Father and son duo Howard and Michael Brown made their much-anticipated return to the US office products industry in 2010. A November move for the leading dealer MyOfficeProducts put their HiTouch Business Services company second only to WB Mason in the independent channel. It doesn’t stop there, however, as Michael Brown explains to OPI
Despite having only recently turned 40, Michael Brown is no stranger to the office products industry. His father, Howard, is classed as one of the icons of the industry in recent decades, and Michael cut his OP teeth working for him at BT Office Products after graduating from college in the early 1990s. After investing in a coffee business and a brief stint on Wall Street, Michael rejoined his father after the acquisition of Allied in 1998, playing a key role in the growth of the business until it was sold to Office Depot eight years later.
As part of the Office Depot agreement, the Browns had signed restrictive covenants, preventing them from competing in the office supplies space for four years. In this interim period they bought Rentacrate and ShredX, keeping a number of key Allied staff members with them along the way.
As the covenants reached expiration, the Browns saw opportunities to combine their new businesses with an office supplies operation, leading to the establishment of HiTouch Business Services on 10 May 2010, the very day those covenants expired!
With Howard installed as Chairman of HiTouch, overseeing strategy and financial relationships, Michael took on the CEO role and is responsible for all HiTouch operations and sales.
OPI: Let’s start with the sale of Allied to Office Depot in 2006. What was the state of that business?
Michael Brown: The company was on a run rate of $360-370 million. From 2003 to 2006 we grew by approximately $100 million, partly through very small acquisitions, but the majority of the growth came from new business, selling our one-solution through our existing salesforce. This growth was predominantly in the northeast, but, at that time, we had just launched on the West Coast, which in itself became a $35-40 million business.
OPI: What are your thoughts on the sale of Allied to Office Depot?
MB: I was 35 years old at the time and the company was doing very well. I did not want to sell the business, but my father said to me: “Michael, the fact is they want to buy this business and the price that they’re offering is phenomenal. You’ll never see this again. And they want to roll out the one-solution sell that we had at Allied.”
So he saw this as a platform through which we could use our expertise to create a great synergy. He was beyond excited. He thought we were going to be able to grow the business by another couple of hundred million dollars by cross-selling to their customers. Legally I can’t say much except that we were disappointed with how it all ended up. We left at the end of the year and bought Rentacrate.
OPI: It seems as though you were under the impression that you were going to stay on once Allied had been acquired.
OPI: Obviously it didn’t work out like that.
MB: After the first week we saw the writing on the wall.
OPI: You didn’t waste any time buying Rentacrate.
MB: My father had originally wanted to buy Rentacrate in 2005, but we held off and ended up buying the company in June 2007. We didn’t go into that business thinking it was our platform to go back into office supplies – we just saw it as a natural play into customers that we had from our previous business.
OPI: You added the ShredX business along the way.
MB: In 2008 we bought ShredX, which was doing $150,000 of business, with one truck. Today that division will do close to $10 million and we have about 27 trucks with nationwide capabilities. All of this growth has been organic.
OPI: How’s the Rentacrate business doing, while we’re on the figures?
MB: The Rentacrate business is tough. It took a hit with the real estate market and we had to change the model from being a wholesaler to a more direct model with Fortune 1000 customers and facilities management companies. We had to do a company change very quickly because that market really fell out. I would say that Rentacrate, while it is a great product for us as it relates to sustainability and where we want to be, as a standalone would have a tough time in the long run solely doing what it does. So we had to get into other businesses.
OPI: Did that influence your move back into the office supplies side with HiTouch?
MB: We had almost gone back into the office supplies business in 2008, with Office Depot, but that deal did not happen.
OPI: What was that about?
MB: We’d met with [Office Depot’s Business Solutions President] Steve Schmidt and he was looking at possibly bringing us back, in conjunction with some former Allied salespeople. I think it was a genuine proposition, but it did not come to fruition.
Then in 2010 we saw an opportunity in the marketplace because it didn’t seem like any other companies had changed much from a service offering standpoint. We saw this opportunity as a no-brainer, and that we should be offering services in the office supply side, and we went back into business.
OPI: Obviously you had to wait until those restrictive covenants had expired in May 2010?
OPI: How long prior to that had you developed the idea for HiTouch?
MB: In the fourth quarter of 2009 we decided that we were going to come back into business when our restrictive covenant ended. We were originally going to go down the acquisition route first, but we met with several companies, and I told my father: “Unless we are ready to go by March 15 with an acquisition for May, we have to stop and do everything organically.” And that’s when we started getting ready for HiTouch.
OPI: So MyOfficeProducts (MYOP) wasn’t actually on the radar between March and May?
MB: While it was on the radar, it was not something that we felt we could close in time. The day that restrictive covenant was up was the day that we wanted to be back in the business because we just felt there were so many opportunities we wanted to capitalise on.
OPI: I guess it was a symbolic date to announce your return.
OPI: Was it your strategy to grab the biggest dealer you could at the start that would act as a roll-up for future acquisitions, or did it just work out like that?
MB: Because Rentacrate is a national company and deals with Fortune 1000 companies we felt that either you had to get a super regional dealer or you had to find someone that, like MYOP, had the scope. The only issue that we saw was that it didn’t have any tremendous density within one market.
My biggest fear was management because I wasn’t sure whether a New York guy walking into customers somewhere like Tupelo, Mississippi, would be exactly who they want to see. But once we met Butch Johnson and John Frisk I felt very comfortable that we had the right people who think the way we do. It was as if we had found lost family members.
OPI: Looking at MYOP’s stockless model, did you have any issues with that?
MB: Yes. In fact, we have started the process of integrating all Rentacrate, ShredX and MYOP facilities into stocking facilities. As of 1 June we will have a traditional stocking model on the West Coast, in Tennessee and in the northeast.
As leases are due within the Rentacrate and MYOP arenas, we’re consolidating distribution centres. For instance, in California we were able to consolidate the Rentacrate and MYOP facilities into a larger and efficient 40,000 sq ft (4,000 sq m) facility.
OPI: So what kind of footprint will you have with these integrations?
MB: We’re in 26 states and we can service, with salespeople, close to 55 markets, with the combined reach of MYOP and Rentacrate. We’re in all the major markets throughout the country.
OPI: How have you handled the salesteams? What have you done in terms of integration to give a single offer to customers?
MB: All the MYOP salespeople have been bringing in specialists from Rentacrate and ShredX to sell customers those products and vice versa. In January we had a national sales meeting with all of our companies and we have put in place a brother-to-brother programme, combining sales efforts and compensation.
OPI: What about technology? Were there any integration issues there?
MB: Actually MYOP is on Thelarus, we are on the Microsoft NAV/BMI platform. The customer experience is unchanged and the back-end operations are able to use stock inventory, while management runs the company from a data warehouse that holds all of the company’s information.
OPI: How has the technology developed since you were with Allied?
MB: Microsoft has moved forward with their core ERP systems and the web technology has vastly improved. Connectivity tools to move and capture data is our primary focus as we improve the overall technology platform. We invest a lot in technology to continuously improve the customer experience and manage the business.
OPI: Going back to the MYOP acquisition, how was that financed?
MB: It’s very different from our past. We are not highly leveraged at all. We are very well capitalised and cash is not an issue for this venture.
OPI: So is there no private equity behind you with, say, a three-year return timetable?
MB: No, no private equity. My family, employees and investors did very well in our last deal, so while I’m not saying it would never happen, this is not about an investment to then sell at a later date and make a huge chunk of change. Those same investors are now a part of Rentacrate and ShredX and couldn’t wait for us to get back into the office supply business. My goal is to make HiTouch a billion dollar company. I have the complete support of my father and our board.
OPI: How many other acquisitions have you carried out since November?
MB: After MYOP in November we acquired Diverse Office Solutions in December. We did a non-office supply acquisition in January, we’ve got a couple of acquisitions lined up now and we’ve hired a number of both new and former salespeople who have contacted us.
OPI: Are the lined-up acquisitions traditional office supplies dealers?
MB: A couple are, yes. We’re looking at established office supply companies that have a large density within a specific marketplace. I would be very surprised if we haven’t completed two acquisitions before 1 July.
OPI: You’ve previously said that you were looking to get up to $200 million by the end of this year. Are you on track?
MB: Yes, well ahead of track. MYOP’s budget was $160 million, not including ShredX and Rentacrate. We also have HiTouch, which will do north of $20 million this year. So we should be able to achieve more than the $200 million, without any acquisitions. With the acquisitions we’re looking to close, I’m hoping we can get close to a $300 million run rate for 2012.
OPI: That’s quite impressive growth.
MB: It is and it’s not an easy mission considering there are not many players out there, no other $100 million companies.
OPI: Not too many. Who do you see as your main competitors? The power channel? Or WB Mason in certain markets? Other independent dealers?
MB: It depends which marketplace you’re in, but when we’re going after that total consultative sell, with office supplies, distribution of forms management, promotional products and so on, Staples is really the only other company that does that.
In my opinion, there are no other companies with those capabilities and the expertise to satisfy the customer in all areas. We don’t see any competition at all when we walk in and we’re able to incorporate the shredding and the crates. I don’t know many companies that can do what we do and execute it well, especially in the technology area of being able to procure all their products.
OPI: Just to recap, what services do you provide?
MB: We provide office supplies, janitorial supplies, contract furniture, promotional products, managed print services, coffee/breakroom refreshments, forms and print management, complete crate management systems, equipment and supplies, and secure document management and destruction.
A lot of our customers have their own systems and we integrate with those systems. So if you take a hospital, for instance, we’re able to keep all their forms in our warehouse and look after their online inventory. They can create on demand stationery and workflows on the web with us. We have great expertise in forms management programmes.
OPI: We hear a lot about managed print services (MPS). When did you start rolling this out?
MB: At Allied we launched MPS in 2004. Today, we are able to offer much more than what we see out there. Right now we have customers that are able to do not only the printers, but the copiers as well. We have strategic relationships with companies like Ikon and we’re working with NER and people like that.
But managed print is a very difficult sell, because when you get to the larger enterprise, you have 22 people that you have to convince because you’re playing in all their arenas.
I think the copier companies have a much bigger jump on the office supply guys and whether it be Xerox or Ikon/Ricoh, I think their solutions are better than what our industry has to offer
OPI: Do you think that’s a threat going forward in terms of just basic toner and paper supplies?
MB: 100%. It’s unbelievable that it’s 2011 and in 2004 we had rolled it out. I had more customers then on managed print than I do now. It’s amazing that if you are not ahead of it you are going to get knocked out.
There’s no question that’s where all the spend is at a certain-sized customer. How many times is the same person going to buy a stapler? The top selling two items are paper and toner.
OPI: Are you positioned to take advantage of this trend?
MB: The small customer is difficult to get to, to understand. But we have the ability to offer whatever it is that the customer is looking for, regardless of size. What’s interesting is that we’re working more on our Rentacrate customers for managed print than we are on the MYOP side, because Rentacrate customers are dealing with a lot of facilities management companies as well, like Pitney Bowes for example. Because they have staff in copier rooms, servicing the equipment, they’re trying to get in on MPS as well, and I think you’re going to continue to see a merger into that arena.
OPI: I want to talk about your relationship with SP Richards. You selected SPR as your first call wholesaler. Why was that?
MB: First of all, MYOP was an SPR dealer and did a lot more business with SPR than HiTouch did. When we came into business originally in May, SPR was a logical move.
But, at the same time, we have a very good relationship with United and a lot has changed in ten years. When we sold Allied in 2006, United was handling our entire West Coast business.
OPI: Any feeling that you’re going to become to SPR what WB Mason is to United?
MB: No. I think we’ll be one of SP’s largest customers, but we don’t have a dependency. I don’t know what Mason is doing with United Stationers on a daily basis, but I don’t want that. It just creates a problem; United has to defend itself on a daily basis. I wouldn’t want to do that to SP Richards and even though they’re a phenomenal wholesaler, they know that our strategy is to become a stocking dealer in every marketplace.
OPI: I know that MYOP is, or was, a member of the Office Partners dealer group. Is it still?
MB: It is.
OPI: Is there a commitment to stay at least for the near term?
OPI: We’ve seen a lot about Dave Guernsey’s Pinnacle group for larger dealers recently. Is that something you would consider joining in the future?
MB: I think that Pinnacle is doing a great job and I’m open to anything, but we have not explored whether we should be with TriMega or with Pinnacle.
OPI: I understand that MYOP is pretty strong in the public sector. Is this local/state government, the federal side?
MB: Both. We’re one of the suppliers on the North Carolina state contract. We have partnerships with companies such as Chesapeake Office Supply and Metro Office Solutions which allows us to service the public sector. We also do a lot of government business on the Rentacrate side.
OPI: Do you think it’s easier now for independents to get a foot in the door in this type of business than it was before?
MB: The thing is, unless you have feet on the street going into every nook and cranny of government and getting your catalogue in front of people, you’re not going to convert that business. How many buyers are there within the US Communities group, for example? That’s a huge task to undertake. So while I think the independents will continue to eat away and erode at the market, it’s going to take some time.
OPI: Just a couple more questions. You previously said that the overall goal is to create a billion-dollar global business. How will you achieve this?
MB: Well, the good news is I don’t have a gun to my head on how quickly I get there! I have been travelling both in the US and outside to get a complete understanding of what’s out there. I see a lot of opportunities, but I do believe that for us to be successful outside the US, we need to do business on a local level, using people in the area because every marketplace is different.
OPI: Would a natural progression be to look at Canada and South America?
MB: Well, Rentacrate and ShredX do business in Canada already. From a timing standpoint, our focus is on getting the salespeople integrated within HiTouch so they can sell all of our services. We are focused on getting our distribution centres up and running where we’re stocking products. We’re trying to create the HiTouch Business Services offering in the vertical markets, such as healthcare and legal, in addition to working on acquisitions.
OPI: In terms of possible markets, what about Europe?
MB: Anything is a possibility, and I think somewhere such as the Brazil market could be an interesting play; the economy there is doing very well. But we’ve really been concentrating on getting everything done here in the US before we look elsewhere.
OPI: Office Depot, or parts of it, could be up for sale soon if we believe the market chatter. That would be ironic, wouldn’t it, to buy them out?
MB: (Laughs) I’d get to a billion dollars a lot quicker that way! But I think the biggest issue is, because it’s a publicly traded company, until they get through all of their issues with the government, you’d be crazy to take on that risk. So yes, I don’t think the deal is that difficult to get financed, but someone has to go in with management and be willing to have unlimited exposure to all of the company’s legal issues.
There’s talk that ’Max and Depot might merge but, if you ask me, Depot’s situation has to be fixed privately.
OPI: Do you think that’s the most logical scenario?
MB: I think it is. You could either sell off the pieces or get it cleaned up and take it public again.
OPI: What are the differences between Allied and MYOP/HiTouch now?
MB: That’s a good question. I think the biggest difference between Allied and HiTouch is that our goal at Allied was to do an acquisition and convert the company to become the Allied brand. The problem was, what did Allied mean? With HiTouch, and especially with the social media and online aspect, for the first time we actually have what I would call phenomenal brands. For example, Rentacrate is well recognised and commands close to a 75-80% national market share as a service business.
ShredX is a no-brainer brand. We’re big in the shredding business. MYOP is also a phenomenal brand, and one that is very self-explanatory. We’re really excited about our prospects in what I would call this new social media age.
OPI: You mentioned the power of the brand. Does MYOP have its own brand of products or are you using a wholesaler?
MB: MYOP has its own brand of paper and pads, but other than that our business model is to support the manufacturers. We are not going with a private label strategy like we did at Allied.
OPI: So there’s no target to have 30% of your sales through private brands?
MB: No. I also think that in most cases the private label is a knock-off of the original, or it could be the original with its own label. There’s no innovation going in. Staples is the only one I know that really has been innovative, coming out with new products. I believe that when you look at the Averys and 3Ms of the world, that’s their business. They’re working very hard to get their brand out there and to create great products. So that’s the way we’re going to go to market.
OPI: Thanks for your time this morning.