What's Luck Got to Do with It?
Julian Danielly repeatedly anticipated marketplace changes before his competitors did -- and has emerged as the world leader in latex-glove and -condom manufac-turing as a result. It didn't happen by accident
Julian Danielly, Aladan
* * *
From the very start, Julian H. Danielly has left little to chance in building Aladan Corp., based in Dothan, Ala., into an industry leader. In fact, just about the only element of luck, if you can call it that, occurred when he was fired by his previous employer, Ansell Corp., a latex-glove and -condom manufacturer, in August 1986. He had been kicking around the idea of starting his own business with a fellow employee, Larry Povlacs, who had been building glove machines for most of his professional life. When headquarters got wind of what the two partners insist was nothing more than a pipe dream and a spreadsheet, Danielly and Povlacs found themselves with quite a bit of free time. Soon thereafter, they incorporated Aladan and embarked on an enterprise the size and scope of which neither man had seriously imagined.
Danielly's experience had certainly prepared him. Before joining Ansell, he had been a big shot at G.D. Searle, heading up its Health Products Division, which he had helped grow to $500 million in revenues and 3,000 employees by 1981. When G.D. Searle struck gold with aspartame, the artificial sweetener, Danielly was ordered to sell off the comparatively humdrum empire he had spent nearly 20 years building.
He had a hard time finding a buyer for the ugly duckling of the lot, the glove and condom division, but he eventually found a group of Australians who, he remembers, "desperately wanted to enter the U.S. market." They named their new company Ansell Corp. Povlacs, a Searle employee working in the division, went with the deal, and later Danielly joined him to establish Ansell's sales and marketing operation. Danielly talked until he was blue in the face to Ansell executives about the impending glove boom he envisioned and the need for more factory capacity, but they wouldn't listen. By the time he and Povlacs were fired, Danielly had had it with corporate politics. With Aladan it would be solely his own savvy that could make or break him.
By late 1987 AIDS awareness had created what appeared to be a shortage of gloves, as hospitals and dentists began hoarding inventory. Danielly milked that situation for all it was worth when financing Aladan. He got investors to fork over $2 million for slightly more than 50% equity. The risky start-up received industrial-development bonds, a financing mechanism usually reserved for more- established companies. Finally, anxious customers agreed to sign legally binding five-year purchase and supply agreements with the company -- superb terms for a start-up.
Meanwhile, Povlacs had drafted blueprints for an innovative $3-million glove machine that would be twice as efficient as existing machines and would produce a glove that would be an effective barrier to AIDS -- a new twist for a product intended until that time just to keep hands clean. By comparison, according to Povlacs, fly-by-nighters were slapping together $350,000 machines that churned out small amounts of shoddy product. As a result, on the day Aladan broke ground for its factory in Dothan, in July 1987, the company was about nine months ahead of the herd of glove suppliers.
Even within the context of the glove boom, Danielly's deals were shrewder than those being struck by others in the business, which helped make Aladan a major player in less than two years. Being the first to reach the market with additional supply during a shortage has its advantages. Aladan accomplished its five-year plan in one year, raking in an extraordinarily profitable $20 million in 1988. But through factory innovation, shrewd selling, and product diversification, Aladan has distinguished itself from flimsier start-ups and established itself as a company to be reckoned with over the long haul.
Latex exam gloves are an essential but low-margin commodity product for distributors that sell thousands of products to hospitals. Glove manufacturers have watched prices fall from an average of $5.25 per 100 in 1986 to $3.60 today, and the prices continue to drop. In that time, glove prices have fluctuated wildly, from a high of $12 per 100 to a low of $2, creating a highly volatile market in the formerly staid industry.
Total glove sales in 1992 were estimated to be $300 million. In units, the market has tripled since 1986 and is currently experiencing a 10% growth rate, but the competition is brutal. Aladan holds 17% of the global market, and its revenues for 1993 are closing in on $55 million for gloves. Ansell, the market leader when it let go of Danielly, now lags behind Aladan in market share. Smith & Nephew Perry, another major player in 1986, is out of the examination-glove business altogether. Baxter Healthcare Corp., the glove-sales leader with 22% market share in dollars, is struggling to keep major customers, setting the stage for Aladan to gain even more market share.
Still, as glove prices continue to slip and the quality of imported products improves, the company faces real challenges to its growth.* * *
"Selling stock was about the only thing I hadn't done as a businessman, and it was a lot tougher than I imagined," claims Danielly, who started pitching investors soon after Aladan had been incorporated. In round numbers, Danielly and Povlacs had $200,000 in cash invested in the company. Danielly pegged the value of their idea at $5.6 million. The two had agreed from the outset not to become sharecroppers, "farming" gloves for a pittance and turning over the profits to investors. Danielly figured $4 million for 40% of the stock was plenty fair.
Initially, the market explosion that was so crystal clear in Danielly's mind's eye was incomprehensible to those he approached, but as AIDS awareness gained momentum, so did Aladan's fortunes. Houston County, Ala. (where Dothan is located), came across with an offer: it would give Aladan $3 million in industrial-revenue bonds, which are an incentive tool commonly employed by county governments to lure new factories. The bonds are tax-exempt and can be used to underwrite construction. The issue was contingent upon Aladan's finding a bank to back it.
Ronald DeVane, of South Trust Bank in Dothan, agreed to back the bond placement but had a condition of his own: Danielly had to line up a customer with a long-term contract. The request flabbergasted Danielly, who had sold gloves for 20 years and couldn't believe someone doubted his ability to move gloves during a shortage. Says DeVane, "I thought his plan sounded great, but I wanted to see some firm orders."
He did. By February 1987 Danielly had closed a $25-million order, to be delivered over five years. "I had been a salesperson my entire life and had never seen a $25-million order," says Danielly. Then DeVane had the audacity to ask for another contract, and again, Danielly delivered.
In addition to helping secure the bond issue, those contracts substantially reduced the risk to potential investors and increased the value of the cofounders' stake. With customer promises and market timing on Danielly's side, his high-priced stock became more attractive. He had rustled up five private investors by the spring of 1987.
After months of negotiation with them, Danielly reluctantly gave up control of Aladan and traded just over 50% of the stock for almost $2 million. To this day, Danielly insists he undersold Aladan to investors, but at least the sale got the ball rolling.
As the first factory was going up, word was out that Aladan was a go, and more customers began queuing up for gloves. Danielly drew up ever more shrewd customer-payment terms as demand picked up. When the market was peaking, five major distributors were willing to pay up to 90 days in advance on long-term contracts. Danielly even worked in a clause that would pass the cost of latex-price fluctuations on to the customer, insulating Aladan from risk. All that poured almost $10 million into Aladan over 12 months in 1988 and 1989. The contracts would fund the building of additional machinery that would fulfill customers' demands.
Henry Berling, senior vice-president of sales and marketing for Owens & Minor Inc., a $1.4-billion distributor of hospital supplies based in Richmond, Va., was an original Aladan customer. "I knew Julian was out hunting for money, and we needed gloves, so we contracted with Aladan to build production for us. If it hadn't been for the contracts, we probably would have bought gloves from Ansell, our original supplier, when demand dropped and we didn't need as many." Today Berling continues to buy about half his gloves from Ansell and half from Aladan.
Another $5 million came from a handful of customers who issued letters of credit to Aladan's bank for a year's worth of glove payments, to be paid out to Aladan as it delivered gloves. Those funds in turn were used to underwrite a bond offering by Merrill Lynch, which earned an impressive AA rating.
At the same time, another $11 million in industrial-development bonds were issued by Eufaula, Ala., where a second factory was to be built. Flush with cash, Aladan purchased the entire offering itself, saving the hundreds of thousands it would have paid in taxes had it paid for the factory out of pocket.
Danielly's ability to leverage equity was a big factor in the success and ongoing stability of Aladan. It also impressed the Entrepreneur of the Year judges: "His ingenious use of industrial-development bonds impressed me," says Bank of Boston's Diane Fulman. "He was getting letters of credit from customers to underwrite bond offerings. Also, the exclusive long-term contract seemed to be a coup that was well-thought-out on his part."
In February 1989, when the market was glutted and factory capacity was idle, $9 million worth of customer advances were sitting in Aladan's bank account. Still eager for majority control of Aladan, Danielly used profits to buy out a couple of investors, who walked away with up to 10 times what they had originally paid in, less than a year earlier.* * *
Danielly would rather have been almost anywhere than three miles down the road from Ansell, in Dothan. "I didn't want to be a bigger sore in Ansell's side than we had to be," he says. But Dothan, the self-declared peanut capital of the world, had come across with substantial tax incentives, had a small airport, and was home to Povlacs.
Before the Dothan facility was even completed, Aladan already had enough guaranteed orders to keep eight machines busy. The company started building its second plant 45 miles up the road, in Eufaula, which offered tax breaks and a water-treatment facility that even Dothan couldn't compete with.
On the Eufaula ground-breaking day, in May 1988, the glove boom was peaking. The cost of latex had more than doubled since Aladan had purchased a year's worth to cover the orders the company had lined up. Bill Kleinhoff, the Eufaula plant manager, remarked to Danielly that the company could skip building the plant and cash in its latex futures for an easy $13 million in profit. Danielly built the plant anyway.
By February 1989, two months after the addition of the Eufaula facility had doubled the company's factory capacity, Aladan was operating at 25% of capacity. The distribution pipeline was choked with gloves, many from overseas. Import records from the U.S. Bureau of the Census show that surgical-glove and medical-glove imports skyrocketed from a total declared value of almost $37 million in 1987 to almost $400 million in 1988.
Distributors who had signed purchase agreements just months before came hat in hand to Danielly, asking him to relax delivery and payment schedules. Since they'd paid in advance for their gloves, their negotiating power was practically nil. Legally, the tiny start-up had those distributors over a barrel, but Danielly was more interested in building long-term customer loyalty -- a priceless asset in a commodity market.
He worked out mutually beneficial terms. He crunched numbers endlessly to ensure that Aladan would earn a profit even if machines went idle while distributors sold their excess inventory. "I backed off on the amount I supplied to customers and the price, extending their contracts over a longer period of time," he says. He then went to latex suppliers to renegotiate terms with them.
As Danielly forged ahead with the Eufaula factory during the market peak, he was fairly certain that a glut was in the offing and knew that machines might go idle. But as long as customers were willing to bear the risk Aladan incurred in building additional factory capacity, and to buy the gloves it made, Danielly would be happy to oblige them. That goodwill protected Aladan's market territory and profits from the war for market share that loomed on the horizon. "When the shortage was over, distributors would have to keep buying from us, not our competitors," sums up Danielly. He was willing to let factory capacity go idle in order to bank on the long term.
Povlacs stared at the idle machinery and knew condoms were the answer. Although Danielly was reluctant to pursue that business, Povlacs took it upon himself and eventually landed two small contracts in 1990. Condom sales revved up Aladan's idle machines and have grown to represent almost 20% of the company's revenues today.
After a long, strange trip, Aladan reached 100% capacity in November 1991 and closed out the year with almost $50 million in revenues -- after having reached just $27 million the previous year.* * *
From the outset, Danielly recognized that someday Aladan would be competing with offshore manufacturers because of the labor-intensive nature of making gloves. "Manufacturing moved offshore in a bigger and faster way than I ever thought it would," he says now. To combat the trend that he'd foreseen, Danielly wanted a quantum leap in factory efficiency from the get-go, and Povlacs delivered.
Changes in glove-making machinery played a big role. By redesigning the dipping-machine mounting system to allow it to hold twice as many glove molds, Povlacs doubled machine capacity at negligible cost -- giving Aladan a substantial edge over all its competitors. Each machine holds 8,000 hand forms, which complete a revolution in 17 minutes, resulting in 200 million gloves per machine per year. "A lot of what we've done here is incorporate improvements we had thought of over the years but never had the opportunity to build. Starting from scratch was a real advantage for us from a manufacturing standpoint," says Povlacs.
"Triple-dipping" is Aladan's claim to quality, and it's becoming an industry standard. Typically, molds are dipped once in a vat of latex. A few manufacturers have altered the latex chemistry and machine design to create a better-quality double-dipped glove. But even with that process, Aladan claims, the impenetrability is too low for a glove that is supposed to be an effective barrier to blood-borne disease. Povlacs added another dip to the equation, dramatically increasing the impenetrability. As a result, Aladan can make an examination glove that surpasses not only the Food and Drug Administration standard set for it but also the more stringent standard set for surgical gloves.
Rarely does Aladan go on shopping sprees for equipment. Even the dryers used in the final stages of glove production are built in-house. Povlacs designed one that costs twice as much as a commercial dryer but is six times as efficient. "When it's your own dime, you want to find the cheapest way to achieve something instead of the easiest," he says. High-tech condom-testing equipment is also built in-house. A government inspector was so impressed with the design of Aladan's testing equipment, he bought a machine to inspect condoms at other condom factories.
Aladan has continually striven to improve its products in any way possible. Since 1989 the company has spent $1 million reducing the labor component of its popular and premium-priced "powder-free" glove, which is much more difficult and expensive to make than the standard exam glove, which comes coated in cornstarch. The company is developing proprietary technology to make it feasible to sell the powder-free glove in mass markets. The goal is to automate the finishing steps even more, cutting the labor component of costs from the current 40% to 10%, making it comparable with the labor component for the standard powdered exam glove.
All machines can make either gloves or condoms. But the labor component of condoms is much higher, owing to the intensive product testing necessary to meet FDA quality standards. Today six machines run gloves, and two run condoms. Recently, the company has cut back on glove sales to meet the growing demand for condoms. And as long as the machines are humming, Larry Povlacs is happy.
Since its founding Aladan has poured almost $30 million in working capital into building the company's facilities. That investment has paid off in sales per employee, which totaled $126,000 in 1993, with profit margins of between 10% and 20% -- impressive numbers for a manufacturer.* * *
The sales relationships Danielly established in Aladan's early days continue to supply him with a solid base. Jim Devlin, president of Veratex Corp., a $100-million dental- and medical-products supplier based in Troy, Mich., has a long-term Aladan contract coming up for renewal in 1994 and is looking forward to doing more business with Aladan in the future. "I have not met many businessmen who are as reasonable as Danielly is," says Devlin. "Besides, Aladan's product quality is superior. Why bother wearing cheap latex gloves that aren't going to be an effective barrier to disease?"
But Danielly always knew he needed more than long-term purchase agreements to see that Aladan was entrenched in the marketplace. He'd need to diversify his product line and sell quality in a commodity environment.
When competition was heating up and Aladan was at 25% capacity in 1989, Ted Borek was brought on board as vice-president of sales and marketing. "When I joined," says Borek, "they had a basic Chevy exam glove." Borek helped roll out a Cadillac line, which helped keep Aladan out of the commodity gutter.
Among those products was the popular and reasonably priced powder-free glove, which Aladan introduced in 1990. Formerly sold in small quantities at astronomical prices to the electronics industry, the gloves now move in mass quantities to hospitals and laboratory environments, places that routinely conduct tests that could be altered by the presence of a starch. In 1993 the powder-free glove accounted for a whopping 30% of all the company's glove sales.
Today Aladan gloves are even being sold in retail outlets. Last year $5 million worth of gloves was moved through that highly profitable channel. Still, it's spit in the ocean compared with the hospital market. Laboratory work, physicians' clinics, emergency-rescue businesses, and nursing homes are all markets Borek has targeted in light of the Centers for Disease Control recommendation that all workers who come in contact with bodily fluids wear gloves.
As yet another hedge against becoming a mere commodity business, Aladan entered the retail fray in 1991, shortly after Gene Freed, the fifth Aladan key manager, was brought on board from Ansell, where he had been in charge of that company's LifeStyles brand of condoms. Now he is vice-president of sales and marketing for all Aladan condoms, including those made by Safetex, a floundering condom company Aladan purchased to gain some equipment as well as established retail channels and brands.
Safetex also allowed Aladan to acquire the FDA approvals necessary to bid on a lucrative contract to supply condoms to the Agency of International Development, which distributes condoms to developing countries. Aladan won that $35-million-plus three-year contract in 1993, underbidding Ansell. Povlacs estimates that Ansell lost two-thirds of its U.S. condom business as a result, making Aladan the largest condom producer in the United States.
Danielly figures the retail division of Safetex was a bonus, and he's expending a good deal of money and energy trying to shore it up. It's no cinch getting newly branded condoms into drugstores that are loyal to traditional suppliers. That's why Safetex is pursuing more offbeat distribution channels for condoms, as they come out from underneath the counter and go mainstream. Freed's mission at Aladan is to open up those distribution channels for what are now called the Saxon Gold and Gold Circle Coin brand condoms, the latter top-rated by Consumer Reports. The $110-million wholesale market is split between four major players, of which Aladan is the smallest, with just a 5% toehold. After a year of calling on 7-Eleven, Freed got his line into 6,000 stores.
Danielly believes it's worth taking a chance on developing the brands because a retail brand makes Aladan less dependent on health-care distribution channels, spreading the company's risk. Danielly is convinced the market is there for a more updated brand.* * *
Tomorrow's task is to optimize the efficiency of the medical marketing and distribution channels. "By design, I want to get the company away from latex technology. We've built a strong marketing division and brand-name recognition, and I'd like to leverage that by taking on additional disposable medical products," says Danielly.
In theory, the plan sounds great. As major hospital distributors try to reduce the number of suppliers they use, one- and two-product companies like Aladan are going to be at a disadvantage compared with those that have a family of products to sell. But today the disposable-medical-products industry is a price-competitive, mature industry; it's not the industry it was during the 1960s, when Danielly built his empire of products at G.D. Searle.
Current market conditions, according to John Brown, CEO of Stryker, a medical-device manufacturer in Kalamazoo, Mich., will force medical suppliers to "deliver more for less." To keep out of the commodity trap, Danielly is shopping for items that are more high-tech and less price-sensitive than gloves are.
At the end of the day, Danielly is optimistic that there's room for Aladan to grow as a medical supplier, despite the increasingly fierce marketplace. "Medical services will still need products. But you have to be the low-cost, high-quality provider," he says. "It's simple to say, difficult to do." He should know.* * *
The Aladan Growth Lines
|Annual revenues (millions)||$20.2||$33.4||$27.2||$49.7||$60.6||$68||$75|
|Condom-only revenues (millions)||$1||$3.5||$4||$14||$30|
|Shareholders' equity (millions)||$1.6||$4.9||$5.8||$10.5||$17.2|
The Big Picture
Production versus demand for the latex glove industry, in billions of units:
|U.S. market usage||2.5||4.0||6.5||8.2||9.6||10.8|
Source: Aladan n