David versus Goliath
There have been plenty of developments since OPI launched in 1991, but none have changed the pecking order in the industry more than the birth of the OP superstores – the new power channel of the 1990s
Exciting and glorious for some, challenging and threatening for others – no other period has seen the various OP channels lock horns as much as the 1990s. In the US certainly, and globally later on as the big boxes increasingly exported their contract (and retail) businesses to other markets, independent dealers and the relatively new OP superstores were at the heart of all battles.
Before the superstores, the landscape in the US was dominated by independent dealers. Margins were high and being successful perhaps wasn’t as tough as it is today.
Mike Feuer, former Chairman/CEO of OfficeMax, is refreshingly blunt about it: "The dealers hated us with a passion, but the truth is that the office superstores enabled the dealers to survive. The ones that did got a dose of reality, and that was to give customers what they want, when they want it, at a price they want to pay.
"The superstores made the good independents one heck of a lot better because they were fighting to survive. They figured out how to differentiate themselves and change their whole strategy of doing business."
And fight they did. Of course, many dealers put their heads in the sand, hoping that the new competitors wouldn’t catch on and somehow go away; others succumbed to the widely held notion that you have to sell to survive. But plenty took the bait and rose to the challenge. One of them was – and continues to be – Dave Guernsey at Guernsey Office Products. "Thoughtful dealers recognised that a sea change was coming and began to adjust their business models accordingly," he says.
For an industry that had, up until then, been relatively unaffected by consolidation and rollups, the world was about to change as Wall Street started taking a very close look at office products. More and more of the entrepreneurs of the previous decades turned into corporate entities, governed by shareholders and quarterly returns.
Superstores were a popular bandwagon at the time and industry experts believe that at one point there were as many as 20-30 superstore operators in the US. Many of them didn’t make it, others like Office Club and Bizmart were gobbled up by their larger competitors. All this weeding out meant that by the early 1990s, only three large players were left, the same ones that are still standing – although two on wobbly ground – nearly 20 years later.
Interestingly, in these formative years Office Depot, created just a few months after Staples, was for a long time the clear winner in the superstore race. Fewer acquisitions, expensive real estate in difficult markets and a more thorough but slower build-up of stores were the reasons for Staples’ trailing behind. Ultimately, says founder Tom Stemberg, "the turtle won the race", however, as the company expanded outside its core, well-established markets into other parts of the country.
As former Office Depot CEO and long-term industry player Bruce Nelson concedes, Staples’ real estate portfolio was in a much better state than that of Depot and also of ‘Max. Like many, he also alludes to the failed merger between Staples and Depot in 1997 as a crucial time when Staples gained – and kept – its superior status. He says: "I’m the person who took over from the people that tried the merger and I can tell you that the company never recovered from it – psychologically, emotionally, business-wise. During that period of time Staples got its insurmountable Canadian dominance and its dominant position in North American real estate. The failed merger was a devastating thing for Office Depot."
A time of change
There were plenty of other merger discussions between the superstores and their large competitors, but nothing dramatic happened for several years. Ultimately, Mike Feuer who was looking for a buyer for OfficeMax, chose Boise Cascade – one of the dominant B2B players in the industry for many years – in 2003 as its partner and got $1.3 billion for it. Feuer says selling ‘Max was a no-brainer at the time. "We knew that we needed to have a contract stationer presence. From a superstore perspective, the world had started to change. People were time-stressed and my concern was that the superstores were too big physically and did not lend themselves to dealing with the consumers’ most precious asset, their time."
Financially, Feuer and other OfficeMax investors did exceptionally well out of the sale, but in hindsight, was the sale to Boise a good move? Clearly not, Feuer admits. "It wasn’t a great integration and there was a lot of bloodshed. And look at the value. The value of the combined company was over $4.5 billion. Today the market cap is under $1 billion, so just looking at the maths it was terrible and huge amounts of money were lost."
As the OP superstores, most notably Depot and Staples, picked up dealers all over the world to drive their contract and delivery businesses, they truly became global operators. It was a road littered with obstacles, however – Tom Stemberg still refers to Staples’ foray into Europe as a great regret, certainly in terms of timing – and in the early days with few success stories.
In Europe, the competition, in the shape of Buhrmann, Lyreco and Guilbert, was invincible in their home markets and threatening to decimate dealer bases in the countries around them, including Germany, the UK, Benelux and the Nordics.
In the US, the ubiquitous USOP as well as Corporate Express (CE) began their march across the US and then the globe. Many good companies were bought up and that might well have been their downfall – Dudley’s demise in the UK under the USOP umbrella is a good example. Others that have been integrated well and are part of a solid company, like Prime Office Products or Alpha Office, have prospered.
Ted Nark’s company Trick and Murray in Seattle, Oregon, was the first dealer to sell to Jirka Rysavy at CE. It brought CE’s revenues to about $50 million at the time.
Now again involved in an independent OP player (Complete Office Supply) in addition to his role in private equity group KRG Capital, Nark was later on credited with turning Corporate Express Australia into a resounding success following the purchase of the country’s biggest dealer in 1995.
What has changed the most since the ‘early days’, he says, is the degree to which the business has been commoditised. "The national players have done an excellent job of building national account business. That said, they seem to view salespeople as for the most part fungible and have largely abandoned the individual relationships and customised service that is still meaningful to many mid-market accounts."
Dealer buying groups have done much to put dealers on a level playing field with the power channel, in terms of buying power, technology and marketing capabilities.
Germany-based Soennecken is a dealer cooperative that in its set-up and management had major difficulties over the years. Now, however, it is living proof that it’s possible to go beyond the apparent abyss. Indeed, it has not only carved a niche for independent dealers in the German market that the globals find hard to penetrate, it has also recently announced its aim to compete head-on with the OP behemoths in the country.
So bruised and battered as many dealers might feel, plenty are still standing tall. Says Guernsey: "I’ve lost count of the ways in which my dealership would be put out of business in the past decades: Buying power and lack thereof; stockless models; internet-based models; economic downturns that would stress our balance sheets to a point where selling out would be the only option.
"Few people understand," he adds, "even within the dealer ranks much less the overall industry, why the dealer model is viable, especially in the SME space. There are certain very objective reasons why a well-run dealership can compete and grow despite what to many must seem like overwhelming odds."
Staples and Lyreco against the rest of the world – is this what it will ultimately come down to? Wait for OPI 300! n