Size matters

 

With the seemingly non-stop news of industry consolidations, the creation of a new dealer group is a rare occurrence these days.

 

But Dave Guernsey, head of one of theUS‘s most successful independent dealersGuernseyOffice Products (GOP), has never been one to sit back and rest on his laurels.

 

Instrumental in the setting up of BPGI and involved in numerous other OP initiatives over the years, Guernsey, along with two other major US dealers Warehouse Direct and Eakes Office Plus, has established a new dealer group, Pinnacle Affiliates, which is designed to cater exclusively to the needs of large dealers.

 

OPIspoke to Dave Guernsey about the decision to leave the TriMega fold and to set up the new group.

 

OPI: Why have you chosen this route at this particular time ?

 

Dave Guernsey: Many people have asked ‘at this particular time’ and I’m not sure I know what to infer from that part of the question! We’ve all been in business for a long period of time and we’re constantly re-evaluating our supply chain relationships and our business models in light of a rapidly-changing market place.

 

The simple answer is that in a review – which goes back about a year to a year and a half ago – Warehouse Direct and GOP started discussing whether there are better ways to go forward than rather just to accept the status quo.

 

We work in a tremendously competitive industry and every little thing that you can do to make it better, it’s probably something you should do.

 

OPI: How did you get together with your two co-founders?

 

DG: The dealer community is very tightly-knit in the US. I’ve known these two companies for many years – we’ve always had a good and open pipeline between us. And Warehouse Direct and Eakes are very progressive dealers, so it made a lot of sense for us to sit down and talk through this. We used the three of us to bounce off ideas and thoughts and we were able to move it from a concept to a reality in a relatively short space of time.

 

OPI: You describe yourself as a group aimed at the needs of larger dealers. How do you define this?

 

DG: I don’t care who you ask, there are different takes on what makes a large dealer. My own large dealer view is something north of $20 million a year in sales. But perhaps an even more important metric is related to a dealer’s direct buy volume – what kind of material handling capabilities they have, what kind of order size they can accept, those kinds of things are very, very important. I don’t know if top line size is the be all and end all to describe a large dealer, but it’s probably one of the best metrics we have, at least in terms of a starting point.

 

As we start talking to people interested in Pinnacle, one of the things we are going to be interested in is what I was just referring to – their ability to handle large orders, accommodate large average order size, accommodate the shipment size that is most economical in the eyes of a manufacturer. There are a number of other things that are involved as well, such as working with the manufacturers on the marketing side of the business, on consumer-oriented category marketing, etc., but these kinds of issues are, in my mind, what best defines a large dealer as Pinnacle sees it.

 

OPI: What do you see as being the main benefits for your member dealers?

 

DG: We’re bringing together peer organisations of like-size and like-mind. That will lead to a variety of benefits as we work together.

 

We fully expect on the buy side that we will create programmes that are as good as, or better than, anything that exists for the dealer community today.

 

On the marketing side, we have strong coverage in the markets we serve – over 100 sales people in three US sub-markets – that will benefit the manufacturers we work with.

 

In terms of the similarities of our businesses, the ability to work together and develop our peer relationships – we think that is an upside as well.

 

All we need to do is serve the needs of large dealers. Cost-wise this organisation is substantially less than what it costs to belong to another dealer group – not that that’s such a big issue, but the leveraging approach that we’re using we think makes a lot of sense.

 

OPI: You’ve outsourced back-office functions to is.group. How does this work?

 

DG: On two fronts we wanted to leverage what the industry already provides as opposed to reinventing the wheel or duplicating expenses. is.group has the computer structure and a lot of the personnel that we need to run this group, so we developed an outsourcing contract with them that gives us access to those services. It’s really no different from outsourcing any service a business requires and we’re basically outsourcing IT and general administration.

 

OPI: Why did you choose is.group?

 

DG: is.group offered one other attribute which we felt was attractive and that is their RDC programme. And there’s a real irony there, because 3½ years ago we left because of the RDC programme. But that programme today has dramatically changed under Mike Gentile.

 

Our Pinnacle members will have access to the RDC programme, but will have access as best fits for our individual businesses. I suspect that some members will use it more than others. GOP sees some value in it and we expect to make some use of it, but the majority of our purchasing is still going to go direct to our favoured manufacturers.

 

We also like the fact that is.group is using SYNNEX existing infrastructure as opposed to paying for its own. That was a positive move – SYNNEX is a very strong player. GOP does most of its IT distribution through SYNNEX and we find it to be a very capable company. So we think that arrangement made a lot of sense.

 

Another thing is that we didn’t want to take our purchasing outside the broader independent dealer community. We are plugged into BPGI, we are plugged into the programmes of BPGI, so there has not been any fragmentation in terms of the establishment of Pinnacle – we are still established within the broader dealer community and, in fact, we’re helping leverage existing infrastructure, so we’re not really creating anything that doesn’t already exist.

 

OPI: Are you organised like a traditional dealer group?

 

DG: No, we aren’t – we’re not a cooperative. A cooperative is an interesting animal. In fact I think it’s one of the things that drives dealer groups today: to be all things to all dealers – they almost have to be! You’ve got dealer groups with members with top line sales ranging from $1 million to $70 million a year, and there’s a vast difference within that group.

 

Cooperative law in the US requires that if you’re formed as a cooperative, it’s one vote for each dealer, meaning that there’s an equal say in matters of governance. Now that sounds very egalitarian on the one hand, but on the other hand there’s a decided difference on the voting power of the smaller constituents.

 

So we do not want to organise as a cooperative, we are organised as a limited liability company (LLC). Now that does not mean that we are going to differentiate ownership in Pinnacle by the size of the dealer: we are looking for a certain size of dealer so that we can all be the same in terms of our share of ownership in Pinnacle.

 

OPI: How are you organised structurally?

 

DG: We use a matrix management approach. I serve as Chairman, Kevin Johnson (Warehouse Direct) is Vice-Chairman and Mark Miller (Eakes Office Plus) is our Secretary/Treasurer. Mark will represent Pinnacle as an adviser to the is.group board. Steve Marzak will act as Purchaser and web presence is headed by GOP’s Marketing Director Daria Moore.

 

OPI: Is there a critical mass for the group that you’d like to achieve?

 

DG: If you step back and take a look at the structure of Pinnacle and the way we’ve leveraged the components of the business that require capital outlays, Pinnacle is financially viable as it exists right now. We have no intention of going out and raiding dealer groups or trying to promote ourselves to the world. We have a different approach here and different values associated with that approach. If other dealers are interested in taking a look, we will be happy to speak with them and to share our concepts, philosophies, values and attributes, and then these dealers can make their choice.

 

What it amounts to is another choice for large independent dealer groups to consider when looking at dealer group relationships.

 

Critical mass is not an issue. In terms of having a broader ability to have peer groups with which we can share ideas, I fully expect other people to join us, but if you take a look at the number of dealer groups in the US, the number of large dealers probably doesn’t exceed more than 25 dealers.

 

Which was one of the things which was important when we put this thing together. We said this has to be financially viable with less, not more – it does not require a mass of members that you have to manage on different levels.

 

OPI: Will you look to expand geographically?

 

DG: I don’t think that there’s much doubt that we will add members that will take us into other areas of the US.

 

But we do not have a game-plan that says that we have to be in every market. What we want is strong dealers in good and growing markets – it’s not as if we have to cover the map. We want good representation for our manufacturers in the markets we’re serving.

 

It’s important for existing dealer groups to be in every market and they make a big thing of it. It’s not a road we want to go down, because if you do you start compromising your size standards as you try to cover markets. Our main orientation relates to the size of our members.

 

OPI: I imagine this move must have come as a blow to TriMega?

 

DG: I’ve been asked what is wrong with TriMega and my answer to that is nothing is wrong with TriMega. I think they are a fine organisation, but I think you need to step back and ask yourself the question: "If there is greater peer similarity within a group, does that mean for a stronger supply chain relationship-

 

Going back a number of years, there were large-dealer-only groups, and they were that for a reason. They morphed into structures that we have today largely because of the power channel – and this is in the days of USOP and Corporate Express. The dealer groups began to huddle together and they began to take the approach that they were all things to all dealers.

 

And during that time it probably made sense that they huddled under the same umbrella the way they did. Today, we are simply asking the question: "Does it make sense for all of us to still huddle under the same umbrella or does it make sense for dealers with very similar characteristics to work together on their own peer relationships and their relationships with the supply chain-

 

Will that make a stronger outcome? We think that it will.