Looking forward


Predicting the future is a risky business. While the danger of persecution from religious zealots may have passed (always a worry in medieval times) nowadays there is the fear of being dismissed as a crackpot or ending up with egg on your face.
So it’s with some bravery that OPI digs out the tarot cards and invites you cross our metaphorical palm with silver to hear our premonitions about the office products industry in 2007… with a little help from some experts of course.
After the industry saw good growth in 2005 and 2006, the general consensus among those in the know is that there is likely to be some levelling off in sales, especially given the slowdown in the US economy.
The focus of the power channel is likely to be on increasing geographical exposure, with the likes of Staples rolling out more outlets to become a nationwide player in the US and meanwhile happily posting high organic growth as well.
Untapped revenue
According to Rob Sweers, an analyst at Insinger de Beaufort and expert on the contract stationery and retail industries, there will be more emphasis on private label with all players increasing their ranges into other segments of the MRO (maintenance, repair and overall) market where the same distribution network can be applied.
This means we’ll see even more jan/san and breakroom supplies being provided by contract stationers than we did in 2006, as their importance as a largely untapped and fragmented sector increases.
In fact, jan/san has been hailed by many as the standout sector in terms of growth, with wholesalers predicting the bright performance in 2006 to continue throughout next year.
Sweers believes that the New Year will also see the contract players entering into new areas. Educational products and schools supplies, and medical supplies to hospitals and nursing homes are among the most promising segments.
Sweers believes office products retailers will face more competition from general retailers adding more stationery to their product mix. Specialist items and arts and crafts in Wal-Mart alongside photocopiers and shredders will make life even more difficult for specialist OP dealers.
Most in the industry believe the talk next year will be all about the ‘c’ word – consolidation. January will hail the beginning of the buying season as deals which have been on the cards this year are put into motion, prompted by a busier than usual 2006.
The past 12 months have seen Buhrmann make what Sweers describes as a "transformational" acquisition of Andvord Tybring-Gjedde (ATG), giving it a foothold in the Scandinavian market and stepping up its march across Europe. Other medium-sized dealers can expect to see themselves the target of such deals with plenty of rich pickings for the cash-loaded power channel.
"Consolidation has started to pick up again," says Sweers. "Europe particularly is still a fragmented market where there are many opportunities for the leaders to buy out smaller players.
"As this business is all about scale, the smaller companies are forced to take strategic decisions and have to make sure they can survive on their own or else join the stronger players. The market leaders are also seeking opportunities in new markets. Eastern Europe and emerging markets in Latin America and Asia are target areas for many, given their growth potential.
"The big players, especially Staples and Office Depot, have strong balance sheets and hence ample financial ammunition to make acquisitions. Even one final round of consolidation among the big players cannot be ruled out.
"The consolidators are likely to look at acquisition opportunities in filling in the blank spots in their geographies in order to be able to serve international/global customers in as many markets as they can. They will also be looking to acquire in order to expand in their product offering."
Slower growth
Sweers believes the contract stationery market will grow in line with GDP, with additional growth coming from the increase in the number of employees working in an office environment.
"After the strong growth in the US there is likely to be some slowdown from the 2005/06 level," says Sweers. "The US OP market can still grow some 3 to 4 percent, however, in 2007. The leaders are likely to continue to gain market share as well as a proportion of the wallets of existing clients by offering a broader product range.
"In Europe, growth is likely to be a little higher, say 4-5 percent, as the economic cycle started a little later. The most potential is in the emerging markets, which are becoming more sophisticated."
Generally-speaking, a mature market like the office products industry is expected to grow in line with GDP. Meanwhile, apart from jan/san as already mentioned, the furniture market, with its typically late cycle also still looks set for decent growth in 2007. Certainly, companies like Ahrend which sold its office products division in 2005 to concentrate on furniture have seen strong growth in this sector – evidence of the buoyancy in the market.
The contract suppliers are offering more products, moving into non-traditional lines, and this is where the market will see the most growth.
Says Sweers: "Both suppliers and customers alike are becoming more sophisticated in their procurement and therefore these product lines are creating more demand as a result of the mutual education process."
He adds: "The introduction of the new Vista Microsoft platform is likely to create additional business in the industry. Not only with replacements from old to new software, but also maybe more specifically with the adjustment of software applications running on Microsoft platforms."
The industry will also be focused on internal efficiency as private label becomes more prevalent. Boardrooms will be kept busy with the sounds of category management, single source supplies, merchandising and supply chain management.
For the dealers, 2007 will see the battle with the power channel intensify. Maintaining and increasing relevance to their existing customers will be the biggest challenge of all, says United Stationers’ senior VP of marketing Mark Hampton.
"The power channel has a significant brand that’s getting bigger in the consumers’ mind and dealers need to find new ways to compete. E-competencies will drive higher levels of customer acquisition, retention and loyalty," he says.
Wholesale changes
Elsewhere, Hampton believes the same old issue of margin pressure will raise its ugly head as dealers duck and dive to squeeze them higher, with plenty of eyes on the "large, untapped" jan/san market for a helping hand.
Taking a more constructed sales approach will also be important.
"Most dealers we talk to are placing more importance on executing a very specific sales model and focusing on segment specific end-consumers," adds Hampton.
"I don’t expect any sweeping wholesale changes in consumer trends, but I think the more savvy independent dealers are realising greater success in proving value to the end-consumer who I think is placing more emphasis on service. At our Vision conference next spring we’ll be discussing new ways in which independent dealers can capitalise on well-known consumer segment specific sourcing behaviours for increased retention and growth."
The turbulent year had by dealer groups looks like it may settle down after Christmas… a little. Their existence is set to become increasingly relevant to manufacturers as a direct route to the more profitable independent sector.
However, 2007 will be the year when manufacturers demand compliance across the board at the dealer and buying groups, including the likes of BPGI. A real challenge for dealer group managers who continue to herd cats on a daily basis.
The ‘annus horribilis’ had by is.group will hopefully be left behind as its RDC model survives through the group’s partnership with SYNNEX. A few medium-sized stocking dealers may even be tempted back to the fold.
TriMega along with most other western dealer groups will continue to thrive although those groups attractive to the larger dealer will be susceptible to member loss through the looming threat of further industry consolidation.
The relationship between dealer groups and wholesalers in markets such as the US, UK and Germany will be increasingly fractious. Switched-on dealer groups like Integra in the UK, for example, will increasingly be more relevant to their "with-it" members than the wholesalers. These types of dealer groups will carry on helping their members gain competitive advantages through personalised marketing programmes, access to cutting-edge technology and intensive sales and marketing training.
2007 will not see the demise of the independent dealer per se, but it will be another jungle where historic rules apply – the strong will get stronger and the weak will perish.
This will especially be so if we see certain key economic factors reach a tipping point, such as the UK’s interest rates rising further to curb inflation, or a resurgence in prices of oil and raw materials leading to a widely anticipated increase in cost of goods manufactured in China.
The world, especially the office products industry, has become over-dependent on cheap Asia-produced products. Any adverse economic movements will affect consumer confidence and buying patterns and will no doubt impact on gross margins in the office products business.
Green agenda
For manufacturers, the rise and rise of environmental products over 2006 shows no sign of stopping. Whether intent on saving the whales or not, no manufacturer is going to ignore new margin opportunities. As consumers and governments push the green agenda so new ranges of recycled products will appear from all angles.
If it isn’t possible already, the complete planet-friendly office will be well stocked by the time we see 2008. John Dickinson is once such manufacturer which has been busy updating its high-end products with recycled alternatives with its Basildon Bond line of envelopes and writing paper.
Recycled pens from Pilot, Herman Miller picking up awards from the US Green Building Council, Office National in Australia flagging up its recycled products in its catalogue… environmental issues will not go away and, whether it’s cynical or not, commercially speaking these will be an excellent driver of growth in 2007.
The cost of raw materials will hurt manufacturers and the rest of the supply chain alike and be felt most by the former group, but it isn’t a problem that looks like going away any time soon.
Some of the best clues as to what will happen in the coming year can be found in the headlines of the year just gone. It certainly hasn’t been a quiet past 12 months and there are plenty of unresolved issues which will no doubt carry over into 2007.
But with a well-deserved Christmas holiday on the way there’ll be plenty of time for all that. So how does it go?
"Should auld acquaintance be forgot…"