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Matching the product to the market — Grundfos' way ahead
company visit
Matching the product to the market — Grundfos’ way ahead Jens Jørgen Madsen had been CEO and group president of Grundfos for a year when he talked to World Pumps. He was the first person from outside the Grundfos inner circle of family members to attain such high office and was eager to talk about his first 12 months in the hot seat.
A
lthough at the time of the interview, Grundfos’ figures for its turnover during 2003 yet to be released, Mr Madsen knew they showed that despite difficult market conditions the Grundfos Group was able to increase its turnover by approximately 4% to 1.5 billion and its pre-tax earnings by an entire 48% to 124 billion.
Grundfos’ largest market is Germany, which thanks largely to its strength in its heating and buildings services markets, grew last year by 7% and had a turnover of 200 million. Madsen attributed the figures to improved efficiency across the entire group, “We have strengthened our sales organization, and we are now more focused and can take market share. We have centralized our back-office ordering department. We also believe that specialized sales forces are more efficient than sales forces that sell everything.” Grundfos has 63 sales and production companies around the world. Significantly, 10-12 acquired companies represent 15=20% of Grundfos’ turnover. Grundfos started buying 15 years ago and its most recent acquisition of the German pump company Hilge, known for its production of high quality stainless steel hygienic pumps mainly for the food and pharmaceutical markets, attracted some attention. This is not least because up until now Grundfos had no experience of that market. However, Grundfos does not acquire companies without a strategy. “You cannot say Grundfos’ acquisition of Hilge was incidental,” said Jens Jørgen Madsen, “we have had this segment as part of our strategy for some years.” By saying this he confirmed that Grundfos was still in acquisition mode and was following a definite plan of what to buy and what markets to move into. Madsen went on to explain that the Hilge deal came through Grundfos’ German operation at the start of 2003 when Grundfos heard that Hilge was for sale. The family company has a 130-year history and it was looking for another company it felt it could trust. Hilge probably did discuss a deal with the competition, but felt that the values of Grundfos were the same as their own. Madsen felt that Hilge’s product range fitted perfectly with that of Grundfos, which although produces stainless steel pumps, unlike Hilge, does not serve the hygienic industry. Hilge covers a new market segment for Grundfos, making hygienics an area into which Grundfos can move by introducing its sales force to Hilge’s customer base and explore cross-selling opportunities.
WORLD PUMPS April 2004
Jens Jørgen Madsen - Grundfos president and CEO
Hilge has a sales force of 220, which is comparatively small, but to sell Hilge products successfully Grundfos must undergo an education process. Whether it is Grundfos’ or Hilge’s sales forces that perform the sales tasks will depend upon who has the strongest customer interface. In areas where Hilge is not so well known, Grundfos will be responsible for sales. These include countries such as China, France and Denmark. However, Madsen stressed that Hilge will continue as an independent company as the Hilge brand is very strong, particularly in Germany where the brand was tested and came out on top — even higher than that of Grundfos. Madsen made no secret of the fact that the main reason behind the Hilge acquisition was to break into the very promising hygienic pump market that currently has no one dominant player. Grundfos reckons that a conservative estimate for the size of the hygienic pump market segment is around E1 billion worldwide for all hygienic pumps. However, Hilge has only a E30 million share of this and while Madsen admits that Grundfos has a long way to go in terms of growth, he also sees it as a fantastic opportunity with the expanding markets in Asia, Eastern Europe and Russia now opening up. This is all to the good for Grundfos as these markets become increasingly competitive.
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company visit Hilge acquisition The largest buyer in this market is the brewing industry, followed by pharmaceuticals and food. Madsen’s optimism is not misplaced. A recent forecast stated that in the past ten years in China, the production of beverages has maintained an annual average growth of 17%. It is estimated that in 2005, the total productivity of the beverage sector will reach 27 million tonnes. By way of another example, the world’s largest brewery is being constructed outside Moscow. Here, Hilge will be supplying pumps to sections that have to be upgraded to comply with new EC directives. Hilge provides a product range and market knowledge Grundfos does not possess and is seen as a main player in the brewery industry. Grundfos believes that by combining its sales force with new products from Hilge it will be well placed to take a larger share in that 1bn worldwide market segment. “By taking Hilge products and introducing them to Grundfos ways, we expect to double turnover from 30 million to 60 million within five years,” predicted Madsen. Mr Madsen stressed that some of the key issues for his company were ‘focus and priority’ and ‘measured against profit and turnover’. Each acquisition must represent a strategic fit and contribute profit to sales targets. So Grundfos has no plans to acquire companies outside the pump business as there are enough opportunities in the core business — pumps, booster systems, electronics and motors. When talking about further acquisitions, Madsen was reluctant to be pinned down, other than confirming that Grundfos will continue to look for products it can fit into its cross-selling model. However, he did confirm that Grundfos was screening the US market for acquisitions in different sectors. “Perhaps in the future, Grundfos will focus even more on the US,” continued the CEO. “Currently we sell US$120 million of products in there — representing 7% of our turnover. This compares with a US$1 billion turnover in Europe. The US market is very difficult to break into and it is particularly difficult to do so with a product range aimed at Europe. The US is a huge area to cover and with many existing opportunities in Europe presenting themselves it becomes a question of priority.” The next part of its strategy for the US will see Grundfos looking carefully at distribution — ready-made for the US market. “We are in the middle of a process to find the right strategic acquisition, but it is not easy to buy in the US as there it is relatively expensive compared with Europe.” So what of the rest of the world? Germany has always been strong in heating and building services and is now showing a steady growth in wastewater of 20%. Perhaps surprisingly, the second biggest growth area for Grundfos is the UK. China has an enormous industrial segment, while India has a burgeoning water supply market. Exporting into India has traditionally
8
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met with the infamous tax wall; Grundfos has circumnavigated this by producing parts outside the country, but has the finished products assembled inside. These markets are expected to grow and Grundfos is doubling its capacity in China from 12 500m2 to 25 000m2 to support this growth. Grundfos is also turning to new markets in Russia and eastern Europe. Russia has an enormous building service industry and Grundfos has established its Hungarian factory as its low-cost production facility in Europe. Grundfos has also set up a new sales company dedicated to the Ukraine as it feels that the market there — in heating, water and wastewater — is mature enough to warrant such a move. However, there are no plans as yet to expand dedicated services. Having recently reviewed its five-year strategy plan, Grundfos envisages no major changes, but has identified two targets: real 10% profit before tax in 2005 and 2 billion turnover in 2007. Madsen said that achieving these would be possible because Grundfos is a Foundation, so income that would have been destined for shareholders in public companies, was instead reinvested. Investments, therefore, are self-financed and not reliant on banks. Madsen was proud that Grundfos ploughed 4 — 4.5% (80 million) of its worldwide turnover back into research and development, which he stated, was more than Grundfos’ nearest competitors. Additional profit comes from reduced costs and greater sales. “Better customer interface with specialized sales forces gives the customer a better offering,” said Madsen.
Life Cycle Costs When it came to the subject of Life Cycle Cost (LCC) and whether there was a real desire from customers to invest in energy efficient pumps, Madsen was quick to dismiss this notion from experience by saying that “Often customers do not worry enough about long-term costs.” However, he believed that Grundfos should do its own marketing to push for more energy-efficient pumps. He believed that one day these will become standard, but first they would have to be supported by legislation. “There is always fear of new products and this is our marketing challenge, to get more use of efficient pumps.” Grundfos is now taking its energyefficient offering to the new markets in Eastern Europe. Madsen observed that while Switzerland and Germany are the most energy-efficient countries, the US is less energyaware as energy prices are very low. “If prices rise, LCC issues will become more important and easier to sell on. The three things that push for LCC are cost of energy, legislation and Grundfos’ own marketing efforts.” It will be interesting to see how much of this actually takes place over the coming years. The success, or otherwise, of getting its customers to take LCC seriously, will be reflected in the sales figures. FOR MORE INFORMATION GO TO: HTTP://WWW.GRUNDFOS.COM
WORLD PUMPS April 2004
Matching the product to the market — Grundfos’ way ahead Jens Jørgen Madsen had been CEO and group president of Grundfos for a year when he talked to World Pumps. He was the first person from outside the Grundfos inner circle of family members to attain such high office and was eager to talk about his first 12 months in the hot seat.
A
lthough at the time of the interview, Grundfos’ figures for its turnover during 2003 yet to be released, Mr Madsen knew they showed that despite difficult market conditions the Grundfos Group was able to increase its turnover by approximately 4% to 1.5 billion and its pre-tax earnings by an entire 48% to 124 billion.
Grundfos’ largest market is Germany, which thanks largely to its strength in its heating and buildings services markets, grew last year by 7% and had a turnover of 200 million. Madsen attributed the figures to improved efficiency across the entire group, “We have strengthened our sales organization, and we are now more focused and can take market share. We have centralized our back-office ordering department. We also believe that specialized sales forces are more efficient than sales forces that sell everything.” Grundfos has 63 sales and production companies around the world. Significantly, 10-12 acquired companies represent 15=20% of Grundfos’ turnover. Grundfos started buying 15 years ago and its most recent acquisition of the German pump company Hilge, known for its production of high quality stainless steel hygienic pumps mainly for the food and pharmaceutical markets, attracted some attention. This is not least because up until now Grundfos had no experience of that market. However, Grundfos does not acquire companies without a strategy. “You cannot say Grundfos’ acquisition of Hilge was incidental,” said Jens Jørgen Madsen, “we have had this segment as part of our strategy for some years.” By saying this he confirmed that Grundfos was still in acquisition mode and was following a definite plan of what to buy and what markets to move into. Madsen went on to explain that the Hilge deal came through Grundfos’ German operation at the start of 2003 when Grundfos heard that Hilge was for sale. The family company has a 130-year history and it was looking for another company it felt it could trust. Hilge probably did discuss a deal with the competition, but felt that the values of Grundfos were the same as their own. Madsen felt that Hilge’s product range fitted perfectly with that of Grundfos, which although produces stainless steel pumps, unlike Hilge, does not serve the hygienic industry. Hilge covers a new market segment for Grundfos, making hygienics an area into which Grundfos can move by introducing its sales force to Hilge’s customer base and explore cross-selling opportunities.
WORLD PUMPS April 2004
Jens Jørgen Madsen - Grundfos president and CEO
Hilge has a sales force of 220, which is comparatively small, but to sell Hilge products successfully Grundfos must undergo an education process. Whether it is Grundfos’ or Hilge’s sales forces that perform the sales tasks will depend upon who has the strongest customer interface. In areas where Hilge is not so well known, Grundfos will be responsible for sales. These include countries such as China, France and Denmark. However, Madsen stressed that Hilge will continue as an independent company as the Hilge brand is very strong, particularly in Germany where the brand was tested and came out on top — even higher than that of Grundfos. Madsen made no secret of the fact that the main reason behind the Hilge acquisition was to break into the very promising hygienic pump market that currently has no one dominant player. Grundfos reckons that a conservative estimate for the size of the hygienic pump market segment is around E1 billion worldwide for all hygienic pumps. However, Hilge has only a E30 million share of this and while Madsen admits that Grundfos has a long way to go in terms of growth, he also sees it as a fantastic opportunity with the expanding markets in Asia, Eastern Europe and Russia now opening up. This is all to the good for Grundfos as these markets become increasingly competitive.
www.worldpumps.com 7
company visit Hilge acquisition The largest buyer in this market is the brewing industry, followed by pharmaceuticals and food. Madsen’s optimism is not misplaced. A recent forecast stated that in the past ten years in China, the production of beverages has maintained an annual average growth of 17%. It is estimated that in 2005, the total productivity of the beverage sector will reach 27 million tonnes. By way of another example, the world’s largest brewery is being constructed outside Moscow. Here, Hilge will be supplying pumps to sections that have to be upgraded to comply with new EC directives. Hilge provides a product range and market knowledge Grundfos does not possess and is seen as a main player in the brewery industry. Grundfos believes that by combining its sales force with new products from Hilge it will be well placed to take a larger share in that 1bn worldwide market segment. “By taking Hilge products and introducing them to Grundfos ways, we expect to double turnover from 30 million to 60 million within five years,” predicted Madsen. Mr Madsen stressed that some of the key issues for his company were ‘focus and priority’ and ‘measured against profit and turnover’. Each acquisition must represent a strategic fit and contribute profit to sales targets. So Grundfos has no plans to acquire companies outside the pump business as there are enough opportunities in the core business — pumps, booster systems, electronics and motors. When talking about further acquisitions, Madsen was reluctant to be pinned down, other than confirming that Grundfos will continue to look for products it can fit into its cross-selling model. However, he did confirm that Grundfos was screening the US market for acquisitions in different sectors. “Perhaps in the future, Grundfos will focus even more on the US,” continued the CEO. “Currently we sell US$120 million of products in there — representing 7% of our turnover. This compares with a US$1 billion turnover in Europe. The US market is very difficult to break into and it is particularly difficult to do so with a product range aimed at Europe. The US is a huge area to cover and with many existing opportunities in Europe presenting themselves it becomes a question of priority.” The next part of its strategy for the US will see Grundfos looking carefully at distribution — ready-made for the US market. “We are in the middle of a process to find the right strategic acquisition, but it is not easy to buy in the US as there it is relatively expensive compared with Europe.” So what of the rest of the world? Germany has always been strong in heating and building services and is now showing a steady growth in wastewater of 20%. Perhaps surprisingly, the second biggest growth area for Grundfos is the UK. China has an enormous industrial segment, while India has a burgeoning water supply market. Exporting into India has traditionally
8
www.worldpumps.com
met with the infamous tax wall; Grundfos has circumnavigated this by producing parts outside the country, but has the finished products assembled inside. These markets are expected to grow and Grundfos is doubling its capacity in China from 12 500m2 to 25 000m2 to support this growth. Grundfos is also turning to new markets in Russia and eastern Europe. Russia has an enormous building service industry and Grundfos has established its Hungarian factory as its low-cost production facility in Europe. Grundfos has also set up a new sales company dedicated to the Ukraine as it feels that the market there — in heating, water and wastewater — is mature enough to warrant such a move. However, there are no plans as yet to expand dedicated services. Having recently reviewed its five-year strategy plan, Grundfos envisages no major changes, but has identified two targets: real 10% profit before tax in 2005 and 2 billion turnover in 2007. Madsen said that achieving these would be possible because Grundfos is a Foundation, so income that would have been destined for shareholders in public companies, was instead reinvested. Investments, therefore, are self-financed and not reliant on banks. Madsen was proud that Grundfos ploughed 4 — 4.5% (80 million) of its worldwide turnover back into research and development, which he stated, was more than Grundfos’ nearest competitors. Additional profit comes from reduced costs and greater sales. “Better customer interface with specialized sales forces gives the customer a better offering,” said Madsen.
Life Cycle Costs When it came to the subject of Life Cycle Cost (LCC) and whether there was a real desire from customers to invest in energy efficient pumps, Madsen was quick to dismiss this notion from experience by saying that “Often customers do not worry enough about long-term costs.” However, he believed that Grundfos should do its own marketing to push for more energy-efficient pumps. He believed that one day these will become standard, but first they would have to be supported by legislation. “There is always fear of new products and this is our marketing challenge, to get more use of efficient pumps.” Grundfos is now taking its energyefficient offering to the new markets in Eastern Europe. Madsen observed that while Switzerland and Germany are the most energy-efficient countries, the US is less energyaware as energy prices are very low. “If prices rise, LCC issues will become more important and easier to sell on. The three things that push for LCC are cost of energy, legislation and Grundfos’ own marketing efforts.” It will be interesting to see how much of this actually takes place over the coming years. The success, or otherwise, of getting its customers to take LCC seriously, will be reflected in the sales figures. FOR MORE INFORMATION GO TO: HTTP://WWW.GRUNDFOS.COM
WORLD PUMPS April 2004