Big Interview: Advance & retreat

Once one of the most intrepid OP companies around, franchise operator Office 1 has pulled back from many markets since the global recession of 2008. But it's clearly not done with exploring yet, albeit down somewhat different avenues.

Over the past 20 years or so, OPI has regularly reported on the adventures and exploits of US-based franchising operation Office 1 Superstores International. At the helm for a long time was founder Mark Baccash who, with great gusto, travelled to the furthest-flung corners of the planet to sell his franchising concept. Things have changed. 

Now in charge is Radostin Kirilov and Office 1’s HQ have moved from Florida in the US to Sofia, Bulgaria. The company’s portfolio of franchising partners and indeed its whole business model has also changed, almost beyond recognition. OPI’s Heike Dieckmann caught up with Kirilov in November to find out more about the priorities of the present and future – and to dwell a little on the past.

OPI: Let’s start with some personal background and a career synopsis: when did you join Office 1 Superstores International and what did you do beforehand? 

Radostin Kirilov: I joined Office 1 in 2001 as Sales Representative for Office 1 Bulgaria after obtaining my graduate degree in history. It was an interesting and promising entry level position. I liked the contact with people and it was always exciting to close a difficult sale. In 2004, I was offered a managerial position at the newly opened regional office of Office 1 International in Sofia. From then on, every step up the ladder has been varied and challenging in addition to having the opportunity of seeing the world and meeting incredibly interesting people.

As Managing Director, I am now in charge of both Office 1 and the newly created ChairPro company. My core responsibility is to support our master franchisees in their geographical areas. As for ChairPro, my mission is to rapidly acquire experience and expand and secure this fast-growing business.

OPI: Where are your global headquarters now? 

RK: Our headquarters are in Sofia, Bulgaria. Mark [Baccash] is not involved operationally now, but approves important new initiatives. The ChairPro business I mentioned, for example, is his personal creation and he is involved in anything to do with brand image and strategic direction. As Managing Director of both Office 1 and ChairPro, I run the day-to-day business at our HQ in Sofia, which is also conveniently located within striking distance of the headquarters of our Bulgarian master franchisee Panda and our ChairPro showroom.

OPI: Office 1 has epitomised the concept of globalisation in the OP industry over the past 20+ years. But you considerably scaled back on the number of countries you are in. What happened?

RK: Our trajectory is a classic study of the turbulent cross currents of globalisation so vividly chronicled in OPI over the years. Our challenges were magnified by a number of factors that made for a rough but exhilarating ride until reality set in with the bursting of the bubble in 2008. The last OPI issue, devoted to your 25th anniversary, remembers wonderful times that were had at OPI conferences when the sky was the limit. A great paradigm of our industry’s roaring 2000s! 

The demand for the Office 1 franchise model came initially from far-out emerging markets. It was hard to refuse the substantial initial fees thrown at us by local entrepreneurs eager to invest the money then sloshing around. Having acquired a reputation for success in negotiating these difficult markets, we then turned our eyes to less developed countries in Europe that were in a stage of rapid transformation. 

We achieved significant positions in Lithuania, Slovenia, Slovakia, Ireland, Serbia and Greece. At the crest, in early 2008, Office 1 had stores in perhaps 30 countries. Mark once received a hilarious postcard from Irwin Helford, then visiting Sri Lanka, expressing surprise that he could not find an Office 1 store there. 

Our excesses were larger than most and so was our hangover! We retrenched just as swiftly as we expanded. Meanwhile, cash dried up for the more leveraged masters in the cratered economies of Ireland, Greece, Iceland and Slovenia.

OPI: Years ago we had news of stores opening in countries like the Yemen, Sudan, Colombia, Vietnam, etc. These either didn’t materialise or, if they did, were short-lived. Then there were big plans for many other markets. What were the mistakes made? And what is your strategy now? 

RK: Well, each market had its own twists and turns and tales to tell. In Iceland, our master franchisee filed for bankruptcy and with government assistance bought back our contract and moved on solo to achieve greater heights when things rebounded. The business we created there is still the market leader but under a different trademark. 

Other masters, like Ireland, sold to larger dealerships. Office 1 Lithuania moved its operation to a store-in-store model and bounced back very nicely. Peru morphed into a chain of strategically-located copy centres. We managed to minimise the damage wherever possible. Some countries, like Venezuela or Haiti, were irretrievable and we let them go! 

We never did the Yemen or Vietnam, that was a bridge too far. We indeed were in Sudan and may still be for all I know – I am not eager to check. The Office 1 superstore in Libya still stands tall in downtown Tripoli, an impressive glass cube, and sales are good. We should have conducted our interview there! 

As an owner-managed company, we were quick to adapt and kept a tight leash on overheads even in the best of years. Some steps taken in our turnaround will be familiar to you: moving to smaller store sizes, creating a great e-commerce platform and going stockless where available, closing unprofitable stores, adopting a store-in-store model when practical, closing the US head office. In essence, what has changed in Office 1’s outlook is that the world has changed and we had to keep up or become irrelevant.

Our most proactive move that shall have the most impact going forward was the launch in 2014 of a new online venture, ChairPro, offering a large assortment of chairs targeting the mid and high-end markets. 

We are now present in 12 countries. In two of these, France and Germany, we follow a pure e-commerce model. In Bulgaria, our biggest market, the master franchisee Panda cut down the number of its stores to a little over 50 and is in the middle of a national refurbishing and re-merchandising programme that will take us over a year to complete. 

Sales are back to what they were when we had twice as many stores but so are profits and we are again opening new sub-franchises (in Bulgaria). 

OPI: Tell me more about ChairPro. Why chairs? 

RK: We were searching for a new business with good macro trends and great potential that would utilise our IT expertise and offer accretive growth to our activities at Office 1. 

ChairPro features a full assortment of some 3,000 chairs for a variety of clients. On large projects, we can tap into the depth of know-how available at the best global manufacturers and employ designers from a large local pool. We focus on ergonomic and innovative chairs and furniture. Manufacturers are now designing chairs to accommodate the human body as companies have been made aware of the impact of ergonomics on productivity. There has been a redefinition of the corporate workplace from a focus on efficiency to one that enriches the emotional and physical well-being of people. 

OP dealers have not developed as yet the expertise to sell such products. But the large, upscale manufacturers – major family-owned businesses with sales in the billions and a profound interest in the environment – prefer to distribute through specialised dealer channels. 

So we created a separate company for ChairPro and our staff trained extensively at the factories of the more technically-advanced manufacturers in Europe. Like I said, www.chairpro.bg was launched in 2014 and the business is scaling up rapidly. We soon got listed by Google first or second in every chair category and by the spring of 2016, we felt ready to back what started as an online business with a 300 sq m (3,000 sq ft) showroom on a major artery leading into Sofia. 

We are also launching a complementary ‘ChairProjects’ website targeting large companies to offer innovative workspaces and improve business performance. We can source almost anything needed to create beautiful, effective and adaptable interiors with products that help employees work better and feel good.

We also recently launched a duplicate ChairPro operation under a JV arrangement in Greece. This will follow the Bulgarian template. So our focus now is on Greece and Bulgaria and then one additional market per year, with Serbia perhaps next in line. 

OPI: Who is your target customer?

RK: Everybody, with special emphasis on SMEs until ChairProjects reaches cruising speed and expands our ambitions. 

OPI: Broadly speaking, what is your business model now – how much B2B as opposed to retail – and how does it vary across markets? 

RK: The Office 1 model is basically the same across Europe, with the usual mix of retail, telemarketing, e-commerce and contract deals. We run two separate businesses – Office 1 and ChairPro – with the same team and the attending economies of scale. Office 1 is expected to grow organically as we are not seeking new master franchises right now. 

B2B continues to account for 50% of the business. But physical stores remain surprisingly more important than we thought as a comprehensive study conducted in Bulgaria recently indicated, so I don’t see the retail business shrinking further any time soon.

OPI: You mention Europe. About half your markets are here now which is quite different from the past. How does the business model in Europe differ from that in, say, Indonesia? 

RK: Yes, the bulk of our markets were outside Europe but not the bulk of our sales which were always Europe-based. Bear in mind that at some point we held the number one or two market positions in Turkey, Lithuania, Iceland, Slovakia, Bulgaria and Serbia, even Italy. 

Indonesia is a unique market. Consumers there shop in malls and delivery is questionable due to traffic congestion. Our master franchisee owns several chains of stores in the country and Office 1 is located as a store-in-store in selected outlets. 

OPI: What about Germany and France – they are the only countries with an online-only presence. What are the main challenges in those markets? 

RK: All our masters have websites but some, due to our retail heritage, are not as internet-focused as we would like. The businesses in Germany and France are stable to slightly growing now that the space has become so crowded. They are a nice little profitable operations with minimal overheads and sheltered within the large OP organisations of our partners. 

Our challenges are no different from anybody else’s. Too many dealers, too many sites, too much similarity in the product offerings.

OPI: Overall, where are your best-performing franchisees and why are they doing so well?

RK: Good management is always most important. Strong finances, longevity and a great brand name also make for success. These are all present in Bulgaria and Turkey, our best and oldest markets. I also have high expectations for a new master franchise in Greece which was launched a couple of years ago.

OPI: You attempted the Chinese, Russian, Indian and also Australian markets years ago, but retreated. Is it likely that you’ll venture back there at some stage?  

RK: Some markets are impossible for outsiders to navigate. Cultural barriers, protectionism, xenophobia, distance, language, bureaucracy, corruption, pollution and often all of the above make them daunting. 

India, Russia, Japan, South Korea and China come to mind. We tried all of them or rather they tried us and sent us packing! We were lucky in China after having spent very serious money to find a Chinese acquirer who made us whole at the 11th hour when we thought we would have to cut and run. We traded our Chinese mirage for his hard cash. 

As to venturing back there… To put it delicately, we don’t have the endurance for abuse that we once had.

OPI: Any thoughts on the major players that attempted the same as you and had to retreat?

RK: Ouch! It’s pretty hard to make money in Shanghai on less than 17.5% gross margin when your General Manager has a chauffeur-driven $250,000 BMW and his children are enrolled in the International School. Toss in housing and travel allowances and factor in the many local reviews from home office specialists eager to visit the Terracotta Army of Emperor Qin Shi in Xian and other attractions, and you are soon in the red up to your ears! 

OPI should chronicle one day how otherwise sober-minded managers lost their collective minds somewhere out there on the Silk Road! It would read like an Indiana Jones thriller and we can contribute our own chapter.

Let’s just say that at times Mark wondered whether he shared his salesmen with Lyreco and would exclaim in exasperation that he’d trade the whole lot of them for the aforementioned chauffeur.

OPI: Are you competing with the big operators like Staples, Office Depot and Lyreco in any of your markets? If not – or even if so – what type of companies do you compete with?

RK: We never really competed against Depot or Staples. Our competitors have always been good local OP dealers and it gives us great pleasure to see that the best of them have survived and are doing well.

OPI: Do you believe Staples and Depot’s exit strategy in Europe will have an impact on what Office 1 is doing in countries like Germany and France, for example? Or has Depot’s exit in the past from various markets had an impact?

RK: We give both companies credit for somehow teaching us the business. Dealers and cooperative groups grew up quickly on account of the competition and the impact was felt as far as Russia and Japan.  Paradoxically, they had a much stronger impact on us by coming into a market than they ever did leaving it. We truly wish both companies well. One can’t help feeling bad when one reads that Office Depot sold its European operations for a ‘nominal fee’! It’s not funny.

OPI: Where are the best opportunities and core challenges now for operators like Office 1?

RK: The OP industry seems permanently doomed to live in interesting times and is uniquely positioned to get further buffeted by fast-developing trends. 

Decline in the usage of traditional office products, commoditisation of major categories, changes in working environment, computer-driven strategies replacing active managers, decline in the number of white collar workers, budget reductions, new technologies in education, notebooks, tablets, smartphones, the office of the future, cloud-based systems, Amazon, drone delivery… you name it – the challenges are many. 

But dislocations bring opportunities. We are optimistic that we are well positioned with ChairPro and other initiatives.

OPI: There’s always a lot of talk about OP players needing to become a one-stop shop, offering a product as well as a service proposition, and venturing into adjacent categories like facilities supplies, etc. What is your view on that? 

RK: These measures are all good and necessary palliatives. We have introduced them to the extent possible, but they do not address the winds of change cited above.

OPI: What about margin trends? 

RK: Margins suck. But we must live with them and sell more of the adjacent categories you’ve just mentioned until such time as they too deteriorate under the crush of overcrowding.

Office 1 roundup

Radostin Kirilov goes full circle and provides a short roundup of Office 1 since its inception.

In 1989, Mark Baccash founded Carlin with Spanish partners and the first superstore was launched in Madrid. To facilitate national expansion and make up for the lack of capital available, a franchising programme was started in 1991. It proved to be successful. 

By 1993, there were 35 Carlin franchises (there are now close to 500 in Spain) and Mark decided to apply the concept to emerging markets. These were all the rage in the 1990s and had the advantage of being out of the reach of the major office products players. 

The first master franchisees, in Turkey and Bulgaria, were signed in 1995 and 1997 respectively under the Office 1 brand. Within about ten years Office 1 had expanded to approximately 30 countries. 

In 1999, Office 1 extended its concept to emerging economies in Western Europe and did well until it got hit hard by the 2008-2009 global recession. In 2010, we decided to acquire expertise in e-commerce by partnering with strong local dealers in the markets of Germany and France. The online know-how acquired served to upgrade and optimise web marketing in most Office 1 markets. 

ChairPro was launched in 2014. It’s the latest and perhaps boldest Office 1 strategic initiative to date. It positions the company in the promising area of the workplace of the future. 

That pretty much wraps things up until 2020!