What makes Legrand so unique is the autonomy they allow the companies which they acquire. It’s not just a talking point as there are only four employees of Legrand Lighting in the US, so even if Legrand wanted to micromanage these businesses, there is no manpower.
I visited Focal Point in Chicago a few weeks ago, before the coronavirus changed the world, to learn about the acquisition and transition with Legrand. Chris Thornton is Focal Point’s president and Michael Thornton is the Chief Marketing Officer. Mike McCoy, Director of Architectural Systems, gave me a tour of their facility. I had been to the factory across the street a lifetime ago when I sold ballast to Chris and Mike’s father, Peter Thornton, back when the Thornton’s owned Fail Safe.
Focal Point is extremely vertically integrated. One component I don’t normally see in factories is P.E.T., which is used in their acoustic product. I love the idea of ground-up plastic being used to quiet buildings.
Your humble editor sat down with John Selldorff, CEO of Legrand North & Central America, to discuss the Focal Point acquisition. This was our first face-to-face talk since Legrand acquired Pinnacle Lighting in 2016.
Reid: When we spoke last week on the phone, you were keen to frame the Focal Point acquisition in the context of a broader lighting strategy for Legrand.
Selldorff: Legrand has been successfully participating in the commercial lighting market in North America since we acquired Wattstopper in 1996. The legacy luminaire business was not of interest to us because it was a very mature business with established players and we could not see where we could add value to the customers. The move to LED over the last decade changed that view and created a market dynamic which is really exciting, creating new possibilities for the intersection of technology and design. This new dynamic made commercial lighting an attractive business for Legrand to invest.
Our heritage is wiring devices, where we have a 19% market share globally, but we are leaders in other areas of building infrastructure from AV to datacenter infrastructure to lighting controls. We spend about 2x, as a percent of revenue, as compared to the amount that our competitors spend in R&D. While our competition focuses on cost we focus on innovation so we are interested in markets and segments where innovation is expected and rewarded by customers. It is the same thing in Lighting, our strategy is not about cost-cutting, it is about adding value.
Reid: Can you let us know the goals of the strategy and also explain how the strategy works?
Selldorff: As we looked at the commercial lighting market, we saw architectural lighting as an attractive space for us to focus. We try to really respect local market dynamics, which allow us to be nimble to respond and adapt to customers quickly. This separates us. We don’t want global platforms for products, and we are not looking for synergy between models, as many times you wash out what the customer valued when searching for those synergies. The independent architectural lighting businesses we have acquired are great examples of businesses that have evolved and become successful by focusing on local market and customer needs.
So for our expansion into lighting in North America our strategy centers on building a family of lighting businesses with differentiated market positions in segments where product and service innovation is expected and rewarded. Legrand prefers to acquire market leaders with mature customer centric cultures and so Focal Point is perfectly aligned with our strategy.
The other component of our strategy is how we are organized and our approach is different than others. We created a lighting sector operating model that supports business autonomy which allows the businesses to continue to drive innovation and value to serve customers better and win business. Each business has its own leadership team and retains decision making across most areas of the business from operations to sales to product development. It’s not quite business as usual because there was a change in ownership but we try very hard to make sure that the business continues to operate as it did before it was acquired. Again, these are successful businesses and success for our strategy is if they continue to bring value to their customers and grow.
Reid: What changes do you expect to implement at Focal Point?
Selldorff: It’s a good business and we want to continue the way it is. Focal Point doesn’t need anything, and we don’t buy companies that are broken.
Reid: Specifically, what did you find appealing about Focal Point?
Selldorff: First, Focal Point is a good business with great people. Second, we see that offices are changing and owners and tenants want to use the entire space to create different experiences. High tech companies have led the effort as they compete for the best talent. There are now huddle spaces, which are fragmented and not linear—those cube farms from the 70s are gone and there is much more collaboration and people are right next to each other. How do you provide light solutions in those spaces? Focal Point does this better than anyone. There are privacy and noise distractions and Focal Point is already in the space working with the designers, why not add acoustics? Sometimes these are built into the light fixtures and sometimes they are additional. But Focal Point is well-placed to get these types of jobs.
Reid: The lighting market is unique in its constituents and make-up. How do agents fit into your strategy?
Selldorff: They are core to it. I can’t overstate just how important agents are to our business. Agents are our partners as well as our sales force and the interplay between the agent, the specifier, the contractor, and manufacturer is the key ingredient to success in this business. For our businesses, the agent is the service company, the systems integrator and solutions provider. Because we sell value added products, like some of the acoustic product you saw on your tour, we have great features and benefits that need to be sold and this is where our agent comes in.
Reid: With six lighting businesses: Focal Point, FineIite, Wattstopper, OCL, Pinnacle and Kenall, you have six independent agency networks, which is unique. Is it sustainable?
Selldorff: That is correct, we have six different networks and while there is some overlap, each business has their own network. Yes, it is very sustainable and core to our strategy in lighting. We want these businesses to continue to be successful and grow and key to that is the partnerships they have developed with their agents. For instance, in Chicago, Focal Point works with PG Enlighten and Jim Haworth and then two other companies are represented by Jim Williams and KSA Lighting. These are successful relationships so why change. There are only a few reps that have all six lines and that has more to do with history and the dynamics in that territory versus a deliberate alignment decision.
Reid: Having one rep for all six lines works in one territory—would it ever work in Chicago?
Selldorff: No, you are missing the point. The businesses we have acquired have well developed agent networks that work for them in each territory. These are successful relationships. Now that means that some of our businesses will have different agents in a territory and may sometimes compete with each other but that is okay. Our lighting businesses competed at times before they were acquired by Legrand and thrived so we are comfortable with competition because each of these businesses has developed their own formula for winning, and that combined with their relationships, has made them successful. We buy good companies and we pay good money, why would we disrupt what is working?
Reid: How do the conglomerates fit into your strategy?
Selldorff: We are conglomerate-agnostic because we want to be with the best sales force in each market and each conglomerate has markets where they are with the best agents. The interests of conglomerates and Legrand align with the agent, we both do better with a stronger and healthier agent. Think about this, our companies only supply some of the fixture types on a project, we need our reps to have a strong line card so they can put together a complete package. Our reps don’t need us to be everything, as they can pull from dozens of manufactures to offer the complete solution. Every day we are competing with conglomerates and other manufacturers but when we are aligned with the same agent we share a common goal which is for the agent to be successful at winning business which is good for both the conglomerate and hopefully good for Legrand.
Reid: What about drivers? Now that you have six lighting companies, can you gain efficiencies by combining your driver business?
Selldorff: We could, but we don’t. We work with all of the major driver companies because we don’t want to make compromises on product design and certain drivers have certain features which are integral to those designs. For instance, Kenall is a big Universal Lighting Technologies account and Focal Point is more geared to Signify. Finelite and Pinnacle work with Osram. We won’t come in and flip the switch, as it is those subtleties that make or add value. We also like having multiple sources of drivers.
Reid: Do you sell any of your lighting online, direct to customers?
Selldorff: No, not at all, we work solely through the rep channel and we strongly support their business. Now, in our other businesses we might help some of our customers, some of our distributors for example, with their online presence, but we don’t sell lighting online.
Reid: When you look at a Terry Clark at Finelite or Chris and Mike Thornton at Focal Point, these are highly independent entrepreneurs and strong leaders. Do you think they sold their companies to Legrand because you have a reputation of allowing the businesses to continue running independent?
Selldorff: You would have to ask them, but during the negotiation process, we ensure that the company we hope to acquire understands our policy. We don’t think they give us a discount because of the independence. These people you mention have built a legacy and they want to see the company continue, and we are probably the best at preserving and enhancing that legacy. Again, we buy strong companies that are doing great. Remember, we acquired Wattstopper in 1996 and it has thrived so we have a long track record in this market. I have been with Legrand since 1989 and this is my 27th acquisition and five are lighting companies.
Reid: Speaking of the negotiation process, what was the price of the acquisition?
Selldorff: We don’t disclose that.
Reid: I understand the independence, but where do you draw the line. For instance, with Coronavirus, does Legrand dictate a world-wide policy, say on travel or do the businesses make their own decision.
Selldorff: That is a great example, when it comes to safety and security you will see Legrand step in with certain policies. For example, none of our personnel will be attending LightFair because of the coronavirus (the interview occurred before LightFair announced their postponement.) So if there are issues surrounding safety or security, corporate does get involved.
Reid: Do you think we are going into a recession?
Selldorff: Probably. This coronavirus is the most fluid issue we have faced since I have been with the company. We will manage the business through this but we will also continue to focus on our customer need today and in the future. In the 2008 recession, we made investments in product lines to take advantage of when the recession ended. We tightened our belts and stuck to new innovation so when the market came back, we were ready. We are not under the pressure of debt load that others have, so we don’t have to do things that are unnatural. We never get ahead our skis so we probably have missed some opportunities, but we don’t want to recapitalize the company to do this. If we do go into a recession, we will adapt to market realities.
After the interview I asked Mike Thornton about the reason they chose to sell to Legrand and not a large conglomerate. Specifically, I asked how important the culture was in their decision. He responded, “Cultural fit was a large part of the decision.”