Big Interview

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Rich pickings

 

SpeedSend stands tall – and for now largely alone in terms of its service offering – in the Egyptian B2B office products market. And it’s determined to be prepared for when the global players are ready to pounce on this lucrative market

 

Egypt is not the first country that springs to mind when investigating vibrant OP markets. But with economic growth at a very healthy 7.5 percent and OP segment growth at a scintillating 24 percent, it deserves more than just a cursory glance from the international OP community.

 

Up until now, resellers have by and large shied away from dipping their toes into this particular market. Good news for SpeedSend, Egypt’s only fully fledged B2B operator in the OP market and now part-owned by global giant Lyreco.

 

Set up by Mohamed Hussein and his partner Ahmed El Sherif in 2001, the company initially aimed to create a technology platform that would connect buyers and suppliers in the office supplies field. It soon realised that suppliers were – and still are – very traditional in Egypt, with service being a low priority, so it decided to step directly into the supply chain, buying products, warehousing them and delivering them to customers.
SpeedSend’s focus has always been on the corporate buyer and, according to Hussein, it is this business segment that holds the greatest potential for resellers in the years to come.

 

Ambitious and enthusiastic, Hussein is keen to expand the business beyond Egypt and sees SpeedSend’s first port of call abroad in Saudi Arabia, the region’s largest economy. But while the opportunities are seemingly limitless in Saudi and would also provide easy access to several other countries in the Middle East, Hussein is adamant that he will first explore the Egyptian market to its full potential – and be prepared for a step-up in competition.
OPI: Please tell me about the Egyptian OP market and what it was like when you founded SpeedSend in 2001?
Mohamed Hussein: Well, the whole concept of SpeedSend – completely B2B focused – was a very new one. At the time, a lot of small stationery stores were operating in a neighbourhood-style business format with no customer service and no delivery vans. Resellers would take the order and probably send somebody from the store to deliver the goods around the corner. If the delivery address was a bit further away, they bundled it all into a taxi and delivered that way.
OPI: Aside from these neighbourhood stores, how is the overall supply chain set up?
MH: It’s a very blurred supply chain. In terms of office stationery, we have 16 main suppliers that are so-called agents. They import products and typically also have their own retail outlets. The biggest one has 11 retail stores, the rest have four, five or six outlets. These companies buy the products and put them in their retail stores. They also have a warehousing facility and some sales reps that do wholesaling.

 

Wholesalers usually go down to the big stationery markets – in Egypt they’re known as ‘sagalas’ – where they sell their products. The stationery market basically comprises resellers. In Cairo alone, we have approximately 3,600 stationery stores. They are either serviced by these importers/wholesalers or shop representatives go directly to the ‘sagala’ to procure their products. Even the government would buy from the stationery market.
OPI: Is most of the market concentrated in Cairo?
MH: When we started, around 70 percent was based in Cairo. Now it’s a little less.
OPI: So what was the take-up like when you first launched? Were customers ready for SpeedSend?
MH: Well, we went directly to the big multi-national companies, they were our target. These type of companies already have processes and procedures in place; they use systems for their own operations and we believed this would be the easiest market to get into. Also, in 2001 there was a big recession in Egypt. We were worried that we started at the wrong time and were concerned about non-paying customers. Approaching banks, petroleum companies and generally firms that already dealt in direct procurement seemed a safer bet.
OPI: Product-wise, what is the focus at SpeedSend?
MH: We currently have 2,100 SKUs, comprising both office supplies and IT consumables.
We were one of the first OP resellers to sell consumables as well. But we don’t sell hardware. It’s a very low margin product segment, we don’t have any inventory protection for stocking these type of products and we also couldn’t offer the necessary service levels.
OPI: Do you sell office furniture? It’s a huge market I assume with so much building and construction work going on in the country and the region as a whole.
MH: No, we don’t. It is something we want to do at some stage, but we only reach 0.5 percent of the market with our core product line at the moment.
We’ve taken the approach not to add new products until we can penetrate properly with the products that we currently have. And there is so much growth potential within this product line that we don’t need office furniture at the moment.
OPI: You said that in 2001 your concept was unique in Egypt. Is that still so and what in particular makes you stand out?
MH: We’re still the only one of its kind in the Middle East, I would say. And one of the reasons why that is so is because 86 percent of our orders come through the internet. There is no other company that offers electronic procurement of office supplies.
We offer systems to our customers, online reports, ease of use in ordering office supplies and they value that.
OPI: Is online ordering something they ask for?
MH: Well, there is some specific demand, but so far the initiative has mostly come from us. We offer decentralised ordering, for example. As soon as customers hear there’s no need for a paper-based system anymore, they get very excited, even more so when they learn that it’s free, easily adopted, customisable and with their own pricing.
On a different note, we stand out because we are the only company in Egypt with a paper catalogue where all the products are shown and described.
OPI: What about the retailers – don’t they provide catalogues and product information?
MH: They do, but in a more basic way. Usually what stationery stores would do is print a list of items with their prices.
They would fax this to the customer which would get to choose from it, depending on availability on the day of purchase. These lists would only include office stationery, so for paper, breakroom supplies, consumables, etc, customers would still have to go elsewhere.

 

OPI: You have 45 customers at present and total revenues of about $6 million. With that relatively small customer portfolio, every customer counts.
MH: It does, but that number is also a bit misleading. We deliver all over Egypt to organisations from all sectors, including pharmaceutical companies, automotive companies, hotels, and most definitely the banking sector which is being completely restructured in the country and is growing phenomenally. So while it might be one customer, it can be a very large one with lots of different branches all over the country.
We cannot actually offer more capacity at the moment. These large corporate businesses all demand full account management. As their demands become more complex, we have to ensure that our back-office is working well and the logistics are in place to deliver to more and more customers. We currently have a distribution centre outside Cairo and that serves the whole country.
OPI: Do you also deal with government business?
MH: No, not at the moment. The procurement process in government is very tender-based and we don’t go after that type of business. It’s not the way we want to sell. We don’t want to sell one big shop every year and leave. We want to continue building the relationship.
OPI: Isn’t government buying behaviour changing though?
MH: Yes, it is in some ways. A lot of government bodies are being restructured and reformed, with new rules, regulations and procedures being applied. This also applies to purchasing and we’re monitoring what’s going on.
One particularly challenge we have is language. We are very English-orientated. Our catalogue is in English, our website is in English and the business language is English in Egypt. But when you get to the government, everything is pretty much done in Arabic and that’s certainly a barrier to entry.
OPI: We’ve talked about the large corporations, but you also had a business for small customers at some stage. What happened to that?
MH: Well, we set up the business in November 2006, hired 20 sales representatives and divided Cairo in terms of grids.
But when we looked at the figures late last year, we found that the growth rates in the corporate segment were in triple digits while the small business segment was growing in single digits, so we decided to keep our focus on the corporate business.
We didn’t completely abandon the SME business, however, but adopted another entry level in our corporate business which starts at 100 employees.
OPI: How brand conscious are your customers? Is private label becoming more important?
MH: In terms of consumables, the corporate segment is very brand loyal. As far as office supplies go, I would say they are are not so much brand loyal as quality loyal.
It depends on the product, however. For products like paper clips and rubber bands, for example, customers are very price-conscious and are looking for cheaper alternatives that come from Asia. As soon as we build up volumes, we’re going to start working on private label. We currently only have our paper as private label but by 2012 about 25 percent of our product line should be private label.

 

OPI: Can you tell me a bit about the deal with Lyreco? How large is Lyreco’s stake in SpeedSend now and how is this arrangement working out for you?
MH: Lyreco has a minority stake in the business and owns a little under 10 percent at the moment. We started talking to each other in 2003 and signed the partnership agreement in 2006. Lyreco had a few customers that wanted to extend their global contract to Egypt, so it’s been very beneficial from that point of view for the company.

 

Then, last year, we needed to raise some capital and we approached Lyreco. A minority-stake was a good option for both parties and it’s been a very good relationship so far. In terms of where we want to go with it, it’s very much undecided at the moment.
It’s a capital-intensive business and we don’t think we can develop it fully on our own. It needs a lot of investment, but it’s too premature to even discuss any potential, more full-on ownership by Lyreco. We both have a keen interest in the Saudi Arabian market, so who knows where that will take us.
OPI: So no plans at all about any increase in Lyreco’s stake in SpeedSend?
MH: None.
OPI: Let’s talk about the region as a whole. You’ve just touched on Saudi Arabia. What are your plans?
MH: None for now, Saudi Arabia would definitely be the market where we’d like to be. It’s the largest market in the Middle East, followed by Egypt (in second place).
Saudi Arabia’s office products market has been growing at 32 percent a year over the last couple of years while Egypt’s has been growing at 24 percent.
The uniqueness of the Saudi market is that businesses are centred around six cities. It’s a very big land mass, so any logistics operation there would have to be set up properly, but now with the price of oil, there’s plenty of surplus cash to build up the infrastructure.
We’re certainly looking at Saudi Arabia – it’s got fantastic margin potential.
OPI: Can you be specific?
MH: Margins in Saudi can reach around 30-35 percent.
OPI: Phenomenal – how does that compare to Egypt?
MH: Well, Egypt six years ago was probably working at 10 percent, which was terrible. Now you can get between 22-28 percent, but that’s a fight.

 

OPI: If you were to enter Saudi Arabia, what kind of competition would you have there?
MH: It’s the same channels that we have here in Egypt, but better established and more professional. Connections are very important too, although it’s also a hugely corporate country, which would suit us well.

 

The growth level on its own is sufficient for companies like SpeedSend to operate in the Saudi market. When you have companies like Hewlett-Packard (HP) growing at 35 percent in Saudi Arabia with consumables alone, you’re confident that you can go in and comfortably take a good slice of the market. And there’re just not enough companies at the moment to fulfil all this growth.
OPI: Sounds like there’s massive demand for a company like SpeedSend.
MH: Yes, there is. We went on a look-and-see visit to Saudi Arabia and researched both suppliers and customers that we deal with in Egypt, and we found much interest.
OPI: How difficult is the entry barrier?
MH: Well, on the one hand, with the growth rates in the market, it’s quite easy. On the other hand, however, the country has a problem with labour issues and there are a lot of rules and regulations if you want to open a business.
You are not allowed to fully own a business, only 80 percent, the rest must be Saudi partners. So there are two barriers, one from a legal, the other from an operational perspective.
We would not set up organically in Saudi Arabia, but instead partner with an existing company there.
OPI: This all sounds very promising. How far down the line are you with plans to make a splash in Saudi?
MH: With the good industry growth rates in Egypt, the economy growing at 7.5 percent, and our ability to drive up capacity and get more business in Egypt, it’s something that we have put on the back-burner for the next couple of years. We still listen if there are any opportunities. We still share ideas with our suppliers, but for the time being I think it’s better for us to focus on the Egyptian market.
OPI: So if a great opportunity came along next week, you would say, "no, not really interested, maybe in a couple of years".
MH: Next week we would say ‘no’. Next year, it depends on our situation. Essentially, we’re still building up the business in Egypt.
We’re about to change our distribution centre to a bigger one. We will also open two remote distribution dispatch centres and hire more salespeople.

 

We’re still tiny with revenues of $6 million a year. When we have $20 million in Egypt, then we’ll start looking elsewhere.
Even though we’re ambitious and we’d like to go places, we also have to bear in mind that the company is only seven years old. We can afford three or four more years before we sail outside Egypt.
OPI: Aside from Saudi Arabia and of course Egypt itself, where are the other opportunities in the Middle East and North African markets?
MH: Qatar is the fastest growing economy in the world. It’s on the doorstep of Saudi Arabia. You could easily deliver products into Qatar from a Saudi base.
Markets like the UAE are re-export markets. It’s where most of the brand owners are located because it’s an easy hub and it’s where they have their re-export facilities. Manufacturers import the product, warehouse it in the UAE and then re-export to Egypt, Saudi Arabia, Qatar and so forth.

 

In terms of market size, the UAE is small compared to the rest of the region and there is also a lot of competition because anybody can import.
With the exception of Saudi Arabia, you have to view the rest of the Gulf region as one territory block. One distribution centre could feed the rest of the smaller countries because, in terms of population, they are very small and also quite close to each other.
It’s four hours to get from Riyadh in Saudi Arabia to Qatar; four hours to the UAE; from the UAE it’s three hours to Oman and 45 minutes to Bahrain.

 

Looking at the rest of Africa, from our point of view, North Africa is the most viable to us. We have looked at Tunisia which is a very small market. Morocco is interesting as well, but it’s also French speaking, so it would be difficult for us to enter unless we produce catalogues in French, have our ERP systems operating in French and so on.
OPI: What kind of strategy should resellers trying to get into the region be looking at?
MH: They should be looking at it as a region that, in parts, is very similar. Arabic is the common language between countries and you can cross borders easily. They should most definitely be looking at the growth rates in the Middle East.
Egypt and Saudi Arabia are singular entities, but the rest of the Gulf region is best looked at as one market.

 

OPI: You very nearly became part-owned by the biggest B2B operator in the world in our industry. What’s your opinion on the Staples/Corporate Express deal and Lyreco’s near miss in the whole saga?
MH: [Laughs] I have a press release here from Eric [Bigeard] telling me what to say. Honestly though, I believe that Staples would never have let go of the deal. With the slowness in the US market right now, Staples has to look at international markets to maintain its growth. It was very important for Staples to secure that deal.
OPI: Had the deal with Lyreco come off, I guess that would have impacted on you as well?
MH: As you say, we would have been minority-held by the strongest OP company in the world for the B2B segment. It would most probably have affected us positively.
OPI: Was it the right outcome though?
MH: From a shareholder perspective, it probably was.
OPI: You are being very politically correct here.
MH: Well, it’s money on the table for the shareholders. Sure, a Corporate Express/Lyreco merger would have been a good fit. There would have been plenty of synergies and a lot of savings for both companies, but the Staples/Corporate Express deal is here right now, so there’s no point dwelling on what might have been.
OPI: Is there space in the Egyptian market for a Staples/Corporate Express-type company?
MH: Most definitely. It’s just a matter of time. The big manufacturers like 3M or HP are very interested in the growth of the Middle East region and even though we are probably one of the fastest growing resellers in Egypt for them, they’re still looking for much faster growth, quicker implementation, ready investment and capital to take on the region. I think these big suppliers will eventually force the likes of Staples/Corporate Express or Office Depot to enter the market.

 

I hope it’ll be some time off in the future, however, so they don’t fight us before we’re fully fledged!