Big Interview with Michael Brown

HiTouch Business Services has grown into a multi-division products and services provider that is set to exceed $300 million in sales this year. OPI speaks to CEO Michael Brown...

It’s been almost five years since Howard and Michael Brown – who had made Allied one of the most successful dealers in the US before selling it to Office Depot in 2006 – returned to the OP industry with the acquisition of MyOfficeProducts (MYOP).

MYOP is just one facet of a fast-growing portfolio of companies that are grouped together under the HiTouch Business Services banner. These include the Rentacrate and ShredX businesses that had been set up prior to the MYOP acquisition, and new divisions such as IT Simplify, designWorks and MyOfficeInnovations, as HiTouch morphs into, as its name suggests, a group that offers a broad service proposition to its business customers, helping to differentiate it from the competition and gain traction in large accounts.

With Howard acting as Chairman of the group, his son Michael has overseen the development of HiTouch over the past five years in his role as CEO. As he tells OPI, there is still plenty of room for growth and opportunities to be had from big-box consolidation.

OPI: Perhaps you could start with a rundown of the main developments at HiTouch over the past five years.

Michael Brown: When we bought MYOP in November 2010 it was doing around $125 million
 in revenue, but the issue was that it had no density. It was a non-stocking dealer and our job was to try and build up certain markets where there was potential for growth. 

So, where we had Rentacrate facilities, for example, we could combine them and create regional distribution centres where we could stock – crates, shredding, office supplies, anything and everything we do – and build out that hub-and-spoke model. 

So, over the past five years we have done about 15 acquisitions on the office supply side in different markets – a lot of them in Florida, Texas, Alabama, a couple in Washington DC – which then led to us having seven 50,000 sq ft-plus (5,000 sq m) regional distribution centres (RDCs) stocking 3,000 products. These are located in Tampa (FL), Saddle Brook (NJ), Baltimore (MD), Hayward (CA), La Vergne (TN), Chicago (IL) and Dallas (TX). They then supply in a hub-and-spoke model 24 other cross-docks, which has allowed us to really cover the US and build some density – although we do use some third-party distribution in some markets. 

If you take Florida, when we bought MYOP they were doing $5 million in office supplies; now they are doing about $40 million. So, on the OP side in the past five years it’s been about trying to build density, becoming a stocking dealer and building out that footprint to service all of our customers.

Then there has been a major focus on launching some new brands in the services area, and integrating all the companies onto one operational platform with seven different selling platforms. So it’s been about acquisitions and organic growth.

OPI: Is your distribution footprint where you want it to be?

MB: No, we’re going to continue growth in distribution. The Texas market would probably be the next RDC we enlarge; currently we only have a 25,000 sq ft facility there with about 500 products and we would like 3,000. We’re looking to grow that market because we have a lot of business in Houston and Dallas, not just in OP, but also on the Rentacrate side. 

Chicago is another market where we have a stocking facility, but it’s not a large enough regional stocking facility, so we’re looking to build that out, too.

OPI: So you’re looking to grow in areas where WB Mason doesn’t have a strong presence? 

MB: (laughs) We do have distribution in WB Mason areas, like New Jersey – which services the tri-state – and smaller facilities in Massachusetts and Pittsburgh. In the case of WB, it’s not that we necessarily avoid the geography they are in, it’s really what we have purchased with MYOP, which was not in the north-east at all. 

It’s not that we wouldn’t do an acquisition in the north-east, but it would have to be the right one. We did four acquisitions in the Washington DC market, but didn’t do any in New York because we didn’t feel that there was anything attractive. But I don’t think we’ll be buying an office supply dealer in Massachusetts! In the north-east you are just trading accounts on a daily basis. 

OPI: Do you think there is a similar DNA between MYOP & WB Mason?

MB: They are two different companies. I have a lot of respect for WB Mason and how they grow. They add anywhere between 60-100 sales people every year and they have a very regimented and replicated model of customer acquisition, with sales people, the price books and so forth. While on the OP side we do have that additional legacy rep, old-style industry relationship, we also have a lot more in what I’d call the enterprise side. 

WB Mason and we are very different in how we go out to market. WB’s density and concentration is great, the delivery and emphasis on the driver’s relationship with the customer is great and I think its customer service is great; it’s a model that works for them. For us, that hunter/farmer type model is not something we do today, although that would probably be the next wave. You make an acquisition, have an RDC and now can go out and have this hunter/farmer model in certain markets. 

That’s something we actually did years ago in Tennessee to gain density around our distribution centre and be successful, but we then turned it all back into inside sales and moved into another direction. 

OPI: Why did you do that?

MB: When we bought MYOP – which was itself a roll-up of many acquisitions – each sales person could probably count 700 customers, with 50% of them dormant and the 80/20 rule with lots of smaller customers they never called on. So we built an inside sales team and took the number of accounts down from 700 to probably 60-100 that the reps would physically call on. This allowed us to take those smaller customers and put them in inside sales. 

We want our sales people more focused on maintaining and cross-selling current larger accounts and opening up new, larger accounts, and this allowed them to do that. So now we have about 80% of customers being handled by inside sales.

OPI: What is the size of the sales team?

MB: Nationwide, we have a little over 180 sales people. Inside, we have about 25-30 focused on that traditional, transactional OP-type business, although they also do some furniture and what we call MPS ‘light’.

OPI: How do you think the market has changed in the past five years?

MB: I see that everyone has gravitated towards… I don’t want to say a ‘me too’, but the OP industry went and annihilated the office coffee industry and now it wants to do that to the jan/san arena. A lot of this is staving off the inevitable in different people’s cases, but from a competitive standpoint, the big change to me is not a ‘who’, it is the technology. It is the fact that in more and more industries there are fewer people working in an office, there is less need for OP and more need for technology than anything else.

The Fortune 1000 companies have been shedding real estate, going more to a hotel modelling situation and everyone’s becoming more and more mobile. So while the products are being bought per se, they’re just not coming into the contract stationer. I can either a) wait to be irrelevant or b) try to get ahead of the game and try to become more of a multiple services provider than a transactional provider.

OPI: It’s been difficult for OP dealers to compete in this technology space.

MB: They’re not even there.

OPI: Are you there?

MB: We’re there because we have a separate company to make sure we’re there. If I take HP, for instance, I have a managed print services division which is a certain certification that allows for certain pricing, and you have to stick to that within that area. Then I’ve got the transactional OP and then, in the IT Simplify division, I’m selling laptops and other enterprise and managed services. 

I’m talking about areas like the cloud, IT hardware, IT software for things such as asset management, space utilisation studies and conference room reservation software. We have engineers on staff who are certified with Cisco, Apple, HP, Lenovo, networking, enterprise solutions, document workflow, etc. 

Our old strategy was to be branded at Allied as one. Our new strategy, with wanting to be in all these businesses – and to make sure the manufacturers know we were committed to all those – is to have these separate selling entities that have their own business leaders and who just focus on that piece, and that is very helpful.

OPI: How did you perform last year?

MB: In 2014 we did around $270 million. We have a budget of over $320 million for this year, and in the first three months we were 9% ahead of that budget.

OPI: What percentage of total business is done by each of your divisions?

MB: MYOP is 60-65% of overall sales and that includes our educational product sales; Rentacrate and ShredX together are about 5-10%; IT Simplify is about 8-12%; designWorks, which is our Grade A furniture business, is about 6-10%; and then we’ve got an e-commerce operation – branded as MyOfficeInnovations – that makes up about 8-12%. From an organic perspective MyOfficeInnovations has been doubling in size each year for the past three years; IT Simplify has done the same for the past two years. Overall, the company has been growing 20%-plus every year.

OPI: Can you say something more about MyOfficeInnovations?

MB: MyOfficeInnovations is our B2C model and helps us move inventory; it brings in great volume, great cash flow and gets us into automated business. We have proprietary software that was written; and if I say that tomorrow I want to sell $200,000 of this product, it combs the web, tells us what price we need to be at, and it’s a pretty good indicator of what we need to do. So if I have got heavy inventory on a certain product and I want to relieve that product, I can do so. 

It’s about leveraging distribution centre capacity. I’ve already got all the infrastructure in place, so for me to post anyway, either on my own site or someone else’s third-party site, it’s nothing. Most people today who are buying that way are buying on price, so I can fulfil that need without really doing anything except picking and packing. I only have to use technology from the sales and marketing side; I’m just a fulfilment person.

OPI: It sounds like it’s doing around $30 million, which is not a number to be sniffed at. 

MB: And we should grow by over 10% this year.

OPI: What are the cross-sell opportunities between the different divisions?

MB: They’re tremendous. If you look at our IT Simplify business, for example, 40% of our revenue last year came from our existing customer base. Rentacrate deals with Fortune 1000 and very large companies and it has been able to gain business for IT Simplify, coffee, office supplies, etc.

I have two Presidents: John Frisk, who was the original President of MYOP, and Joe Aiello, who was the original Head of Sales at Allied – he takes care more of the services business while John takes care of the transactional, OP side of the business. The two of them are working together as co-Presidents on pretty much a daily basis on initiatives to penetrate each other’s customers. 

OPI: What other services have you developed?

MB: The interesting thing is that the services industry has such a long selling cycle. In 2004, we launched MPS and we were way ahead of the curve then. We became the exclusive North American dealer for a software solution called Condeco a year and a half ago, and it’s been a similar situation – we would get an appointment but we couldn’t really sell it.

Today, because of what’s happening in the real estate market and people getting rid of real estate, we have 3-4 presentations a week that we are making on a nationwide basis and it’s a challenge keeping up.

It took virtually two years to get that going. When it finally gets into the system – and it will probably be nearer the end of 2015 – it will all be recurring buying and incremental revenue.

OPI: What is this software exactly?

MB: Condeco is used for conference room reservations, hotelling, looking at the utilisation of desks and being able to right-size your footprint and optimise your space. When we’re pitching a furniture job, the software is part and parcel of that.

OPI: You said MYOP is more than 60% of your business. Where do you think that number will be in a few years’ time?

MB: Depending on what happens in the market, it could continue that way. Right now, we’re seeing tremendous success in the IT solutions business – and that’s organic growth, penetrating our existing customers, so that could be a runaway for us like Keurig was a few years ago. 

We’re always going to be in OP, but in a lot of cases, it’s just paper and toner. In what people call the traditional OP market, I can tell you we don’t sell certain products anymore. But other than that everything’s pretty good.

OPI: What do you think of the proposed Staples/Office Depot merger?

MB: It makes for a very interesting time in the industry but, personally, I don’t believe it will happen.

OPI: Really?

MB: Number one, the Comcast/Time Warner thing didn’t help them [Editor’s note: the merger was blocked by the antitrust authorities]. I think it is very clear that in the Depot/OfficeMax merger, the FTC cited Staples as a competitor, but now who’s left? Theoretically, if the merger was to happen – which, again, I don’t think it will – Staples would control almost all of the Fortune 1000 customer accounts. 

Number two, the big issue is that with the larger accounts, and even some of the larger medium-sized ones, there is no one else that can write the prebate cheques that are required to win the business in these accounts. We can feasibly write a couple, but the big boxes are writing anything between 8-15% of sales up front to get that business – there’s no one else that can afford that.

OPI: So you think the FTC will impose conditions or requirements?

MB: If that were to happen, we see tremendous upside because a) if there were a spin-off of an asset we would be in the market to buy it and b) we would be the only other national footprint with sales people to be able to compete against Staples; there always has to be a number one and a number two…

OPI: Someone like AOPD might disagree with that line of thinking.

MB: I hear you, but – and nothing against AOPD – I think they would have a hard time competing against us or Staples in front of the customer. In the larger, national customers, it’s not a traditional sell; it’s like doing an acquisition: there’s computer integration, standardised pricing, rules that have to be put in place for every market, etc.

Then, within certain markets you might have to provide specific services that you need to offset in other markets. For example, if I have to do pantry put-away in the New York City market that means I lose money there, but I don’t have to offer that service in other markets, so overall I’m making money. I think that would be a harder thing to make happen with the AOPD model.

Look, to get a Fortune 1000 company you need big money; it would be a big leap of faith for that Fortune 1000 company to say: ‘OK, I’m going to give this vendor $15 million of business when they’re only doing X amount of business in total.’ 

So it’s just the financial wherewithal to handle all of that, and I don’t think anyone [in an enterprise purchasing department] would get fired for choosing Staples. 

OPI: What would a Staples/Depot merger mean for the wholesaling channel?

MB: Personally, I don’t think it would be a game-changer. I don’t think Staples would go with one anyway; there’s a place for both of them, especially during the integration phase, with moving everything around, etc.

OPI: What did you make of the recent Amazon Business announcement?

MB: We’re very big partners of Amazon. We do a lot of business with them as a third-party exchange and we also do a lot of business with them in other areas that are not just OP.

OPI: For example?

MB: My family are investors in a toy company called Alex Toys. Last year, in a three-week period during the fourth quarter, we sold $2 million worth of toys on Amazon. Now, it’s a distribution play; I have no sales people. To be able to sell toys on Amazon, you have to be integrated and have certain ratings, so we’re doing both their FBA [Fulfilled By Amazon] business and looking geographically in areas with them where they want to do B2B. I’m actually going to meet with Amazon in Seattle shortly.

OPI: What could this Amazon Business platform mean for office resellers?

MB: It’s interesting. When you read the announcement, they’re talking about two-day delivery; I don’t know if that works. I know that Amazon has hired sales people. If they can execute correctly, they can be a real transactional killer. If they went with the MYOP model, the B2B model, I think they could clean house.

OPI: Which is what everyone’s concerned about. What’s stopping them?

MB: I’m personally not afraid because we keep diversifying out of the price/transactional model. If I were an independent dealer in a particular marketplace – and especially in a high-visibility marketplace – and I had the legacy-type reps who are big earners, I would be very nervous about WB Mason, Amazon and about whether this Staples situation happens. Very nervous. 

In a lot of cases, these guys could go in at 50 below zero and wipe out a $20-$30 million dealer – which in this industry is a good-sized dealer – in a minute, because it’s all transactional and it’s all price. 

We’ll see. But I do believe that getting into the more sophisticated accounts and at the same time making them feel as though they are important customers that are tied into upper management, then that’s our bread and butter, even in the Fortune 1000. In fact, I’m flying down to a customer next week; we just do coffee with them on a nationwide basis and I’m going down there specifically because it’s a ‘thank you’ visit, a ‘what else can we do for you’ opportunity, given what else is going on in the marketplace with Staples and Depot.

I don’t think there are too many CEOs who are jumping on planes to get in front of the customer.

OPI: We haven’t mentioned your father. How is he doing?

MB: My father is great! While he spends some time in Florida, he is extremely active, especially on the OP side. Let there be no mistake, there is no one that has the passion for our industry and our business than my father – it’s in his blood. He’s in front of our customers, the manufacturers, the wholesalers, acquisitions and the employees. That’s why we have had great success: while he is focused on the traditional business, I’m building out the services end of our business.  

OPI: What is your strategy for the next 18 months to two years?

MB: There are two paths we are going along. One is to continue to make acquisitions, to grow organically, to cross-sell and to continue to achieve more density. At the same time, whatever happens with this [Staples/Office Depot] merger could dictate a major move for us if there is a spin-off requirement.