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A consolidated warehouse to support the Australian independent dealer community seemed like a good idea on paper. Martin Smith, at the time CEO of WCP Group Services and the brains behind Appaloosa, was certainly fully behind it.
In an interview with OPI in June 2005, he enthusiastically explained how the warehouse would save time and costs for dealers and manufacturers alike. At the time Appaloosa had been open for about a year, and Smith reported he was "pretty pleased" with its progress so far.
"Until this point, there was no centralised warehouse in Australia for independents where you could bring products in," said Smith in the interview. "For dealers, transferring direct purchasing from manufacturers or suppliers into a consolidation warehouse like Appaloosa, allows them to buy a consolidated shipment on one pallet rather than have to order from 65 different suppliers – and free up time and costs in their business as a result. It is also better for the suppliers, because they can deliver one shipment to a major warehouse and we do the distribution to the dealers."
The Appaloosa warehouse was the lynchpin of a service marketing operation, Buying Group Services, which was then part of WCP Group Services and a service provision company to the Office Choice dealer group.
Population
However, any zeal surrounding the warehouse was short-lived. In October 2005, just eighteen months after it was established, Smith resigned to "pursue other interests". His departure came after a career in the Australian OP industry that spanned over 15 years. Colin Fern, director of Office Choice and chairman of now-Allintos, formerly WCP Group Services, also left. Then in December, the warehouse closed its doors. The grand plan had been a failure.
This development was intensified by the fact that much of the Australian industry was sceptical about the idea in the first place. And in the end, the cynicism proved well-founded.
In theory, the Appaloosa plan made sense. So why the collapse?
Australia, as local industry insiders will tell you, is a very different place to, say, the US. It has a spread-out population and upholds only a small OP industry that would appear to have little demand for wholesale. There has been no national wholesaler in the country – like Spicers in the UK or United Stationers in the US – since the early 1990s, largely because in Australia the suppliers are often subsidiaries of major multinational companies, and power players such as Corporate Express Australia (CEA) have their own warehouses.
Grant Harrod, CEO of CEA, explains: "I was not surprised [by the closure of the warehouse]. In our view, the present structure of the OP marketplace in Australia, excluding IT products, does not lend itself to accommodating a wholesaler. The vendor community has undergone significant consolidation with many now offering broader product ranges. Most have also developed sophisticated distribution infrastructures capable of supporting the reseller channel directly. It would be difficult for a broad-based wholesaler to add value to either vendors or resellers, especially as most OP resellers operate inventory distribution models."
Sean Cooney at Officewise, part of Office Products Depot, claims: "Appaloosa never had a snowball’s chance in hell of surviving as, frankly, there was no demand for a wholesaler."
Research
Graham Harman, CEO of dealer group Office National, told OPI that the group has conducted its own extensive research in 2000 with consultants PriceWaterhouseCoopers, and it concluded that the Australian market did not have the wholesale margin to successfully run a warehouse programme.
"Even when there was a wholesale margin, the margin was not large enough to run a distribution centre," he says. "In the Australian market, 38 per cent of our members’ turnover is in IT consumables and up to 20 per cent of their office products sales are supplied by Acco Australia. Together with our paper merchants, these guys are the best in the industry at getting a parcel from point A to point B anywhere in this huge country we live in. That doesn’t leave much available product to run a distribution centre."
Industry researcher Andrew Penfold of BIS Shrapnel, on the other hand, was one who thought the warehouse would work. "The industry needed a good independent wholesaler to finance the smaller guys, because we have a very weak wholesale sector with only one large wholesaler, GNS, although that is more for newsagents," he told OPI.
"Previously Daisytek tried to fill this gap but that didn’t work out. Now stationery manufacturers have become by default like wholesalers, packing up small packages with their own pricing and distribution system in place. It’s a weird situation. It was in part the lack of support from suppliers that contributed to Appaloosa’s failure."
Many also questioned why members of other dealer groups such as Office National would support the operation when it was basically owned by competing group Office Choice.
CEO of Office Choice Max Ritchie told OPI that he was "extremely disappointed" that the project had not been successful, not only from the point of view of Office Choice’s own members, but also from Australia’s independent dealer channel as a whole.
Impact
Ritchie blames Appaloosa’s failure on "margin, cost, insufficient volume and to a degree inexperience in the operation of this type of facility. History shows the difficulty of establishing an operation like this," he says. "The model does have merit, but the correct cost structure and volumes are required to run a national distribution operation like Appaloosa."
Managing director of the Allintos Group, Ivan Hodges, was not available for comment at the time of writing.
Appaloosa was financed in part by Office Choice members. On this matter Ritchie comments: "Office Choice members supported the warehouse and we are thankful. With its closure, Office Choice, which previously owned Buying Group Services, has had to ‘buy back the farm’, so to speak. That process is being worked through at the moment. This will hopefully be completed in the near future, but in all of these situations it is hard to unravel… The WC Penfold dealers are working through a similar process to Office Choice," he adds.
The impact of Appaloosa’s failure on Office Choice going forward is, unsurprisingly, under intense scrutiny in the Australian OP industry and one rumour doing the rounds at the moment is that Office Choice and Office National may merge over the next year as a result of the episode.
Harman at Office National said he does not believe Appaloosa’s collapse will impact the Australian OP market, although he agrees it will "set the Office Choice group back a little" while it regroups.
To rumours of a merger, he told OPI that Office National formed a steering committee with three representatives from the Office Choice board together with Office National’s board, and meetings commenced in December. But as yet, nothing has been agreed. Although Ritchie confirmed that this was the case, he told OPI that he sees consolidation between the independent dealer channel as "inevitable".
Ritchie claims that the whole affair will not impact the service Office Choice offers its dealers, although he feels they have missed out on an opportunity. "The effect on Office Choice into the future will be to consolidate and continue to provide services, marketing and technology to its dealers. These services are being supplied to dealers now and will continue to be supplied.
"Suppliers will be impacted by the closure, but to what degree will only become clearer in time," he adds. "What it will do is make any effort to attempt a project like this in the future very difficult. The major suppliers will be reluctant to expose themselves without some very good reason. It really means back to business as usual for the time being, with suppliers again distributing directly to the independents and the wholesaler community providing additional support."
Ritchie hopes what happened will leave at least one positive legacy: "The addition of Appaloosa into the market provided an alternative for dealers to the wholesalers and direct routes to purchase," he says. "That competition has had an impact that will hopefully improve the level of service that dealers are providing through the channel."