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The PIPELINE

A national monthly newsletter for agency principals dedicated to agency management topic

The Tale of Two Family Businesses

In 1861 John Wanamaker and Justus Strawbridge opened competing dry good stores on Market St. in Philadelphia. if you know Philadelphia, these names, Wanamakers and Strawbridge and Clothier are as much fixtures in the city and the area as is William Penn's statue on top of City Hall.

But in August, 1995 The May Company purchases Wanamakers and the name will vanish as all of its stores become Hecht Department Stores.

Now, how does this relate to the business of insurance agencies?

Well, both Wanamakers and Strawbridge have been family run organizations. But the similarity in management ends at that point. The results of the 134 year competition tells a valuable story to the insurance agency industry, most of whose participants are still multi-generation family owned businesses.

However, the fate that befell Wanamakers has been repeated countless times in insurance agencies all over the country as competition and economic reality whittles away at the industry numbers.

Family businesses are very fragile. According to Michael and Scott Friedman's book HOW TO RUN A FAMILY BUSINESS, only one-third are passed on to a second generation, and only one-tenth (that's 3% of the original number) reach a third generation. The agency business during the last century has been exceptional compared to this rule. many more agencies have stayed in the family through two, three and four generations. Until the 1990's, agencies have been good cash generators. Competition did not really become established until the direct writers incursion beginning inthe 1950's. The commission rates were historically high enough to generate a comfortable living for these, mostly small, businesses.

As conditions changes\d, family owned agencies began floundering -- much more than corporate entities. The Wanamakers and Strawbridge comparison will illustrate why this has happened.

Wanamaker's genius for the business came early with the originator, John Wanamaker. He was a visionary who concentrated onthe single store concept able to sell everything from pencils to pianos. You could listen to concerts at Wanamakers and dine in the Tea Room. Philadelphia residents equated shopping with a trip to center City's Wanamakers store. John ran the operation conservatively, with a strong hand and was involved in all decision-making.

Most insurance agencies were started by a "spark plus" personality. The originator was normally a tireless, insurance professional and, above all, a salesman. The motivation was simple -- feeding his family. The agencies that arose as leaders combined that hard-working image with a flair for knowing what customers wanted and providing it to them, rather than waiting for the knock at the door or the phone to ring.

Meanwhile Justus Strawbridge was a diligent, conservative Quaker, very unobtrusive, but providing quality merchandise at fair prices with excellent levels of service. Strawbridge grew, but not in the same way as Wanamaker. While it was a successful small business, Strawbridge would never achieve Wanamaker's success without it's own "spark plug". The Strawbridge genius arrives with Justus' grandson, Stockton. In the 1920's Stockton realized that the retail business was changing and success would only come to those who innovate. People were beginning to move away from the city's center into something call "suburbia". In the 1930's Strawbridge opened the first suburban branches. And throughout Stockton's career innovation to satisfy the changing needs of the clients was Strawbridge's goal.

For over a hundred years the insurance industry matured. The changing insurance needs were accomplished by the innovation of the insurance companies in the creation of standardized policies and packaging coverages. Insurance agents studied and became learned and proficient in the technical aspects of th coverages. That was their primary benefit to the clients, who were generally ignorant in policy terms and coverages. But the advent of the direct writers changed the industry forever. Unfortunately, few carriers and even fewer agents realized and reacted to this in the 1950's. Times were good and the growing ecomony in the fifties, sixties and seventies lulled most agencies into generations of inactivity. Why change something that works? But a few "spark plugs" quietly and effectively opened their own branches and expanded into other insurance arenas. These innovators are the giants of the brokerage and retail insurance businesses today with regional and national scope and program managemtn (before it became "en vogue").

The personal lives of the Strawbridges remained conservative and unobtrusive as each generation evolved some members became managers of the business. During the same period, the Wanamakrs offspring were developing interests outside of the retailing business. Social, political and cultural interests resulted in more passive management of Wanamakers after its second generation. Both employed professional executives, but the Strawbridges were always personally and intimately involved. In 1928 when Rodman Wanamaker died (John's son) the operation of the company was assumed by the Rodman Wanamaker Trust, which then owned the company. a Wanamaker would never, again, control the company. There were many offspring, but they were involved in interests different than that of their parent and grandparent.

Many second, third and fourth generation agents have "followed the leaders", acquiring businesses, opening branches, and launching sponsored insurance programs. But, like Wanamaker's branch operations, these agents don't have the "spark" that caused the success of the innovators in the first place. They are reacting rather than innovating. Wanamakers branches never achieved the success of Strawbridges (although they certainly opened enough of them - most in the same malls as Strawbridges).

Another phenomenon also occurred in the 1980's that has caused the speedy decline of many current generations of family agency owners -- the insurance companies first slowed, and finally ceased its renowned training programs for agents. presently agencts can receive some basic training from the carriers, but not the scope of training offered in th past. offspring generations (with a few notable exceptions) lost the agency originator's sal desire as they became the insurance technicians and experts of the 20th century. The offspring generations had also developed other interests ourtside of the insurance business. They were not paying as much attention to the business as had their forbearers. Once the technical skills training was diluted they no longer even bore that strength. They had lost the competitive edge.

Wanamaker's lived on the edge for many years before the final blow occurred. Externally, they still looked like the Wanamakers of old. But the foundation laid by John and Rodman was not built upon by their successors. meanwhile, Strawbridge is being run by it's fourth generation family members with the fifth generation in training. all family members desiring to enter the business mus go elsewhere to break into the retail industry. They mus "EARN" their way in.

There is still time to save the concept of the family owned insurance agency. But the current and future owners must shake off their feelings of desperation and get "hungry" again. Every year we find agents innovating -- trying new ideas, markets and concepts -- to renovate and rejuvenate their families' businesses. This means that all is NOT lost. In ten, twenty and fifty years there will still be agencies out their serving the public. But they will not do so as they have in the past. Like the Wanamakers and Strawbridge comparison, some agents will resign into oblivion while othrs will create new and exciting assets to pass to the next generation. Only you can decide to ACT, REACT or remain INACTIVE.