Punching above their weight

The David versus Goliath metaphor within the business world is one that can inspire passionate dialog among investors, business owners, customers and economists, to name just a few constituencies.

Entrepreneurial spirit is a noble driving force in any economic system that wants to promote opportunity and class mobility.

At the same time, creating and managing a company that is large enough to attract investors and deploy capital also is a virtue of an economic system that values investments in plants and equipment and a suitably low unemployment rate.

For the past several decades, the recycling industry has been one of dozens of arenas where these two forces meet and compete.

Fifteen years into the new millennium, the recycling industry hosts several publicly traded corporate powerhouses, including steelmakers Nucor Corp., Commercial Metals Co. (CMC) and Steel Dynamics Inc. (SDI) in the metals sector as well as Waste Management Inc., Republic Services and Rock-Tenn on the nonmetallics side.

Smaller companies keenly feel the presence of these and other large firms in many market regions. The extent to which firms like these can genuinely consolidate the industry remains a question to many recyclers, who respect the advantages such Goliaths command but also point to ways in which the Davids in this scenario can stay viable.

Interviewed for a 2013 article in Recycling Today, Danny Rifkin of MetalX, Waterloo, Indiana, said the largest recycling companies fared no better in the turbulent economy of 2008 and 2009 than smaller enterprises did. “It appears to me the economic downturn has thwarted the type of [consolidation] that was the norm from the mid-1990s through 2008,” he remarked. “Many players in the industry—midsize, public, large, private, etc.—are all struggling to figure out how to adapt to what’s ahead and how to find a course that will produce stability and success.”

Rifkin and several of his family members who also are involved in MetalX are examples of individuals who have left a larger recycling company to start all over again. Rifkin founded MetalX in 2012, several years after selling his previous company, OmniSource, to Fort Wayne, Indiana-based SDI.

The battle for market share in the recycling industry among companies of all sizes seems poised to remain part of the industry’s narrative, though recyclers’ opinions regarding the future are not unanimous.
 

Tipped scales

When industry analysts, economists or business owners list the advantages a larger company enjoys over smaller rivals, one often sits atop that list: economies of scale.

“Large multilocation companies have the advantage of creating volume across a broader geographic area and can have resources that may not be available to a single-location business,” says Steven Siegel, vice president of Spartan Recycling Group.

Siegel, a 25-year veteran of the scrap industry, is another example of a recycler helping create the second iteration of a family business. While Spartan is a relatively recent family-owned startup in Spartanburg, South Carolina, the Siegel family is not new to the industry, having previously owned and managed Carolinas Recycling Group, which OmniSource/SDI purchased in 2008.

Jeffrey Mallin of Kansas City, Missouri-based family recycling business Mallin Cos. is another recycler who cites scale as a competitive factor. “Economies of scale; less duplication of effort on the administrative end; more support on legislative, safety and other compliance issues; and more capital expenditure dollars to continue to upgrade technology,” replies Mallin when asked about the advantages enjoyed by large, multilocation companies.

The Investopedia website describes economies of scale as: “The cost advantage that arises with increased output of a product. Economies of scale arise because of the inverse relationship between the quantity produced and per-unit fixed costs.”

The reverse retail nature of the recycling industry does not lead to the same outcome as might be seen in other sectors: lower prices for buyers. Very few recyclers are striving to sell their No. 1 copper, shredded ferrous scrap or baled old corrugated containers (OCC) at a lower price.

However, as Mallin indicates, scale—when properly managed—can help larger companies collect and process their material at a lower overall cost, thus increasing their margins. These savings can come in the form of purchasing equipment and industrial supplies in bulk; investing earlier in newer, labor-saving or yield-enhancing technology; or having access to more affordable employee benefits. Scale also can provide access to more material through servicing national accounts.

The vertical integration of metals producers into the recycling chain also can lead to scenarios where a lower sales cost does come into play. Irving, Texas-based CMC has long contended that its scrap recycling operations are best off as a separate profit center, not as a source of low-cost supply for its steel mills. That approach may not be universal.

When steelmaker Nucor acquired multilocation scrap company David J. Joseph (DJJ) in 2008, then-CEO Daniel DiMicco commented, “The acquisition of DJJ [will] provide Nucor with global sourcing of many key steelmaking raw materials. DJJ’s rail services and logistics capabilities will allow Nucor to leverage the largest private railcar fleet in North America dedicated to scrap transportation. The industrial scrap programs of DJJ will also provide improved channels of raw materials to Nucor.”

Siegel says this strategy has had an impact on the options available to some smaller companies in the scrap sector. “Where there is an affiliation with a consumer (such as a steel mill), then large scrap enterprises will be first in line to supply their parent company with raw material.”

Siegel also is among those who point out that while there are advantages to being a large-scale company, entrepreneurs also can use their small scale to their advantage. “Smaller companies can operate with a much lower [total] cost structure,” he comments.

Sharon Kneiss, president and CEO of the National Waste & Recycling Association (NWRA), Washington, sums up the early stage advantages: “Unlike many industries, the waste and recycling industry has low entry barriers for new companies. All a company needs is a truck and a driver, the willingness to work hard and the desire to succeed.”
 

At your service

A large percentage of recyclers are quick to comment that theirs is above all else a service business. Providing prompt, personal and attentive service is the key to retaining customers, this tenet holds.

“Smaller companies can connect on a true local level with their customer base,” Siegel says when asked to consider advantages available to smaller firms.

It is difficult to overlook the service aspect when it comes to examining industry sectors where small and family businesses can survive and thrive versus those where they are a vanishing breed.

Heavily consolidated sectors include mining, petroleum refining and discount stores. These sectors reward scale for several reasons, but they also are largely absent a service aspect or (in the case of discount stores) that aspect often is overlooked in favor of low pricing and wider selection.

Retail sectors such as restaurants, taverns and hair salons, on the other hand, continue to attract and often reward entrepreneurs. Despite the presence of a McDonalds or Subway in nearly every ZIP code, diners seeking a new experience, specialty cuisines or attentive service have proven supportive of local restaurants in an enduring fashion.

Providing good service often entails close supervision and management, and some recyclers question how well larger companies can do that. It also can involve having the proper incentives in place.

“If you look at it from a textbook orientation, you would think [larger companies] could communicate and triangulate on picking up customers and boxing out competitors for scrap and making sure industrial accounts got handled and kept in the fold,” says Mark Lewon of Utah Metal Works, Salt Lake City.

“In practice, I don’t think it works that well,” Lewon continues. “The bonus structures often make it hard to do those kind of cooperative moves, and the communication is not that good. On the bonus side, people protect their own bonuses rather than being part of a larger agreement,” adds Lewon, who also serves as chair-elect for the Institute of Scrap Recycling Industries (ISRI), Washington.

Lewon’s viewpoint ties into the industry maxim “all scrap is local.” Before scrap can be processed, someone needs to know where it is being generated. Furthermore, that same person or relatively small company can gain that scrap generator’s enduring trust and business in part by providing attentive service.

Whether the scrap industry can continue to support family businesses and create entrepreneurs who can compete with publicly traded companies or whether economies-of-scale-driven consolidation is inevitable is a play with several acts remaining.
 

Unfinished script

In part because the recycling industry remains so fragmented, it can be difficult to get a handle on just how much market share lies in the hands of its largest companies and how much remains among regionally focused smaller companies.

While agreeing that smaller companies and entrepreneurs can still compete, many of the recyclers interviewed for this article believe consolidators have increased their market share in the past two decades.

“The scrap industry is still highly fragmented, but there has been consolidation over the past 20 years,” Siegel says. “There are not nearly as many family businesses in the scrap industry as in the past; the number has been reduced mostly through consolidation,” he adds.

Mallin’s view is similar. “There has been a large consolidation of business in our industry, more so in the recent past—say 10 to 15 years ago—than recently,” he says.

Lewon points out the consolidators are not only publicly traded companies. “Some of the bigger companies are definitely bigger than they were 10 years ago, but a lot of this is regional consolidation,” he remarks. “I really believe in regional consolidation because it makes sense. There are family businesses leading that trend as well, like Alter Trading and Padnos.”

St. Louis-based Alter Trading Corp., owned by the Goldstein family, has more than 50 facilities primarily in Iowa, Nebraska, Wisconsin, Minnesota and on the Gulf Coast in Alabama and Mississippi. Padnos, based in Holland, Michigan, and owned by the Padnos family, has more than 15 locations, predominantly in Michigan.

Although capturing market share through consolidation is a strategy of public companies and larger family businesses, entrepreneurs remain very willing to chip away when market share accrues in the hands of any single company in a region.

“After the wave of consolidation in the late ’90s many entrepreneurs saw an opportunity and launched new companies,” says Kneiss. “This entrepreneurial spirit is a strength of our industry.”

Immediately after saying consolidation has had an impact on his market in Missouri and Kansas, Mallin adds, “There has also been a surge of entrepreneurial spirit that has created new companies with great marketing and newer technologies in various commodities, which have a place and future in our industry.”

Those entrepreneurs are sometimes industry veterans with family roots in North America’s recycling sector, but they also may be recent immigrants who have moved to the U.S. specifically to seek out scrap for consuming facilities in China, India and other nations.

Although 2014 statistics indicate that China’s demand for U.S. scrap may have peaked, that nation likely is still several years from scrap self-sufficiency. Scrap trading figures also point to India being in a scrap-deficit situation. India-based family businesses are likely to continue the strategy of sending a family member to set up a trading office or even a processing plant in the U.S. or Europe into the future.

Entrepreneurs or second-, third- or even fourth-generation family members who run small and medium-sized recycling firms hardly are resting easy, thinking they can outlast all consolidation challenges.

“We’re likely to see another round [of consolidation] and another reduction in small business owners,” says Siegel. “But the industry is inherently local, and there will always be a place for the family business in scrap, as long as the knowledge and desire are passed onto the next generation.”

Lewon says, “I think there will always be family businesses in this industry. My brother [Chris] and I rely on each other and cover each other’s backs. It’s a good business model.”

The author is editor of Recycling Today and can be contacted at btaylor@gie.net.