Despite the uncertainties surrounding the office supplies industry, United Stationers’ share price is bucking the trend and is trading at an all-time high.
That market confidence is testament to a diversification strategy that began in the cleaning and breakroom categories and has now extended into industrial supplies. Not that United is neglecting its traditional office supplies resellers. Far from it, says CEO Cody Phipps, who took over from Dick Gochnauer two and half years ago and has just celebrated being with the wholesaler for a decade.
OPI travelled to Chicago to get Phipps’ take on the challenges facing the office supplies community and why he feels United is well placed to help its customers grow.
OPI: You took over from Dick [Gochnauer, former United Stationers President & CEO] in May 2011 after a well-planned succession period. What did you take away from his leadership in terms of lessons and experience?
CP: Well, first of all Dick was a great mentor to me. It was really an honour and a privilege and I’m fortunate that I was able to work with him for nine years and watch him in action. I think Dick shaped the culture of United, the culture of what we call ‘servant leadership’. He’s recognised as really the person that brought that to United and that lives on today.
I think Dick and I were good complements in some ways because he was a very detailed bottom-up thinker and I was a little more of a big picture, top-down thinker.
OPI: You took over during a difficult period for the economy. What were your plans, goals or aspirations for the business when you succeeded Dick?
CP: We are certainly still challenged with the economy. We don’t see a lot of tailwinds out there and so as we think about our future we believe a lot of it is going to have to be driven by our own initiatives.
The luxury I had coming in and following Dick is I was one of the architects of our strategic plan, and therefore when the transition took place it wasn’t like I had to come in and reinvent a new plan; it was really a question of ‘sharpen our pencil’ and go execute the plan we have.
And our plan really has two main components: one is to strengthen the core businesses in light of the economic times and the digitisation of the office, and the second is to diversify our company into higher growth channels and categories.
Early on I was accused of turning away from office products, but I don’t see it that way at all. I think it’s understanding the situation in office products and the digitisation of those products and then recognising that the company needs to diversify into other products that fit our business model. The good news is it’s the same advice we’re giving our customers. We’re not asking them to do something that we don’t think is important for ourselves.
OPI: Just how great a threat is this process of digitisation and decline in traditional office products? I get various sentiments from people – some border on complacency, some border on paranoia and panic. Where do you sit on that scale?
CP: I’m probably a little to the right on the paranoid side because I think it’s good to have a healthy sense of paranoia.
And let me tell you why I say that. We studied this phenomenon three or four years ago – I think we were one of the first to really get our arms around it. And I was at IBM when they claimed we were going to have a paperless office and I don’t think this ever really came into fruition the way people thought; in some ways maybe it was over hyped.
So when we first started thinking about digitisation of the office, I thought it was the ‘iPad effect’ and all this stuff going digital. But as we really got in and understood it, it was the effect of that compounded with cloud storage. Compound that now with the new millennials entering the workforce – I have four of them in my family and they just don’t use traditional office products the same way we do. And we’ve confirmed through other studies that as these folks come into the workplace they consume fewer office products.
So am I paranoid? No, I’m not paranoid but I believe in this digitisation of the office. I feel it’s having a profound effect on our industry and I think the smart players are recognising that and they’re really shifting their business model and becoming something different – leveraging their strengths, but also heading in a new direction to remain successful.
OPI: Do you get the sense that the vendors share that same degree or margin of paranoia and are doing something about it?
CP: I would venture to say they all have that same sense that digitisation is real, that consumption is likely to decline further and that companies have to take
action: redirect their business models, redirect their product portfolios and come up with more product innovation if you’re a manufacturer.
OPI: Are the vendors in our field willing or able to adapt quickly enough?
CP: I know all of our good partners are trying. Time will tell how successful everybody is, but I think everybody understands this change and is attempting to shift their business models to address it.
OPI: With that in mind, what organisational or structural changes have you had to make to the organisation?
CP: Well, a key area is strengthening our core, and we have two fundamental tenets to that. One is win the shift to online, because we think these products are going online and so we’ve taken some action to strengthen our organisation that way.
A second fundamental tenet of strength in our core is to become easier to do business with. As we’ve gone out and talked to customers and suppliers and even looked at consumer research, we believe that consumers want to buy more of these products from a single source.
They want easy digital access through e-commerce sites and want to get more products in a single box. So we made a move several years ago to move the operations of our three platforms to one shared service model and that included facilities and logistics.
And now we’re contemplating more ways to become easier to do business with and provide more seamless product offerings and services – it’s an ongoing thing.
OPI: That gives me a nice link into your trUchoice programme, which did throw up some issues between yourselves and the dealer groups a few months back. Where are we now with that?
CP: TrUchoice is one element of a larger programme, which is 1) the ability to truly choose how you want to do business with United and 2) us recognising that we have to lower costs in the supply chain and offer more flexibility so our resellers can be competitive.
One component of that is expanding capability to buy a wider variety of products in a variety of different methods, from drop-ship all the way up to direct truckloads. That’s the capability we want to bring to our resellers because they’re asking for it.
It was portrayed as some kind of assault on the buying groups, but that’s not it at all. It is our effort to broaden our service offering to the larger players who are saying, “I need this or I’m going to get it somewhere else”. So, we’re trying to work hard to reposition trUchoice because it got off on the wrong foot.
OPI: The groups seem to think it will damage the collaborative balance of the industry. Do you understand their point of view?
CP: I do to a point, but I believe the industry has to change and, at the forefront of that change, is providing the services that our dealers need to compete. And at the forefront of that is lowering our total supply chain costs. Beyond that we’re quite willing to partner with anybody in the value chain who can help do that on behalf of our dealers.
And so ‘Winning From the Middle’ isn’t always without its own little bumps in the road and we tend to work through those. But where I gain confidence in all this is, at the end of the day, all of the 3PVs, the buying groups and the wholesalers, they all have a vested interest in helping the independents being more successful, more competitive and more adaptive to the changing environment.
So, despite all the discussions around these things, I feel we’ll find common ground because that’s in all of our best interests to do so.
OPI: How would you describe your relationship with the dealer groups?
CP: We’ve always had a collaborative relationship with the two main groups and we support them. I think they are coming together now – there’s certainly talk about that – which is probably a good move. I do think their model will morph and change, just like our model’s changing. I don’t have all the answers to what that will look like, but I think we’re all facing a future that has us with different business models and different approaches.
OPI: When you talk about dealers you’re talking about customers; when the groups talk about dealers, they’re talking about members. There’s a pretty significant difference between the two.
CP: I think there are some things they can do as co-operatives that we can’t do and there are things we can do as a $5 billion company that they can’t do.
So I believe that the relationships are going to remain strong, but probably we’re going to emphasise new areas of opportunity. For instance, I believe it’s in all of our dealers’ best interests to go online as it is with the groups to go online, so I think there will be collaboration on that front.
As we think about broadening the portfolio of products we sell, the groups may need to take on a role in other categories, or work with the wholesaler to find a way to bring lower cost of goods to the customers.
If you think about our ‘7 Moves to Win’, there’s a real question about what role the groups will play in those 7 Moves and how can we collaborate. And that’s some of the dialogue we’re having with them.
OPI: You referred to your ‘7 Moves to Win’ and that was a key element of your last Vision event. Fast forward almost a year and how’s that panned out?
CP: I think we’re having a great deal of success. Basically, underlying the ‘7 Moves to Win’ was a subtle message from us to our customers that we view the need to change as your partner. As I’ve said to many of our customers, the only thing I’m certain of is that the status quo is a bad strategy.
This is not a time when we can sit and wait out the economy and hope things go back to the way they were. That won’t happen. And so the subtle message we had in the ‘7 Moves to Win’ was, “This is what we’re seeing; this is the insight we’re gleaning from it; this is where we’re going as a company and as your partner, and we think we should go there together”
And that’s really what drove the ‘7 Moves to Win’ and I think we’ve had a really great reception from our customers on that. We’re seeing our leading customers adopt those principles, think more about online, target their campaigns, sell their sales force and sell their brand.
OPI: Have you’ve seen any impact on their revenues and therefore your business with them?
CP: We’re running pilots on various aspects of it and we’re encouraged by those. I can say that when we see customers successfully go online and successfully market themselves, we’re seeing an uptick in sales and they’re seeing it as well. If we didn’t we would stop.
Our customers are kind of black and white in that respect, so they see the need and we’re seeing progress. I think one of the things we learned is it takes time.
The strength of these entrepreneurs is their adaptability and you’ve got to convince them and they need to convince themselves, but once they get going then they’re a real force.
So we’re probably still in the formative stages, but I would say the reception of those ‘7 Moves to Win’ has all been very encouraging, despite the overall economic environment and despite the clouds hanging over office products due to digitisation. So we’re bullish on that.
OPI: The term ‘business essentials’ has cropped up in some of your recent conference calls and press releases, and we’ve even suggested that ‘United Business Essentials’ might be the new name for the organisation. What can you share with us on your repositioning and rebranding?
CP: I’ve said publicly that we need to reposition the company. People ask me about renaming and rebranding the company, but for me it’s more about repositioning our company to the business that we are today and where we’re going.
When I joined the company ten years ago we were 87% office products; today we’re 62%. What we like about the term ‘business essentials’ is that it recognises where the business is going and how it’s broadening, and that’s the positioning we’re going after. I don’t feel a great need to rush out with a new name.
I do feel the need for our company to build the requisite capabilities to deliver against that promise and, in the process of doing that, reposition and eventually rename the company.
OPI: Cleaning and breakroom is now your second largest category. You have just revamped your breakroom offer and rolled out your jan/san Fresh programme. You obviously still see a lot of upside in this category.
CP: Yes, janitorial and breakroom are still the fastest growing categories within the office products channel and I think it’s fairly well known that the channels between the office suppliers and jan/san distributors are blurring.
What’s playing out, is that leading office product players offer a superior value proposition. They’re e-commerce enabled, deliver every day, are capital light and showing up in the office. So they naturally view that as a very attractive adjacency.
Quite frankly, we didn’t think we put our best foot forwards in enabling that, so we’re taking moves to make our platform easier to do business with. We’re lowering the cost of those transactions, providing new marketing programmes like Fresh to broaden what we sell and are providing new capabilities.
Again, as part of the effort to become a broader market player, that’s one of the nearest opportunities. Everybody knows it and is chasing it, and we’re trying to provide more services and capabilities to help our independent dealers successfully go after that opportunity.
OPI: But what about cost of goods? I’m hearing that dealers just can’t be price competitive at the moment.
CP: You’ve got two channels that are merging and there’s different pricing between the two. You’ve got to navigate that carefully, but we believe we can bring our scale to bear to help independents be more successful in the category.
The capabilities, the breadth of the product line that we’re offering and the cost of goods we’re bringing are being very well received. I think we’ve got more work to do there, but I think it’s an attractive and exciting opportunity for the independents.
OPI: And can a traditional independent reseller sales rep sell cleaning fluids and toilet paper?
CP: According to figures we have from last year, our average penetration of these products into the OP channel was around 7%. But as with all things we have very successful resellers who have penetrated to the tune of 20%-plus.
OPI: And what have they done that’s different?
CP: They’ve made investments and increased capabilities. They’ve hired experts at selling the product and they’ve understood some of the equipment needs in the industry, whether it’s dispensers or cleaning equipment.
So there’s a casual reseller in the marketplace that gets to that 7% and then there’s the ‘power-user’ who’s really going after that category and they invest at a different level and we’re trying to tailor our programmes to help both.
OPI: I have to ask you about the Office Depot/OfficeMax merger. I know you’ve referred to that before as a potentially positive event for United. Is that still your take?
CP: Yes, and the reason we view it as an opportunity is that it’s less and less about shaving a point off your supplier relationship.
It’s increasingly becoming important that the partner you choose can help you go to where this industry needs to go, and our whole strategy is designed around broadening what we sell, making it easier to get those products and making them digitally sourced.
We tend to win bigger, more sophisticated customers because of that and, as those two companies come together, we think we have a good shot of winning that business.
We’re first call today with OfficeMax and second call with Office Depot, so they’re both our customers; and we think they’re going to look for a partner that can help them with all the important parts of their strategy: broadening what they sell, getting more SKUs online, being capital smart.
Again, we think we’re very well positioned to help them do that because of our physical assets and the size of our distribution network, as well as the new e-business capabilities that we’re building.
OPI: Is there a danger that the combined entity will look at your relationship with Staples and lean towards giving their business to SP Richards?
CP: There’s always that risk. There’s that risk in any one of our customer relationships. Again, I think what we stand on is the value that we can bring to those customers and I think it’s very compelling. We like our odds in that, but nothing’s guaranteed.
OPI: I guess no interview with the United CEO would be complete without mentioning WB Mason, which is your largest privately owned customer. What should the industry and your other independent resellers learn from the success of WB Mason and its operating model?
CP: First of all, I think WB Mason has been a phenomenal success. They’ve shown growth that is enviable in our industry and I think what they’ve done is to really understand what they bring as an independent dealer and what we bring as a wholesaler. So they bring that high-touch customer intimacy and a very strong sales culture, and we bring scale and logistics expertise to bring that to life.
What I’m really pleased about is that together, and not just with them but all of our successful resellers, we’re now starting to understand that we can take that relationship and do the other things that are important, such as broaden what we sell, become more e-commerce enabled, be more capital smart.
And I think they’re one of the players that are doing very well and are going to be one of the successful leaders.
OPI: This is where I ambush you with a couple of things that you may not want to answer.
CP: And I evade skilfully.
OPI: I wanted to ask you about the lawsuit that’s come out of the SAP debacle, involving the Sage Group. It’s a substantial amount of money being claimed and they’re naming dealers as well. What can you say about this?
CP: First, I would never refer to it as ‘the SAP debacle’. I think we made investments and raised a whole industry up as a result of that. And second, I can’t discuss ongoing legal matters in this interview.
OPI: OK, I had to ask the question. Secondly, it was suggested to me recently that Genuine Parts may look to divest SP Richards at some stage.
If that were to happen, do you envisage a situation where the industry would allow you to acquire your primary office products competitor?
CP: I can’t predict what the industry would or wouldn’t allow. What I can tell you is that the industry is evolving and it is consolidating.
I don’t think many people ten years ago when I joined United would have said that Corporate Express would be merged with Staples and that OfficeMax and Office Depot would be coming together, although there was talk of it.
So, as the industry evolves is there going to be more consolidation and could that consolidation happen at the wholesale level? I believe it could. Will it be well received by everybody? Probably not. But the one thing I can say is the industry is changing and it’s dynamic and the winners are going to be those that recognise those changes and adapt. So I would not rule out the possibility of something like that happening.