Photo Opportunity

IN THE BEGINNING, THERE WAS KODAK. KODAK cameras. Kodak film. Kodak processing. Kodak paper and processing supplies. As America fell in love with photography, it fell in love with Kodak.

Not so the Justice Department. In 1954, Eastman Kodak Co.'s success in dominating the photographic industry finally prompted an antitrust suit. In the consent decree that settled the suit, Kodak agreed that in the United States it would no longer sell processing as part of the price of its film. The agreement spawned a new industry of small local photo processors and a few larger companies, too. The largest of them was Berkey Photo.

In 1976, Steve Bostic became president of Berkey's photo-processing division, and in three years would see its sales climb from roughly $68 million to $90 million. Bostic, then only 33, expected to become Berkey's next chief executive, but in 1979, an aging Ben Berkey decided he would keep things under his own control for the indefinite future. Bostic attempted a hostile takeover, but his short-lived campaign to oust the old man ended in defeat. It was out of that defeat that American Photo Group Corp. (APG) was born.

Bostic's analysis at the time was that the photo-processing industry was in the midst of a radical transition. More Americans were taking pictures, but the regional photo processors were in trouble. Snapshots had become a commodity, sold on the basis of price and quick delivery. Even as prices were dropping, costs were rising, the result of costly nighttime wages and expensive new equipment that the overnight processing demanded. The new technology also created huge amounts of expensive new capacity, which intensified the spiral of price cutting and fierce competition. Margins were becoming badly squeezed. By 1981, some of the smaller regional processors were looking for a way out.

Enter Bostic's Photo Resources Corp. -- d/b/a American Photo Group -- with a simple strategy: bring together some of the best of the regionals into a national processing company with national economies of scale. Using $250,000 of his own money and many millions in borrowed capital, Bostic made 10 acquisitions in rapid succession, assembling a network of 20 plants and 1,600 employees serving outlets in every state but Hawaii. By the end of five years, Bostic and his wife, Alice, found themselves with sole ownership of a company doing $78 million a year in sales -- and with the top spot on the 1987 INC. 500.

"We're just getting this business off the ground," Bostic told me on my first visit to his Atlanta headquarters. "My ambition is to build a billion-dollar company and control it. We're 10% of the way there." The next time Bostic called, he said he wouldn't make it to a billion after all. Maybe next time, he said.

Steve Bostic has the classic Main Street background of the INC. 500 founder. He grew up in small-town, Indiana, working in his parents' sporting-goods store. Married after high school to his kindergarten sweetheart, he was the first in his family to go to college, working his way to a degree in marketing and economics at Indiana University by cleaning the offices of three doctors and the local Methodist church. After college, he satisfied his entrepreneurial instincts by buying two Burger Chef franchises in Florida with his small savings and money borrowed from his father-in-law. But when a road rebuilding project cut off the expected flow of customers, the business almost went bankrupt, and Bostic sold out, retreating to the relatively secure corridors of big business.

His subsequent career would also sound familiar to the CEOs of the INC. 500. He'd climb near the top of two different public companies, each time to find himself running out of rope. From regional sales rep at American Hospital Supply Corp., he'd moved to marketing vice-president and then division manager of Pepsico's North American Van Lines. His three-year presidency at Berkey came after that, culminating in the unsuccessful takeover attempt in 1979.

"I started APG because I had no other options," he remembers. "I began to realize that it might be riskier to be in a large corporation than to take a stab at starting something of my own."

In steering acquisition-propelled APG, Bostic looked for regional processors that had kept equipment and quality levels up but had seen profits disappear. The ideal size was about $10 million in sales. In each transaction, he kept his own capital exposure small, borrowing against 90% of the inventory and receivables of the acquired company to create the working capital and against the real estate and buildings to create the necessary investment capital. His goal in each case was to achieve a 20% profit margin within six months by reducing inventory, selling off underutilized buildings and equipment, and centralizing accounting and financial services at the Atlanta headquarters -- then renegotiating bulk terms for supplies with vendors, first among them Kodak.

"Anyone with the available capital could have done what we did," Bostic insists. Indeed, industry leader Colorcraft Corp., which had acquired Berkey, was using the same strategy. But Bostic had several advantages over his large public rival. Colorcraft had been competing with the regionals for years, often bitterly, and APG had the advantage of being the newcomer. Negotiating one on one, as the CEO and major shareholder in APG, Bostic could move faster. He also paid more -- usually twice the earnings he expected once the integration into APG was completed. After the sales, the former owners were invited to sit on a "board of advisers"; Bostic was also careful to send them tickets and hotel reservations for the industry's trade shows. "All the guys in the business know one another," Bostic explains. "Our reputation got around."

Inside the acquired facilities, APG brought immediate improvements. There were 401(k) plans and zero-defect campaigns. Each plant had its own quality team with subteams devoted to such issues as safety or office supplies. Compensation for line managers was tied to operational savings, with each plant competing against other APG facilities to cut photographic paper waste.

But perhaps the most important change Bostic brought to his newly acquired operations was getting managers to think of theirs as a marketing company rather than a processing company. APG's clients weren't the photographers -- they were the thousands of drugstores and stationers and retail photo outlets and newsstands where people brought their film for processing. And APG's task was to help them add enough value to the processing service that they could enjoy increased sales and higher margins from their processing sideline.