OPI: Hi Bob, can we start with a snapshot of how business is at Royal at the moment?
BB: Royal Office Products sales are approximately $50 million. For the first six months this year, we’ve had a 14 per cent growth rate. We have nearly 200 employees and offices in Atlanta, Chicago, Dallas, Denver, Fort Lauderdale, Houston, Indianapolis, Orlando, Phoenix and Tampa.
OPI: And how are you looking to grow the business?
BB: We’d like to double the company in the next five years. We’ll look to do this with continued investment in our salesforce as well as continued investment in our website.
OPI: And I seem to recall that you bought Royal for next to nothing, about $160,000, is that right?
BB: That’s correct. I came upon Royal in 1989. It was selling about $400,000 a year and working out of a 10,000 sq ft facility full of obsolete inventory. We were equipped with rotary telephones, no computer, no fax machine and no copy machine.
The day after I bought Royal, I was fortunate to spend a full day with Nate Gold. Nate was the CEO of Publix at the time and was considered one of the most successful independent office products dealers in the country. That day I asked Nate: "If you were in my shoes, what would you do first- He said: "Son, I would buy myself a computer and get out on the streets and sell."
That’s exactly what I did over the next year. I set the company up with a computer system and increased sales to $1 million. In 1990, I brought my brother Howard in as an equal partner, and he and I spent all our time trying to generate new sales. Over the next year, with the help of my brother, we increased revenues to $1.8 million.
For a period of the next three years we were absentee owners, off into other ventures, and the company was running at about a $1.8 million pace.
Then, in the summer of 1995, we came back into the industry. We studied what some of the most successful dealers at that time were doing. My brother and I started to mirror and implement the programmes of such success stories as Village Office Products and WB Mason. At the time, these companies were two of the fastest growing independent dealers in the United States.
Over the next four years, we grew over 100 per cent a year and were able to leverage technology when opening our new facilities.
Strategically, we centralised customer service, purchasing, accounting, human resources, and marketing in Chicago. This enabled us to keep our finger on the pulse in all our new locations. These new facilities outside Chicago became a sales office and a cross dock for product and distribution.
Customers could dial a local phone number in a satellite location and it would ring in Chicago.
OPI: And then it was full steam ahead?
BB: Yes, it grew from there. We doubled into $4.5 million, then to $10 million, and then from $10 million to $19 million, $19 million to $38 million. At this point, we started to stabilise and work out some of the growing pains. When you are growing as fast as we were, banks and wholesalers get a little nervous.
Through a very controlled growth, we reached $45 million in a short period of time and had focused on generating more profit instead of reinvestment. Today, we are in a very strong position and have developed a five-year business strategy to double the company once again.
OPI: You’re a member of TriMega – do you feel the worth of being part of a dealer group?
BB: We have to participate because there are obviously rebate dollars that we’d be leaving on the table.
I believe dealer buying groups are a tremendous opportunity for all independent dealers.
OPI: Do you have a view on what’s happening at is.group with it taking the decision to act as a distributor?
BB: Personally, I think the dealer group trying to become a distribution network is a big mistake.
Dealer groups, if they focus on their strengths of leveraging overall purchasing power, can produce great savings for independent dealers.
Let the professionals handle the distribution. They have already developed the most efficient way to work the system. For us, we are a stockless dealer. SP Richards handles all our distribution from the manufacturers and we are very pleased with their performance and with their fill rate.
I would like to see the dealer buying groups focus on developing a more elaborate private label programme which could be distributed through the wholesalers.
OPI: I noticed, looking at some of your websites, that you offer a lot of jan/san or break room products. Is that a big part of the business that you do now and how significant do you see it becoming?
BB: Right now, as a percentage of our sales, the business is not as significant as we would like it to be. We feel it’s a great opportunity for growth. Today, we are developing more of a niche marketing approach for jan/san, school supplies, legal supplies, medical supplies and accounting supplies. We are supporting this programme with product specific catalogues and individual websites for each category.
OPI: And I guess this is a key product growth area?
BB: Jan/san, as well as school supplies, legal supplies, medical supplies and accounting supplies are key product growth areas that we are currently developing.
Today’s research tells us that each one of these niches are more likely to shop through a smaller industry-specific catalogue than our grand 24,000 item general line book. The wholesalers have been increasing the product offering and developing niche catalogue programmes for each of these industry-specific categories.
OPI: How do you feel Royal has been able to co-exist and fight off the encroachment of the power channel?
BB: To compete with the power channels, we focus on the small to mid-sized businesses. With the size and the infrastructure of the power channels, it’s not as economical for them to be able to service these smaller accounts as well as we can. Our infrastructure and our costs aren’t as great as theirs, but our ability to react to a smaller customer is seen to have been our competitive niche.
I also feel our investment into private label products has helped us to be able to compete and sustain pretty good margins. The power channel has a huge investment in private label products.
When you use private label, you’re branding your own name as well as identifying with a different commodity or different SKU. Private label is a low-cost solution for the customer with a better gross margin for the dealer.
You have an opportunity to build brand and brand loyalty. That’s where I feel the dealer buying groups can bring the greatest advantage to independent dealers that are not capable of building a private label programme.
If the dealer groups head in that direction, I feel that they can create additional competitiveness for the independent dealer when competing with the power channels.
I’ve heard roughly ten per cent of sales from the power channels are represented by private label products, and they are looking to increase that substantially. In North America, the grocery industry is averaging 24 per cent of revenue as private label products. I hear it is even higher in the UK. This strategy has proven to be very profitable for resellers of commodity products.
OPI: What’s your take on the stocking versus stockless dealer debate?
BB: Royal is a stockless dealer and we have been able to compete as a stockless dealer. If you are getting into the business today and were to take advantage of all tools and assets that SP Richards has to offer, why would you want to hassle with inventory? I believe the economics are a wash for the amount of investment in inventory and the employees needed to manage it versus the savings you receive by buying direct.
SP Richards has millions of dollars invested in inventory and a technologically advanced distribution network. It is more economical for us to deliver orders to customers 100 per cent filled than have to go back another day with a back order from our own inventory. SP Richards is the professional in inventory; we are their sales and marketing arm.
OPI: Changing tack a bit, I wanted to ask you about the OP Exchange, which you launched around 2000. I know that this was a venture which didn’t come off for you. Why do you think it didn’t work out and what did you learn from that experience?
BB: When the Office Products Exchange was developed, it provided efficiency for the marketplace to go online, enter in however many items you would like to order, choose which resellers you would like to participate, select a winner, and have your order delivered the very next day.
The reason I felt that it did not launch successfully is because it was way ahead of its time. I do believe at some point in time, generation X and Y are going to demand some type of exchange like this. We are in such a commodity industry and this is where a true auction provides the most efficiencies within commodity goods and services.
The actual end user were just not ready for an exchange. Fortunately today, customers still like to see a sales rep. They are prefer to go through sales catalogues, and still like to be able to call customer service.
However, I believe that an exchange is something that could cannibalise the bricks and mortar companies over the next 15 years. Once our online ordering generation grows into the positions of procurement, they then could change the landscape of how we sell OP.
I do believe that it will have its place in time. I just think that we were well ahead of ourselves like most other B2B exchanges that were developed at that time. There was a great frenzy to build an exchange in every industry, and very few of them have come off successfully.
eBay is probably the most successful exchange that developed during this time period.
OPI: You obviously did your due diligence on OP Exchange. You clearly did the research that would have said this is the right idea at the right time. So why was this proved wrong?
BB: The customer wasn’t ready for it. We were building this in 1999 when everybody was building a B2B exchange, when Wall Street was raising billions of dollars for B2B funds and exchanges. On my advisory board, one of my members was the head of ecommerce at MIT Sloan. A professor there had written that in 1997, the OP industry should have an exchange because it is essentially a commodities business where exchanges provide the most efficiencies.
Another statement of encouragement was that the first mover into that space would be worth at least a billion.
In the industry, the top technology talent, top academics, and the top business professionals around the world were participating or building exchanges in their industry in fear of ecommerce destroying their traditional business model. This excitement of the unknown potential commerce on the internet led to many over-valuations of start-ups.
Anybody who was building exchanges at this point in time could not foresee the future outcome. Out of the hundreds, if not thousands of exchanges being built for every industry, there was only a handful that were successful. My only explanation is that today’s customer is not ready for an exchange. However, I will predict that it will happen in the future.
OPI: Would you try it again or are you once bitten, twice shy now?
BB: I think you always have to have your eyes open. You always have to be prepared to reinvent your current business strategy. Once you think everything is running perfectly smooth, that’s when you’re most vulnerable.
Nevertheless, I don’t regret the experience. It was a phenomenal time in history, and I learnt a tremendous amount about the technology, ecommerce, angel investors and start-ups.
OPI: Just to round things up, as Royal is a family-run business, can you tell me if you have a succession plan? This has proved to be quite a hot topic among dealers recently.
BB: I definitely think about a succession plan. First off, I will share with you, for a family member to come into the company they must work two years in another business and then get their MBA before we’ll invite any siblings into the company. We have no intentions to necessarily sell the company unless there was some ridiculous offer.
As far as succession, I have been very fortunate to build succession within our key managerial positions. Over the next five years, we would like to build in a succession plan for both myself and my brother, in which time, we would like to pass on the day-to-day responsibilities to somebody in the company that we are currently mentoring.
If that does not work, our other option is to find a key individual who may be qualified to take Royal Office Products to the next level.
OPI: That will just about do it Bob. Thanks for your time and good luck in the future.