsely populated geography, which plays into our multiple segment strategy. I think we’re a product of our acquisition strategy over the past 25 years. The acquisitions that we’ve had over the last several years have allowed us to complement our key markets. We do well in rural markets and secondary markets. Our trucks have a lot of miles to cover and go out fuller to cover multiple segments.
We also have expertise in each branch.
DSG: That expertise, how does it play out with presale and post-sale?
Kennedy: Presale is really about bringing our expertise to bear. We’ll send a technical salesperson out with the engineer and contractor to help provide value if a waterworks project is being engineered. The same thing goes for lighting. We would have a lighting design person driving that project. Then logistically, we have multi-segment branches. We don’t do everything, everywhere. That provides us with future growth opportunities. For instance, we’re not in the electrical business in Montana yet, but someday we will be. That’s a future growth opportunity.
DSG: Why do your customers buy from you?
Kennedy: It’s really all about the people. We’re in the community. Our employee-owners are at church or the grocery store, or the post office with customers. So it’s developing a relationship that resonates with people.
We’ve got to provide solutions, have local inventory and have the right price. That’s just the ticket of entry. Now that we have that, how can we take it one step further and provide solutions for customers so they can rely on us?
DSG: What role do outside salespeople play in the more rural areas of your footprint? Are in-branch interactions, telesales and email more important in these regions?
Kennedy: We have a lot of sellers out on the road in those rural territories. Some customers want to see an outside salesman and have that personal relationship and interaction. So if that’s what the customer wants, we’re going to provide it. We also have email and text services.
In late 2020, we started a revenue growth project we call “DSG Let’s Grow.” If we couldn’t be in their shop, we wanted to make sure that we were proactively picking up the phone and calling customers. We’ve seen improved levels of engagement with it. It’s not just driving revenue but also helping our customers feel like we care more.
Everybody calls — inside sales, counter sales, outside sales, etc. They log their calls so the next time they call a customer, they know what they’ve talked about and can follow up on a particular job or whatever the case may be. Some of that was happening before, but now we’ve made it intentional and part of our culture.
DSG: How have customer expectations changed, and what do you think will be permanent?
Kennedy: Frankly, I think they’ve become more accepting of inventory challenges. They understand that there are challenges and are more open to us delivering alternative solutions. So, if they call asking for a particular brand and we don’t have it in stock, we can talk through it together.
Secondly, with all of the inflation we’ve seen over time, expectations with pricing have changed. I don’t want to say that contractors have resigned themselves to the idea that prices are just always going to go up, but I think they’re more receptive to manufacturers trying to recoup their increased costs.
DSG: How did COVID affect Dakota Supply Group?
Kennedy: I wish there was a huge “aha” moment here, but we never stopped buying at the beginning of the pandemic. In anticipation of any disruption that might happen, we loaded up the barn to make sure we had inventory.
We also brought on additional vendors to complement our offering. You need to make sure you have a diversified supplier base to serve your customers’ needs. For some customers, brand became secondary. Instead, their focus was on just getting the job done.
DSG: How does being an ESOP company play into your culture?
Kennedy: Before I joined the company, I did some research into it and felt like employee ownership would drive a different level of engagement and culture within the organization. That’s proven to be true. I’ve never seen more people walking in the parking lot and stopping to pick up a piece of garbage than our employee-owners. There seems to be greater care and ownership in the success of the company.
From a cultural perspective, it’s all about building wealth. The performance of the company helps drive that. We’re just like any other company in that we have a leadership team that makes decisions and drives the business forward. But, we’re probably more transparent with results than many companies because everyone is an employee-owner, and that performance will drive the share price higher for them.
We’ve made three acquisitions in the four years I’ve been here – one in 2020 and two in 2021. In two cases, the owners did not have a succession plan but felt an overwhelming desire to take care of the employees who had helped them build their business. What better story for them to tell than when they look their employees in the eye and say, “Hey, I’m selling the business, but now you’re an owner.”
DSG: When you think about service as a differentiator, what does that evolution look like for you with the rise of digital?
Kennedy: Great question. I’ll go back to a comment I made earlier and say it’s about meeting the customer where they are and providing the experience they want. Some people want an in-person touch, and others want access to ecommerce. We made an investment in ecommerce back in late 2019 ahead of our ERP conversion. We’re still not where I want it to be, but we’re providing digital solutions in addition to that personal connection.
DSG: Where do you see Dakota Supply Group in five years, and how do you plan to get it there?
Kennedy: It’s interesting. I spent the first three or four years with the leadership team building out a foundation for the company to allow us to grow and continue growing. We have aspirations to continue to expand significantly. Considering the sparse population of where we are with segment expansion and new branch opportunities and acquisitions, we have plenty of runway ahead of us to grow briskly.
My expectation is that we’re going to continue to grow and provide financial opportunities for our employee-owners and career opportunities for them within Dakota Supply Group. We’re not in every segment in every state, so we have a chance to expand. We’re Midwest people. We cover rural markets, and we’ve got a good formula to serve those customers.
Watch our interview with Paul Kennedy: