Big interview: Jeff Whiteway

When Jeff Whiteway was last featured as the OPI Big Interview, the year was 2005, OfficeTeam – or OyezStraker as it was known at the time – had recently been acquired by a private equity firm with deep pockets and all economic signals were pointing to a rosy future for the business supplies market. That all seems like a different world now, but Whiteway is still alive and kicking and, after steering OfficeTeam through two subsequent financial transactions, the jovial 52-year-old is still as optimistic as ever.

OPI caught up with the OfficeTeam CEO at the firm’s headquarters just outside London.

OPI: We’ll dive straight in and talk about the financials before we do anything else. You’ve sold the business twice in the past eight years and been through a recession. I recall from the interview in 2005 that the company sales were about £160 million and your most recently published results show revenues of £148 million. So talk us through what’s led you from £160 million down to £148 million. 

Jeff Whiteway: The turnover at the time Hermes Private Equity acquired us in 2004 for £80 million was actually £130 million, with an EBITDA of £13 million. Fast forward to 2007 when Hermes exited and AAC Capital bought in, we were showing good success in terms of the top and bottom lines. In fact, in that period we were forecasting £166 million in sales and a bottom line of £17 million. This helped the multiple, but realistically what helped us most was the market. We sold the business for £163 million. As you can imagine, Hermes were delighted with that result – from £80 million to £163 million in three years. That was great for the exiting shareholders, but just six weeks after completing the deal, Northern Rock declared they had problems and the market just fell away. Once Lehman’s had failed it was very clear that our bullish forecasts in terms of sales were not going to be possible.

OPI: Was that because your revenues were heavily dependent on the financial and legal sectors?

JW: More to do with the general economy. Since 2007, we’ve had to manage the bottom line, often to the detriment of the top line. In 2007, P/E investors were buying businesses and gearing them up very heavily, so we took on £110 million worth of debt. We – with hindsight – foolishly hedged the interest rate at 6.1% because at the time rates were at 5.5%, and with £110 million we couldn’t afford for a significant increase in interest rates. I do remember a conversation with the board to the effect that interest rates could possibly go up by 5%, but they couldn’t possibly come down by 5%. Although the interest is not payable and is akin to equity, it builds up year on year to make the balance sheet look horrible. 

OPI: Sounds like a similar situation to the one that VOW faced.

JW: Similar, because it was a typical private equity structure. Most financial directors, suppliers and credit insurers understood the ‘debt’ was closer to equity, but it still meant that we had a very sick balance sheet and that caused some challenges in the business. The big difference from the VOW situation was there was no requirement for additional cash and the banks never considered writing any debt off.

So come 2012, we looked at the situation and said: “Look, this is getting crazy. We’re not doing the right thing for the long-term viability of the business. Yes, we’re making £16-£17 million profit, but is that sustainable?” So as a team we went to our investors and our banks and told them we needed to change something. The balance sheet was showing £220 million of debt – albeit bank debt was reducing nicely – and there was too much ‘funny money’ as we call it, and we wanted to invest in the future and not just manage the bottom line.

OPI: Which led to AAC taking a severe haircut on its investment?

JW: AAC were very grown up about the situation. They realised they had bought in at the peak of the market and worked with us to equitably exit the business. We now have a balance sheet of £40 million in debt and investors who are acting as shareholders not like banks. Are they asking me to sell the business now? No, they’re not. They realise the value in this business is worth more tomorrow than it is today. So we have some long-term growth plans and not short-term sale plans.

OPI: Let’s fast forward to the end of 2014. When you crack open the bubbly on New Year’s Eve, what kind of number will you be pleased or proud to have hit in terms of top line and EBITDA?

JW: What I want to see is year-on-year growth, because for the past five years we’ve seen declines, despite successfully managing the bottom line. We are investing very heavily this year, with additional costs of investment in new people alone being in excess of £100,000 per month. We are now materially back to historic sales force numbers, having kept our best people and replaced others with those with more relevant skills for the future.

OPI: We know all about the challenges facing the office products industry in terms of secular declines in traditional categories and the impact of digitisation. How much of the decline that you have seen in the past few years was down to those challenges?

JW: The biggest issue we have is that traditional office products cannot be seen to be the future of this business in terms of growth. A declining market with too many players is not a great place to be to try to grab market share. In terms of margins, they are going to decline – supply and demand will see to that.

OPI: Let’s look at profitable growth and new categories. I probably won’t spend too much time talking about jan/san because I think if you’re not in that game now then you really are behind the curve.

JW: Everybody talks about jan/san and everybody says they do it, but how well do they do it? I think OP resellers are generally amateurs at it. The majority of the industry has not recruited the expertise they need to actually drive that market forward. We made a mistake to start with where we were retraining our paperclip salesmen to do that job. These salesmen walk through a different door, they see a different person and they need to show they know what they’re talking about – and a retrained stationery person normally doesn’t. So we’ve had to go out and employ people who don’t sell paperclips, who don’t know office products, but they do know jan/san and they do know health and safety. We were too long in doing that, but we now have an excellent specialist team. We’ve now got a good percentage of our turnover from jan/san – about £17 million depending on how you define the category – and it’s our fastest growing area.

OPI: I think the $64,000 question is can resellers grow and add new product categories and services quickly enough to counterbalance the decline in traditional product areas?

JW: I have to say, the way the industry is structured at the moment it has to change. I think there are too many dealers chasing an ever-reducing market. Yes, we can move to other markets, but actually they’re quite well populated already. There has to be consolidation and there has to be cost taken out of the supply chain. I can’t think of any other industry in the world where the wholesaler makes above 20% gross profit, but is only marginally profitable.

OPI: So does it surprise you that it’s taken so long for the EOS/technology wholesalers, who are used to working on much thinner margins, to show an interest in office supplies?

JW: Yes, it does. These wholesalers are seeing their markets toughen up and they’ve had to react. I think the likes of Gem have got the financial clout to come in and stir things up a little bit, and I welcome that.  

OPI: Will you be a customer?

JW: Possibly. I wouldn’t discount it. We are a very big customer of wholesale, because the wholesale channel adds value to our supply chain. If they didn’t we wouldn’t be using them. So yes, we will certainly talk to Gem and, being frank about it, competition is good if you’re a buyer. What I want is to look in the whites of the eyes of the traditional wholesalers to say: “There is another option; we just want you to be that little bit smarter in terms of your cost base because if you’re smart in terms of your cost base you can offer me a better deal.”

OPI: Let’s talk about your competitors, because some of them are facing well-publicised difficulties. What’s your take on your four primary competitors: Staples, Office Depot, o2o and Lyreco?

JW: Lyreco is missing Eric [Bigeard]. Obviously everybody had a huge regard for Eric and I’m just quite surprised how much one man can have had such an impact on that business. Lyreco’s still a great company and I’m sure Steve [Law] will sort out the UK, but it’s not the company it was a few years back. Office Depot: they’re not focused on the UK, they’re focused on the States and I understand the reasons why. What they need – and can I put my tongue in my cheek now? They need to reverse themselves in the UK into OfficeTeam because we would show them how to put 8%-10% onto the bottom line. Staples: Europe is very difficult for them. They want to be number one in every market where they trade. They’re a long way from that in the UK, but I don’t think they’re going to achieve that if they treat the UK the same as Europe. If they were to focus on the UK and on individual businesses within Europe, then they might succeed and that would worry me more. Tongue back in cheek – or they should be buying OfficeTeam because my team could do that for them. 

OPI: Do you think that’s likely?

JW: No, I don’t. And I suspect it would never happen because when Staples, barely profitable in the UK, looks to buy a business making 10%, is the question they ask themselves about how they get their profit nearer the 10% or is it more likely the 10% is diluted. The day somebody realises: “Actually, hang on a second, maybe our model isn’t right, and maybe these guys have got it right because they’re making industry-leading profit”, then we have a very interesting conversation.

OPI: Did you ever have an interesting conversation with Simon Moate when you were considering your options at the end of last year?

JW: Given o2o’s share price, Simon had enough problems of his own.

OPI: We’ve talked about resellers, but how do you think vendors should react to the predicted decline in traditional office product categories?

JW: We are all vendors at the end of the day. Manufacturers need to consolidate, add much more brand value and reduce the costs of their supply chains. A shrinking market requires fewer suppliers and ever-increased efficiency. We have some world class manufacturers in the traditional office products market. These have reacted to the market conditions and have consolidated, evolved, moved manufacturing and widened their product offering. Those who haven’t or won’t, will not be with us in the future.

Many ‘manufacturers’ are now merely middlemen for an Asian factory, adding little brand value, but potentially cost to the supply chain. They are in great danger as dealer consolidation allows access to the ultimate manufacturer on a more frequent basis. The dealer community as vendors to the end user needs to project forward two to three years and understand how their businesses will look then, with their traditional market shrinking and key areas such as EOS nose-diving in terms of volumes. This won’t look pretty unless they diversify. And that means a great deal more than waking up and realising they need to be selling coffee.

OPI: What is your view on managed print services?

JW: MPS will certainly have a major impact on EOS consumable sales. The OEMs are becoming more effective in this space and will battle it out for market share at the top end. The likes of HP have a great deal to lose so can’t afford to let this market get away from them. Where that will leave the traditional dealer is questionable, but selling a third-party service is likely to prove a challenge in what will be an ever more competitive market. Strong alliances will be essential to maximise opportunities at the mid and lower end of the market, but even then the wise dealer should be viewing the future of EOS supplies in the same vein as fax rolls and carbon paper of the past, as MPS takes an ever larger slice of this market. Such a view can only help bring focus in driving other product sectors. However, the EOS market with a very low cost of serve should not be ignored as, even under MPS, there is still good business to be had.

OPI: Let’s finish up with a couple of personal things. What keeps you awake at night?

JW: Not very much I have to say, because I feel in control. I’ve surrounded myself with people who are darn good at what they do. It makes my job that bit easier. Now we have the right financial structure and excellent support from our investors and non-executives, it is a great place to be. You can only worry about what you can’t control. We’re in control. 

OPI: Given that we have, somewhat unfairly, a reputation for conducting these Big Interviews and the interviewee finding themselves out of a job inside a couple of months, is this interview likely to keep you awake?

JW: This interview is most enjoyable and is keeping me very much awake!  But am I concerned to be out of a job inside a couple of months? No. If I’m the wrong person to drive the business then I shouldn’t remain in charge, but I’m confident in my ability, very proud of our business and enthusiastic about the future. I’m well backed and well supported, so it’s great place to be.

OPI: So we’ll see you in another eight years?

JW: I’ll be an even ‘older boy’ by that time so maybe not. Saying that, I love what I’m doing and I have no intention of retiring. Anyway, my wife wouldn’t let me retire – she’d find it abhorrent me being at home every day.

OPI: It’s taken us an hour and fifteen minutes, but we’ve finally figured out what drives you: it’s what your wife says! JW: (laughs) And I suspect that goes for most sensible men and why I still remain very happily married.