Executive Briefing: Reading the signs

The cautious whispers suggesting the US economy is showing signs of recovery may have been met with a sigh of relief in most quarters, but the latest set of Q3 results suggest we may still have to wait until well into 2010 before the OP industry feels any benefit.
The good news is that in difficult market conditions some companies are showing modest sequential improvement from the second quarter. The comps are also starting to look brighter with declines narrowing. Although it is well worth mentioning that the comps will look better because they are now starting to comp against poor results from 12 months ago.

As indicators of the turnover of product in the US market, SP Richards and United Stationers are as good as any, which once again shows the resilience of the independent dealer community.

SP Richards saw net sales fall 5 percent year-on-year in Q3 compared to drops of 7 percent and 6 percent in the first and second quarters of the year. At United Stationers Q3 net sales declined 8.6 percent year-on-year to $1.25 billion, but CEO Dick Gochnauer added that the year-on-year rate of decline within the office products and furniture categories had slowed marginally in Q3 compared with Q2.

The star category of the quarter for the two wholesalers was Jan/San supplies, whereas once again technology products and office furniture continued to struggle, indicating that discretionary spending is still depressed.

This was mirrored by the sales of hand wipes, hand sanitiser, hand soap and tissues at the office superstores in the quarter. During the Back-School-Season (26 July to 12 September) alone, concerns over the spread of swine flu meant sales of those products saw triple and quadruple digit increases.

It is difficult to imagine how the gap between suppliers of Jan/San anti-flu products and manufacturers of office furniture could be any greater than it is now. While companies such as Systemcare, Durable, AF International and many others can boast about record demand, it’s been a gloomy period for furniture manufacturers.
For instance, sales at HNI’s office furniture unit were down 32.2 percent year-on-year to $379.9 million. The US company said that the performance was driven by "substantial" weakness in both the supplies driven and contract channels. And HNI is not even the worst performing company in the sector.

Like many other companies, the effects of sluggish demand are being combated at HNI with aggressive cost-cutting measures, including the closure of its North Carolina factory. As a consequence, its operating profit slid by just 3.6 percent year-on-year to $38.1 million.

Back-To-School shows strength

Despite the boost of a relatively strong BTS and perks in a few categories, the truth is that things are better than they were but demand remains weak and a recovery is some way off.

The 3.5 percent growth in the US economy has contributed to the weakening of the dollar and those with international operations like ACCO, Depot and Staples will actually benefit in their Q4 sales from the weaker dollar. That said, unless consumer demand takes a sudden hike, manufacturers are still going to struggle and retailers are still going to be disappointed by footfall until the rest of the economy heats up.

Of course, this puts extra importance on the holiday season in the US, traditionally kicking off with Black Friday (the day after Thanksgiving). However, this year, retailers look like they will begin promotions even earlier to attract consumers before their competitors. The problem with this is that it just creates a promotions-driven environment which might help the top line, but which kills margins.

By most estimates the recovery of the US economy will be fitful for the next six to nine months. It is also expected to be ‘typical’ in that unemployment rates (and all that implies) will lag behind. However those looking to the past to predict the shape of the OP industry’s recovery should be cautious.

The recession of the early 1990s ultimately played into the hands of the big boxes, particularly in the US as they rose to dominate the market. The shallow one at the beginning of the decade shook things up but it arrived on the back of the longest period of growth the US has seen. This recession has been longer than the last two combined and the industry has evolved since 2001, so the truth is that anyone telling you they know exactly when and how the recovery will happen is lying to you – and themselves.

The office products industry itself has changed markedly since then. During this recession we’ve witnessed the increasing importance that mass retailers are putting on the OP offering in their stores and the continued increase of online retailers. You can guarantee that they will continue to have a long-term impact on the shape of the industry as it recovers.

Cost cutting having an effect

A lot of cuts have been made over the last 12 months, with some degree of success. If the market continues to be soft for, say, another year, what else is left to cut? That’s why cash is king at the moment and you can see a number of companies strengthening their balance sheets. Depot, ‘Max, ACCO, etc have all been at pains to highlight their healthy cash positions and for good reason – they might need to dip into their available cash if sales don’t pick up soon.

Across the board, the effects of cost-cutting and rationalisation have kept businesses afloat but the OP industry is not the only one that has coped by cutting jobs and ‘leaning’ their operations. White House Budget Director Peter Orszag has warned the coming months "will continue to be difficult ones for American workers" and that the employment picture isn’t going to brighten immediately. Much the same can be said for the UK which is seemingly the sickest child in the family of leading economies.

The OP industry will definitely have to take a double hit before it fully recovers. We’ve felt the effects of fewer consumers of office products for the past 18 months, and we will have to enter an inevitable period where companies slowly shake off the shackles of budget cuts. It will also be one where suppliers and dealers are under more scrutiny than ever.

A recent survey by purchasing professionals magazine CPO gives a clue to what suppliers to large organisations should expect. Of those surveyed, 72 percent of those hit by the downturn said they were monitoring suppliers’ businesses more closely, making it the biggest issue after price-cutting requests. And among those unscathed so far, 88 percent expected to have to pay more attention to this in the next two quarters. (Some respondents said they were enjoying a period where they could exact revenge for price rises!)

One impact of large corporations (and local government) reducing their OP expenditure is that those companies who traditionally sell more into this market (Staples, Lyreco, etc) are being forced to turn to SMEs and be more aggressive in the independent dealer’s traditional market space.

As Staples’ COO Mike Miles predicted in August, it will be new start-ups and growth in SMEs that will lead the OP industry out of the recession. However, with credit lines still tight and investment hard to find, it is still a case of hope rather than expectation. But – at risk of spinning out another cliché – patience will be a virtue and one that is hopefully rewarded.