German dealer group Soennecken has become a formidable player in it’s 90-year history. For a start it’s more than a dealer group; the cooperative encompasses a wholesale element as well as the recent addition of a direct online business. Getting members on board with this complex model could have been a challenge, but CEO Dr Benedikt Erdmann is confident that this has been achieved.
Read how here, and find the rest of the interview in the European Office Products Annual Review.
OPI: Where did Soennecken begin?
Benedikt Erdmann: Soennecken, then GDB, was founded in the 1920s as a cooperative of ten or 12 retailers in Cologne. It was a very traditional buying group and the company had excellent growth. In the 1980s we bought the brand name Soennecken.
OPI: Where is the name from?
BE: It’s the name of the founder – Friedrich Soennecken was a brilliant thinker and inventor. There’s an old fight between Leitz and Soennecken; in the 1870s, Leitz in Stuttgart and Soennecken in Bonn invented the lever arch file at the same time. Anyway, we bought the name in 1982 because the company was bankrupt. In 2002 we merged with Büro Aktuell, and the common name of the joint venture was BRANION, which stood for Brand Union because we needed an international name. It was never well accepted and I took the first chance to come back to Soennecken.
OPI: Is the business entirely owned by dealer members?
BE: Yes. There are 530 members that have to buy shares related to turnover; about 4% of turnover. It starts from c2,000 ($2,700) but the largest members have shares of about c200,000.
OPI: You’re the CEO; who else is on the management team?
BE: I’m responsible for the orders coming in and my colleague Rainer Barth is responsible for the boxes leaving the company, that’s where the money is.
OPI: Who has the easier job?
BE: These days I think it’s much harder to get the orders in, but times are changing.
OPI: Do you have a supervisory board of dealers?
BE: Yes, with six members; five dealers and one from outside, Benno Lohhausen, the former CEO of edding.
OPI: How have the objectives of the company changed over time?
BE: Until the 1970s it was still a very focused buying group. The big change was in the 1980s when marketing became more important. There was another big change a couple of years ago when we started our direct business. This was a logical step for Soennecken to take an active part in the market and a big evolution for cooperatives in Germany.
OPI: How do you define your members in terms of being retail and delivery focused? Do you segment them by size?
BE: We have three kinds of members. First, the traditional contract stationers. Then the retailers, which we call the papeterie. Finally, the output specialists with printer and copy machines. In all of these businesses we want to have the leading companies in the regional market – every one of our shareholders is a local regional dealer.
OPI: What percentage of the business does each division have?
BE: It’s 50% contract, 30% papeterie and 20% output management.
OPI: So apart from paying 4% to buy shares, what other criteria do the dealers have to meet to be eligible for membership?
BE: There are two important criteria: first they have to have a solid financial situation because we’re giving them a lot of credit to buy with vendors.
OPI: So you run some pretty tough credit checks and financial audits.
BE: Right, and we do that quarterly.
OPI: Do you insist that members put as much of their purchasing though this facility as possible?
BE: Yes and we have contracts with most of the vendors. If members don’t do that then they don’t get the dividend from us.
The second criterion for our members is that it’s very important in a cooperative that the members have the ability to work together with Soennecken and the people working here. It’s a cultural aspect; it’s very helpful to have members that are willing and able to cooperate.
OPI: It’s much harder to audit the culture than the balance sheet.
BE: Yes, but we talk to people two or three or four times before we make a decision. I think after a talk of two or three hours you get a good impression of what they are like.
OPI: When you’re having these discussions, what do you sell as the benefits of Soennecken?
BE: I think we have some real USPs. First of all from the warehouse business and the logistics and pricing aspect I think Soennecken is number one in Germany. I don’t know if we’re in all aspects better than Spicers but I think it’s very close.
OPI: Are you the biggest in terms of wholesale revenue?
BE: Yes. I also think we have better prices for members. On the logistics side, and from a quality perspective, we’re the best you can get in Germany. Our mistakes quota is 0.1%, so no mistakes. We also give a pretty high rebate, about 2.6% on turnover this year.
OPI: Talking about Spicers, what impact have you seen since the divestment of the UK and Irish business, and ADVEO’s acquisition?
BE: Nothing’s really changed in Germany so far. I think they have internal problems right now, but in the next two or three years Spicers will become a stronger competitor. The merger between these two companies, from the market point of view, is a logical step. I think that was a good decision for Spicers.
OPI: So you think it will win some market share?
BE: Yes, I think so. It’s a strong competitor.
OPI: Where will that market share gain come from?
BE: There are many smaller distributors in Germany. There will be consolidation; you can see the wholesale business shrinking and shrinking.
OPI: How many wholesalers are there now?
BE: Some 50 or 60. Perhaps ten or fewer important ones. In the long run there will be three leading wholesalers in Germany: Spicers, PBS Deutschland and Soennecken.
OPI: Tell us a bit about your services, particularly your ‘LS’ models.
BE: LS means the delivery service. LS1 is a pallet or a box sent to the warehouse of the dealer. LS3 is when we send boxes to the customer of a member in the name of the member – the stockless dealer concept. LS2 is something in between; we send the boxes readymade to the warehouse of the dealer, who takes it to the customer. LS4 and LS5 are desktop delivery models, which are comparable to the logistics services of Staples or Lyreco.
OPI: Do dealers have much need for the desktop delivery service?
BE: It’s not a big business but it’s increasing. The most important part for us is LS3 where we have about 50% of turnover and more than 90% of boxes shipped.
OPI: How much of that is next day?
BE: 99%. If we’re delivering to the customer it’s about 95%.
OPI: So do more of your members rely on you completely for stock now you offer these services?
BE: To be honest not really. Most love their stock.
OPI: Why? Is that a lack of confidence in you?
BE: No, they love to buy, to have contact with vendors.
OPI: So they’re buying outside a Soennecken contract?
BE: No, but they run their own warehouses. It’s very traditional in Germany. Though I think you need to turnover a minimum of c7-8 million to do it well.
OPI: This has been an industry issue for ten, 15 years.
BE: We cannot change it.
OPI: Maybe the slowdown in the economy here in Germany might be a catalyst for some of these dealers to free up some capital.
BE: Maybe, but I’m not very optimistic. In the time I’ve been in this job we’ve had three or four recessions and nothing has changed.
OPI: Let’s talk about marketing and e-commerce, two subjects that are high up on your strategic list of priorities. What differentiates you from the others?
BE: We have different catalogue and marketing concepts for our members; most of our competitors just have one. It’s very hard for dealers to differentiate in the market if we all have the same catalogue, same products, same prices and so on. So we have four marketing lines in Soennecken; three marketing groups and then one main catalogue. Below that we also have several marketing campaigns.
OPI: How about in technology and e-commerce?
BE: Of course we have the best web shop – everybody has the best web shop! But I’m convinced we’re the leading company regarding the data quality we can deliver to our members. We have a system that holds data to produce catalogues and fill the web shops. Using our content management systems our members can produce their own catalogues.
OPI: How many of your members now have an open web shop?
BE: In B2B I think it’s 80%. In the retail market it’s only 2% I think, maybe 1%.
Our e-procurement system is also very important, called So.PROCURE. With this platform our members make an annual turnover of about c175 million. I think we’re leading in this because competitors sometimes only have direct links to their customers via SAP or other ERP systems but, with our multi-platform, dealers can work with multiple catalogues and offer different assortments.
OPI: Is this produced by the company that you acquired?
BE: Yes, in the late 1990s.
OPI: How many of your members use that system?
BE: 78 use So.PROCURE, and the rest have an open shop for B2B business.
OPI: What is the view of Soennecken as it relates to electronic supplies? And managed print services (MPS)?
BE: We’re working on a concept for MPS, where we can deliver ink and toner cartridges to our members’ customers directly from our warehouse. We’re going to work with HP, Epson, Lexmark and so on.
OPI: Do you have direct contracts with all of the providers?
BE: We have some direct contacts but not with HP. A direct contract to sell pallets in huge amounts directly to members is the business we stopped because we didn’t make money with it. It’s not a good idea for a supplier to have a business model that makes it impossible for a distributor to make money with the product. The margin with HP products is much too low for us.
OPI: Let’s talk about financials. I know we published a few years ago that you had some ambitious aims for 2013; I think your aim was w650 million. Tell us where Soennecken is at the moment.
BE: The good news is that we’re happy with the numbers that we have right now. The bad news is we will not reach that 2013 goal, but we’re getting close. We expect turnover in 2013 to be up to c620–630 million.
In the first two quarters of this year we have increased turnover by about 1%; that’s not enough for our plan this year but in total we have increased about 23% in the last four years so that’s not bad.
OPI: I know the dividend and rebate are quite important to you.
BE: Yes, our goal was to increase the dividend by 50% and that’s realistic. I think we have increased it in three years about 40%, 45%, maybe not 50%.
OPI: What sort of percentage last year and the year before?
BE: From 1.8% to 2.6%.
OPI: How have you achieved that?
BE: By increasing profits in the wholesale business and saving costs.
OPI: So the CEO drives an old car?
BE: (laughs) Right, a very old car.
OPI: You operate as a cooperative, which is usually not-for-profit.
BE: No, we work for profit.
OPI: So how do you decide how much of a bottom line profit you redistribute as dividend and how much you keep for working capital and future investment?
BE: We have a very good economy at Soennecken. Our equity quota is about 30-35%. We don’t have a problem on the capital side, so we give 95% of the money we make back to members. For example, next year we’ll have a dividend of about c14 million and the total profit will be about c15 million. It’s like saying one for me and 14 for my wife.
OPI: What’s your view on Soennecken participating in some form of international alliance such as BPGI in the future?
BE: We haven’t seen the advantage so far. We talked to Jim Preston several times; he was so close to us signing a contract. But I never really saw the advantage; maybe I’ll change my mind sometime.
OPI: Was it that you didn’t see the benefit, or you didn’t see the benefit because of the cost that was attached to membership?
BE: It’s a balance between input and output. If we cooperate with somebody we take it very seriously. It takes time, awareness and management capacity. I also thought it was a little bit unbalanced financially. But it’s a 60/40 decision you know; it’s very close.
OPI: BPGI has no German member.
BE: No, which is why Jim was here very often.
OPI: So do you see Büroring being a potential member of BPGI?
BE: You should ask them, I don’t know. We have other challenges right now, maybe Büroring has no other challenges right now.
OPI: What are your challenges then?
BE: Three challenges: turnover, turnover, turnover! To be honest, first of all the business challenge is to participate in internet business. No cooperative in Germany really has a business model for that and it’s not enough to have a web shop. Our problem is that I think we could do this business, but we cannot share our margin with members.
OPI: That would be a problem.
BE: That’s the key thing. We can do it successfully; we cannot compete with Viking in Germany though. They have built up their business over ten years. It takes time to catch up with them, but we should start sometime.
OPI: Well you have to start somewhere, but your members won’t let you participate – or will they?
BE: We haven’t asked yet because we have had other subjects to talk about, but we have to soon. We cannot wait and see what happens. But, crucially, nobody has a business model for this market. The way to the customer is completely different from a traditional, contract stationer business; it’s not an appendix to an existing business. That’s a big challenge for the next couple of years, not just 2013. The main thing for 2013 is to increase the dividend by another 15%.
OPI: So that will take it up to 3%?
BE: That’s what we want to have. We’ve got 2.6% by doing an excellent job. Whether we can increase the dividend again depends on the economy. If the market is growing it’s realistic, but if we have a recession it’s not. We’ll wait and see; we cannot change that.