Big interview



Spanish King


by Bruce Ackland


Having only joined Unipapel in 2008, its CEO Millán Álvarez-Miranda Navarro is a relative newcomer to the industry. However following the Spanish multi-channel operator’s acquisition of Adimpo last year, he now heads one of Europe’s biggest players with revenues nearing 1800 million


OPI: Hi Millán, perhaps you can start off by telling me a bit about Unipapel’s history.


MA-M: Sure, first of all Unipapel is a very traditional company. It was founded in 1976 following the merger of three very old paper companies which were Vasco Sobres, based in Gupiuzcoa, Segundo Moreno from Madrid, and Logrono’s Papyrus.


A year later, the company went public on the Madrid stock exchange and in the following years, as the company grew and the sales force grew, they decided to include other products that were not manufactured by themselves and that’s how Unipapel, on top of its manufacturing, became a wholesale distributor in 1983.


In 1989, together with Lyreco, we formed Ofiservice, which is the largest contract stationer in Spain then in 1991 we went into the filing business and opened a new manufacturing site in the Basque country.


The other key milestones in our history would be joining EOSA in 2008 and then, of course, our acquisition of Adimpo last year.


OPI: And can you tell me when you joined Unipapel and what your background was before that?


MA-M: I joined the company in July 2008. Prior to that I was at a large multinational in Spain called Acciona which is in real estate and construction, but I actually spent almost all my career in Eastman Kodak. I worked there for 12 years, eight of which were in the medical business where I ended up being the global Vice President.


OPI: What attracted you to the office products industry?


MA-M: Well Unipapel offered me the position of General Manager with the idea of replacing the CEO in a couple of years and that was four or five months ago. It was just a very exciting plan in a new sector and with different responsibilities.


OPI: So you moved from a group that was heavily involved in construction right about the time that the whole world economy went into freefall. Was that good judgement or just luck?


MA-M: [laughs] It was luck. The offer from Unipapel came up and it was a good opportunity. Moving to a smaller company which had very attractive growth plans and having the capability to manage things more directly and in a more hands-on style was what I wanted to do.


OPI: Let’s talk a bit more about the company itself. You are in three channels: manufacturing, wholesale and, through Ofiservice, contract stationery. Approximately what percentage of your total group sales come from each of those three channels?


MA-M: Wholesale is about N760 million and as you can imagine Adimpo is a very large part of that. The manufacturing side is about N63 million and that’s just the sales from manufacturing into the wholesale channels. The sales are much larger but the margins go into the wholesale channel. Ofiservice in Spain is about N63 million (our portion of it is 50 percent).


OPI: Ok, I’d like to move on to your domestic economy now. I’ve been reading a lot about the major difficulties within the Spanish economy and I’m wondering how the office products businesses in Spain were coping with this difficult situation.


MA-M: Well, Spain had been growing very nicely since 2000 with quite high growth compared to other markets in Europe but when 2008 came we suffered a much faster and abrupt crisis than the rest of Europe, mainly because our economy was very dependent on certain sectors.


OPI: Like construction?


MA-M: Absolutely. Construction was hit very hard hit by the crisis from both a financial and economic model perspective. From growth at 4-5 percent, we went into a very strong market decline which obviously affected office products because, as you well know, office products is one of the first areas where companies cut costs.


At Unipapel we weren’t impacted until July 2008, but from July on we had a very tough end of the year, and in the beginning of 2009 it was extremely hard.


OPI: Do you have any sense of how much of a sales decline the Spanish OP industry saw?


MA-M: I don’t have the hard numbers but I’d say it was around a 10 percent decline in 2008 and another 10-15 percent decline in 2009. The first six months in 2009 were extremely difficult for everyone, for the economy in general, and for this sector. However, if you look at what happened with real estate, construction or the car industry, they were suffering declines in the range of 40-50 percent.


OPI: Specifically, how has your company adjusted its business model to cope with the effects of this recession?


MA-M: Firstly we protected margins very carefully last year. Although we had a decrease in sales (in the range of 8 percent), our margins didn’t suffer very much. Then obviously we worked very hard on reducing costs in sales, in marketing, in advertising, in general expenses. We also reduced head count quite aggressively which I think will give us quite a healthy return in the next few years and put us in a much more competitive position going forward.


We also cut costs on the manufacturing side by adjusting the capacity of the three plants we have in Spain. In parallel to all this, we worked on growth opportunities and made three acquisitions. The first one was Galgo Paper which is a very traditional brand of quality paper and envelopes in Spain. We completed that deal in May 2009 and then, as you know, in August 2009 we closed the N45 million acquisition of Adimpo, which is one of the European leaders in percent of market share.


Finally, around October last year, we acquired the goodwill and customer base of the fourth largest office products wholesaler in Spain, Nova Line.


All that together basically gave us a consolidated growth for the year of around 20 percent.


OPI: You mentioned earlier that the company is now publicly traded on the Madrid stock exchange. Are there any significant shareholders, family shareholders or original owners?


MA-M: Yes, the shareholder base is quite balanced: 35 percent of the ownership of the company is in the hands of the family founders while a further 23 percent has been acquired in the last eight years by institutional investors, like investment firms, banks etc. And then the remaining 42 percent is ‘free float’. So we have quite a nice balance between traditional family founders and new investors coming from financial institutions, which gives us a very balanced approach to the Board of Directors.


The family founders tend to look more long term and they tend to look more at the assets of the company. The institutional investors tend to look more at the growth of the company and the profitability short term. The two objectives coming together at board level is something that works out very well. It is important that around 50 percent of the ownership of the company is represented at the board level, so when we take decisions they are decisions that represent the interests of the whole company.


OPI: If we can take a look at some financials now, what do you forecast for group sales in the current year?


MA-M: We don’t provide forecast sales of the current year but for 2009 we have two numbers that I can give you. One is the pro-forma, which is Adimpo and Unipapel included in the whole year, and then the other number, which is the official one that is in the books that just includes four months of Adimpo, which is from August on. So if you have the full 12 months for the whole group sales in 2009 were N815 million.


But if you include just the four months of Adimpo, sales were N446 million. So the number that I reported for 2009 in the official accounting was N446 million, but if you want to have a sense of the size of the business right now, on an annual basis, it’s around N800 million.


OPI: Obviously you’ll be looking for future growth to come from the acquisitions, but do you also see the economies in your main markets starting to perform better?


MA-M: Not really. Up to now – January, February, March – we have seen no signs of recovery. We are seeing more or less the same trend as the end of 2009 which, as I said earlier, was better than the beginning of 2009 as the first semester was really difficult.


But, as you said, our acquisitions are helping us to grow within our customer base and to acquire new customers so the growth is not coming from a better market performance but from a better company performance, which is something very nice to feel.


OPI: Have there been any economic casualties among your competitors?


MA-M: Yes. Nova Line, which I mentioned earlier, was the fourth largest national wholesaler in Spain but they basically went into Chapter 11 and that was when we took the opportunity to retain their customer base.


OPI: Do you think 2010 will see more of your competitors in Spain struggling and maybe entering Chapter 11?


MA-M: Yes, although what I am learning is that companies in this sector tend to be very agile and very resilient and, surprisingly, there hasn’t been too much of this happening in the last two years.


OPI: Prior to the acquisition of Adimpo, were you purely a Spanish business?


MA-M: We were mainly a Spanish business. I would say that 90 percent or 85 percent of the revenue came from Spain, but we have or had operations in France, Portugal and Morocco. We also exported in small numbers to another 20 countries, including Chile and Japan, as well as having a subsidiary that sells into the Middle East.


OPI: This is all manufactured product?


MA-M: Yes.


OPI: With the addition of Adimpo that must have significantly altered


MA-M: Yes, that is now very much changed because more than half of the sales of Adimpo are outside Spain and mainly in France, Germany and Italy. We expect sales in France this year to be around N200 million, Germany around N100 million and Italy in the range of N70 million.


OPI: And the acquisition of Adimpo must make you the largest office products wholesaler in the Spanish market with the other two main wholesalers being Comercial and Spicers?


MA-M: Right.


OPI: I guess between the three of you, you have a fairly significant market share.


MA-M: Not really. The Spanish market is still very much atomised and I don’t know the number but there has to be another 500 or 600 wholesalers in Spain. Before the acquisition of Adimpo, Unipapel had in the region of 5 percent market share. Now with the acquisition of Adimpo, if you include the EOS products, we may be in the range of between 15 percent and 20 percent. But I think between the three of us, we are not over 30 percent of the market.


OPI: Why do you think that is? You, of course, will have looked at other markets like the US, UK, Germany and France where the main players have a much more significant market share. Why is Spain still so fragmented?


MA-M: It is still fragmented both at the wholesaler level and at the distributor level and I think it’s mainly because the consolidation process that took place in Europe and in the US has only just begun in Spain.


OPI: So you mentioned that there are 500 to 600 wholesalers. What do you think will be the key factor that will start the consolidation process among this community?


MA-M: I think it will be the development of larger wholesalers like the case of the three largest in Spain – Unipapel, Comercial and Spicers – and it will be driven by pure competition. What tends to happen in this kind of consolidation is that there are a number of key players that can drive the consolidation through the cost structure.


OPI: So essentially, your superior buying power will start to mean that the other players are not competitive.


MA-M: And not just that, what we see is that the consolidation will happen more through our capacity to offer services to the market. If we have a cost structure that allows us to give better and more varied service to our customers, we would hope that would enable us to set a standard that others will not be able to reach.


OPI: I want to go into more detail on Adimpo now. This acquisition was obviously a key milestone for your company but I’m very keen to understand the rationale for getting into a product category which is notorious for having a much different margin structure than pure office products.


MA-M: Very politely said [laughs]. Well, I think there are different reasons for why we did this.


For many years, Unipapel has been in a very good financial position so the company had at a certain moment in time a solid cash pot of N40 million that needed to be put to use. And for some years, the board and the management have been looking for inorganic growth opportunities and for a potential acquisition that would drive growth into Unipapel.


We all know that the envelope market, the notebook market and the filing market are flat or declining markets and the growth in the past came mainly from the introduction of general office products. But it was clear in 2005/2006 that unless Unipapel found a new growth path the company was not going to have the potential to keep on growing in the way that the shareholders were expecting.


So different targets were looked at and during the last year the possibility of Adimpo came up and it was seen as a very attractive opportunity because Unipapel had a very weak position on the IT consumables side. It accounted for less than 10 percent of our sales while representing 50 percent of the market and 50 percent of our customers’ purchases. It was a product range that had grown much faster than traditional office products although it is true that in the last two years there has been a decline in the market of about 15 percent. However, Adimpo has continued growing during the last two years so that’s very good news.


The second reason for the acquisition was that we saw potential long term growth on the consumables side. Spain is still quite a non-digitised market compared to France, Germany or the UK and the penetration of the internet in the home is still low compared to other countries.


Additionally, Adimpo gave Unipapel the critical mass, the size that we needed to start thinking about the market consolidation that we mentioned previously.


OPI: In the 20 years we’ve been publishing OPI magazine we’ve often written about the convergence of the office products and the IT consumables industries but very few companies in Europe have ever taken the step of merging an office products wholesaler with an EOS and IT products wholesaler, yet you go and do it with one of the largest firms in Europe.


So I have two big questions that come to mind. Firstly, how are you going to manage the two different margin expectations of the businesses? And secondly, do you think your actions will influence your competitors into following your lead and making a similar acquisition?


MA-M: To give you a simple answer to the first question, the way we plan to manage the margin expectations is carefully. The ownership of the company and the board understands that although we are bringing these two businesses together, they are quite different animals from every perspective. The customers look at both the segments in a different way and, as you said, the margins are different. The way you have to manage the cost base on the company is different, the speed at which you have to make decisions is different and the power of the manufacturers is completely different. Therefore the whole business is different.


If you are able to keep those two management principles or management bases separate and you’re able to communicate with your board on how you are managing the businesses, then I think it’s fine.


OPI: So you don’t really plan to integrate the two businesses?


MA-M: No. Internally you have to be able to analyse your IT business on one side and your office pro
ucts business on the other, and you have to understand that you are making different business decisions and that you cannot handle HP in the same way you handle Staedtler.


OPI: And what about the logistic challenge? How do you shift large volumes of expensive IT consumables and can you accomplish that under the same roof as a warehouse full of Staedtler pens, notebooks and file folders?


MA-M: I think what we are seeing is that there is a huge advantage in doing that because, at the end, the shipping addresses are fairly the same. So basically if you integrate the two businesses, or the logistics of the two businesses, what you are doing is reducing your shipments by half.


OPI: I can see how that makes sense, but I still wonder why nobody else has done this before. Also, if you talk to any of your IT products competitors across Europe, like ACI or Alpha International, they will tell you that they have never considered moving into traditional office products. So I’m still surprised as to why you’ve made this decision and I’m very interested to see how you’re going to manage maximising value from the acquisition.


MA-M: I think if you look at it from a customer perspective, customers are buying the whole portfolio. Their decision to buy one item or another is basically the name. As in many other industries, if you are able to offer a one stop shop for them then that is a huge positive. One shipment, one invoice, one account, one administration and one point of contact. So from a customer perspective I think it is an advantage.


OPI: As you said, you manage it carefully. So maybe we’ll come back in a couple of years and see how that process has gone.


MA-M: Absolutely and actually right now we are looking at the strategy plan for the next four years.


OPI: Ok, I’d just like to go back to the second part of my question about Adimpo which was whether you think this acquisition will mean one of the two other big wholesalers may make a play for an EOS wholesaler as well?


MA-M: I don’t know if that will happen. One of the prerequisites for that to happen is that there has to be an IT wholesaler for sale in the first place and as far as I know there aren’t any.


OPI: Moving off the wholesale subject then, I want to ask you about the Ofiservice business. It seems quite strange that a wholesaler would own or part-own a contract stationery business although it’s been very successful for over 20 years now. Is that 50 percent investment still key to your business strategy now you are so wholesale driven?


MA-M: As you said, Ofiservice has been an extremely successful business since its foundation. It has contributed and it is still contributing to Unipapel with very good profits. I would say that the relationship between Unipapel and Lyreco right now is going though a very good phase and we see the investment in Ofiservice mainly as a financial investment.


We only manage Ofiservice at arm’s length and we participate on a regular basis on the management board, but this is a few times per year where we look at how the company is doing from a senior level. Unipapel does not really participate in any operational decisions, these are mainly driven by Lyreco.


OPI: So you don’t think there’s a conflict between your interest in Ofiservice and the fact that most of your customers are now competitors of Lyreco.


MA-M: No. I know that at the beginning there was some turmoil in the market because of this potential conflict of interest, but in the last few years I think Unipapel has shown to the market that there’s not such a conflict. For us, Ofiservice is a financial investment and there are, let’s say, Chinese walls between the two companies. There’s no data going from one place to another. There’s no kind of preferred treatment in any direction and I hope the market has come to the conclusion that this represents no threat to any of Unipapel’s customers.


OPI: You mentioned earlier that you’d looked at a number of different ways of growing the business. I’m guessing one of those must have been to take a look at how companies like Spicers have grown in markets like France and how by almost owning a certain section of the dealer community they’ve guaranteed a customer base for themselves. Is that an option you’ve looked at? Are you looking at the dealer groups or maybe taking a look at someone like Carlin with their 500 stores?


MA-M: In fact we are moving in a different direction. It’s not completely different, but it’s different in the way it gets implemented. We feel that our job as wholesalers is to make our customers successful. So our role in the market place is how to supply products and services that do two different things: first, make our customers capable of competing in the market place in the best conditions and secondly guarantee the profitability of the whole channel network.


OPI: You also mentioned earlier your membership of EOSA. What was the motivation for joining that organisation?


MA-M: Well, we felt that it was important to be part of a larger purchasing group in Europe that would allow us to better negotiate purchases, especially from the angle of the products that we were buying in China. That’s mainly the focus of our presence in EOSA. I’m not sure it’s still like that, but EOSA was both a sales organisation and a purchasing organisation. We never belonged to the sales organisation. We were part of the purchasing organisation to leverage better pricing from China and to be able to leverage from larger volumes, not just from our purchasing power perspective but also from a logistics perspective, and that’s the way we keep it and the way we look at our participation in EOSA. n