Big Interview: Reign in Spain

0

 

by Steve Hilleard and Heike Dieckmann

 

With its multi-pronged business model, Carlin is one of Spain’s leading OP players, successfully fending off the competition encroaching its space.

 

Carlin is a long-established and well-known name to those familiar with the Spanish office products market. Many, however, perceive the company merely as a retail-based franchise operation. And one could be forgiven for thinking that, particularly considering that a substantial part of the OP market in the country is made up of thousands of papelerias, all eager – but increasingly struggling – to keep up with the advancing competition.
Carlin is in fact a true multi-channel operator, competing head to head with small papelerias as well as some of the big boxes that have entered this vast market.
President and general manager José Luis Hernández has been with the company from the very beginning, creating, moulding and shaping all its various businesses as they evolved. And while the near-term future will be challenging in uncertain economic times, his overall outlook for Carlin remains wholeheartedly positive.
OPI: How would you describe the structure of the Spanish office products market?
José Luis Hernández: Our market is different in many ways than other European markets. The retail market in Spain is still very important, for example. We currently have between 12,000 and 15,000 small stores, not all of them dedicated to office supplies, but they sell office supplies among other items.
Every year stores disappear and new companies emerge. In the last decade some of the big players have entered the country and they now have a definite place in the Spanish market. Some have come and gone – Office Depot, for example, is regarded as one of the failures in the country.
OPI: That’s a very large number of stores. Why is the Spanish market so focused on retail and is this changing at all?
JLH: When we started the business, only one percent of customers bought via catalogues. Today it’s quite different and about 30-40 percent use this channel. What we discovered is that customers like to have their suppliers close to them. But that’s changing now. People increasingly trust buying through catalogues.
OPI: In terms of OP sales, where is the market concentrated? I presume Barcelona and Madrid?
JLH: We have 478 stores all over Spain at the moment, but one third of them are in Madrid, so that market is very important for us. When I say Madrid, I mean the greater region of Madrid – not just the capital, but the wider community around it as well.
As for Barcelona, we currently have a small representation there. We only have 26 stores in the whole of Catalonia, which is very small. But this is the region where we are growing more than anywhere else in the country.
Overall, we have a presence all over Spain, even in the Balearic and the Canary Islands.
OPI: Before we talk any more about Carlin, I just want to make clear to our readers that Carlin is not just a retail operation. Can you explain a bit more about that?
JLH: Of course. We operate in five channels, among them the retail and the delivery businesses. As a general rule, about 60 percent of Carlin’s market is delivery and 40 percent retail.
In essence, companies can opt for a number of franchise contracts. The first one is to franchise just one store – a Hiperpapelería. This franchise has exclusivity within a territory where we’ve already done some marketing and know for sure that there is enough business within that territory – approximately 2,000 professionals and small businesses together.
Ofimarket, the second type of contract, can be started in a warehouse environment. Again, we need a minimum of 2,000 companies in the surroundings of that warehouse. This type of business is a delivery business and is channelled through mail order, catalogues, client visits and so on.
The third contract – Ofimarket mixto – is a combination of the first two.
Next, we have a distributor agreement. Here, the franchisee has reached a point where success is guaranteed within Carlin. Typically, the franchisee would have anything up to five stores plus a warehouse and is ready to step up to sell products to other small franchises. This type of contract receives better conditions from vendors plus extra benefits directly from Carlin.
Lastly, the fifth contract is the so-called master franchise where we hand over a large territory and plenty of responsibilities to the franchisee.
OPI: Let’s go back to the market as a whole for the moment. With 478 stores, Carlin is obviously a significant player in Spain. What are the other main office products players in your market?
JLH: As far as retail is concerned, some small groups join together to benefit from better conditions with vendors, for example. But we don’t have too many difficulties defending our first place in the retail sector, because the big stores like El Corte Ingles don’t concentrate much on office supplies.
The real big players for us are the multinationals – the Vikings, Ofiservices, Miscos and so on. They have their catalogues and they are very professional, and I would certainly say that they are the real big competitors as far as we are concerned.
OPI: You said that Office Depot, from a retail perspective, closed its stores in Spain and called it a failure. Why was it a failure?
JLH: Well, Office Depot only ever had a presence in Madrid. Its goal was to create 80-90 stores all over Spain. That was hugely worrying for us, because what Depot did in Madrid was very well executed in terms of quality of the stores, style and product presentation. But retail has its costs and you cannot go over a certain limit.
Depot went to the best places in Madrid and the most expensive ones too. Some of our franchisees were very concerned about that competition. My feeling was that it was almost impossible to have sales that cover those high costs for a sustained period.
OPI: And it obviously was – Depot disappeared.
JLH: Yes, about 18 months ago I believe. It only stayed in the market for a couple of years.
OPI: How many stores were there before they closed in 2006?
JLH: Six or eight I think.
OPI: So the retail business is gone, but the Viking brand is, at the moment, still present in Spain. Is that the market leader for mail order?
JLH: I’m not sure, but I would certainly say that Viking owns a substantial part of the market. It has a good catalogue and is a very professional operation.
OPI: You also mentioned Ofiservice. That was already a successful company before it was acquired by Lyreco.
JLH: Yes. I think Ofiservice is, of all the big players, the one that is doing better than anyone else at the moment.
OPI: Would you say it’s the leader in the delivery business right now?
JLH: As far as we are concerned, Ofiservice is our biggest competitor. We are fighting a company that is well positioned and has the best buying conditions possible.
OPI: What about Staples?
JLH: Staples is well placed in Portugal and appears to be doing fine. I’m not sure what its plans are for the Spanish market going forward.
OPI: Let’s talk about some of the smaller dealers and retailers. How strong are Spanish independent dealers at the moment?
JLH: Papelerias in Spain are not doing very well. They are struggling to keep up with emerging companies coming in so aggressively, with their tremendous prices and good marketing initiatives.
What can they do? Some are joining forces, working together in small or large groups to purchase together or to create catalogues. It’s very difficult to go to market today without these tools.
But the reality is that many will close down. Several hundred disappear every year. Some of them join Carlin, some of them go to another franchise company.
OPI: What does all this mean for a wholesale operation like Spicers?
JLH: Spicers is one of the most professional companies in the market. But its prices are too high for us and our franchisees. We prefer to buy directly from manufacturers and give our franchisees the best conditions. As such, we haven’t had many dealings with Spicers so far.
OPI: Which is why you have your own distribution operation I guess.
JLH: That’s correct.
OPI: Let’s talk a bit about yourself now. What’s your career background?
JLH: Well, I’ve spent nearly 20 years with Carlin now. As you know Mark Baccash and I set up the company in 1989. I had met Mark in the US where I spent five years following my university years.
We became good friends and several years later – I was working for an international France-based interior decorating firm as an advisor responsible for finance and administration – Mark came over from the US and asked me if I wanted to create a catalogue-based sales company with him.
At the beginning, we planned to sell underwear, but after three months of research and hard work in Spain, Mark said: "I’ve changed my mind. The business should be office supplies, because it’s a business that is going to grow in the future." That’s how it started all those years ago.
OPI: So the lingerie industry’s loss was our gain?!
JLH: (laughs) I suppose so.
OPI: What was the inspiration behind the office products idea?
JLH: Well, as I said, there was no other sales company like the one we created. All the big players we talked about earlier weren’t in Spain at the time. We were beginners, but nevertheless we were the first ones to create a catalogue-based business.
Mark had a good relationship with mail order company Reliable [now part of OfficeMax] in the US. We visited Reliable and the initial idea was to invite it to join us in our venture in Spain.
It wasn’t the right time for Reliable for such a move, however, because it was concentrating on the UK at the time with its Universal business.
In the end, we started Carlin with the information we had about the Spanish market on the one hand and with the help we got from Reliable and Universal on the other, hoping that either of them would join us in Spain at some stage in the future.
OPI: Mark is no longer an executive at Carlin, is he?
JLH: No, he left in 1993 for personal reasons. He went back to the US and created Office 1 Superstore International – something quite similar, but still very different because it’s adapted to many countries.
OPI: Please tell me about your first store.
JLH: We opened a 15,000 sq ft store in downtown Madrid which was quite unusual. There were no stores of that size in Spain at all at the time. We also mailed our catalogues all over Spain.
In Madrid, Carlin was a success in a very short time – in less than six months we had 5,000 customers listed and we almost immediately made a profit. But outside the capital, the results were close to zero. 50,000 mail-outs to Bilbao, Valencia or Seville provoked virtually no response.
OPI: Why do you think that was?
JLH: Customers just weren’t used to buying from catalogues. It wasn’t something that was offered in the market. They also wanted their stationery supplier to be local to them.
We had two choices. One was to continue to invest and open other stores, perhaps not as large as the one in Madrid, but to at least have a presence in other cities. We did that in some places and we opened more stores in Madrid. In Valencia we partnered with a local dealer and opened two stores there. But we didn’t have enough money to invest all over the country.
It was at that point that we decided franchising was the best way forward. Our original plan didn’t include franchising, but we realised that, as a result of our customers’ preference to deal with local companies, this would be a good solution.
OPI: How would you describe a typical Carlin store?
JLH: A typical store is one with a good location, not too large – 800 sq ft to 1,200 sq ft is sufficient. If you sell only office supplies, you won’t sell proportionally more because the store is bigger. The important factor is that any store must be well located.
OPI: What’s your definition of "well located"?
JLH: To start with, the territory where the store is should have plenty of consumers, that means small companies, professionals and so on. So in every territory, we need to have a few thousand of these potential consumers.
OPI: What sort of product mix do you sell? Office supplies, furniture, technology products…
JLH: When franchisees open a new Carlin store, we ask them to stock all the products in the catalogue to begin with, with the exception perhaps of furniture. If the store is not big enough, we avoid furniture, which would bring the total to about 3,000-3,500 SKUs.
OPI: That’s pretty substantial.
JLH: Yes. It’s important because one of our target groups is small companies and professionals. They are going to receive our catalogues, so the shop should have the same items in stock.
OPI: Do you have copying services in your stores?
JLH: In some of them. Essentially, it’s up to the franchisee, but if we see that the store is located close to a college or a university, for example, having a copying service can be very important.
OPI: So how is the organisation structured?
JLH: Our slogan says it all really – we are professionals at the service of our franchisees. Our job here is to work for our franchisees every day. To do that we have a large range of departments, dealing with everything from purchasing and marketing, over finance and IT, to franchisee-focused services such as telemarketing, store quality control and simple business advice.
OPI: What’s Carlin’s potential in the market as far as store count is concerned?
JLH: Well, we offer different businesses to the franchisees as I mentioned before. One option is a store only. The other one is a warehouse from where the franchisee can sell on a contract basis. The third option is a mixture of the two.
In Madrid, for instance, continued growth is very difficult in the B2B area, as 95 percent of the territory today is already taken. But we can still open more stores in the capital, maybe another 30 to 40.
As for the rest of Spain, if we take territories with 20,000 people or more and with 500 small businesses or more, I believe we can reach a total store count of approximately 1,000.
OPI: That’s more than double the size of your current business.
JLH: Yes, but the second half will not have the success rates of the existing 478, because the best territories – except for Catalonia – are already taken by Carlin players.
OPI: What makes a good franchisee?
JLH: Age seems to matter – not too old is good. Somebody ready to run his/her own business and someone flexible.
We ask all franchisees to dedicate all their time to the business, to be optimistic and to follow certain important rules we have at Carlin. Some of these rules are to use our tools, to accept research that we’ve already done and not to dedicate time to change when we have already embraced it.
OPI: So, for example, they shouldn’t sell products that you haven’t negotiated contracts for.
JLH: That’s a very good example. Imagine a franchisee needs a vendor that is very close to a specific store and offers a product at a lower price than the one we have in our catalogue.
Our interest lies in the well-being of our franchisee, so we listen to him/her and of course we want to know more about this vendor. And if it all seems genuine, we sign an agreement with this vendor if we are going to get better conditions as a result.
Essentially, however, franchisees shouldn’t buy products outside of the catalogue. Is this a respected practice? The answer is no. About ten years ago about 35-40 percent of products bought by franchisees did not come from our vendors. Today that has thankfully come down to about 12-15 percent.
OPI: What are the total combined sales of all your franchises in Spain?
JLH: Carlin’s turnover today is between €160 million to €180 million ($248 million to $279 million).
OPI: Before we started this interview you mentioned to me your three keys to success. Could you just summarise them again?
JLH: Firstly, we negotiate with vendors the best conditions possible so that our franchisees, no matter how small they are, get the best prices when they do their purchasing.
Secondly, we have a marketing department that provides franchisees – free of charge — with a large selection of tools that enable them to compete more evenly with the big players in the market.
Thirdly, we do a lot of the day-to-day administrative work of our franchisees, including analysis of costs and margins, allowing them to spend 90 percent of their time selling office supplies.
OPI: You obviously have a very nice profitable business in Carlin. Is that at least in part the result of the unique characteristics of the Spanish OP market or could the model easily be adapted to another country?
JLH: If you moved the concept to a different country, then changes would have to be made I’m sure of that. If you are talking about some kind of master franchise, I guess you would ideally have to work with someone who has experience within the business.
It took a long time to build a business like the one we have. If you wanted to do it in a shorter period time – two or three years say – you should have one big warehouse, not 18 little ones.
OPI: What are your company’s specific challenges in 2008?
JLH: What I want to say first is the thing that makes me the most proud. It’s to have people around me who are very close friends. Distributors, master franchisees… there are half a dozen people who believe in Carlin more than I believe in it myself, who are giving more than I am giving today. They work for Carlin with such enthusiasm that it makes me feel very optimistic about the future.
That said, there’s an economic crisis on the way. This is true for everyone, of course, and it will definitely affect Carlin. Certain stores may sell less this year than last year, but I don’t see why, as far as the whole group is concerned, we should go into decline. We will have more stores and more franchises in 2008 than in 2007, because we are pushing from many fronts towards the same goal.
OPI: Does that positive Carlin future include José Luis Hernández?
JLH: Well, I would really like to retire sometime in the near future.
OPI: Do you have successor within the business?
JLH: Well, I have four children – two sons and two daughters. I have a son who is doing business studies at university at the moment and he likes Carlin a lot. I don’t know how my daughter, who is currently a franchisee, or indeed my son will proceed. We will have to keep all our options open I guess.