Big Interview: Wholesale changes

Former investment banker Paul Yardley has been putting his business turnaround skills to good use at Australian wholesaler GNS.

Creating a sustainable national office products wholesaling specialist has proved to be somewhat elusive in Australia over the years. That might be about to change following a series of acquisitions in the past couple of years by A$80 million (US$60 million) distributor GNS Wholesale Stationers under the leadership of Paul Yardley who took on the CEO role at the end of 2016.

These transactions form part of Yardley’s vision to refocus GNS on its core distribution business and bring value to the supply chain. It’s a strategy that has not been without its challenges, as Yardley explained when Andy Braithwaite caught up with him at the OPI Global Forum in Chicago last November.

OPI: This is your first interview with OPI, so let’s start with a quick recap of your career to date.

Paul Yardley: Sure. I’m not an office products industry veteran by any stretch of the imagination. I was born, raised and educated in the UK and started off my career in investment banking in London, doing ten years of mergers, acquisitions and equity refinancing for corporates across Europe.

OPI: How did you end up in Australia?

PY: I had a great time in investment banking and learnt a lot, but it was not what I wanted to do for the next ten years of my life. Through a contact I got the opportunity to run an Australian video games business called GAME, that’s how I fell into retail.

GAME had a 100-store Australian business that had had its challenges – my job was to take the business and apply some of the logic I had learnt in investment banking in an actual operating entity.

I restructured the business and spent the next three years running it before selling parts off to a local investor and winding up the remainder. Then I worked for PwC for a while, followed by several other companies as an interim consultant to help them restructure, before I was approached by WH Smith in the UK; the high street stationery retailer was looking for someone on the ground in Australia who could build its start-up operation in the country to maturity and turn it into a material part of the business.

I worked for WH Smith for the best part of two and a half years. When we reached a position where I was happy with what we had done, I was lucky enough to be asked by the board of GNS to take on the CEO role. That, in a nutshell, is how I got into stationery wholesaling.

OPI: There is a common thread of restructuring and quite severe change within the companies you’ve run. I believe that was also the case at GNS?

PY: Absolutely. The common threads were either mature or declining industries, companies that had been poorly or mismanaged, and rapid change. All three of those were present at GNS too.

OPI: Before we talk more about the challenges you faced, could you give us a quick overview of the company?

PY: Sure. GNS today is a nationwide wholesaler of office products in Australia. We started off in the 1960s as a cooperative owned by newsagents. Group Newsagency Supplies was the original name of the company. It was started by four newsagents in a garage after they found they couldn’t source stationery from suppliers for their own stores in a cost-effective way, so they basically clubbed together to create a buying group at the time.

That grew from one state in Australia – New South Wales – and over the intervening 30-40 years rolled out nationwide and moved away from just newsagents to selling to other independent retailers like post offices and small supermarkets and, more recently, into the dealer channel. We’re a pretty classic wholesaler in that sense.

We have five warehouses around Australia: Sydney – which is where we are based – Melbourne, Brisbane, Adelaide and Perth. We have about 19,000 products on file and north of 10,000 product lines actively ranged. Our annual revenues are about A$80 million.

OPI: In terms of the ownership structure, is it still owned by shareholders that are newsagents?

PY: Yes. Newsagents traditionally had to be shareholders to use the service, so originally the company attracted shareholders as part of the model. The business ‘corporatised’ in the early 2000s and became an unlisted public company. That means we’re subject to all the same reporting requirements public companies are – half- and full-year results, etc – but we are not listed on a stock exchange. Today, we have about 400 shareholders, all newsagents and they remain the core of our ownership base.

OPI: How much of your business still goes through the newsagent channel?

PY: About two thirds is still through newsagents and small retailers. They are under a degree of pressure and have been for a number of years, largely due to the rise of Officeworks which has become the principal competitor in stationery retail for newsagents. Its store rollout over the past ten years can be directly correlated with some of those newsagents closing down.

OPI: Aside from those market challenges, what were you confronted with when you took the job?

PY: The principal issues we had in 2016 when I joined were twofold: firstly, a lack of liquidity that gave rise to challenges around inventory and working capital; secondly, the company had suffered some revenue declines over the previous three or four years as newsagents – our customers – had either closed down, reduced the space allocated to stationery in stores and/or shifted to other products such as giftware.

The business had fundamentally reached a position where it couldn’t grow other sales fast enough to offset those negatives. It also had a cost base that was probably too high for its revenue levels and, like many wholesalers around the world in the past few years, had to make significant changes to the business model to address that.

That was the situation when I joined. The first thing we did was refinance the business by using assets we had. We sold off one of our largest warehouses in Sydney which took away the liquidity crunch and allowed us to reinvest in inventory, fill rates and service levels for customers. That, in turn, brought back some of the revenue declines we’d been seeing.

Another initiative was to push much harder into the independent office dealer community. Traditionally, this had been a bit of an afterthought for us, without a coherent strategy or plan behind it, but we redoubled and accelerated our focus into this channel.

The final thing we did was to take out a lot of what I call central admin cost. We reduced management headcount and flattened the business down to be more efficient and cost-effective.

On the back of all this, we have stabilised our revenues. We have continued to build our business in the dealer community and the share of wholesaling into dealers has grown from nothing five years ago to a third.

OPI: Has your relationship with Australian dealer group Office Choice helped with that?

PY: Definitely. Office Choice was a strong early supporter of ours and we came on as preferred wholesaler to its members five years ago. More recently – about 18 months ago – we were appointed by Office Brands as one of its preferred wholesalers and we’re on the wholesaler panel of ASA too. This has given us a more even spread across the dealer groups.

The big build-out in our commercial dealer growth has been acquisition-related. In early 2017, we acquired a wholesaler in Western Australia called WA Stationery, and that brought a large chunk of dealer business to the group. We purchased V Wholesale, a smaller wholesaler in Sydney, later the same year and more recently, in early 2018, we bought Satex in South Australia.

OPI: All with the aim to get national coverage?

PY: Yes. If you consider the overall picture, Australia is a country of 26 million people and it had eight office products wholesalers when I came into the business. In my view, that is over-wholesaled; if you look at markets like the US and the UK, there’s a concentration down to a strong one or two, and that’s what Australia needed to do.

As such, a big part of the strategy in 2016 was to aggregate those smaller wholesalers into GNS. In the process, we have taken what was essentially an East Coast-focused operator – Brisbane, Sydney, Melbourne – and expanded it across the country.

OPI: Is that it for now in terms of acquisitions or
do you have more targets?

PY: We would always look if people are in the market to sell, but our strategy was driven by the desire to build a national platform. Now we have that and are leveraging it; the value would have to be compelling to do something more.

OPI: Traditionally, there have been challenges in the Australian market in terms of the geography and relatively low volumes. How have you lived with that specific situation?

PY: You’re right, it’s a large geographic space to service which resembles, if compared to Europe, an area from London to Moscow. But that’s why we exist and my view it’s an asset, not a liability.

If we can show our worth to enough vendors around the country, then a wholesaler can really play its role in the market, because we can bulk up an order from one supplier with 20 others; it then becomes economic to ship rather than the supplier itself delivering from Sydney to Perth. Ask any manufacturers whether that’s economic for them and they’ll shake their heads in pain.

The only companies with warehouses in Perth today are us and ACCO Brands. That’s it. And as the pressures continue in the manufacturer space around revenues, margin squeeze and the rising cost of doing business, the prospect of farming off the tail of your account base to a wholesaler becomes ever more attractive in my opinion.

We’ve built the network and now we have to make sure it’s productive which means adding volume to it. We are in the process of striking agreements with a number of vendors around that approach. Part of that also comes from the deals we’ve made with Office Brands, Office Choice and ASA, and their members purchasing through us as opposed to other wholesalers.

OPI: What other wholesalers are in the market?

PY: There are still four other operators in the space – two of size and two smaller ones. The two larger ones are Stationers’ Supply in Melbourne and General Stationery in Brisbane. They both cover elements of the East Coast, but don’t have the national platform that we bring to the party, so we certainly see competing with them on volume as a big part of our role going forward.

In terms of the wholesale market structure, it’s currently only about 15% of an office products dealer’s typical purchase, so there’s plenty of room to grow. Within the other wholesalers, there’s probably A$40-A$50 million up for grabs in that channel and we’re targeting that as well.

OPI: Last year you announced an agreement with Office Choice regarding your Officesmart group. Can you give more details?

PY: Officesmart members were GNS customers which had mostly started out as retail-oriented newsagents, but had made a successful and productive move into the smaller-end B2B space, and were pursuing that side perhaps more aggressively than the retail side of the business.

Since I arrived at GNS, we have been much more focused on what we want to do and doing it really well. We want to be a great mover of product and a great distributor, rather than a provider of marketing services, an IT company or an e-commerce business.

We had a number of customers in Officesmart that were looking for more help than we could give them to become better B2B dealers, so we had a decision to make: do we want to go into that space ourselves and create that service element for them, or do we want to go and find a partner that could work far better for those customers than we could?

The answer was Office Choice. We entered into a partnership with the group whereby it took on the Officesmart programme, brand, business and many – about 50 – of the members we had. They transferred to Office Choice in July 2018.

OPI: When we hear the word ‘partnership’, it’s quite often a euphemism for ‘acquisition’. Can you clarify – did Office Choice acquire the Officesmart brand, for example?

PY: It’s part of a wider partnership, so it wasn’t a pure acquisition in the sense that Office Choice bought the business and then paid us some money. Effectively, Officesmart members, rather than being supported by GNS in terms of their marketing, catalogues and promotions, are now supported by Office Choice. But the fee income or membership services revenue that GNS originally had, Office Choice now gets. That’s the deal.

OPI: What’s in it for you still?

PY: The supply of product to those members is still via GNS, so we retain the distribution volume those companies require from a wholesaler.

OPI: Changing the subject, what is your view on the entry of Amazon into Australia? How could that impact the market?

PY: The consensus is that Amazon has had a slow start in Australia – not just in office products, by the way, but across a wide range of categories. My opinion is that eventually, given three, five, seven or ten years, it will reach a successful level of distribution that will allow it to compete.

What does our industry do in the meantime? Well, we get on and reinvent ourselves in the background – at the wholesale, dealer, newsagent and manufacturer level. There’s still plenty of inefficiency in the value chain in the country, so there’s much to do.

If you look at the Amazon selling price for basic items and the net manufacturer cost price for those products, that’s the margin we as an independent channel need to be fit to compete on.

OPI: What is Amazon’s distribution footprint at the moment in Australia?

PY: It currently has a warehouse in Sydney and one in the process of being opened in Melbourne, but that’s it. Amazon can probably cover 40% of the population within a three-day delivery period. By comparison, we cover 99% of the population within 24 hours.

OPI: How long before you think this operator will have a national footprint?

PY: On the current numbers I’ve seen in terms of its rate of penetration in Australia, it probably makes sense for Amazon to open in Brisbane next, allowing it to cover all of Queensland within a 24-hour window. Beyond that, the West Coast and South Australia are smaller markets and probably wouldn’t stand on their own two feet just yet.

One of the challenges we have with Amazon as an industry is that its bottom line requirement is different to most of our participants. There is no prediction I’ve seen about how fast it will roll out. But we do look at the Canada experience as a market that is similar in geography and in population distribution to Australia, and we use that as the best view we have on how the market might evolve in Australia.

OPI: Could Amazon be good for you as a customer, especially in its early days in Australia?

PY: We’ve not engaged with Amazon as a business and we are wary of hitching our wagon to a business that at some point could eat you (or your customers). We are watching with interest, but that’s as far as it goes today.

OPI: Are you aware of dealers in Australia that are already selling on the platform?

PY: Yes, some do, and they actually use us to fulfil, so perhaps, indirectly, we are benefitting in some small way from Amazon. But I could count those dealers on one hand and I certainly haven’t seen anyone really push office products yet in a serious way on the platform.

OPI: Let’s talk about consolidation. The Complete Office Supplies (COS)/Lyreco and the OfficeMax/Staples deals – have they had an impact on either your newsagents or your commercial dealers?

PY: They haven’t and won’t affect the newsagents at all. In some ways I see what’s happened in the market as an opportunity for dealers because across those four businesses there was a large amount of loss-making volume that’s falling out now as they come to re-price. This is being looked at certainly, if perhaps not being picked up yet by dealers from the groups, and could lead to incremental business for us as their wholesale partner.

I also think there’s opportunity for us with dealers servicing multisite customers or national accounts. Dealers can look after one site really well on their own, but it’s very hard to do more when you haven’t got the distribution power. As our drop-ship capability grows, a dealer could pitch for any multisite operation using GNS as its distribution partner.

I know that all the groups get phone calls from larger customers looking to have a third bidder on a tender panel. They have Winc and COS, but they need a third to meet procurement requirements, so there is potential there for the groups to play in that space too.

OPI: Is that a genuine opportunity or just to satisfy the requirements of the tendering process?

PY: Hard to say, but from a pure logic perspective, if volume in the market is available at a profitable price point for the contract stationers, on the cost base the dealers operate on, there’s every chance they could win that business and make some money out of it.

OPI: Can dealers really be cost competitive, especially when you look at the size of Winc, which is considerably larger than even COS?

PY: My sense is that they’ve always struggled to compete on a pure cost basis across any account. What they are very good at is relationship building and service levels. If they can stack themselves up well on those points to a contract, then, yes, they could win. Keeping it is the key after that, but I am optimistic.

The other point about the market structure is that we’re also seeing consolidation on the supplier side. ACCO Brands combined with Pelikan Artline two years ago [and, at the time of going to press, had just bought all brands and distribution rights from fellow Australian vendor Cumberland Stationery]; Hamelin has come in and purchased Bantex in the past 12 months; and we’ve also seen a couple of closures of small suppliers in the past year or so.

The local Australian market, in terms of supplier base, is shrinking and that’s forcing both the dealer groups and us, as wholesalers, to look at the manufacturing community which we need to be robust and strong.

OPI: As you all rely on each other to some extent?

PY: Australia is probably the best-balanced market globally I’ve seen. The wholesalers can’t drive the market as we’re not big enough. There are two strong buying groups in Office Choice and Office Brands which pursue their agendas, and the suppliers are now consolidating up to be strong enough to push their plans too. We are a triangle and pretty well-balanced, but clearly all of us need the other two parties to be strong to continue.

OPI: Finally, how have you found the stationery/office products industry?

PY: For a start, it’s an industry that’s probably gone through more change in the past two years than I was expecting. The rate of change both in Australia and globally has been hard and fast and I don’t see that slowing down or stopping – we probably have another two years of really interesting transition to go.

The other thing I would say is that in industries that are in change and transition, people tend to hold onto the past quite robustly. Change unsettles people and makes them nervous, but we can’t move forward and face the future if too many participants are unable to let go of the past.

OPI: I guess there are dealers of a certain age…

PY: …who are looking forward to retirement, to be frank. And I can understand that they don’t want to take a huge risk.

All of us – dealer, dealer group, manufacturer, wholesaler, supplier, newsagent – have challenges in our businesses. One of the biggest ones at GNS in the past two years has been cultural. It’s been about getting away from a ‘we’ve always done it this way’ mentality to a ‘we must embrace this’ mindset. We have to do things a bit differently and in a way that is going to get us going in the future, not stuck in the past.

On the non-business side of the industry, I’d say generally there are very nice people in it, it’s very social and probably one of the more fun industries I’ve worked in. I enjoy it.