Rack 'N' Roll

if you've recently made an impulse buy at the checkout of a major grocery store or discount retailer, chances are Source Interlink Companies had a hand in getting the item in front of you. The company probably made the display rack that held your pack of gum or issue of People, and it likely administered the complex process through which the product ended up occupying that coveted piece of retail real estate. If, instead, you picked up your magazine at a specialty store, like Barnes & Noble or Borders, Source Interlink most likely distributed the periodical; if it was a foreign title, you can be sure of it.

Bonita Springs-based Source Interlink is a leading provider of merchandise distribution, marketing and front-end management services to retailers, publishers and consumer-product makers. On a weekly basis, some half-million consumers pass through checkout displays designed, manufactured or managed by the company or purchase a magazine it has distributed.

A recent merger with Coral Springs-based Alliance Entertainment Corp., a billion-dollar company that distributes DVDs and music, means that Source Interlink can expand its distribution and logistics-management services to home entertainment.

That's a lot of business-and businesses. But according to Source Interlink chairman and chief executive officer Leslie Flegel, it all fits within a decade-old vision.

Location, Location, Location

Flegel's company started Feb. 1, 1995, as a small retail-consulting business that collected-on behalf of retailers-the various rebates and incentives vendors and publishers pay for prime retail placement of their products. Shortly thereafter, Flegel merged his St. Louis company with a competitor's, and the new partners did $7.5 million in business their first year together. "It kind of amazes me," says Flegel. "Next year, if everything goes well, [Source Interlink] will do between $1.3 billion and $1.5 billion."

Before the Alliance merger, Source Interlink consisted of three main operating divisions: in-store services, wood manufacturing and magazine fulfillment.

In-store services, provided to mainstream-market grocery, drug and discount retailers, include the original rebate-management business, along with a slew of other services that amount to complete front-end maintenance for these customers. Source Interlink designs, manufactures and installs checkout racks and point-of-purchase displays that retailers fill with candy, magazines, batteries and other items. It also helps retailers select and market the products they include on the front end. "There's very limited space on the checkouts," says Flegel. "Logistically, it's really complex. We do that for the retailer."

Source Interlink's wood-manufacturing division, a century-old company with roots in the Kmart Corporation, is called Source-Huck, the appended name a carryover from the original. The company produces high-quality wood fixtures and displays for specialty retail clients. "It really makes some beautiful stuff," Flegel says proudly.

The wood manufacturing division builds the interiors of bookstores in the Borders chain. "From the ceiling to the floor to the trash can, we build that," says Source Interlink president and chief operating officer James Gillis. Another client: Hudson News stores, found in airports.

Source Interlink's third main operating unit provides direct-to-retail magazine distribution. It's the fifth-largest magazine distributor in the country and the largest importer of foreign titles and exporter of United States magazines.

The company got into the business about four years ago through the acquisition of IPD, a San Diego-based distributor. That company had a majority market share for magazine distribution to specialty retailers-bookstores, music stores, computer stores. Unlike magazine distributors in the mainstream market, which relied on their own truck delivery, IPD used Federal Express for overnight shipment directly to stores. "They, in effect, became the only national method of supplying magazines," says Flegel.

The acquisition "took us from a $190-million company to approaching a $400-million company," he says.

It also provided the company with a platform for moving the distribution model into familiar territory. "We realized that this system could be translated to the mainstream market," says Flegel. Previously, the company had simply managed magazines shipped by other suppliers for supermarkets, discount stores and other mainstream retailers. But it now started shipping magazines directly to retailers via Federal Express. With its mainstream-retail customers in addition to the specialty stores IPD already supplied, "we have gone in 2004 from zero to 2,000 stores," says Gillis.

Supporting all these businesses is ICN, or the Interactive Communications Network, Source Interlink's proprietary Web-based information system. It offers sales and marketing information to help publishers, vendors and retailers make decisions about what to position on the front end. Tracking its own data and using information from the likes of ACNielsen and Barnes & Noble, Source Interlink can give publishers information on how its magazine is going to sell and how a certain cover might compete against others. "Britney Spears sold better on Cosmopolitan than she did on TeenPeople, which means she's moved up in demographic category," says Gillis, by way of example. "No one would know that if you weren't tracking those numbers."

A Florida Company

Source Interlink's various business units might seem disparate at first blush, but Flegel recognized early on that "conceptually there can be this company in the middle of all the suppliers and retailers to bring it all together." Looking at it component-by-component over the years has given his company a marketing edge.

"This is not an accident," says Flegel. "We've been building this thing carefully over 10 years. I can't tell you how many times I've been asked the question, 'Why are you in the manufacturing business?' Now people begin to understand it."

Flegel says his ability to tell a retailer that he can build its fixtures, lay out its marketing plan, supply the magazines it sells, bill and collect for the front-end space, and so forth makes his company unique. "We have competitors who distribute magazines and DVDs and music, but there's no company that carries everything in a major way that also builds and designs the fixtures those products go on-that has the logistics management we have."

Reaching this point has meant buying other businesses. "Very few companies can have the kind of growth in 10 years that we did without acquisitions," he says. "When we did the acquisitions, we ended up with many locations. We were everywhere."

After the purchase of IPD, says Flegel, "We made up our mind that we had to move to one location from a corporate-headquarters perspective." The company looked closely at St. Louis, New York City and Florida. After a consultant's study and a survey of employees, "Florida won out in almost every regard," he says. "From a perspective of employee pool and standard of living, it's a slam dunk."

Although the company maintains manufacturing and fulfillment operations elsewhere, its headquarters have gradually been consolidated into a brand-new facility in the Riverview Corporate Center in Bonita Springs.

Local officials worked with Source Interlink from the time it identified Southwest Florida as a possible home. Corporate headquarters meant higher-paying new jobs that could help diversify the local economy.

"I think they're a great addition to our community," says Regina Smith, executive director of the Lee County Economic Development Office. "Part of their industry is very much IT-related. That's helping us build the IT jobs in the community-which, frankly, I think will be good for all of the companies [here]."

Some 60 to 80 of the 300 employees at the company's headquarters, primarily executives and key personnel, relocated to Bonita Springs, but most are from the local market. With the Alliance Entertainment merger, Flegel anticipates growing its local workforce to about 500. "For a commu-nity like this, that's an important number."

"We're very happy down here," says Flegel. "Alliance is based in Coral Springs. We're a real Florida company."

New Alliance

Last month, Source Interlink merged with Alliance Entertainment, which provides distribution and logistics services in the market for home entertainment products such as DVDs, CDs and videogames. Alliance serves more than 30,000 stores, with such customers as Barnes & Noble and Best Buy, plus two million individual customers through a direct consumer-fulfillment business.

"DVDs were becoming the next hot product in the mass market," says Flegel. "All of these retailers wanted to carry DVDs in their stores. We were running into retailers that were asking us to get into the DVD business." As fortune would have it, Alliance contacted Source Interlink, saying it was looking to merge with a company that could get its products into the mainstream market.

Alliance becomes a fourth major operating group of Source Interlink, which plans to leverage its longstanding relationships with mass-market retailers to move Alliance's business into the supermarkets, drug stores and discount chains of mainstream America. "That's our sweet spot when it comes to new product placement," says Gillis.

Alliance does about $1 billion of business a year. Source Interlink expects the combined companies to do up to $1.5 billion in business this year. "The mouse that swallowed an elephant," says Flegel of the merger.

His company's latest growth spurt all stems from the partnerships Flegel has cultivated with most of the major retailers in North America through his original business.

"I'm a believer that you always go back to the basics," he says. "With all the hullabaloo about how big we've become and all the distribution, the thing that gives us the edge is this rebate-management business. As much as any company I know of, we are in constant communication [with the retailer]. I'd say it's the most influential business we have."