1. Situation Summary
Cousins Unlimited was founded by Alfred Smith in 1921
near Fort Smith, Arkansas. It specialized in furniture which
was strong, functional and mid-priced. A fairly significant portion of sales
was direct sales to schools, hospitals and other institutions. The remainder
was direct to regional department stores and independent furniture
retailers. The Company had been organized into two divisions
- Case Goods and Upholstered – both divisions with multiple manufacturing
and assembly facilities. Grandpa Al was well-loved in the community
and he gave countless hours to the community while his Company
prospered under the watchful eye of his Senior Vice President,
He raised two children and when Al, Jr. became 38 years old Grandpa
Al turned the business over to him. He also made certain gifts of
stock to his daughter, Sara Smith Allen, and grandchildren. He felt
strongly that Al, Jr. should run the business and be in complete
control and accordingly gave Al, Jr. the vast majority of the “voting
stock” with other family members getting non-voting.
The furniture industry proved to be a lot tougher in the 70’s
and 80’s than in the early hey day. Tom Robinson, who made
everything “look easy”, had retired. Al, Jr. had a few
surprises and pitfalls but struggled fairly successfully until the
mid-80’s. His nephew, Nicholas joined the Company in 1978 right
out of college. He possessed the jovial good nature of Grandpa. Al,
Jr.’s four children each professed “no interest” in
the Company until the youngest child graduated from the University
of Texas Business School. At age 30, he arrived and said “I’ve
always loved this business.” He possessed the following assumptions:
- I am Al, III; Dad owns all the voting shares and someday those
shares will be mine.
- Running a business that is already
successful will be easy. Grandpa Al didn’t work very hard.
always loved this business. I just forgot to tell anyone.
In 1988, Al, Jr. strengthened the marketing and sales organization
by hiring Bob Prendergast, an accomplished industry veteran. Prendergast
proceeded to restructure the sales function, brought in additional
talent and instituted a formal sales training program. The results
were impressive. Turnover stopped, professionalism as perceived by
customers rose, and several large new accounts were won. By the early
90’s, sales were growing at two times the rate for the industry.
Unfortunately, the Company continued to lose money, suffering operating
losses in five consecutive years. The only good news was that management
believed momentum was on the upswing, with a small operating profit
reported in the most recent year to break the string of losses.
Nicholas’s sister Alice recently worked at the Company as
a summer intern before her second year at UVA Business School. She
wanted to come to work for the Company and in fact, possessed impressive
financial skills and experience, but would not consider it under
the current facts. Among other things, she referred to the Company’s
ownership structure. The stock was held as follows:
||# Non Voting
||Total # Share
|Alfred R. Smith, Jr.
| His children:
|Alfred R. Smith, III
|Total Smith Family
|Sarah Smith Allen
| Her children:
|Nicholas Allen, Jr.
|Total Allen Family
Al, Jr. was rarely seen at the company before 10:30 AM. In the most
recent year, he and Al, III purchased a new company outside of the
Cousins Unlimited structure. This new venture manufactured recliners
and vibrator chairs and had been losing money for years. It began
purchasing key subassemblies from Cousins Unlimited on special payment
The financial results of the new venture were disastrous. Some of
the cousins were getting restless. Seeing an attorney was no longer
considered an unacceptable option. The local Bank was even more restless.
Senior bank officials asked for a detailed plan of action. Of particular
concern was the performance of one division, upholstered furniture,
and the impact of the new venture. Cousins Unlimited owed the bank
several million dollars and was in violation of various loan covenants.
The new business venture owed Cousins Unlimited in excess of two
million dollars, while its losses continued to mount.
2. Sales History
See Exhibit 1. Combined
sales of both Divisions A and B had grown from $50 million
in year one to about $76 million in year eight, an average compound
growth rate of 6.2% per year. Division A, which contributed 40%
of total company sales in year one had grown faster, 9.5% per year,
reaching 50% of total company sales in year eight.
3. Quantitative Danger Signs
- Poor Operating Performance Compared to Industry Peers. See Exhibit
2. The company’s poor performance versus its peers
went far back into time. While it made an operating
profit in year eight, its first in six years, the level
of profitability was still consistently below the industry
Division Significantly Out Performing the Other.
See Exhibit 3. Division A, despite having grown to 50% of
total company sales by year eight, delivered just 33% of
total division profit, before accounting for corporate expenses.
Division Actually Losing Money. See Exhibit 4. The division
profit margin for Division A had been consistently below
that needed to cover its share of corporate expenses. Yet,
it is the division that was growing the fastest.
- Excessive Number
of Very Small Customers. See Exhibit 5. More than one-half
of Division A’s customers were contributing only
5% of the sales from each plant.
- Chronically Poor Operating Cash Flow.
See Exhibit 6. The financial condition of the company had
been dramatically weakened by years of operating losses and
declining asset productivity.
4. A Diverse Group of Shareholders
Al Smith, Jr.’s children, with the exception of Al, III, seemed
resigned to their stock having little value. Sarah Smith Allen and
her children were becoming increasingly more vocal over their dissatisfaction
with the company’s habitually poor performance. The era of
avoiding confrontation of people and issues was coming to a
5. The Solution
- Brought in a new CEO. An analysis of the existing management
led to a recommendation to hire a new CEO with a five-year
contract; part of his or her charge was to recommend a successor,
with the goal of naming a family member. The new CEO was
required to supervise the three cousins and help develop their
individual talents. Alice was hired as Chief Financial Officer
and Al, III and Nicholas continued as Vice Presidents with carefully
defined areas of responsibility. Al. Jr. heaved a great sigh of
relief and assumed the office of Chairman of the Board. At the
request of friends in his local church, he embarked on a campaign
to become Moderator of the General Assembly of The Presbyterian
- Effected Recapitalization. All common stock was exchanged
for two new classes of common, each with voting rights.
The non-participating shareholders received Class B common
which was redeemed over a four year period. Through family
transfers, Class A Common stock ended up 25% to Al, III,
25% to a family partnership with Al, Jr. as General Partner,
25% to Alice and 25% to Nicholas.
- Wrote-Off Investment. The
disastrous Vibrator Chair business was put out of its misery
and the receivable to Cousins Unlimited was written-off.
- Downsized Division A and Invested to Grow Division B. The
downsizing included the closing of two plants and the elimination
of many unprofitable customers and market segments. Although
the lay-offs were painful, everyone agreed that employee morale
quickly rose to an all-time high.
1. Situation Summary
Neil Kelly, Sr. had come to America as
a teenager during the 1920’s,
settling with his family in the Chicago area. He grew up working
in the meat business for a variety of companies and in the early
1940’s opened his own plant under the name Kelly & Son
Meat Packing. The company was successful for over twenty years, primarily
providing sausage-based meat products both under its own brand name
as well as a subcontractor for other well-known branded products.
Customers were supermarket chains, grocery distributors and all of
the independent family owned food markets which thrived in the Chicago
area. Mr. Kelly, Sr. had the happy-go-lucky personality of his Irish
ancestors and was at his strongest roaming the plant interacting
with rank and file employees. Turnover was very low and the word
had spread that Kelly & Son was a great place to work.
His son, Neil, Jr., began working in the family business while still
in junior high school, but it soon became clear that working in the
plant or on the shipping docks was not his strength. He was a natural
born salesman, loved being out of the office, on the road and interacting
one-on-one with the customers. His sister, Kate, worked in the office
but after marrying, showed a declining interest in the business.
Mr. Kelly, Sr. died suddenly in late 1960’s, leaving seventy
percent of the stock to Neil, Jr. and thirty percent to Kate. Neil,
Jr. became President and Chief Executive Officer. For a time the
company continued to grow successfully. Neil, Jr.’s legendary
sales skills were resulting in new accounts every year. But he was
spending less and less time inside the Company and morale, especially
in the plant, began to slip. Union activity was becoming prevalent
around other plants in Chicago. By the late 1970’s Kelly & Son
had been forced to fight two union organizing efforts, winning both
but by narrow margins.
Profit margins were being squeezed by two factors. First, labor
costs were rising faster than sales. Second, Neil, Jr. had been developing
a whole new category of business for the company – producing
store-brand products for the large independent and national food
store chains. Volume was growing in this new product line, but margins
were substantially less than the branded products upon which Kelly & Son
was built. By 1978 operating profit was less than interest expenses.
Neil, Jr. decided that to survive, the company would have to move
to an area of lower labor costs. Accordingly the move to central
Alabama was completed successfully in 1979.
The company’s fortunes reversed and it enjoyed a number of
years of rising profitability and labor stability. In 1985 Neil,
Jr. attracted one of the industry’s finest Sales and Marketing
Vice Presidents, Pete Gibson, from a competitor. Pete and Neil became
a good team and the Company continued to grow. Also at this time
Kate expressed an interest in selling her thirty percent of the Company.
On the advice of the Company’s attorney, accountant and bank,
an ESOP was created to purchase Kate’s shares. In 1987 Neil
made another important personnel addition as Hank Trumbull joined
the Company as Controller. Hank had an industrial engineering degree
from Virginia Tech and after working on factory floors for a number
of years, went to business school at the University of North Carolina
at Chapel Hill. Neil had in the back of his mind that perhaps Hank
would someday take over as CEO.
By the mid-80’s competition intensified as the buying power
of large retail food chains increased substantially. Neil, Jr. loved
the interaction and the bantering with the buyers and purchasing
managers, and was convinced the future of the Company depended upon
increasing the business with these power-house customers. He had
even changed the name of the company: Kelly & Son became Commodities ‘R
Us. In the late 80’s one large competitor withdrew from the
business, presenting what Neil, Jr. felt was a once-in-a-lifetime
opportunity to accelerate the growth of Commodities ‘R Us by
obtaining new business with this competitors’ accounts, many
of which were “mega chains” he had been trying to crack
for years. Now these accounts were actually calling Kelly asking
how much of their business he could handle! Gibson and Trumbull developed
the new operating plan for accomplishing the increased growth. Among
other things, the plan included an additional $5 million borrowing
on the Company’s line of credit to finance the higher working
While Neil was criss-crossing the country growing the large chain
business, morale inside the Company was slowly but steadily deteriorating.
Turnover was increasing. While operations had been marginally profitable
throughout the recent period, the Company failed to meet plan for
three consecutive years. One of the consequences of the shortfalls
was no bonuses for Gibson and Trumbull. Debt was increasing and the
resulting interest costs actually created a pre-tax loss in the most
recent year. The last two ESOP evaluations showed declining stock
Both Gibson and Trumbull were noticeably frustrated, and Trumbull
in particular seemed to be losing interest. What had been a close-knit
threesome had become a fragmented group of individuals without a
common direction. A recent survey of customers had suggested that
Commodities ‘R Us was suffering from a confused image in the
market place. Neil’s wife Suzanne, an outspoken and capable
member of the Board was strongly lobbying her husband to reduce
his work and travel schedule, and withdraw from day to day management.
bank continued to be supportive despite the lackluster results.
Though the Company was in technical violation of certain ratio covenants,
the bank was eager to increase the line of credit to support
the proposed expansion. The loan officer had even raised the possibility
of financing an acquisition to increase capacity.
thought the bank was crazy and that the Company was teetering
on the brink of financial catastrophe. Not afraid to speak-up,
she had expressed to the Board, which included two strong independent
directors and Neil, her opposition to expanding the private
label business further if such expansion meant more debt. She had
confided in others her belief that the Company needed new blood in
senior management. Pete Gibson had also stated privately, “We’re
in no man’s land. We need to get serious about making some
major changes or this company is headed for real trouble.”
2. Quantitative Danger Signs]
Selling Price Deflation on Certain Products. See Exhibit
7. Industry over capacity and intense competition had been
unrelenting for six years. Selling prices of certain key
private label products were from 2% to 22% below their levels
in year one.
- Disappearing Gross Margins, in Several Key Products. See
Exhibit 8. Only one of the five private label lines produced
a gross margin that was close to acceptable. Two products
were actually losing money at the gross margin level.
Resources Among Product Categories. See Exhibit 9. The
total private label product lines were almost 40% of the
sales, consumed one-half the labor and machine resources,
but generated one-eighth of the gross profits.
- Gearing Up to Satisfy
the New National Accounts. See Exhibit 10. The plant manager
had been instructed to plan for significant volume increases
for the leading private label products.
3. The Solution
- Named Pete Gibson President and Chief Operating Officer. Neil,
Jr. moved up to Chairman, and cut-back dramatically his day-to-day
involvement. Neil and Suzanne went on a long vacation soon
after the Gibson announcement.
- Reduced Commitments to Supply
Commodities to New Retail Accounts. The substantial reduction
of these commitments was accomplished through high-level
negotiations spearheaded by Kelly and Gibson.
- Dropped Notoriously
Unprofitable Customers that were Purchasing Only Unbranded
- Identified and Pursued Candidates for a Strategic
Alliance. The objective was an alliance with a focused commodity
producer that needed CRU’s national account relationships,
thus permitting CRU to devote its plant to branded products.
the Plant’s Capabilities to Manufacture Specialty
Branded Products. The company targeted two specialty product
categories it intended to dominate.
- Communicated New Direction
to All Employees. Presentations of the strategy were made
by Gibson to all employees. Each employee carried a printed
laminated card containing the new mission Statement and strategic
- Recruited a new Vice President of Marketing with Experience
in Specialty Branded Products.
1. The Situation Summary
family came to eastern Tennessee in 1915. Grandfather Carlo was a
stone mason with three children, the youngest of whom, Vincent, was
an entrepreneur right from the beginning. Through a succession of
shrewd investments and business deals, Vincent accumulated a substantial
net worth by age thirty-five. He and his wife Rose-Marie had six
children, three girls and three boys. The two youngest, sons Anthony
and Michael shared their father’s interest in business.
Michael in particular exhibited many of his father’s entrepreneurial
and natural leadership talents.
Around 1970 Vincent purchased a failed metal fabrication plant at
a bankruptcy auction and began immediately to refurbish and re-outfit
the facility. He renamed the company Spouses Express and proceeded
immediately to rejuvenate the business. The two boys began working
in the Company while in high school.
Spouses Express designed, built and installed custom metal signs,
primarily for independent and regional family restaurant chains throughout
a number of Southeastern states. Customers were lower/mid to mid-priced
independent and regional chains such as Waffle House, Krispy Kreme,
Pancakes Galore and Captain Jack’s. By 1980 sales had been
rebuilt to over $20 million, and Spouses Express was considered number
one in its industry.
Anthony was the sales and marketing talent, and was at his best
in front of customers. He could instantly translate a customer’s
need into the design of a product, and was well known throughout
the trade associations of which customers were members. He had graduated
from the University of Tennessee, married Frances Higgins and had
two daughters. The youngest daughter, Angie, worked at Spouses Express
as a product designer.
Michael had not finished college, dropping out in his sophomore
year to come full-time into Spouses Express. His strength was in
the operations and manufacturing. He was generally given credit for
state-of-the-art facility. He and his wife, Emma, had three sons,
two of whom were working in the Company. One covered two states as
a salesman. The other was coming up through the ranks in the manufacturing
organization. Both were in their twenties with hopes of advancing
in the business.
Vincent had left the Company entirely to Anthony and Michael. Each
owned fifty percent of the stock while none of their four older siblings
were involved in any way. Anthony and Michael worked well together
for years. But things began to change during the mid-1980’s.
Anthony was devoting more and more time to outside interests, including
state-wide politics and a variety of charities. Frances had inherited
substantial assets of her own and the couple enjoyed traveling in
social circles consistent with an upscale life-style. Consequently,
Anthony spent less time supervising the sales force and several salesmen
were beginning to complain privately to Michael about his lack of
The strain between the families increased in the late 1980’s.
The decision was made to expand the business by designing and building
the actual restaurant structures. As part of the necessary financial
package, the bank required personal guarantees, not only from Anthony
and Michael, but also each wife. Frances, in particular was extremely
uneasy but succumbed to the pressure from both Michael and Anthony
to sign the guaranty agreement.
While customers were thrilled with the company’s expansion,
the start-up did not go well. Technical and field installation problems
had resulted in costly delays, operating loses and a strain on the
company’s finances. The bank had become concerned enough to
call in its Special Assets Division. After a year of tense and often
bitter confrontation with the bank the brothers reluctantly agreed
to partially downsize the business as a condition of restructuring
the loans. Operations began to improve and the bank, while still
believing that the Company was undercapitalized, was less concerned
about its short-term exposure.
The relationship between Anthony and Michael continued to deteriorate.
Michael accused Anthony of waffling, of being unwilling to take a
stand on any issue so that he could later second-guess everything.
He also accused Anthony of neglecting his responsibility to manage
the sales people. Sales force turnover had increased. Anthony’s
absenteeism and outside interests also had become a great sore point
with Michael. On the other hand, Anthony claimed Michael was a hip-shooter,
made decisions too quickly without proper due diligence and consideration
of the long-term risks, and tolerated incompetent friends in plant
management. Anthony and Frances believed Michael forced them into
accepting the decision to expand into the new product line and personally
guaranteeing the debt. They also believed that Michael’s management
style was directly responsible for the start-up problems which had
brought the Company to the brink of bankruptcy.
The morale of non-family key executives was poor. The management
team seemed unable to make even the simplest decisions, as every
matter brought before the group degenerated into a stalemate between
Anthony and Michael - Anthony saying, “I told you so” while
Michael lamenting “You are interfering with everything I am
trying to do.” Several chief financial officers had quit and
a key regional sales manager threatened to leave.
On a number of occasions during this period, Anthony had said he
wanted to sell his interest, pay his debts, and devote the rest of
his career to his outside interests. Several times, potential transactions
seemed ready to close only to have Anthony back down at the last
minute saying he had changed his mind, was going to get more involved
again and “straighten this company out.” But it never
The tension between Frances and Anthony and Michael was mounting.
Michael and Frances had had to be physically kept apart during the
first closing of the restructured financial package. Another loan
package renewal was only months away when Frances made it very clear
to both men she would not be “coerced or threatened” into
signing any more personal guarantees.
2. The Solution
- Elevated Anthony to Chairman and appointed new Vice President
of Marketing from within the Company. Frances was actually
instrumental in convincing Anthony to go along with the Plan.
negotiations to sell Anthony’s interest in
the Company. A qualified investor group that had expressed
interest in the past and was compatible with Michael came forward.
This time a transaction was completed. The Company also benefited
by the resultant infusion of new working capital and a new
- Strengthened Management in the Modular Building Arena.
Needed steps were taken which had been impossible previously
because of the conflict between Anthony and Michael.
the Field Sales Force. The new Vice President of Sales
became an active hands-on leader, something badly needed
and welcomed by the sales force.
- Made it Possible for Anthony
and Michael to become friends again. Michael tearfully commented
that the cloud lifted during the closing of Anthony’s stock sale. Brothers, brothers’ wives
and cousins began to enjoy each other again in non-business