Mopping up the market

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by Tom Phillips

MRO is the new product segment that has burst onto the OP stage. The jury is still out on whether it’s an opportunity or threat, particularly for the dealer community.

A recent move by a major dealer database company in the US to add the country’s largest maintenance, repair and operations (MRO) suppliers to its price comparison list, has signalled a historic tipping point for the OP market.

Atlanta, Georgia-based GOPD, which provides independent dealers with real-time access to retailer pricing, last month added MRO suppliers Grainger, The Home Depot and Lowe’s to its database. The news came off the back of a recent acquisition by United Stationers of MRO wholesale giant ORS Nasco, and the two developments could mark a major change in the OP landscape.

The potential for suppliers like these to move into the OP space should leave dealers and big box contract suppliers with furrowed brows. A quick look at Grainger in particular should banish any thoughts of scaremongering. The company and its 17,000 strong workforce serves 1.7 million customers across the major markets, from government to retail. Mainly offering tools, parts, industrial chemicals and hardware, the firm also runs a network of 425 retail branches along with a catalogue and website, all offering more than 138,000 facilities maintenance products.

With 2006 sales of $5.9 billion, the company sits at the top of the tree in the world of MRO suppliers (Home Depot and Lowe’s are primarily retailers in the home improvement space). Gradually, Grainger has been upping its portfolio to include jan/san-style products and in 2006, it began a general expansion plan by introducing 23,000 more products compared to 2005. As yet, staplers, pens and printer consumables don’t feature in Grainger’s grand plan, but watch this space…

However, the move by jan/san suppliers in the OP space also throws up an interesting prospect for independent dealers. The good fit between OP on the one hand and jan/san on the other has been well documented. The question is, who will make the most of this opportunity? Will OP dealers embrace the potential of this sector, or will the likes of Grainger and Home Depot be the ones who, excuse the pun, clean up?

The looming threat
The OP sector surely must look like a tasty prospect for Grainger. The fit is too blatant to miss. A company of this size and experience could, in theory, become a major competitor to the largest contract stationers in the US if it chose to sell binders instead of, or in addition to as the case may be, bleach.

The team at GOPD saw this threat by MRO firms coming for some time, but it took the United/Nasco deal to tip the decision in favour of adding the traditionally separate MRO operators to its reference list. This move not only signals the importance of this sector to OP dealers, it also highlights an opportunity. By allowing access to pricing of MRO firms, GOPD has pre-empted a rush from dealers wanting to open up their offering to include more jan/san and MRO products in the crossover.

Rick Marlette, co-owner of GOPD, believes the current situation presents both a threat and an opportunity to independents. To gauge the threat, dealers need only listen to Grainger itself. The company already claims that 20 percent of its sales come from jan/san, breakroom and sanitation supplies – lines already carried by US wholesalers and sold by independent dealers. In fact, GOPD’s database allows for price matching with about ten percent of Grainger’s products. The majority of these are only sold by the case, which means in quantities too large to meet most business requirements. But this is sure to change.

It makes perfect sense for the likes of Grainger to move into office supplies. Marlette refers to rumours that Grainger had even looked into the possibility of buying Corporate Express or United Stationers with a view to producing a marriage of convenience by combining the two similar businesses.

He also points to the previous decade, which saw Staples, Office Depot and OfficeMax all having a tough time converting from mere retailers into retailers and contract stationers, with slow growth in the contract market. "Most independent dealers are surviving because Staples, Depot and ‘Max are not as good at servicing the contract market," says Marlette. He adds: "Grainger on the other hand, already has vast experience servicing a contract market through its extensive catalogue sales. If it were to expand its office supply offering, it could become a significant threat to the contract market currently being well serviced by independent dealers."

A United opportunity?
However, it’s not all doom and gloom. There is also an opportunity, in the form of United’s $180 million addition of ORS Nasco to its portfolio, which sells products that compete with the Graingers of this world. Marlette’s piece of advice to all independent dealers out there: start marketing MRO products to existing customers and the likelihood of Grainger harming the independents’ business will be reduced.

On the acquisition of Nasco, United president and CEO Dick Gochnauer says it provides the wholesaler with a smooth entry into the $22 billion wholesale industrial supplies market.

Muskogee, Oklahoma-based Nasco is a pure wholesale distributor of industrial supplies, selling exclusively to independent dealers. With annual revenues of about $285 million, it offers about 200,000 premium branded and private label products, selling to more than 10,000 dealers.

"We see many parallels to our Lagasse business, which has been our fastest growing category," says Gochnauer. "Lagasse has grown from approximately $80 million to nearly $1 billion over the last ten years. We believe that ORS Nasco provides a similar platform for profitable growth."

Price with confidence
With this acquisition, United has opened the door for independent dealers to compete with MRO providers like Grainger. SP Richards will likely follow United down this path and increase its MRO offering through acquisition or by adding additional vendors. But there is another problem facing dealers.

"The toughest thing we’ve found with independents is trying to help them find out what price to sell products for," says Marlette. "One of the biggest mistakes dealers make is selling products at too low a price. They always think that they are getting beaten by the competition, but we’ve found over and over again that they are selling far lower than the chain stores. Dealers think they can’t compete, which is wrong."

The addition of Grainger and the likes to the GOPD database means independents can check their jan/san prices against the most successful suppliers in the US, and adjust them accordingly. In fact, since the news about MRO suppliers and their inclusion on the GOPD database broke on OPI’s website in late November, proactive dealers have been quick to contact Marlette for more information.

"GOPD has some dealers that are very big in jan/san and some that don’t touch it at all. The dealers that do a good job of moving into other markets have already made a lot of enquiries about Grainger since we included them into the database," Marlette points out.

GOPD runs a successful programme called Match or Beat which, like it says on the tin, allows dealers to match or beat a Staples or Depot contract. This gives dealers a powerful pitch. By comparing the entire quote, they can offer to beat a customer’s current deal by 2 or 3 percent with the added bonus of being a local supplier, which in today’s climate of locally-sourced procurement also boosts their chances and could well seal the deal.

Dealers that have successfully closed deals using Match or Beat have seen their gross profit increase, further revealing a habit among the community of selling products at too low a price.

Then, of course, there is the opportunity for independents to get new business by offering a one-stop-shop for office and MRO supplies. For dealers working towards this model, an extension of their jan/san range into MRO products can provide the answers. Any dealers truly wanting to market themselves in the one-stop mould in the future have no choice but to provide a reasonable line of facilities products.

The likes of Grainger, The Home Depot and Lowe’s are currently at the forefront of a movement that could leave some OP dealers behind. The question is not if, but when change will come. What’s clear is that MRO could be the sector that takes with one hand but gives with the other. Who will be ready to snatch the opportunity when it finally arrives is up to dealers themselves.