Transcript
Speaker: The American economy has a hidden champion. Come and learn who it is. Welcome to The Market That Moves America, a podcast from the National Center for the Middle Market, which will educate you about the challenges facing mid -sized companies and help you take advantage of new opportunities.
Speaker: Hello and welcome to the first episode of The Market That Moves America. I'm Tom Stewart, the Executive Director of the National Center for the Middle Market. And I'm Doug Farrin, Managing Director at the Center. The National Center for the Middle Market was founded in 2011 as the first of its kind research center located at the Ohio State University Fisher College of Business.
Speaker: dedicated to mid -size companies. Our mission is to help middle market companies grow through a broad network of partnerships, through extraordinary content, vital supportive networks and communities, and valuable programs that help improve these companies' competencies and performance. Our current sponsors are SunTrust, Grant Thornton, and Cisco. This economic segment is understudied. In fact, a majority are privately held
Speaker: These companies are bigger than startups, but smaller than the Fortune 1000. It's really kind of a no man's land where they tend to identify more by industry ownership type or location or in relation to their customers.
Speaker: We've defined the middle market when we started out the center in 2011. We found that there were a lot of different definitions of what the middle market is. And so we took sort of a simplification process. Let's say that the middle market is the middle third of the private sector.
Speaker: Where do you find a third of output and a third of employment? And if you put those sliders, you find that there are about 200 ,000 companies with revenues between $10 million a year and $1 billion a year that produce a third of what we produce and employ a third of the people whom we employ.
Speaker: Another third is in smaller companies, small businesses, moms and pops, dry cleaners, startups, and so on and so forth. And another third is in the giants of the fortune and S &P 500. But here in the middle, 200 ,000 companies, $10 million to a billion dollars in revenue.
Speaker: Now, within that, they fall into three pretty distinct segments. The smaller group with revenues between $10 million and $50 million are sort of like large, small businesses. They may be in a single location, have a single division, a single P &L, and they may be somewhat younger than some of the companies that are in the core middle market or the larger ones.
Speaker: The second segment, the core of the middle market, are companies with revenues between $50 and $100 million. They're starting to develop functions. They may be starting to develop divisions. They still tend to be in one place. There are often local champions, pillars of their community, really important companies that have been around for a while. In fact, one of the interesting things about the middle market is the median age of these companies is 31.
Speaker: So they're not newcomers on average. They've been around for a while. And then that larger group with revenues between $100 million and $1 billion a year, they tend to start becoming international substantial exporters that may have more than one location. But those are the three bands of the middle market.
Speaker: But they have a number of things in common. As Doug said, they're bigger than small and they're smaller than big. I like to wisecrack that they are too big to qualify for exemptions from regulations and too small to shape the regulations to their own way, to their own liking. And above all, they have in common, or the middle market has in common, the fact that it is the unsung hero of American capitalism. It is what is really driving
Speaker: economic growth in the country. I mean, Doug, we've got some numbers that we collect every quarter on middle market growth. Talk about some of those numbers. Yes, one of the benefits of the Center has been our ability to collect a vast series of data on middle market companies that prior to the Center's existence really wasn't available, at least publicly.
Speaker: I like to refer actually back to the 2011 study that was used to launch the center at first here, and it actually shares the same name as this podcast. The Market That Moves America was our first white paper.
Speaker: And that paper was put together by meshing data from sources such as the US Census, the Bureau of Economic Analysis, Compustat, Dun & Bradstreet, as well as interviews with C -suite executives at close to 1 ,500 middle market firms. And we found some very fascinating insights about the forgotten middle.
Speaker: First, as you mentioned, Tom, these companies are providing a third of the private sector jobs in GDP in the United States. In addition, growth is consistent and constantly, as we've seen through our middle market indicators, outpaces both large and small business. Growth in terms of not only top line revenue, but also jobs.
Speaker: Another interesting statistic to share, in 2010, 27 % of large companies, those over a billion dollars, were still middle market firms in 2005. This segment also generates well over $10 trillion in total annual revenues, but perhaps more importantly, the middle market is a resilient job creator.
Speaker: As we've seen, while small businesses might receive credit for job creation, we also know that there's inevitably significant job destruction through failure rates. As the Bureau of Economic Analysis estimates, perhaps as high as 50 % of these small businesses are no longer around five years later.
Speaker: And that's not the case with the middle market. As you mentioned, Tom, the average age is 31 years old, so they've been around a while. And during the downturn of 2007 to 2010, while big business was shedding close to 4 million jobs, the middle market added over 2 million jobs. So as we've seen, quite a different, diverse, and powerful segment of companies.
Speaker: And as I said, and as Doug was saying, it's sort of the unsung story. The forgotten middle child, that group of people who go on doing their business and doing it remarkably well and very rarely get the attention. They don't command the attention of the behemoths of big business and they don't have the sort of romance that's attached to small business and starting up in the garage and so on and so forth.
Speaker: So, who are these guys? In fact, a lot of middle market companies are companies that you've heard of. Every professional sports team is a middle market company. So, when you go to a ball game, when you go to a basketball game, a hockey game, a football game, whatever your passion is, you're going to a middle market company. Companies like Ethan Allen, furniture maker, Tootsie Roll is a middle market company. Callaway Golf is a middle market company.
Speaker: And the middle market, we call it the market that moves America because it's a pretty important American phenomenon. I like to sort of think about waking up on the 4th of July and thinking what it would be like to have a middle market 4th of July. The first thing you might want to do is take your Annan flag. Annan is America's largest maker of flags.
Speaker: So you put your Anna American flag up on the flagpole outside your house. You might get your little red wagon or your little red tricycle made by Radio Flyer, another middle market company, and put your toddler on the trike or in the back of the wagon and head off to the 4th of July parade. The kid might want...
Speaker: a little lemonade and you might fill the thermos bottle, another middle market company with lemonade. And then when you come to the 4th of July parade, you might see a fire truck made by Sutfen. Sutfen is right across the river from us in Columbus in Dublin, Ohio. And I'm sort of killing myself that I haven't yet gone to see the Sutfen factory. My inner
Speaker: eight -year -old boy wants to go see a firetruck factory and ride on a firetruck almost more than anything else. So you go to your parade, see your SUTFAN firetruck, and then you maybe want to go to a ballgame. And again, as I said, those professional sports teams are middle market companies, and after the game, come home.
Speaker: Fire up your Weber Grill, another middle market company. Put your Nathan's Franks on the Weber Grill. Pop open a Sam Adams beer or an Abita beer or a Sierra Nevada beer.
Speaker: One of the best things about the middle market is the food, and the very best thing about the middle market is the beer. If a beer is really good but you haven't heard about it, it's a microbrew. If a beer is really terrible and you have heard about it, it's one of the big breweries. But if it's really good and you have heard about it,
Speaker: Sam Adams, Abita Beer, so on and so forth. It's a middle market beer. The one exception to that is Yingling in Pennsylvania. Yingling beers are worth drinking, but Yingling just passed over a billion dollars a couple years ago. So they're no longer a middle market beer, but they still have that middle market flavor.
Speaker: And so then, having had a couple of those beers, you might go out and watch the fireworks show that would be put on perhaps with the fireworks coming from the Zambelli Company, another middle market company. So there you go, from Annan to Zambelli, a 4th of July, a middle market 4th of July. As Doug said, most of these companies are private.
Speaker: They're not publicly traded, only about 15 % trade on the stock market. Of the rest, the 85 % that are private. About a third are family owned. About a third have private equity investment or a substantial amount of private equity ownership. And about a third are other. They may be professional services firms, partnerships. In the Amlaw 100 list of America's largest law firms,
Speaker: 85 of those are our middle market companies, so you may have a bunch of partnerships. If you took this together, if you took all of these middle market companies together and measured their GDP as we do at the National Center for the Middle Market, it would be the third largest economy in the world.
Speaker: Now, those of you who know about some of these European economics know that the German middelstand, its middle market, is world -famous and it's famous and renowned in Germany. They're very proud of their middelstand. There's even a minister in the government to support the middelstand. But here the middle market is
Speaker: Sort of forgotten. Doug and I were at a Chamber of Commerce of the State of Ohio meeting a couple years ago when Governor Kasich was giving a talk. And just about every third sentence out of his mouth, like that of almost every politician, was, it's the small business person and the entrepreneur, the small business person and the entrepreneur.
Speaker: Doug and I had to restrain ourselves from sort of rushing the podium and saying, no, Gov, you got it wrong. Look at this guy, this 31 -year -old company, this guy with the factory at the end of the road who's now hiring the daughters and sons of the men and women that were hired in the first generation. That's the core and the heartbeat of the U .S. economy.
Speaker: So I think the question is, why are we so passionate about the significance of these companies? Well, if when you think about the job creation, in our estimate, over 50 million jobs in the middle market, who are really the beneficiaries of those jobs? I know, Tom, you like to say it's not just the 50 million workers, it's the families, it's the sons and daughters, it's the
Speaker: It's the communities that are really the beneficiaries of middle market prosperity and growth. In addition to sustainable jobs, middle market firms tend to be more linked and affiliated and pillars of their communities, as you said earlier. Why is that? Well, they're more likely to have local and regional relationships in their supply chains than maybe what we see in large companies that are more global in nature.
Speaker: And they also have more scale and reach than small businesses and they have the ability to impact their cities and communities. So while we may hear shop small, perhaps we should say recognize the midsize.
Speaker: You don't see the mayor on the front page of the local paper touting the middle market manufacturing firm that's adding 20 or 30 jobs this month. It's typically the more glamorous stories of companies relocating or large stadiums being built. I'd like to share
Speaker: And steal maybe something from our friends at the Brookings Institute in DC about where economic development organizations tend to focus their time. And it's about stealing stadiums and startups. Stealing, taking other large businesses and having them move from one city or state to another. Having local subsidies to attract stadiums, building things, infrastructure, or startups. How many incubators do we hear about?
Speaker: But who is actually paying attention and supporting the middle market? That's really our story and part of our mission here at the center. I did want to share a little bit more detail about the demographics of the middle market. You think about the top four industries, professional services, manufacturing, retail, and wholesale. In fact, according to our estimates, middle market companies make up nearly 40 % of all US manufacturing.
Speaker: When you think about the geographies, they tend to be more concentrated in the Midwest and West, although middle market companies are everywhere. They're in every state, they're in every community. And the segments that you described, most of those firms being under 50 million, there's a lot of opportunity to professionalize, to bring more insight, more management practice to these firms. And that's really where the center looks to play and where we want to help these companies grow. You know, it's interesting, we have
Speaker: We're at Ohio State. We are an academic center paid by the university and, as Doug mentioned, sponsored by SunTrust Banks and Cisco Systems and Grant Thornton, but the focus
Speaker: of our research and the stuff that excites us. Maybe it's because Ohio State is, after all, a land grant university. The focus is on the practical aspects of what these companies do and helping them do even better.
Speaker: We're the only center of our kind, and that almost reflects this gap in the map of understanding business. Not only who these guys are, but what their issues are and what their challenges are. Just to take an example, a lot of what we know as scholars or as consultants or business experts, a lot of what we know about innovation or about globalization is predicated on our knowledge of big companies.
Speaker: They're publicly traded. There's lots of data. There's lots of newspaper stories, lots of magazine articles. The big consulting firms do research for them. So you get ideas, for example, with innovation about how to manage a portfolio of innovation projects so that you can spread your risk over quite a number of projects. That's terrific if you're General Electric or Procter & Gamble or IBM.
Speaker: But the typical middle market company we discovered has three projects in a year. So portfolio theory isn't going to work. So part of our mission is to think,
Speaker: How can we come up with, how can we research and develop ideas that are sort of developed in the native language of mid -sized companies to help them do better? And another important thing for us is to find out who these companies are and tell their stories. And we'll be telling a lot of them in the course of this podcast. These are some of the coolest companies in the world. I mentioned SUTFEN, the firetruck maker.
Speaker: company, they're in the southeast, recently been introduced to one of America's biggest makers of hardwood flooring and operators of the biggest hardwood sawmill in the United States. You will find cool logistics companies, as I said, a lot of food companies, but there's some wonderful stories here
Speaker: and stories that need to be connected, wanna be connected to two things. First of all, the impact on communities and the economy and that importance. And second of all, ideas that can help those companies get even better than they are. So Tom, I'm gonna put you on the spot here. We've been doing this now at the center for five plus years. What has been the most surprising thing
Speaker: about the middle market or the thing that you've learned through the course of this work that really resonates or you think is the most fascinating part of these companies? That's an unfair question, Doug, but I'm going to spin it back to you. But the reason it's unfair is you've cold called me and you at least have something. I think it's two things. The first is I've spent my career
Speaker: looking at big companies. I worked at Fortune for a long time. I was at Harvard Business Review. I was at a major consulting firm. So the discovery of these companies has been like, wow, who knew? I mean, so that's been one thing. But the other thing that has fascinated me and
Speaker: those who've been around me have heard me talk about it, is what I think of as sort of a maturity model as these companies grow. There was a great now dead Harvard Business School professor named Alfred Chandler, who did some work about how companies grow and how they evolve as they grow. And you see it in the middle market. You see a stage where, and that's that smaller segment, where the companies are
Speaker: Just a few of us gathered around a table. We've grown to a certain size. We maybe have one product and maybe a few variations on that product. But we'll really be able to manage it pretty informally. But then suddenly or somewhere, 50 million, maybe a little more, a little less, we start needing functions.
Speaker: We can no longer let our bookkeeping be done by the guy at the accounting firm down the block. We actually need to bring somebody in. We no longer have the family lawyer. We actually have an in -house counsel with maybe minor duties, but in -house. Same thing with HR. We start creating functions. We start creating a marketing director instead of just a sales guy. And then there's another stage.
Speaker: $200 million, something like that, where we start creating divisions. We have more than one P &L, more than one location. Sales and marketing start fighting. And so things happen at this level. And I'm fascinated by the way companies navigate those inflection points.
Speaker: The other thing I'm fascinated by—so I said two, but there's a third—is what mid -sized companies do to attract talent. I think these are some of the neatest places to work. The CEO knows your name, you know his or her name, they know your kid's name, your dog, your parrot.
Speaker: but they're not well known. And so they have really interesting talent challenges and because they're growing so fast, you know, A, they're great places to work because wow, you're working for a growing place. But B, you have this challenge of getting people, I've heard somebody say it's the challenge of getting an NBA player to come and play in a high school gym. So how do you get your talent message out? So that's sort of a third thing.
Speaker: I don't know, Doug, you've been doing it longer than I. You cut the ribbon on the center. Talk about what – actually, tell me about what continues to blow your mind about the middle market. Well, I think similar to you, Tom, my career – I started at a small business, spent the middle part of my career at a Fortune 500 company.
Speaker: Since coming to the center, I've just been able to learn so much and I think the fascinating part, as you mentioned, there's not much in business that hasn't been explored by someone or some institution. And the fact that we're kind of at the forefront of bringing more attention, insight, analysis, tools,
Speaker: you name it, to such an important group of companies, I think is what continues to, number one, excite me, but also fascinate me that there's just so much opportunity. These firms are doing well. But as we've seen through a lot of our research and a lot of the work we've done over five plus years, there's opportunity for even more. And it's figuring out the ways to do that. And it's figuring out how to make connections. For example,
Speaker: As I mentioned, a lot of these companies don't necessarily recognize themselves as middle market. They may be more likely to say, I'm a family -owned maker of widgets located in Toledo, Ohio that supplies the big three automakers. They're not gonna say, well, I'm a mid -sized firm. So the challenge for us has really been to try to continue to educate about what the middle market is.
Speaker: to get companies and other audiences, policymakers, media, academics, students. There's such a vast audience of people who really need to understand this that I think makes our work so exciting.
Speaker: So what are we going to do in the next few episodes of this podcast? We're going to be talking about talent. We're going to be talking about growth. As Doug pointed out, the middle market is where the growth is. And we'll want to unpeel that onion and explore some of the mysteries of growth and the secrets of growth for mid -sized companies. We'll be bringing experts to talk about some issues about managing cash,
Speaker: managing people better, managing your operations better. And above all, I hope we'll be bringing you some great stories from companies that might be examples that you want to learn from and we'll be able to learn from.
Speaker: In the meantime, tweet us with your feedback. We're at Middle Market Center on Twitter. Go to our website, middlemarketcenter .org, and tell your friends. We'll be here, and we're looking forward to telling you more about the market that moves America. Again, I'm Tom Stewart, and with me, Doug Farron. Thanks a lot.
