It’s a done deal


The most exciting development in our industry for the last 20 years – that’s how Bruce Robinson describes the deal that rocked the office products space in the UK just a few weeks ago.
Of course, as one of the chief engineers behind the transaction, Robinson is not what you would call an unbiased bystander. Nevertheless, he has every reason to be excited. He has been at the helm of ISA Trading for the past eight years and while it has no doubt been a rollercoaster ride for him and his team, one aspect of the business that has always been positive, and will be going forward, has been the growing importance of electronic office supplies (EOS).
And that’s the overriding benefit of the deal for the OP community at large, according to Alan Barclay, Robinson’s equivalent at Kingfield Heath, and a man who’s no stranger to large, company-changing transactions. The industry now has a broadline wholesaler with a business model strong in the EOS as well as the OP segment.
Plenty of issues remain open as the integration process gets underway, not least the future of – and the question mark over – Supplies Team, ISA’s direct business. Barclay and Robinson reveal the steps that led to the merger and candidly talk about the long process ahead…
OPI: Congratulations first of all to both of you on this milestone deal. First Kingfield and Heath (then part of ISA), now Kingfield Heath and ISA – you’ve gone full circle. To start off with, please tell me a bit about the venture – who initiated it, how long has it been in the making…?
Bruce Robinson: The shareholders of ISA initiated a project as far back as July last year and engaged Rothschild bank to put together ideas and proposals on the group going forward. Off the back of that we produced an information memorandum, which was privately marketed to different groups of potential interest between the financial community and the trade.
OPI: And Kingfield Heath was one of the prospects?
BR: I’m not at liberty to divulge the details because of confidentiality, but there were a number of potential trade interests and yes, Kingfield Heath was one of them.
OPI: How much did Electra Partners pay for the two companies?
BR: We really are not in a position to answer that.
OPI: When the deal was announced, you talked about two separate entities, Kingfield Heath and ISA on the one hand and ISA Supplies Team on the other. Let’s start with Kingfield Heath and ISA. What is going to happen now?
Alan Barclay: For the foreseeable future – and we want to be clear on this – the two companies will be run in exactly the same way that they were before and, as such, we will be competing with one another.
Broadly speaking, that’s for the very simple reason that, until we have concluded all the integration planning and are ready to start executing those plans, we have to run the businesses. So for now, all service levels, all the support we give to the resellers, all the marketing material, all the back-up is there 100 percent just as it was before.
OPI: And then? What will happen to your respective headquarters, staff and distribution centres, for example? The two companies will merge completely at a later stage, I assume – what will be the ‘new’ company’s name?
AB: We can’t talk about this at this stage, but keeping the running of the two companies separate for a while is pretty normal and certainly similar to how we approached things when Kingfield and Heath came together years ago.
There are a number of reasons for that. You have to organise the product ranges, sort out your warehousing and distribution planning in terms of inventory, and so on. There are lots of things to do and up to the point of doing the deal, there’s information that you can’t really access from either company because it’s so commercially sensitive. You can’t expose that information until the deal is actually closed.
The two companies will merge, and part of our planning process will be to decide on how we might change the name if we choose to do so.
OPI: What will be your respective roles in the new organisation? I guess there’s only room for one CEO at this new wholesaling entity, isn’t there?
AB: As I said, at this moment we are continuing business as usual. Bruce is the chief executive of ISA, I’m the chief executive of Kingfield Heath. When we’ve concluded our management organisation structure for the new company, we’ll announce it externally as soon as possible.
OPI: What kind of timescale are you talking about with this planning process – what is the ‘foreseeable’ future?
AB: Our estimate currently is that our planning process will probably run for approximately three to three-and-a- half months.
OPI: So what will the eventual benefits be to resellers, dealers and their groups when this new so-called super-wholesaler is up and running? I assume offering a very comprehensive one-stop shop is the main and most compelling benefit?
AB: Let me elaborate a bit on that. We have a market overall where computer consumable sales account for more than 52 percent of total products sold to the end-user. So proportionately, computer consumables now represent the single largest range of products sold.
For Kingfield Heath, around 40 percent of our sales are in computer consumables at the moment. As such, it was a business imperative for us to find a way of being equally expert in the range, development, selling and marketing of computer consumables as we were already in the office products category.
Merging with ISA means we can provide to our dealer customers that expertise in a way we simply couldn’t have done on a standalone basis. We also need both companies to increase our scale and therefore our efficiency in terms of being able to support the service of our key vendor partners and in terms of our strategy for going to market.
In a nutshell, as a bigger business, we represent a more attractive proposition in distributing our suppliers’ products into the marketplace.
OPI: And some dealers that previously went to Spicers for their OP needs and to ISA for (additional) EOS might now switch to this one-stop shop altogether. Quite a position to be in, isn’t it?
BR: A delightful thought, isn’t it? And a very advantageous position for dealers to be in I agree.
OPI: And for you. Not quite so advantageous for Spicers I guess.
BR: Perhaps not. We live in an industry where you have to pedal a little bit harder each year. This deal does give us a sustainable model.
OPI: It will also give you greater purchasing power. Are your vendor partners a little worried about being pushed even further?
BR: Not at all. Far from being worried, our vendors are absolutely delighted because this gives them a superb platform for distribution in the UK. Without question, we’ve had tremendous support from each and every one of our vendors in terms of this whole transaction.
OPI: What about your own pricing? Combining low margin EOS with the whole range of Kingfield Heath office products and assuming matrix pricing, do you expect that your EOS prices will change in any way?
AB: I think that this is an aspect of the business that is already mature, very well understood, and something in which we’ve developed a number of sophisticated ways of helping our resellers and dealers in the marketplace as well as helping ourselves. Ten years ago, computer consumable sales in OP wholesaling probably represented somewhere between five and ten percent of turnover. Now, as I’ve mentioned, for Kingfield Heath it’s 40 percent. So we’ve already had to learn how to manage the sales margin aspects of sales in a way that allows us and our customers to be profitable.
OPI: Let’s move on to the second, and perhaps more controversial, entity of the deal – ISA Supplies Team. Revenue-wise, Supplies Team is a considerable part of ISA Trading, but there’s been some criticism about the conflict of interest of this direct-to-consumer business. The burning question on everybody’s lips is, what is going to happen to that part of ISA Trading?
BR: That conflict of interest that everybody keeps talking about has been extraordinarily well managed by ISA and Supplies Team in the past.
About 60 percent of the volume of ISA Wholesale is shipped direct to our customers. That’s an important statistic in that it shows that there isn’t any fear about trust or customer confidentiality. Against that backdrop, the Supplies Team business has evolved into its own entity within the market and in that position is well respected.
In terms of its future, it would be entirely wrong of me to even try to predict what might happen to Supplies Team in the short or medium term. It is what it is. It’s a very successful business and it does not conflict with the wholesale channel today and there is no reason why it would conflict with the wholesale channel in the new format going forward.
OPI: What about the retail side of ISA, where does that fit in?
BR: ISA Retail is a very nice business. It’s a division that is almost entirely dedicated to the major grocery retailers, and that’s a full-on range of products that is the retail equivalent of ISA’s core offer. It’s primarily inkjets.
There are also a lot of complementary benefits here. Quite a lot of Kingfield Heath customers do have retail operations and, of course, the retail business of ISA has some very attractive propositions that could complement the services of Kingfield Heath. It’s not all about Tesco and Sainsbury’s.
OPI: So will ISA Retail remain a standalone segment within this new super-wholesaler or will it be completely integrated?
BR: Selling to retailers requires particular individuals with particular skills and services, that’s where the core difference lies. And, of course, the badge over the door needs to be appropriate to the customer audience.
As to whether it gets called ISA Retail going forward, that’s a long way off. But today you can see how the sales channel very nicely complements the rest of the wholesale business, as it has done within ISA.
OPI: What’s your best guess at when the integration process will be complete?
AB: Our current estimate is that everything will be complete within 18 months. It’s a little too early to tell what functions will be combined when integrated.
That said, we have made clear statements saying that part of the process is about separating the Supplies Team as a standalone business with its own distribution and logistics infrastructure and making it distinctly separate from our wholesale division.
OPI: Any merger, any integration, any deal like the one you’ve just completed brings with it a mountain of challenges as well as opportunities. What will be the biggest issues for you?
AB: From my perspective, the biggest challenge is meeting the expectation levels of our customers. We have had a very positive response from our customers regarding the fact that Kingfield Heath will be a much more competent and capable supplier of computer consumables, both in terms of service and competitive pricing.
Our customers want these benefits now. So my challenge – and Bruce’s – is making sure that we make good headway with the whole integration process and get those benefits to the resellers and the dealers as quickly as we can because they will get very frustrated if we don’t.
OPI: It would be understandable if customers were just that little bit nervous, worrying about disruption of service, as has been the case in so many other merger situations.
BR: I think the market has really matured. Kingfield Heath has a fantastic track record of great service, as has ISA. We both live in a highly competitive environment where you have to be world-class to gain market share, and I think our customers entirely trust us to maintain the service levels necessary.
AB: The other thing, over and above what Bruce has just said, is that broadly speaking Kingfield Heath and ISA today sell the same products from the same vendors to the same customers. Therefore the number of things that we have to change compared to some of the other integrations that you’ve seen in the industry is relatively modest and, as such, much less complex.
That’s not me trying to marginalise any of the work that we’ve got to do to bring these two businesses together successfully, but it does put into perspective the fact that we’re actually combining two companies that already operate extremely professionally.
OPI: Geographically-speaking as well, you’re not a million miles apart – that must help.
BR: On a clear day we can almost see each other.
AB: And it certainly helps with communication, a fundamental part of making sure that everything runs smoothly. Our communication lines are very short and easily managed.
OPI: Wholesalers rely heavily on sophisticated IT and eCommerce systems – what are the challenges in this area?
BR: That’s an easy one. We’re very fortunate in that both businesses are extremely well positioned not just in eCommerce but in the IT infrastructure that is behind eCommerce and I think this is quite unusual. We already have a position of best of breed and, across the two businesses, the technology systems are there, so we don’t see all sorts of big challenges in terms of any integration projects that are coming through.
There are obviously IT decisions to be made, but as far as eCommerce applications are concerned, it’s delightful to be in a position where both businesses are so advanced.
OPI: Alan, as chairman of InterACTION, you’re obviously very involved in the wider European wholesaling picture as well. Will you continue with your work in the alliance, considering you’ve now got a massive integration job on your hands?
AB: Yes, I will. The new business will be totally committed to involvement with InterACTION and we will continue to develop the plans that we already have underway with our partners in Europe.
I also intend to continue in my role as chairman, certainly up until September when my current term of office comes to its conclusion. And if my colleagues at InterACTION require me to carry on for longer I will be happy to do so – that’s their choice.
OPI: Your biggest competitor, Spicers, is clearly a strong force now in Europe, but it would be fair to say that it has had some challenges on its home turf lately. There’s plenty of speculation about the parent company’s moves going forward. Will it just sit tight and let Spicers profit from any fallout and opportunities that are an almost inevitable result of any integration process, or decide to ramp up as well in some way? What’s your best guess?
AB: My general rule of thumb is that for questions about Spicers or its plans you should speak directly to Spicers or David S Smith.
And yes, Spicers is a broadline wholesale competitor, but it’s by no means our only competitor. We compete with paper merchants on cut paper; we compete with EOS distributors on computer consumables; we compete with furniture wholesalers on furniture.
The two companies have always been compared to each other, but I don’t think that is necessarily the complete picture. It certainly isn’t for this particular set of circumstances because we now have underway a sustainable model into the future, where the majority of sales comes from computer consumables.
At some point, all broadline wholesalers are going to have to have a model that allows a large proportion of sales to be computer consumables because that’s where the market is going.
OPI: And that really sums up the main impact that the deal will have on the OP industry in the UK at large, doesn’t it?
AB: Yes. We have created a business model that will be sustainable in the coming years, as we have to cope with the requirements of an industry that sees a significantly greater proportion of sales in computer consumables.
The impact for the OP industry is that it will have a really strong broadline wholesaler with a business model that allows it to be equally good on EOS and on office products, and that’s fantastic news.
OPI: You’ve got the financial backing of Electra as well as the Royal Bank of Scotland – a massive vote of confidence in itself. But venture capitalists have exit strategies – what do you think Electra’s short or long-term plan is?
BR: The deal is so recent that it would be wrong of me to second-guess what Electra could be thinking about. We’ve just consummated a very complex transaction for the industry. I’m proud to have Electra in the chair because it is such a prominent investor. I think it would just be crazy to speculate on what Electra’s exit strategy is at this stage.
OPI: So for the time being, it’s working out the details, getting the integration process up and running – and then start reaping the benefits?
BR: Something along those lines. It’s going to take us a few months just to figure out the details of how we deliver all of those benefits through to the customers while at the same time keeping the same standards in the supply chain.
Today the percentage of consumables in the product mix is 52 percent, but it won’t be very long before it’s 60 percent and even 70 percent – these are the kinds of numbers on the horizon. It’s a very different world to where we are today and it is light years away from where we were ten years ago.
Here is a model that is fit for purpose as far as the reseller and dealer community is concerned. It’s sustainable, it’s got the right shape to it and it’s got a terrific range of manufacturers supporting it.
I believe this deal has more benefit to the dealer and reseller community than anything that’s happened in the last 20 years. Not only that, it’s also great for manufacturers and it’s great for the market as a whole.