The core message coming out of SP Richards’ (SPR) recent Advantage Business Conference (ABC) in Washington DC was clear: the future is bright for those willing to evolve, change and – sometimes – take a gamble. OPI took the opportunity to catch up with CEO Wayne Beacham to delve a little deeper and find out more about the underlying challenges – not to mention opportunities – that exist, not just for the dealer community, but also for the wholesaler itself and the industry at large.
OPI: Let’s start with your recent Q2 results: national account customers were up in the mid-single digits, but this was offset by a similar mid-single-digit decline to independent resellers. That’s not too encouraging as regards to the independent sector, is it?
Wayne Beacham: You are correct regarding the sales comparison. First, our national account customer base has grown nicely and we are pleased with that performance.
In reference to our independent dealer results it really is a tale of two cities. Much has been said about two of the larger independent dealers – HiTouch/MYOP and The Supply Room – converting to our competitor. We enjoyed strong partnerships for many years with both firms – and still do – and we all hate to lose business but nobody can bat one thousand. We feel very positive about our ability to capture new business in this space.
And actually, when factoring out the aforementioned losses, our dealer business is growing a bit better than the national account customers. We do keep score and we’re in good shape. 2015 was a record sales year for SPR and we fully expect 2016 to be another one.
OPI: And you have no doubt seen your primary competitor’s recent results too…
WB: Obviously we follow all the publicly-traded players within our space. To comment on any individual results would not be my style. However, I will say that we feel positive about our position in the marketplace and we work hard to make decisions that can stand the test of time and position ourselves, employees, customers, suppliers and shareholders well for the future. We’d like to think our past results bear this out.
OPI: So what’s your assessment of our industry as a whole?
WB: The market continues to be soft but it’s not without its opportunities. Core OP, along with paper and ink, continue to shrink – especially in areas serving the oil, gas and energy sectors – and there has been no real inflationary impact for a number of years.
While we continue to see consolidation within the independent dealer community (IDC) we believe those that fully embrace all of the technologies and the practical, addressable adjacent categories being made available to them, still have plenty of opportunity for growth.
OPI: How about your business to the big boxes and other channels?
WB: We have seen significant growth in alternate channels and also with the big boxes. They, just like SPR and progressive resellers, recognise the opportunities in facilities, breakroom and safety (FBS), educational and other product categories, not to mention the long tail.
Every company has constraints with warehouse space, working capital or both. We see the big boxes and stocking dealers taking stronger stocking positions in these new categories, creating growth opportunities in more traditional products for the wholesalers.
OPI: Now that the Staples/Office Depot merger is finally dead and buried, what have been the casualties/winners of this prolonged saga?
WB: It is too premature to determine whether or not there have been winners and losers as a result of the decision made.
However, we believe that everyone is relieved that we have some finality around this topic. All parties now have the opportunity to look beyond any potential consequences of this merger and can once again focus on the business at hand.
OPI: Have dealers grasped the ‘disruption opportunity’ over the past year or so?
WB: This question should probably be posed to the dealer community. That said, over the years, there have been any number of events that could be classified as significant disruption opportunities and there will be some progressive, resourceful independent dealers that are focused and well-positioned to take advantage, if in fact there is – or was – some disruption.
OPI: What about SPR in particular – I assume the Depot contract is still yours?
WB: We enjoy a strong partnership with Office Depot and have an important and growing relationship with Staples as well.
SP Richards has a very bright future as a result of a strong balance sheet and a strong management team. We are also very fortunate to have a supportive parent in Genuine Parts Company (GPC) that provides the CapEx and funding for the six acquisitions we have made over the past 30 months as we ourselves continue to evolve.
OPI: What’s at the heart of this evolution?
WB: For a start, the FBS category I mentioned before represents a $30 billion+ opportunity. That’s change!
The industry as we know it will continue to change at a pace that far exceeds what we have seen historically. But what will that change look like? For SPR and our partners, that change – or opportunity even – can be seen in our recently acquired partners which include Impact, Malt, JAL, Garland C Norris (GCN), Safety Zone and two premium brands manufactured by Rochester Midland.
OPI: How satisfied are you with the product portfolio that all these acquisitions combined offer you now?
WB: Well, the fact that we have added Malt, Safety Zone and the two premium brands from Rochester Midland over the past nine months speaks volumes as to how pleased we are and where we are going with the GCN and Impact acquisitions.
We have made great progress rationalising what products SPR can support in our OP distribution centres, allowing the IDC to sell more products to existing and new customers. These acquisitions support our long-term strategy to diversify our portfolio of products. They fit in perfectly with the aim to bring products to the market that consumers want, without having to sell them direct.
OPI: Do you have plans to make further acquisitions in the short/medium term?
WB: That is certainly our goal, but these things always take time, effort and resources.
However, our acquisition funnel continues to look promising and given the success of our recent acquisitions we remain optimistic that the necessary capital required from GPC to further expand our product portfolio will be available.
What I would also say is that in a world where wholesalers and buying groups are tasked with the challenge of bringing more products to the OP dealer channel, there remains one very critical component that we cannot underestimate – it’s having the distribution to support the offering.
To offer a broad array of products through either print or digital means is important, but having the supply chain and logistics to support the offering is critical for this approach to be successful. We confidently state that we do both better than anyone.
OPI: You mention selling direct. There’s been talk of wholesalers perhaps having to shift away from a pure wholesaler model and creating or acquiring direct reselling operations. What’s your view?
WB: We have given zero consideration to selling direct and we do not want to compete with our reseller channels. As a matter of fact, as we examine possible acquisition targets, unlike others that have been acquisitive, one of our criteria is that they be pure wholesale.
So yes, selling direct isn’t just talk, it’s a reality for some of our competitors. But that is not our direction at SP Richards. Our ongoing strategy is to bring the right products at the right price points to market through wholesale distribution. And we believe our recent acquisitions reinforce that direction.
OPI: Talking about acquisitions, are you working on a common technology platform for the firms you bought? What will the level of integration be?
WB: As we do our IT due diligence when making acquisitions we look for every opportunity to leverage these resources. To date, many of the backroom functions have been transitioned to common platforms.
Due to the uniqueness of these companies we have acquired to date the customer-facing platforms remain the same. As you know, IT security is top of mind for consumers and corporations, and a great deal of work and investment has gone into this effort to ensure the needed data protection for our customers and ourselves.
Whether we attempt to bring the acquired companies under one platform at some stage is yet to be determined.
OPI: On the subject of technology, you talked at your recent ABC event about dealers needing to embrace technology and taking a more long-term, rather than short-term, ROI view. Can you elaborate?
WB: There’s no question that all of us have to not only embrace technology, but we have to recognise the need for a commitment of resources – time, money and human capital. We feel we are doing our part at SPR, as are some dealers.
Our hope is that more dealers will take advantage of the technology tools that are currently available from SPR and the independent software providers.
OPI: Let’s go back to specific product categories. You have already mentioned the FBS opportunity. What are the best performers for you?
WB: Let’s first answer this question by focusing on these categories without our latest acquisitions. Clearly, FBS is our fastest-growing category. We have well-documented numbers that suggest our growth in this category far outpaces that of our competitors as the category has doubled as a percentage of our overall business over the past seven years. And this continues to be a focus for SPR on many fronts. Organically, we remain bullish on the future growth of this segment.
When you throw in the acquisitions, that growth explodes. And what that brings to SPR and our partners is tremendous opportunity. How we define that opportunity and how we communicate it has been revealed at our ABC event and will continue to be explored in subsequent meetings with our customers around the country.
Our second-fastest growing category is furniture. The strategies and business plans built around this segment have been impressive. We have consistently outperformed the industry and we do not expect that to change any time soon.
Our Lorell brand leads the way with a very strong compounded annual growth rate over the past few years, and the Diamond Dealer Program has been a smashing success.
OPI: Please tell me about your Guided Acquisition Program (GAP) and its progress so far?
WB: Our Guided Acquisition Program is now 30 months old and we have assisted over 70 dealers in the selling or acquisition of a business. We have also helped dealers in establishing a formal succession plan.
We are highly motivated to keep the IDC business within that same community. In addition, we also want to help dealers receive a fair price for their years of sweat equity. We have an aging demographic, but still a very bright future. Our industry has some very talented young executives in the business and that is hugely encouraging.
The use of independent third parties, especially in the way of business valuations, has gone a long way to accelerating the process of buying or selling a company and narrowing the delta that has historically existed in the perceived value of a business between buyer and seller. This is a key differentiator in helping buyers and sellers reach a fair valuation.
GAP focuses on how dealers can effectively create value over the long term through both organic and acquisition efforts. Our expectation is that through these efforts, independents can grow at a return on invested capital that is higher than the cost of capital.
OPI: On a rather different subject: are you – and if so, how – supporting the IS/TriMega EPIC Business Essentials initiative?
WB: EPIC’s charter is to help the dealer community win regional, co-op and national contracts. If dealers work with or through EPIC to accomplish these goals, SPR will be fully supportive of the effort.
This does not clash with any of our own initiatives. Our job is to support the IDC in their endeavour to win new business. Therefore, we support EPIC in their effort to win new business on behalf of the IDC.
OPI: To sum up, what will the future for independent dealers look like?
WB: We remain bullish about the future for many independent dealers. Like I said, those dealers that evolve by preparing for and embracing new product categories, invest in technology and utilise analytics and other business tools will grow. Those that do not, will not.
The big picture
In addition to a look at SPR with Wayne Beacham, here OPI talks to two of the top level executives at its parent, Genuine Parts Company (GPC) – CEO Paul Donahue and his predecessor and current Chairman Tom Gallagher.
OPI: Given the increasing blurring as well as expansion of product channels for resellers, what synergies do you see between SP Richards and other companies under the GPC umbrella?
Tom Gallagher: Back-office synergies are significant. A couple of examples would be our ability to leverage our global spend in key areas such as freight rates and sourcing. Freight rates for both ocean and ground are negotiated on behalf of all GPC companies which results in better overall rates.
We also continue to leverage our Global Sourcing Offices in Asia across all four of our businesses. This initiative, which began with just four people ten years ago in a small office in Shenzhen, has evolved to include an additional office in Shanghai and over 50 GPC associates today. This team provides sourcing capabilities, vendor oversight, logistics and, of course, quality control for all GPC subsidiaries.
We also see numerous opportunities as they relate to direct spend. Key product categories such as safety supplies, jan/san and industrial supplies cut across many of our business units. Our product teams are collaborating internally to ensure we are leveraging our total spend by category and are partnering with common vendors.
OPI: By the same token, are there any parts of GPC that are not a great fit anymore?
Paul Donahue: Portfolio evaluation is an ongoing process within GPC, both at corporate as well as individual business unit level.
As far as the four segments of GPC are concerned – automotive, industrial, office products and electrical – we are pleased to be in each of these segments and we continue to invest in them. All four are evolving and adapting to changing marketplaces, but they are each leaders in their respective industries and all are part of the long-term strategy for the portfolio composition of GPC.
OPI: You had your final Q2 conference call recently Tom. How would you say GPC overall and SPR in particular are positioned in the market right now?
TG: GPC is fortunate to have strong market presence in each of our businesses. We hold the number one or two position in each of the segments that we operate in, with good operating margins and financial profiles for each business. Yet, despite being number one or two, in no case do we have more than 10% of the total market share. So there is plenty of growth opportunity.
The key will be to ensure that we have the right growth strategy for each of the businesses, combined with a crisp and consistent execution of these strategies.
Specific to SPR, we feel that they have done a good job in transitioning and guiding their business through what has been the most dynamic and perhaps tumultuous period that the OP industry has ever experienced.
If we go back to the year 2000, SPR did about $1.3 billion in sales, almost exclusively in core office products, technology and furniture. Today they are a $2 billion company, still selling OP, technology products and furniture.
But in order to help their reseller partners capture new business and get a higher share of wallet with their customer base, SPR has expanded heavily into new product categories. And they have backed this up with sales training and marketing pieces to help resellers participate in these faster-growing new segments, while at the same time continuing their support for the more traditional categories.
PD: I’m certain that SPR will continue to evolve in the years ahead. Importantly, despite any industry changes that may lie ahead – and Wayne has already emphasised this – the SPR team will continue to operate as a pure distributor, selling only to reselling customers, and they will continue to be committed to the independent dealer community.
These have been and will continue to be their guiding operating principles.