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.
Bostic drew on fast food as his model. Consumers surveys had reinforced his conviction that competing over how fast a processor could deliver a finished picture had gone past the point of diminishing returns. Overnight was fast enough for most people -- now they wanted the same assurance of quality and choice that they could get from symbols like the golden arches. APG's processors would offer it by way of a gold seal on every package of prints. And APG's customers were provided with marketing materials that leaned heavily on the association with Kodak, its "Colorwatch" computerized processing system, and the use of Kodak paper and chemicals. And like the fast-food chains, APG showed its customers how to get people to spend more on every transaction. "Not everyone wants a plain hamburger," Bostic would explain, "so we'll give them doubles and Big Macs, too." In addition to the traditional three-by-five prints, there were four by sixes, four by sixes with a border, photo posters, even photo jigsaw puzzles -- anything that would raise margins and attract hard-pressed retailers to APG.
"We grow because our customers' sales grow," is how Bostic sees his business, and he took care to see that this spirit of partnership was reinforced by his newly acquired companies. Each customer, he decreed, would be provided with a detailed marketing plan complete with a survey of the local competition, a suggested product mix, an advertising and promotional calendar, and detailed financial projections. A customer was allowed to choose a store brand name or one devised by APG -- American Image in one market, American Heritage in another. All were supported with advertising slicks and extensive point-of-sale materials developed by the ad agency that Bostic also had acquired. APG even provided videotapes and workbooks so that retailers could train their clerks to be "certified photo specialists."
It was an ingenious and ambitious program, by all accounts brilliantly executed. But Bostic never expected to reach his goal of a billion-dollar company simply by processing film -- the market was too small for that. Instead, he'd planned to use APG as a base to push the company into broader photographic and consumer products. The only problem -- the big problem -- was liquidity, he admitted to me during my trip to Atlanta. After 10 highly leveraged acquisitions, he said, "We're on a financial high wire with no net."
On the day of my visit, American Photo Group's Atlanta headquarters was an orderly place. People were busy but quiet, and the undertone of chaos I usually hear at INC. 500 companies was nowhere present. Bostic himself was relaxed, reflective, and candid. His only reticence was in talking about Kodak, which was both a principal supplier and marketing partner, and one of his major competitors, having bought the Fox Photo Inc. processing net work the year before.
The next day I found out the reason for his hesitation: American Photo Group had been sold to Kodak. Bostic had found his safety net -- a cash deal, terms not disclosed. Industry analysts estimate the selling price at around $45 million.
Selling APG to Kodak had been a strong possibility from the beginning, Bostic admitted after the sale. Convinced that "there needs to be a national network for picture making," he was never sure how large he could build APG before he ran out of money or the ability to borrow it. Besides, the marketer in him was always equally convinced that, once the network was created, "ultimately -- logically -- Kodak ought to own it."
The specific catalyst for the sale had been Kodak's buying the Fox processing network, about the same size as APG. Bostic had bid for Fox as well, one of seven would-be buyers, convinced he needed the acquisition to achieve the economies of scale his growth plan required. But Kodak outbid him, and within two months Fox had taken $2 million in sales from APG. Bostic felt "boxed in" and became convinced he would have to negotiate a sale.
Despite Fox's inroads, Bostic was negotiating from a position of relative strength. In the aftermath of the Fox sale, several foreign and two domestic companies had asked if he would consider selling APG. "It became evident that a network of photo labs had a high value to people in the Far East and Europe -- and Kodak did not want to see that network go away."
The processing industry was changing again, and the consolidation Bostic had anticipated and helped to accelerate had now caught up with him. In a way, the industry seemed to have come full circle. Kodak, once stripped of its role as the leading processor, was now buying its way back, aided and abetted by Washington's decidedly relaxed attitude toward antitrust.
In its own announcement of the sale, Kodak praised Bostic for his marketing savvy and entrepreneurial drive, but left vague what role it saw for him in the new arrangement. "After the transition, his role depends on what his intentions are, and where we end up taking the photo-finishing business," declared Wilbur J. Prezzano, a Kodak vice-president.
Bostic says his intentions have never changed: "to build a $1-billion marketing company, and control it." A long-term commitment of Kodak, he says, "is not in the cards." For him, it's a question of risk -- and he remains convinced that the biggest gamble is in working for somebody else.
He's already out assembling a capital pool with some friends in investment banking. Now that he's refined his skills in the areas of acquisitions, marketing, and operations, and now that he's gathered unto himself a small fortune, his goal is to duplicate APG in a different business -- only this time on a larger scale.
"That billion-dollar company is closer now than it ever has been," Bostic insists. If he turns up on the INC. 500 five years hence, we won't be surprised.