Raring to go
by Heike Dieckmann
Funny, eloquent and knowledgeable, Office 1’s Mark Baccash gives his frank and free views on globalisation, China, the OP opportunities out there and the dangers of being stuck in a rut
There are few, if indeed any, resellers in the office products industry that epitomise the concept of globalisation as much as US-based Office 1 Superstore International. Created as a retail-focused OP franchising chain by president/CEO Mark Baccash in 1989, Office 1’s empire now reaches out to all but two of the seven continents. (It’s probably safe to say that even the intrepid Baccash will not be lured by the OP temptations of Antarctica, while North America – or the US at least – does not need another superstore operator.)
Office 1’s story is one of sheer perseverance. On the one hand, Baccash and his team have enjoyed the advantages of being the first to market as a foreign company, reaping the rewards before the big-box competition moves in. On the other, finding their feet in a new, and more often than not culturally very different, market has sometimes been an uphill struggle.
China is the perfect example. Half a decade into its foray into the country and Office 1 has only just found a way to make this country work for it. Certainly up until now, the troughs have largely outweighed the peaks. Russia has been similarly hard-going, while the whole Balkan region has been a resounding success.
Stamina, business acumen and patience – Baccash has plenty of all these things. But most importantly, he’s got bags of enthusiasm to venture out and make it all work. OPI met up with the OP industry’s answer to Christopher Columbus near Amsterdam in June, where the cream of our industry gathered for OPI’s annual European information and networking event.
OPI: When Office 1 launched at the end of the 1980s, the term globalisation barely existed. Now it’s everywhere. What effects has it had on our industry?
Mark Baccash: One only gets asked these questions if one has eyebrows as big as mine and is able to furrow them! Globalisation has affected our industry in a million ways, most dramatically through the sourcing of products in a myriad of places at lower cost.
Globalisation in our industry will accelerate because it is driven by the decline in margins and the commoditisation of the products we sell. It also offers a tremendous opportunity for the top brands in our industry – 3M, Durable, Faber-Castell, COLOP – to sell to consumers who are less jaded than those in the West and who are eager for high-quality, branded products. The next chapter in the globalisation saga will be written by daring manufacturers, not the usual power players.
OPI: What about Office 1 – how does it fit into the picture?
MB: I am proud to say that we were global from day one. It was then called being international!
One important trend in our industry is the emergence of very strong local players that dominate the business in their markets. Our franchising concept has kept pace with this shift because it is uniquely adapted to fast-changing market conditions.
Franchising offers a personalised service to a decentralised delivery system from stores close to the customer. It also satisfies the entrepreneurial aspirations of people in emerging markets.
OPI: But especially in those emerging markets, for foreigners wanting to get in, it can be a bumpy ride. Office 1 has had an ‘interesting’ time in China so far, by all accounts…
MB: Quite right. What a market and what a ride! The main benefits of a China entry have been the creation of a buying group to service our stores worldwide and a central management headquarters from which to cover Asia.
Selling to the local market is an altogether different matter. It would seem that when Deng Xiaoping succinctly spurted his immortal words that “to get rich is glorious”, he did not have foreigners in mind!
Our greatest mistake was going in solo rather than with a local partner. We may have a fighting chance now with our new Chinese JV partner, which is a manufacturer of office products. We have launched a number of new franchises in the past couple of months and things are starting to keep pace with the furious outpouring of cement and construction around us. Whether we jumped from the frying pan into the fire, only time will tell.
OPI: In hindsight, what’s your view on the franchising concept in China? Is it flawed?
MB: China is a great franchising market! Franchising works well in countries where people would rather work for themselves and where there are economies of scale in buying cooperatively and selling under a well-known umbrella name. This means practically everywhere.
Our franchising growth globally is only hindered by the lack of national wholesalers outside the major markets. This is also true in China where delivery to franchisees outside the eastern seaboard is very difficult and costly.
OPI: What about the prospects for some of the other globals in the Chinese market? Staples, Office Depot, Lyreco – they are all there in one guise or another…
MB: I think it was Gibbon who observed that history is essentially the recounting of the follies and misfortunes of mankind. The adventures of these giants should make for very interesting reading in future issues of your magazine.
OPI: In product terms, the country’s reputation for churning out cheap office products of disputable quality is long gone. The same upsurge in quality appears to be happening in the office furniture sector now. What’s your perception?
MB: China aspires to be the world’s leading furniture manufacturing centre and I will not be the one to bet against that. I am delighted that the likes of Steelcase and Herman Miller are making inroads. It will be a long haul, but the quality Western brands should not give up in spite of the obstacles.
At the recent Canton Fair, foreign companies were relegated to the remote top floor of one of the more than 30 halls that the trade fair fills. The Chinese authorities want us to do business there the way St Augustine wanted chastity: “Not just yet!”
OPI: There are plenty more opportunities in Asia, of course. Let’s go to India where you set up shop a couple of years ago. What have been the highs and lows?
MB: India may ultimately offer more opportunities than China, in spite of its infamous bottleneck infrastructure. We have an excellent partner in India with Indo Rama Retail Holdings, which has taken a long-term attitude. There is enormous potential for retail and franchising and we were mobbed at the Delhi franchising fair.
We will be slowed down, however, by the high turnover of qualified managers, rapidly escalating salaries and a rather expensive rental market. We are very bullish on Asia and the Middle East in general and plan to enter the markets of Indonesia and Vietnam later this year.
OPI: Moving along a bit further, what about Russia? It’s been a struggle for Office 1, hasn’t it? Is it the sheer market size where challenges lie?
MB: A fool and his money are soon parted and we were foolish in more ways than I care to remember in entering this difficult market, such as simultaneously launching more than half-a-dozen stores in the hyper-expensive Moscow rental market. The presence of two strong local players, one a well-established retail chain, did not help.
Ultimately, success hinges on management and on financing. We have regrouped, restaffed, refinanced, rectified, and may resurrect.
Elsewhere in this vast region, however, I’m pleased that we continue to be the undisputed leader in the Balkans in large measure thanks to Panda, our partner, and enjoy market leadership in a wide arc from Turkey to Slovenia.
OPI: And, as you say, in all those markets the local players are not standing idly by while the big boys march in and take away their market share.
MB: Definitely not. Being first is a decided advantage. One does not have the luxury of time any more as there are already numerous hard-to-dislodge local leaders in a number of countries: Greece, Bulgaria, Romania, Hungary and Russia to name but a few. All are eager for the big boys to come and retire them for a kingly ransom.
OPI: So what do these emerging markets need from an OP perspective?
MB: Nothing could cause the worldwide OP sector to explode more than the establishment of national logistics suppliers in the populous emerging regions. The opportunity to transfer know-how to them is enormous for the major wholesalers in our mature markets.
OPI: But is that a realistic goal?
MB: Nobody expects the Spicers of this world to set up shop in China or Russia. However, a great deal of roubles, yuans and rupees could be made at no risk through licensing with local wholesalers.
We stand ready to provide guidance in that area to anyone willing to listen. Transferring know-how is how we make our living and, ultimately, it is all part of helping the small dealers and stationers.
OPI: Going to Western Europe now, you made the decision to enter a number of more established markets a few years ago, including Ireland and the Netherlands. What’s been your experience there?
MB: The Dutch and the Irish have forced us to get smarter and tweak the model to gear it more to the conversion of existing stationers. Being in these markets is helping us to spot trends that we may then apply to less developed markets. Office 1 Ireland is profitable and superbly managed, and we enjoy a very solid market position there.
Our rollout in the Netherlands has been too slow and we may have been better served starting with an acquisition to get more traction. That said, we are pleased with the work accomplished in both markets and are growing deep roots.
OPI: You also had big plans for the UK when you partnered with XPD in 2004, but this deal quickly came to an end. Is the UK still on the agenda?
MB: XPD did not have enough boots on the ground and, contrary to Mr Micawber, something did not turn up! We keep circling this enticing market, though admittedly in very wide circles.
OPI: There’s also been some speculation about your activities in Australia – what’s going on in that part of the world?
MB: The Australian market seems to be more geared to retail and we hope to offer small stationers a fighting opportunity with our franchise formula. We have launched three stores and are still in the experimental stages of feeling our way around.
Our presence in China has been very helpful in terms of sourcing branded products and printing our Australian catalogues there. Here is an extreme example of globalisation for you!
OPI: The business outlook in emerging markets always appears more positive and dynamic than in the West. Is that because the Western markets are saturated already and don’t have as much scope for growth? Or is it a cultural feature?
MB: It is our fault if we dwell in defeatism and the height of irresponsibility to accept it as a cultural feature. We must adapt and change. For all of the obvious reasons, the OP potential is enormous in emerging markets and the cost of entry in our industry still relatively low.
While strong local players will benefit most, globalisation presents a huge opportunity for chameleon-
like Western manufacturers and wholesalers that think out of the box. Office 1’s advantage resides in the fact that it partners with truly national companies that contribute the capital and management while providing the know-how. This proven formula could certainly be followed by a number of participants in our industry, from wholesalers to manufacturers and even large dealers.
OPI: One of the issues that virtually all these players complain about is margin pressure. What’s your view on margin trends in our industry – geographically speaking as well as in terms of product category?
MB: Gross margins have perhaps become the proverbial scapegoat for lack of imagination, and provincialism. They defy any geographic simplification except that, in general, the decline results from consumables and paper that together account for 50 percent of turnover.
Elsewhere, margins tend to vary based on the volume being done at retail as opposed to B2B level, and the presence of dealers in some Asian markets that operate with little overhead and can reduce prices accordingly.
The gross margins of Mont Blanc and other prestige brands in China and the Middle East are mouthwatering and therein lies the solution. Go where the sales and margins are!
OPI: Talking of retail and B2B, the general perception of Office 1 is that it’s a retailer. But that’s not strictly true any more, is it? How has your B2B business evolved over the years?
MB: About 75 percent of our total volume is delivered, ie non-retail. Retail is essential in establishing our brand and in serving as distribution points. There have been recent surveys indicating that long-term internet sales may plateau at 20 percent of total sales across all industries. I tend to believe this is true given that direct mail was never able to go over ten percent of OP sales in the US.
eCommerce is often viewed as a chore to be quickly dispensed with, whereas retail continues to be a pleasurable experience in most places and cultures. So basically, we operate in all channels of distribution, but retail remains the rock on which this house is built.
OPI: Everybody is talking about the environment, corporate social responsibility in business, etc. How much of an issue is that in the – mostly emerging – markets that you operate in?
MB: There are changes taking place in all these markets driven by globalisation and a more informed consumer. The litmus test is how corporations are going to be held accountable by these consumers. I was very impressed by Dirk Collin’s speech on the subject at eurOPe 2007. Scared the pants off me!
It would seem that in addition to declining margins, commoditisation, consolidation, inroads from discount chains, financial crises, the yellow peril and all the nice things one worries about every morning, we now have to add corporate responsibility and green issues.
OPI: What have been the major milestones since you started Office 1 all those years back?
MB: Looking back, it would seem that every few years the market lobs some big conflagration at us that we have to integrate in order to survive. Our adaptations to these macro trends are our milestones.
Staples’ expansion in the US led to our launching Carlin in Spain; the first steps of globalisation led to our focusing on emerging markets and the launch of Office 1 Turkey and Bulgaria in 1995; the Asian financial crisis of 1997 forced us to switch gear, rediscover Europe and launch Office 1 Italy; the collapse of the Soviet Union led to entries in Lithuania and Slovakia. No doubt the process will not end there.
This has by no means been an easy industry and one feels like one has to go on navigating like Ulysses – very close to the wind, in the middle of a storm, threatened on all sides. I have to say that it is always entertaining to attend OPI conferences and check on the remaining Ulysses, eclectic characters like Mark Austen, Alan Crump, Peter Frost, Frans Koffrie, Ray Peck, Hugh Sear, and OPI’s very own Steve Hilleard. All shrewd Ulysses, all gallant survivors!
OPI: And for a long time to come, let’s hope! What about the future? Where will the travel bug take you next? I hear you’ve had talks in Yemen and Sudan – not your usual office products haunts?
MB: It will take us where events and our trajectory will take us. As stated earlier, the Middle East offers great opportunities and there are plans for Libya and, yes, later Yemen. Why not? We are launching an exciting store in Khartoum in September, which will hopefully make for an extraordinarily positive shopping environment.
We are also being courted by a serious Pakistani firm. Why should we deny the Pakistani stationer a measure of modernity and the opportunity to join the global OP world? We feel that the world is full of opportunities.
So no, we have no intention of losing our lust for adventure and punishment!