by Steve Hilleard
His arrival at Spicers as Chief Executive in early 2006 heralded the start of a new era. At the time, Europe’s leading wholesaler was underperforming in its core UK market, possibly having become complacent while focusing on its impressive European expansion. Some three years on, OPI finally interviewed former Lyreco and Office Depot senior executive Rob Vale for a progress report and discovered that the mighty Spicers is in much better shape and that he himself has adapted pretty well to life among the independent dealer community
OPI: Rob, it’s been almost three years since you joined Spicers and I think it’s fair to say you’ve been pretty busy, having inherited a business that needed a bit of fine-tuning. Specifically, what were the challenges you identified when you arrived?
RV: Firstly I found a business that has enormous strengths – and I still believe that to be the case – but clearly every company always has work to do.
I spent a lot of time in the field when I joined and heard some pretty clear messages from our UK customers.
For example, our EOS strategy wasn’t right – we simply weren’t competitive, so we’ve put a lot of effort and energy into fixing that.
I think we’ve done a good job and now have a very competent offering in EOS that we didn’t really have before.
That has helped enormously and it has also enabled us to achieve Premier status with HP, which I think is very important for us and our dealer customers.
We also spent a lot of time working on service levels which are incredibly important for the dealer.
Spicers is carrying a huge range of products – anywhere from 12,000 SKUs to 24,000 SKUs depending on the market – and it is extremely important that we have high fill rates.
You are obviously not going to be able to enjoy as high a fill rate on a 24,000 SKU range as you would on a range of 3,000-4,000 SKUs.
Nevertheless, our fill rates are in the very high 90s, typically around 98 percent. We strive to do better but, again, it’s across a very large product range and people shouldn’t forget that.
OPI: What about accuracy levels?
RV: Accuracy is just something you’ve got to get right. It’s a key performance indicator for us and we have very high levels of accuracy everywhere.
OPI: What’s your target?
RV: Less than 0.4 percent error rate.
OPI: So where is Spicers today in terms of revenues and profits?
RV: For our last financial year to April 2008 we reported sales of £645 million ($1.13 billion) which represents decent growth of 13 percent over the previous year. We’ve also seen a big improvement in our profits which were up 57 percent to over £20 million ($35 million). We’re proud of that performance which was helped by growth in EOS where we’ve been under-represented, not just in the UK but elsewhere in Europe.
OPI: Profits are about a 3 percent return on sales. Happy with that?
RV: Yes, it’s 3.1 percent. It’s not yet where we want to be but it is good progress. Our principal financial measure is return on average capital employed, which increased substantially to 15.1 percent.
OPI: What proportion of sales come from your traditional core markets of the UK and Republic of Ireland?
RV: Typically about half of our sales come from the UK. The next biggest market is France, which is roughly a quarter.
OPI: In what other product categories, besides EOS, are you seeing growth?
RV: Furniture is doing well but it does vary from one market to the next. In the UK we have a thriving furniture business which has grown very well. We’ve had a good reaction from dealers who tell us that we’ve got the range right and we are continuing to build on that.
Another growth area for us is that of facilities management. I think that’s a growing category for everybody as are green products where we’ve been working very hard to enhance our range. Some of the more traditional product areas are undoubtedly under the cosh at the moment, but that represents both the economy we’re in and the increasing importance of EOS.
OPI: You have a well-established dealer distribution centre (DDC) in the UK handling deliveries direct to your dealers’ customers. What proportion of your UK sales now goes through that facility, and is every SKU available?
RV: It’s about a third of our sales and it is showing a steady upward trend, reflecting the fact that our fastest growing customers tend to be the ones who are running a model with less stock.
So the DDC is certainly a growing part of our business and has a comprehensive offering across all of the range, including EOS, because it’s our job to satisfy the whole of the order on behalf of the dealer. You can’t really be in a business where you send traditional stationery products but you’re unable to deliver a wide range of EOS products as well.
OPI: What specifics can you share with us about your performance outside the UK?
RV: Well our second largest market, France, delivers about a quarter of our sales which means around £160 million (r200 million). We’ve had modest growth in France but we’re pleased with the result in what is a tough market.
This year Germany will be close to r100m and shows good growth. We’ve also had excellent growth in Spain, phenomenal growth in Italy and a double-digit sales increase in the Benelux region.
It’s fair to say you can divide our businesses into those which are more mature businesses and ones which are still in the development phase. Clearly it is much harder to get high growth levels from the established businesses than from the newer ones.
OPI: Let’s talk about some of the wider economic challenges that Spicers, indeed all of us, are facing. Do you see Europe sliding into a recession?
RV: I will be very surprised if the UK does not get into a technical recession shortly but we have seen a somewhat different picture around Europe in terms of our own business.
In the UK, things are clearly tough for all our trade partners and we have no expectation that they’re going to improve dramatically tomorrow. France and Belgium are challenging, the Netherlands less so. In Germany I am surprised because we’ve not had too much bad news in terms of our business there. I read a lot about the Germany economy slowing down dramatically but we haven’t seen that yet.
Elsewhere, in Spain the economy is in a real mess. They’ve had a property explosion and now that’s crumbling around them. In Italy we’re still a relatively young business and growing very quickly. We’re still very much into customer acquisition and frankly whether there was a recession or not, you wouldn’t see it in our numbers.
OPI: Your caution was recently documented by the trading update issued by DS Smith [Spicers’ parent company].
RV: Yes, I think we are being realistic. Things are not easy. We’ve got to re-double our efforts to help the dealer to succeed and get through these tough times. Interestingly, one of the ways they can do that is by freeing up cash from their business by carrying less stock. I have a very clear message to dealers, both in the UK and in continental Europe, and that is that the dealers who are growing the fastest tend to be the ones who choose to go down that route.
OPI: As economies decline, your emphasis on fast growing EOS looks very timely.
RV: We have certainly sharpened up our pricing for dealers in the UK while in many of our other markets we’ve had a more competent EOS offering for some time. The key point of our offer is that we can put it in the box and get it to the dealer either same day, overnight or the next day. It’s a very important part of our service proposition but it remains a high value, low margin product group which we have to manage very carefully.
OPI: Do you foresee a tipping point where the dominance of EOS products in Spicers’ mix forces you to completely rethink your logistics model and how you go to market?
RV: We’re always asking ourselves "Do we have the right model going forward- and we do, in fact, have somewhat different models in each country to cater for the local market circumstances. For example, in Germany about 60 percent of our deliveries are direct to the end user on behalf of the dealer. But we have a different situation in France where a relatively low percentage of deliveries are direct to the end user.
So in this complex situation you can’t just snap your fingers and change your logistics structure overnight, even if it was what you wanted to do. Clearly, we’ve had a look at the UK in particular where we’ve got the most developed and therefore the most complex logistics structure. But a great strength of ours, and one of our USPs, is that we carry more stock in terms of breadth and depth and keep it closer to the dealer than our competitors. That’s an important part of our proposition and we’re not about to change it.
OPI: Does it make sense that your UK business has a separate CDC and DDC a hundred miles apart?
RV: The dealer distribution centre is very well located and provides an efficient service from the middle of the country. In terms of the CDC, it’s located near to Cambridge where the administrative hub of Spicers UK is based and is able to keep our RDC network replenished very well from there.
OPI: Back to EOS – how difficult is it to compete with companies like Westcoast, for example, which have been consolidating other distributors and specialising in low-margin EOS?
RV: Clearly there’s an overlap between us and them in terms of product, but I’m not sure that there’s a massive overlap in terms of the service proposition because it is not really our job to supply EOS in bulk, with the sort of service that they provide. It’s our job to provide a comprehensive range that the dealer needs to help them look after their customer on a day-by-day basis.
We have to make product available to them at very short notice so that it ties in with their existing logistics model. If you’re running a dealership and you need that product delivered to you tonight, or even early this evening, we can do that. Does that carry a price? Of course – you can’t provide that level of service without extracting a price for it.
OPI: So what is the premium you charge for this level of service and how much more expensive are you than the IT distributors? Are we talking single digit percentages?
RV: In terms of difference, absolutely, because the margins that are available on EOS are very tight for everybody. But there has to be a difference to cover that service differential, otherwise you don’t have a viable business model.
OPI: Can you see a situation where specialist IT distributors across Europe will finally start to diversify more into higher margin traditional office products?
RV: As I’ve said, there are fundamental differences in the logistic models that they operate. They operate on very low margins and they’re geared up to ship fairly large quantities at relatively low prices. Some EOS distributors have said in the past "we’re going to get into more traditional office products because there is a greater margin in them" but I’m not aware of any one of them making it work over the longer term.
OPI: What about the reverse – would it make strategic sense for wholesalers like Spicers to acquire IT distributors?
RV: Spicers’ business model and success is centred on its specialisation in meeting the needs of its resellers. I think you would have to be very careful about combining that with any very different business as it could result in a hybrid, which is neither one nor the other. The only significant potential synergies that I could see would be on the purchasing side and I’m not sure what improvement you would generate by bringing them together.
So I personally wouldn’t rule out any such acquisition in the future, but we would have to be absolutely clear that we would need to protect the elements that make each business succeed.
OPI: Let’s move on and talk about your traditional #1 rival VOW. You’re about the same size in terms of UK revenues and offer very similar services so why should a dealer choose you? What are your USPs?
RV: There are a number of things that we do very, very well – the most obvious being that we have a great clarity in terms of our proposition. We only supply the trade and I would urge dealers to think very carefully about who they want to put their business with going forward because it is not our intention to ever compete with our customers.
The second point is that we think it very important to hold a substantial breadth and depth of stock close to the dealer.
OPI: Let me pick up on the "we’re trade only" comment. Do you not think that message is becoming a bit tired now? I’ve seen relatively little backlash from the dealer community since the integration of ISA with Kingfield Heath so maybe you should consider changing the record?
RV: It remains a fact.
OPI: But it doesn’t seem to matter to the customer base.
RV: Our experience indicates that isn’t true. We certainly had some reaction and we’ve had business move to us as a direct result of the fact that we’re trade only.
OPI: Care to elaborate?
RV: No, because we don’t discuss individual customer’s business but there are examples, in addition to which many dealers expressed their surprise and disappointment to us. I think if a dealer is looking to decide who they want to put their business with, they’re going to weigh up a number of issues. I can’t imagine any dealer would simply switch to another wholesale partner on the basis of one single fact but it is an important consideration and it’s one that we’re proud of. We have a clear and simple message that we have no intention of going direct because we don’t believe it’s appropriate for our business or that of our customers. What others choose to do is up to them.
OPI: There are rumours that VOW is looking at European expansion, possibly in Eastern Europe. What’s your view on that?
RV: I’ve got no idea whether they plan to enter continental Europe or not. We’ve been operating on the continent for 16 years and we’ve spent a lot of time learning how to do it. A lot of time and money went into the process but we were careful to recruit strong teams locally so as not to cause distraction elsewhere in our business. We run successful businesses in all the countries where we operate and we’re proud of that fact.
OPI: But why build a business from scratch? Spicers has proved to be a great blueprint so why would VOW not just acquire some of the established wholesalers that now exist in those parts of Europe that you’ve not yet entered?
RV: We’re all aware that it’s very easy to make an acquisition and a few years down the road be acutely disappointed with the result. I am pleased to say that we’re not in that boat. Our most recent acquisition was the Timmermans business in Benelux, which is now fully integrated and has produced great results for us. But we all know that acquisitions can go horribly wrong. Indeed OPI has reported on many in the past.
OPI: You’ll be aware of the rumours that Spicers and VOW could merge in the near future. What do you make of such speculation?
RV: It’s speculation and our policy is not to comment on rumour or speculation. I’ve heard all sorts of speculation in the 21/2 years I’ve been here and frankly where has any of it led?
OPI: What’s your reaction to reports in the local media that you’re losing a lot of business to VOW? Some say £40 million in the past two years.
RV: Bunk! We’ve grown strongly in the last two years. I am sure that we shall continu
both to win business from our competitors and to lose some to them as part of normal commercial life. The fact that we’re growing suggests that we are winning more than we are losing!
OPI: Do you envisage a time when it might make sense to put Spicers and VOW together?
RV: It’s my job to manage and continue to improve Spicers’ business and those [merging Spicers and VOW] are issues, frankly, that don’t occupy my time.
OPI: OK, but hypothetically does either have the financial strength to acquire the other?
RV: As I said before, we do not comment on speculation or hypothetical situations. What I do know is that ours is a solid business that’s very well funded with a strong balance sheet and a strong parent company.
OPI: How important is Spicers to DS Smith?
RV: We’re about a third of the turnover and we do contribute meaningfully to the results of the group, both in terms of our profitability and cash flow. The other side of the coin is they are a good parent for us because they understand the business but they don’t interfere.
OPI: It was an open secret a few years ago that Spicers was for sale but none of the offers matched their valuation. Do you get the sense that if the right offer came along, they would seek to offload Spicers?
RV: I think we’re an important part of the DS Smith group and I’ve got no reason to believe otherwise.
OPI: Let’s look at Spicers’ potential expansion. What markets are next on your hit list?
RV: There’s plenty of Europe left to explore but I don’t think we have to go much further afield to find markets that would lend themselves very well to our model. We’re interested in those opportunities. Our strategy remains to establish the Spicers’ business model profitably across the major markets throughout Europe.
OPI: Is it fair to say you have a preference for green field expansion?
RV: No, I don’t think it is, as we have done both. The acquisition of the Timmermans business is a great example. There was a real meeting of minds and we were able to work with the existing owners for a three-year period, which was immensely valuable. It was a success.
OPI: Does the current economic climate present opportunistic expansion possibilities?
RV: Possibly, but if businesses are in distress, you have to ask yourself why that is. We would be interested in robust businesses that have a future because it is not our way to turn up with a bus full of Spicers people and tell them what they should be doing.
OPI: It strikes me that you’re not terribly strong outside of the traditional reseller community and that you have left the servicing of supermarkets and other mass retailers to your competitors. As the global economy deteriorates, will you start focusing more on those retail opportunities?
RV: I think it’s an interesting question, but your premise is not true in all of our markets. For example, we have a very well developed business that supports the retail trade in the Benelux countries, small retailers right up to the larger, national or multi-national retailers.
We do it well in that region but we do much less of it in the other countries, so clearly there are some opportunities there.
I am also acutely aware that our chosen focus has been the independent dealer and I am wary about doing anything that might dilute our concentration on those people – they are the vast bulk of our customers and it’s our primary responsibility to look after them.
OPI: What other opportunities should you be looking at?
RV: Well we are always looking to expand the range of products we sell to existing customers and I think there’s plenty of opportunity out there. I am very interested, for example, in what SP Richards is doing with its FM and JanSan range, where it is enjoying excellent growth and even has dedicated distribution centres just for that category.
We are very interested in new categories and are looking at various options because they represent great opportunities to help our resellers be competitive on a range of products that historically have not been core to their business.
OPI: What is the importance of private label within your future business model?
RV: Private label is a fairly modest part of what we do. I think we’ve managed our own 5 Star brand extremely well. It’s there for people who need it and we do a good job making it available at the right price and with the right quality. But that’s not why we’re in business. We’re not here to displace manufacturers’ brands. A core part of what we do is to promote and give an outlet for manufacturers’ brands to the dealer community.
OPI: Let’s switch gear and talk about some of our industry’s private label proponents. Firstly Staples. How do you think its acquisition of Corporate Express [CE] will affect the dealer community within Europe?
RV: I think it’s clear that CE will be a better organisation as part of Staples but it will take time. I don’t think you are going to see anything changing overnight other than the usual structural and management changes that go on and that must present some opportunity to independent dealers.
OPI: As a former Lyreco person, how do you think these dramatic events have affected Eric [Bigeard] and his organisation?
RV: Now he has his OfficeMax alliance in place, I am not sure what his next moves are. One thing you can be sure of is they will stick with the knitting.
OPI: Another of your former employers has been making the headlines this year, mostly for the wrong reasons. What do you make of Office Depot’s various challenges?
RV: It’s not for me to comment on their business and it is some time since I worked there and I don’t know what lies behind their latest thinking. It seems to me the apparent decision to drop the Viking name is probably good for the independent dealer.
OPI: Given your knowledge of the local contract business, do you think similar skeletons are hiding in European cupboards?
RV: I can’t comment on what others are doing. All I can say is that at Spicers we take all reasonable steps to ensure that Spicers’ people act ethically at all times.
OPI: Another major trend making the headlines is the environment. What is Spicers’ stance on sustainability and what have you done that is noteworthy?
RV: I’m proud to tell you we’ve just been awarded ISO14001 accreditation for our environmental management system (EMS) in the UK. That in itself is significant but it’s not everything. We have an environmental policy that has to accord with the environmental policy of the DS Smith Group which takes its responsibilities very seriously.
Each of our countries is now installing an EMS which basically describes their impact on the environment and establishes a process for managing that and reducing it over time.
OPI: Fuel is obviously a major expense for a wholesale business. What scope is there for you to be more efficient in the use of energy?
RV: We’ve taken steps all around Europe, for example switching to a highly energy efficient car fleet in Germany and reducing our fuel consumption in the UK by 40% over the past four years.
OPI: That’s pretty substantial
RV: It is. We achieved it partly by using more environmentally friendly trucks but also by talking to dealers and reducing the quantity of deliveries that they need. Turn the clock back a few years and everybody wanted everything in small quantities without any thought to what it meant. But now, increasingly people are prepared to say "Hang on a minute, do I really need a delivery of one or two items and would it make sense to consolidate several deliveries into one bigger one- The answer for the environment is undoubtedly yes.
OPI: Does that also apply to deliveries from the dealer to the customer?
RV: Absolutely. A few years ago the end user was happy to ask "can you deliver small quantities the next day- and dealers would have said "yes". They might have winced when they said it but the arguments would have been purely economic. Now the arguments are both economic and environmental and, in many cases, the environmental argument is more powerful with the end user customer.
OPI: So where does that leave the dealer’s service proposition if the consumer suddenly becomes quite happy to only receive an order once or twice a week? A key weapon in a dealer’s arsenal has always been its flexibility and ability to react to customer requests.
RV: I’m not sure it’s becoming an issue. There are many independent dealers who are now carbon-neutral and working very hard on their environmental credentials. People are increasingly focusing on that which is local. Local is good, so again that helps the dealer enormously.
OPI: Final question. What will you be doing in five years’ time?
RV: Sitting here with you talking about the future success of Spicers.