Life begins at 40
Dave Guernsey has been part of the fabric of the US office products industry for 40 years now, but there’s no chance of him reaching for his pipe and slippers just yet. With an independent dealer community this exciting at the moment, why would he?
The energetic 62-year-old has been behind a number of strategic initiatives in the independent channel over the years – think NOPA and BPGI, for example – and his latest project, the Pinnacle Affiliates dealer group, is making waves after less than two years in existence.
OPI caught up with Dave Guernsey at his new company headquarters and distribution facility in Dulles, Virginia, where he gives us his candid views on the current state of the US independent dealer community, the new US Communities contract and the role of dealer groups.
OPI: Perhaps we can start with a quick recap on how your Guernsey Office Products (GOP) business has been performing recently.
Dave Guernsey: In the last year business has improved pretty dramatically, particularly in the second half of 2010. All of our business lines are up and we’re over our plan in every single major business line. We’re led by furniture, which is just off the charts.
OPI: Are you back up to pre-recession levels yet?
DG: We’re ahead of previous levels. Guernsey is up about 15% this year and will do something in the order of $70 million in our fiscal year ending in June.
OPI: Sounds impressive.
DG: It’s encouraging, but we’re still cautious because the economic outlook remains unclear. It seems like the least little thing, even global events, affects our local markets as it affects the attitude and the confidence of the typical business consumer.
OPI: What are you seeing in terms of the employment situation in your markets?
DG: As you well know, everything depends on the number of people in work in terms of how big the pie is for office products sales. In Washington employment is coming back nicely. In Baltimore it’s pretty stagnant. Richmond is also coming back nicely, but it’s down in the Norfolk area. So I guess the answer is that it’s a very uneven economic recovery.
OPI: It sounds like you are taking market share then. Who are you taking it from?
DG: We’ve mounted a very aggressive effort and we’re definitely taking share. But I should also say that the market is expanding. It’s not like we’re running rampant and winning business easily from all of our competitors. Our competitors are very good. The power channel is extremely tough competition and there are some excellent large independents that we have to contend with. But particularly in the Washington metropolitan area and in Richmond, Virginia, the markets are growing and that obviously contributes to the success we’ve enjoyed.
OPI: What about your own external growth strategy? Your last acquisition was Discount at the end of 2008.
DG: As always we are looking for the right opportunities, but we’re now looking west into central Virginia as opposed to further up and down the east coast. We’ve not yet been able to find a dealer where we can make a reasonable deal so we’re considering greenfielding an operation, probably in the Charlottesville area.
OPI: There weren’t any acquisition opportunities?
DG: There were opportunities and I would have preferred to acquire, but we were just not able to make a deal work. Going west into central Virginia, many dealers are small and don’t offer a lot of infrastructure. When we go into an area, we’re looking to do $5-$10 million in the first five years, and that requires a certain infrastructure and a fairly decent-sized dealer for us to have an interest.
OPI: GOP moved to new headquarters in Dulles at the beginning of last year. How did that go?
DG: I think I held my breath for about three months! I’ve done a move like this a couple of times in my 40 years and it’s not something you want to do very often. Frankly, we had no choice. We were busting at the seams in the other three buildings and it made sense for us to get under one roof. We also moved to different phone and data platforms, but everything happened exactly as it was supposed to and I’m very proud of my team.
All I can say is thank goodness we had it completed before US Communities broke. If we had been in the midst of a move and trying to deal with that as well, it would have been profoundly complicated I think.
OPI: That’s a nice lead into a major topic that I wanted to focus on. What’s GOP’s involvement in US Communities?
DG: Well, we are the main dealer for Fairfax County and that is a big account, approximately $11 million a year with 40,000 users in the county government and school system. We’re currently fulfilling about 250 orders, not including paper, per day and have a team of 12 people that is just focused on that customer. To give you some idea
of the scale, they order eight truckloads of paper per month and we have to distribute all of that to 1,400 different locations, so it’s very challenging from a logistics point of view.
OPI: It must have been a challenge getting all of the systems in place on time.
DG: There were a number of changes that had to be addressed with the online platform. Many are done, but more are yet to come. This is B2G – business to government – and not B2B, so there’s different reporting that is required because, as one example, of the government’s auditing requirements. Fairfax is either the largest or second largest of all the US Communities customers so we had the big dog from the start. We were the first to the party, so to speak, which had its interesting moments but is.group and United Stationers have been great to work with.
OPI: What is your exact relationship with is.group to be able to service the US Communities contract?
DG: In the outsourcing arrangement that Pinnacle Affiliates has with is.group, we have the right to be part of their agreements, whether that be US Communities, FSSI or this new CHAMPS healthcare agreement. That was built into our original contract with IS; it’s just that we had not used it to any degree until recently.
And I think that Mike Gentile would agree that, in many cases, having Pinnacle dealers available to help IS service this business has been absolutely crucial. There are some areas where they have a Pinnacle dealer, but they don’t have an IS dealer, or they have dealers that are so small that the business would overwhelm them.
OPI: We’ll come back to Pinnacle in a moment. Looking at US Communities, I know there is a lot of interest as to how is.group will fare in being able to switch over business from Office Depot. What are you seeing?
DG: It’s too early to tell. Use of US Communities is not mandated, so Office Depot, Staples, OfficeMax and independent dealers are all in the mix. Everybody is going after this business. I think over the next year we’ll get a better feel. At Guernsey we have about a dozen different accounts that are in various stages of ramping up, so we’re doing pretty well.
OPI: Any signs that Depot is struggling to hold on to its US Communities customers?
DG: I will tell you they’ve got their hands full where Guernsey is competing with them – we’re doing just fine. And Staples is too. Staples has come in underneath them and they’re mounting a very aggressive programme. As for areas outside our trading markets, I hear that dealers are faring pretty well. But, make no mistake, this is one tough slog.
OPI: Do you get the impression that agencies are being swayed by all the Office Depot overcharging allegations?
DG: Actually, no. Unless they’re reading OPI, many of the users, and even buyers, seem not to be aware of the allegations. We never talk about allegations involving Office Depot. That’s negative selling and my people have been instructed not to bring that up. Every once in a while we do receive a comment, but these are allegations that we can’t prove and we prefer to just stay away from the whole thing.
OPI: There have been questions – mostly from competing dealer groups – about the sustainability of is.group’s US Communities programme. What’s your take on that?
DG: Well, I think it’s too soon to tell, but it should work. In terms of it being a boost, it’s definitely new business. Whether it’s profitable business remains to be seen. This is a very different business model – different from anything I’ve seen in my 40 years. The cooperation between a major wholesaler, a dealer group and then the dealers is unprecedented in this programme. And so everybody’s getting a piece of the pie; whether or not they’re getting an adequate piece of the pie for what they’re asked to do remains to be seen. I’m not saying that it’s inadequate, I just don’t know at this stage.
OPI: What’s the key do you think? Is it being able to drive sufficient volume through this contract to get more margin dollars at the end of the day?
DG: More like driving sufficient volume to get "adequate" margin dollars. From the dealer’s perspective there are significant last mile delivery costs given a great deal of desktop deliveries. And, since the use of the agreement is not mandated, there’s real hand-to-hand combat to win agencies over the Staples, ‘Max and Office Depot programmes. Not unlike, I’m sure, IS and United, we have some variable costs but significant fixed costs as well.
This whole national account business with dealer groups and wholesalers controlling it is something I think that dealers should be particularly aware of. In fact, you might even say dealers should "beware" of dealer groups and wholesalers that control a significant amount of their volume. You become a sort of quasi-franchisee without the benefit of the laws that govern franchising. I think dealers should be very cautious about how much of their business a dealer group, or a wholesaler, controls.
I think dealers should also be very aware of how much of their top line is devoted to national accounts. These accounts are known for changing vendors fairly regularly, so if you build infrastructure or you build your sales staff around the idea of supporting an ever-growing amount of business in the national accounts sector, and then it abruptly goes away, the dealer can be left with all the overheads and none of the business. And even if they don’t change the vendor, national accounts are well versed in using leverage to compress margins. So, dealers beware!
OPI: OK, let’s talk about your Pinnacle Affiliates group. You’ve now got 13 members with total yearly sales heading towards $600 million. Has that exceeded your initial expectations?
DG: I would say so. Pinnacle as a model was not welcomed by traditional dealer groups, so there was an uphill battle from the very beginning. Falsehoods and innuendo were rampant. That’s number one. Number two, Pinnacle was a self-sustaining model on its own from the very beginning when we started with just three dealers.
We didn’t have a need to bring more dealers in and we didn’t have a recruitment programme. We preferred to let them come to us, and it’s now led to a sizeable number of dealers joining the group, and I believe you will see more to come over the next 12 months.
OPI: Which aspects of the model are the most attractive to these larger dealers?
DG: The buy-side programmes are equal to or better than anything that large dealers have available to them now in the industry. But my own personal view is that what Pinnacle offers is first of all its low cost model. There’s no traditional dealer group that has a model even close in cost compared to Pinnacle. Pinnacle is not all things to all dealers, however, we need only to support one dealer type with very similar attributes.
The other benefit that’s very important is the peer exchange programme. Our dealers are true peers. It’s not a mixture of dealers that range from $1 million to $80 million. These are all large dealers; they’re all B2B, they’re all in different markets with minimal overlap, they all have the same issues with developing go-to-market strategies and fairly much the same operational challenges. All of our dealers except one are on the same systems platform. And so there is a real ability for these dealers to exchange important information and processes by which they do business, with the goal of learning from one another.
OPI: A lot of your members have joined from TriMega, putting a bit of pressure on them, I would imagine.
DG: Frankly, we don’t worry about them, and I’m sure they don’t worry about us. We put our business model out there, the dealers judge the merits of our model and make decisions accordingly. Always good to have choices.
OPI: I understand that your newest member, Village, has a different direct-buy strategy from your other members. How does it fit into the Pinnacle model?
DG: Village is but one; we have others favouring the stockless model. Pinnacle is focused on "large" dealers and not necessarily large "stocking" dealers. If you think about it, a stockless dealer only differs in the realm of pick/pack on site from their inventory. Sales, marketing, delivery, customer service and go-to-market strategy are the same as all other large B2B/G dealers. In our peer exchanges, a stockless dealer has much to share and much to learn.
Traditional groups are myopic with direct buy-side focus. Pinnacle has plenty of direct-buy clout; our purchasing programmes are evidence of that. Because our large dealer model includes dealers with a very large sales staff, we have an attractiveness to manufacturers in the way of intense sales coverage, ability to roll out promotions that help to increase market share and a proven ability to compete and grow well in the markets we serve.
As for direct-buy dealers, they bring large average order size and acceptance of unit of measure that take cost out for the manufacturer. But, whether stocking or stockless, all PA dealers commit to our core manufacturers. Compliance is mandatory.
OPI: So where does Pinnacle go from here? Is there any possibility it could become a selling network in its own right, along the lines of AOPD?
DG: Great question. Frankly, we didn’t go into it with that in mind, but we are rapidly getting to a point where we’re covering much of the US. I would say we’re about five dealers away from covering the whole country.
That throws up a lot of interesting possibilities. Large dealers with large infrastructure capability, the same inventory, and the same front-end customer-facing system. Where needed, I’m told the wholesalers would make their front-end systems available. Watch out power channel, we may be onto something here (laughs).
OPI: So the thing that’s holding you up would be just getting the national coverage to offer this kind of service?
DG: That’s correct, and until that’s in place we’re exploring a national logistics model to drive down last mile delivery costs.
OPI: Can you throw a timeframe into the ring about when that could happen?
DG: It might happen within the next 12 months.
OPI: Taking the independent community in general, perhaps we could start with BPGI. Obviously you’re closely linked to the founding of that organisation. What’s your view on the current situation at BPGI?
DG: I certainly think BPGI has relevancy. What affects BPGI is largely going to be dependent on these new dealer group relationships with wholesalers. TriMega made a decision to align with SP Richards. IS has gotten close to United – it’s not an alignment, but they’ve gotten closer to United for all the reasons we’ve discussed before.
At least one wholesaler would like to tap into the buying power of the dealer groups. Personally, I think it’s going to benefit them more than the dealer group. But if the dealer groups decide they want to get cosier with the wholesalers, then it probably does not bode well for BPGI.
OPI: There’s currently some speculation as to the commitment of TriMega to BPGI.
DG: I’d be surprised if it’s a full-on commitment. TriMega has opted to get very close to SP Richards and it remains to be seen whether or not that will really bear fruit. But I don’t think, frankly, they can serve two masters. At some point they’re going to have to make a decision and drive their volume through one or the other.
OPI: Could BPGI North America be successful without TriMega? And could BPGI be successful without a significant North American programme?
DG: The answer is yes to both questions. First of all, the volume with Pinnacle is being driven through BPGI and it’s significant. IS buying power is being driven through BPGI and the volume in Canada with Novexco is being driven up through BPGI. And BPGI is wholesaler neutral. TriMega doesn’t own the independent dealer community. There are other pieces of it that are pretty significant and until something better comes along, dealers will continue to support the BPGI model. North American volume along with volume outside of the US will be sufficient to sustain BPGI. Jim Preston is fully capable of adjusting his resources to meet a changing landscape.
OPI: Are you optimistic about the future for independents and perhaps more so smaller independents? Can they survive going forward?
DG: Yes. I am very optimistic on the large dealer front, things are going quite well. But I think even the smallest dealer has an opportunity. That said, you need to be a very well-run business today. There is no tolerance in the marketplace for any sloppy business practices. You need to be good at what you do and small dealers are particularly adept at carving out niches even in the face of intense competition.
OPI: Looking at the other end of the independent dealer spectrum, there are suggestions that WB Mason could be preparing to expand out of its north-east stronghold.
DG: Well, they’ve already done it. We’ve been competing with them down here in the Washington area for some time. But they’re a whole different animal – Leo has done an extraordinary job, WB Mason has no peer in the independent world.
OPI: Do you expect them to move into other markets?
DG: Why not? They have United supporting anything they do around the country. It might be easier for them to do it in a contiguous sense, but I don’t think that’s necessary for them to build their franchise beyond the north-east. They have the model, but will they have the management needed for command and control over a far-flung empire?
OPI: We saw recently MyOfficeProducts, one of the biggest independents, bought by Howard and Michael Brown. Were you surprised by that move?
DG: No. I’m excited to have Howard Brown back in the industry. I think it’s been kind of dull since he went away. Howard is one of the most entertaining people the industry has ever seen. He just never goes away. So it’s going to be fun to have him back.
We’ve studied what it is that they’re doing. I think we understand the model, but I’ve had no communications with Howard at all. I used to hear from him periodically, but he hasn’t called me in a long time.
OPI: I’ll print that in the interview and maybe he’ll give you a call after he’s read it.
OPI: Finally, looking at Dave Guernsey. You’ve been in the industry for 40 years. What’s next?
DG: I still don’t know what I want to be when I grow up! Truthfully, after 40 years, I just face what’s in front of me. I enjoy coming to work every day. I love this industry. But I must tell you the day-to-day running of GOP, that’s been turned over to my brother Doug Guernsey and Gordon Thrall. Gordon handles the sales side of the business and Doug handles the operations side. So I don’t really get involved in any of that and, frankly, the day-to-day running of an organisation, I get bored very quickly.
I love strategy. I love building collaborative relationships within the industry. I was chairman of NOPA when we wrested control of the association from the power channel. I was chairman of IS when it went from private to cooperative ownership. At BPGI I was the founding Chairman. I’ve been involved in a variety of other initiatives and now Pinnacle. All strategic initiatives.
OPI: Is it getting to that day-to-day time at Pinnacle?
DG: It’s kind of getting that way. I think the strategy involving Pinnacle is still evolving. But I don’t think it will be long before I step down as Chairman and turn over what is largely day-to-day. I would still continue on the board and we’d still be working towards a commonality in systems, moving perhaps to a point where we could actually pursue major accounts on a broad geographical basis. I think we’re close enough to that. Whether we should actually do it remains to be seen, because again, it’s a margin issue. So there’s still work to be done at Pinnacle.
OPI: You wouldn’t be interested in a vacant CEO post down in sunny Florida, for example?
DG: (Laughs) Probably over my head – I’ll just hang with the little guys.