Membership Perspectives on Industry Consolidation

1. Membership Perspectives on Industry Consolidation ASAE Membership Marketing SymposiumMarch 19, 2001 Kevin Whorton Director of Strategic Marketing ChainDrugStore.net National Association of Chain Drug Stores

2. Why Are We Here? I. Consolidation Happens II. Learn from Others III. Observations from Survey Results IV. Your Experiences

3. Before We Start • A few key points to make .. • Contrary to the old saying, perception isn't reality--however it's more important than reality • In trade associations we often deal with small numbers and very one-on-one • We need "Spin" for outbound communications, to influence public opinion and generate sales • We need "Facts" to run our internal businesses, manage the expectations of our leadership • Lots of details in this presentation to get to a big picture that's hard to see without the data • Ignorance isn't bliss. This data is flawed, but it's the best we have to work with • We'll present some top-line results, then cross tabs to explain some fundamental principles

4. I: Consolidation Happens

5. Current Consolidation Waves • Consolidation is an ongoing phenomena in most industries • Driven by many factors over which we have no control • Investors reward growth—internal or external! • Real efficiencies are possible—eliminate redundancy • Larger size = greater market influence/control • Eliminate competition: if you can’t beat ‘em, join ‘em • Real effects on associations as a result • Decreases in total membership and dues • Fewer small-company or independent operator members; more of a ‘big-company’ feel • Often, more pressure to perform if dues, fees have to rise to offset consolidation

6. Trade Association Structure • ‘Typical’ trade association relies on a variety of revenue sources: • Direct Dues • Associate Dues • Exhibit Fees • Conference Registrations • Products/Services (research, publications) • Members are often ‘2D’ in what they expect • Government relations—legislative and regulatory • Forums and opportunities to work together • Perhaps public awareness/broad industry relations • So the expense side reflects these priorities

7. My Association: Dealing with Challenges • Big changes in the industry …. • Several acquisitions per year claiming members among drug chains and supermarkets • Character changes rapidly: from many 200 store chains to a few large: Wal-Mart, Safeway, CVS • Sharp change in development strategies: • Recruiting supermarket based operators—50 top chains belong • Recruiting regional chains—many small, previously not pursued • Recruiting international chains • And consciously not adding dot-coms, non-Rx retailers • Changes in services … • Same government relations, similar revenue structure • E-commerce initiative: ChainDrugStore.net • Net effect—sharp increase in total chains and stores represented (170 domestic and 32,000 stores)

8. A Need for Empirical Trend Data • Survey conducted among associations • Quantitative survey conducted via email • A total of 70 trade associations participated • Included 48 CEOs and 22 individuals attending the Symposium • Looking for several key variables: actual cross section within many industries • Difficult to establish “best practices” because optimal strategy varies with each association’s: • Dependence on dues • Prevailing market share • General business model

9. II: Learn From OthersSurvey results and comments

10. Association CEOs Comment • “A significant part of the focus on member services has moved toward servicing the significant players in the market to ensure that they remain satisfied with the association's products, services, and response to their issues.” • “(We’re) seeing increases in total associate/supplier members while regular membership is remaining even—increases (are being) offset by members lost to consolidation and going out of business, in addition to those choosing not to renew.”

11. Proportion of Total Industry Volume Covered: 10 Largest Companies, And Your Total Membership

12. And the Point Is? • If I'm VP Sales for a prospective associate member and … • If I visit each of the top 10 companies' headquarters,I reach 51% of the industry • According to this, if I [use a list, visit the conference, sponsor an event, advertise] I reach 61% of the industry Median pct share (computed from ranges)

13. Relating Size, Growth to Your Value Proposition • Growth • High growth associations seem to operate in fragmented industries: top 10 only makes up 36% of total business • High growth associations offer huge premiums to primary members who want to interact with peers, and to associates who want more market exposure: 24% more of the business • Low growth associations (lower than 15% 5-year budget growth) operate in concentrated industries: 57% top 10 • These associations represent 62% of the market • Size • Large associations are in industries where top 10 is 1/2 the business and only offer an additional 7 share points • Medium sized are in far better shape, operating in concentrated industries but offer an additional 17 share points • Small associations are in less concentrated industries, but offer a decent premium: an additional 12 share points • However, working with them only gets me 54% of the market—I have to work with others as well • This may be why the association is small/lacks resources

14. Key Questions Regarding Market Penetration • How do we clearly demonstrate the value proposition of the association: • to associates, exhibitors, advertisers to reach a higher proportion of members and price accordingly • and more importantly, to primary members to consider joining this community • and perhaps the public to convince them that you’re an articulate voice of the industry you serve • How closely do we track our industry? • Do we know who our prospects are … with regard to increasing industry penetration • Are we taking steps to improve our share • Do we feature this kind of information in our communications vehicles (when it befits us!)

15. Recent Trends in Concentration: In the Industry, and the Market Share of Members

16. And the Point Is … • More associations see eroding market share, while industry concentration continues to increase • The harm is indirect in the short term; half of associations increased share past five years, half faced declines or stable share • However, most report that their industries were becoming increasingly consolidated • The impact of the association has to suffer over time--many comments in our survey underscores changes in character, influence and leverage, not financial impacts • Keeping consolidation and association market share on the Board's radar screen is critical • Ensure that you're being graded on a curve • Ensure that they understand the motivation for dues increases, increased membership marketing efforts • from the association's perspective, not merely from their own company's perspective!

17. How Trade Associations Recruit New Members

18. And the Point Is … • Comparing associations by their reliance on dues tells us: • High dues-reliant associations* are more likely to use personal sales—consistent with high concentration, and high dues revenue per “sale” • Low-reliance associations typically use more tactics— especially 'passive' ones: web site, inquiry responses • High usage of direct marketing among all associations *Over 35% of total budget comes from general/primary membership dues

19. Key Questions Regarding Member Recruitment • Review your tactics • How often do new members have to come to you, versus you finding them • How effective are these methods are are they collectively enough • All prospects were not created equal, how does your level of effort relate to the value of the prospect you pursue • What is the real value of the company--in terms of increased exhibit, ad, and other revenue--not just in terms of their direct participation • Who is inquiring—and who else should you be contacting within a prospect company? • In terms of level, ability to to make a commitment, attend events personally, drive participation by employees • How well do the mailing/calling lists, circulations, and attendee profiles fit your needs vis a vis your direct marketing, advertising, and exhibit efforts?

20. Significant Concerns as a Result of Consolidation

21. And the Point Is … • Concerns reflect current priorities • Associations that rely heavily on dues are most concerned with lost revenue • Associations that reply less on dues are concerned with exhibitor support • Affordability (willingness/ability to pay) matters to all • Loss of market share (the underlying problem) is less of a concern

22. Financial, Membership Characteristics of Associations • Profile of responding associations: Average size association Mean Median Total general members 1,967 540 Total associate members 309 108 Budget size $4.91M $2.20M Mean percent of total income: Today 5 yrs ago General/primary member dues 42.0% 45.4% Associate/affiliate member dues 8.2% 8.7% Exhibit/sponsorship income 20.3% 19.9% All other sources of income 29.5% 26.0% Average changes over five years: Mean Median Total general members 9.6% 0.0% Total associate members 22.0% 2.8% Total budget 53.1% 18.8%

23. What is the Estimated Cost of Consolidation? • Survey question: how many members companies have you lost over the past five years due to mergers and consolidation? (outside of 'normal' attrition) • We multiplied average dues times lost members to measure the total financial cost (in terms of money you don't have today from cumulative membership losses) • We look at this in terms of total revenue, as a percent of the association's total budget, and as a percent of total revenue from general/primary member dues • Results: Members lost to mergers and consolidation 73 companies Estimated Dues Income Lost $206,190 As a percent of budget 5.4% As percent of membership revenue 10.8%

24. And the Point Is … • Looking at lost revenue by association size and reliance on dues: • Large associations are affected least as a percent of their budget (only 2.8%) • Medium to smaller are losing over 6% of total budget—and as much as 15% of their membership revenue • Obviously, associations that rely more heavily on dues are losing a far higher proportion of their revenue

25. Ways Associations Have Responded to Industry Consolidation

26. And the Point Is … • Actions taken tend to reflect an association’s ability to mount efforts • Small cut expenses, increase dues but don't change structure • Medium add services, change their primary dues structure • Large go into new markets • In general, action (retention, recruitment) prevails over structural changes (governance, charging subunits of merged companies) • Changes occur primarily to general dues, not associate dues • In 'other' some actually cut their dues to ensure affordability

27. Trade Association Respondent Profile Dues Structure Competitive Position in the Industry

28. And the Point Is … • Loss of market share has a stronger effect on degree of Board concern than competitive position, industry concentration, budget growth, other variables • We often worry about and focus on something after it's occurred and shows up in our numbers • Associations with a constant market share are split between considerable, some, or little/no concern

29. Survey Comments from your Colleagues … • “The most negative aspect is its impact on volunteers. With consolidation there are only a limited number of chairs available in a company. Good, talented people are let go, many with non-compete agreements—and the industry plus association are the losers.” • “We've had to cater more to the larger companies. They are on the leading edge of operations, and we can benefit from their influence and learning.” • “We now focus more on government/legislative efforts to protect the small businesses that make up the majority of our membership.”

30. More Comments from your Colleagues … • “The association is the result of a merger of two competing associations. After previous unsuccessful attempts to merge, the single biggest driver at this point was consolidation within the membership base of both previous associations.” • “We are a global organization. Consolidations have resulted in an increase in internationalization of the organization.” • “Larger companies have less need for association services.” • “Forced us seek out merger opportunities with other associations to help us serve different but related market segments.”

31. And Yet Another Page of Comments … • “We've changed from being strictly a "trade association" to one that more closely represents the entire industry/channel. We've also eliminated a lot of peripheral service areas and concentrated on our core competency development.” • “It's had no real impact or required action on our part—what's occurred has been offset by the new niches that we have embraced.” • “There is the potential threat to our government relations efforts as companies develop more resources in-house to address that area. The Association was primarily founded upon a government relations need.”

32. Ran out of Sub-Heads … • “Improved and more efficient member communications. Raise profile and thus value of association in the industry.” • “Perception that association is a "mouthpiece" for largest member, who is the most dominant player in our industry.” • “Some positive results since larger companies are more professionally managed.” • “The biggest change has been in the volunteer base and support—not always does the most active member remain after a merger (either due to retirement, sometimes from assignments).”

33. “Lower attendance at meetings as conglomerates send fewer representatives, and there is less purchasing of product due to fewer attendees.” • “More industry share is in fewer member hands—smaller committees, less demand for social activities, meetings are shorter and at more convenient locations, on-line and e-services are expanding.” • “We're looking at businesses supplied by our membership—not an option 5 years ago.”

34. III: Observations from the Survey Results

35. I: Consolidation is a Concern • Many associations indicate real effects from consolidation • Often not a high profile concern—a strategic issue, just not high priority for many organizations • Those least concerned are often financially secure, and have a more diversified revenue base • Many of the associations most concerned are smaller associations, or companies with the greatest direct dependence on dues • Many associations are concerned now • Often laying the goundwork to exploit future opportunities later for diversification, new services • Even governance, association mergers are an option to maintain size, prestige, and adequate member value

36. II: Consolidation Costs Association Far More Than Direct Dues Income • Associations may understate the actual costs of consolidation, beyond the short-term pain • The real monetary effect is greater than foregone dues • Associations deciding to tighten belts may also be cutting member acquisition budgets when they are most needed • Members often experience member loss both among direct members and associate members • Communications strategies need to change to convey ongoing size/strength of the associations

37. III: Often, Limits to Aggressive Response • Proposals may be submitted to act to offset loss but less likely to be approved • Higher dues, fewer services not considered • More revenue growth and more belt-tightening are not seen as enticing by leaders • Difficult to be decisive and to penetrate new markets • Organizational philosophy may rightly be to support the existing member—not the organization itself • Hence, rate decreases during times of lost membership • With consolidation, member market concentration may increase so fewer members = same industry size • Associations may get higher dues from larger companies, but they lose community, volunteers and advocates

38. IV: What are Your Experiences?