What started out as an idea in a student flat in Germany became, for a while, a very new, innovative and hugely successful business model, particularly so in the then still very traditional German market. But soft-carrier and its owner/CEO Thomas Veit have had to constantly evolve and reinvent themselves in order to survive and – better even – thrive in a sector that has seen many global competitors staking a claim.
Most importantly, however, its original raison d’être – the distribution of IT and computer-related products – has changed so dramatically through price erosion and technological advances that Veit has had no choice but to change tack and make soft-carrier the broadline, service-orientated OP wholesaler that it is today. But times are tough, he admits in a frank interview with OPI’s Heike Dieckmann…
OPI: Before we start with soft-carrier’s business performance, revenues, product spread etc, can you just take me through the company structure?
TV: Sure. I own the business and it operates under Luxembourg law as a limited company, so soft-carrier SA is the parent company of all the subsidiaries. These include businesses in Germany, France, Luxembourg, Switzerland and Austria.The largest and most active of them is soft-carrier here in Trierweiler, Germany, where our logistics centre is located. That said, all our administrative functions are carried out in Luxembourg.
OPI: Why Luxembourg?
TV: Well, it’s very close to Trierweiler, only about 30km away. And Luxembourg offers great advantages for employees – taxes and social security contributions are much lower and the state of Luxembourg also contributes to these social security payments; that’s quite different from many other countries. So there are several advantages and many people in the border area here in Germany simply prefer to work in Luxembourg. That’s why we looked at a business model that would accommodate this peculiar situation. Soft-carrier itself also enjoyed a one-off tax bonus at the time of company set-up.
So basically, all employees working in Luxembourg – that’s about 30 people – fall under that country’s employment law, and that includes everyone working in sales, marketing, purchasing and accountancy, for example. They all live in Germany and commute on a daily basis. All the employees here in our logistics centre, meanwhile, are employed and paid according to German law.
OPI: How many staff do you have in total?
TV: We are a very lean organisation and have a total of 120 staff. So 30 of those are in Luxembourg, six in France, one in Switzerland and the rest here in Trierweiler.
OPI: Are these numbers representative of the size of your various markets?
TV: Sort of, with the exception of Luxembourg which is a very small country so that would only be about 1% of overall revenues. I mentioned Austria as a subsidiary earlier, but that’s basically just a post box. We then have a partner in Switzerland and that was actually our first foray outside Germany. Switzerland now accounts for about 5% of our total revenues and considering that’s all done by one person in the field, we are very happy with that.
The French joined us in 2006 when we set up a joint venture with Papeterie de l’Est, a Colmar-based – again very near the German border – wholesaler of office supplies. It’s interesting that Germany is without a doubt our strongest market, but it’s in France where we’re seeing the biggest growth and that is also very atypical for the market. So France is currently about 20% of total revenue, but I can see that growing to 30-35% over time.
OPI: In terms of deliveries, all your orders outside Germany are fulfilled from your German logistics centre, aren’t they?
TV: Yes, they are. We can service Switzerland within 24 hours and also most of France. Some areas take 48 hours, but that’s never been a problem.
OPI: I’ll get back to country specifics in a moment, but for now can you tell me a bit more about your current turnover and how that’s developing?
TV: Our revenues are about €65 million ($86 million) and they really haven’t changed much in the last few years. We now have a lot more products – over 50,000 in total – and also some very different products from when we started, but, generally speaking, their individual value is a lot lower. Especially when it comes to IT products, prices have fallen so dramatically that you almost can’t compare them anymore. Products like switches, which 15 years ago cost DM500 each, don’t cost more than €25 today – and they are technically much more advanced. In some categories, prices have dropped as much as 90%.
OPI: That’s phenomenal. What did you do when that started to happen?
TV: We had no choice – we had to move into new products areas and acquire new customers. Sales in our IT supplies range have been decreasing rapidly, for example, but we’ve been able to completely offset this extreme drop with office supplies. In fact, OP has become a considerably stronger category for us than everything to do with computers and IT; it’s about 60% of the whole business now. The whole IT category accounts for about 30% and that includes anything from Apple accessories over network cables, connectors and switches to consumables. We don’t sell hardware or components.
The remaining 10% come from our creative and school ranges, including presents, greeting cards, wrapping paper, etc, and a ‘miscellaneous’ category that comprises largely facilities management (FM) products. These two segments are worth 5% each.
OPI: Everybody’s talking about FM at the moment. Is that a new category for you and have you introduced it as a result of customer demand?
TV: I can honestly say that I have never experienced customers driving serious product range expansions. They don’t say to us that we should include hospitality products, toiletries or whatever it may be. Basically, we throw something into the ring and see how customers react to it.
But to answer your question, we’ve been selling FM for about five years now. The reason everyone’s talking about it now is because we are all losing our traditional revenue sources; for us it’s IT supplies, for many of our competitors it’s office supplies. The market is shrinking, revenues are under threat and everyone’s looking for products that can offset and compensate for this shortfall. And in the age of the one-stop-shop, customers like to get everything from one place, especially c-category items.
OPI: How do the margins in these ‘new’ categories compare?
TV: To be quite frank, they are rubbish everywhere. As a distributor/wholesaler, you can optimise your margins much more with accessories than with, say, hardware or components.
That said, with printing accessories, you absolutely can’t. Office supplies have slightly better margins than most IT-related products unless it’s certain accessories, but as a general rule we haven’t found that any of our relatively new categories – creative and FM for example, have helped us improve our margins.
OPI: Soft-carrier doesn’t have an own brand and never has, is that right?
TV: That’s correct and we will keep it that way. All the other OP wholesalers have been trying to establish themselves in this area, with 5 Star, Q-Connect and so on, with varying degrees of success. Soft-carrier made the very conscious decision to only distribute branded goods and that clearly differentiates us from our competitors.
It also really helps with our relationships with vendors. When our competitors sell 30-35% of own brand goods, it’s very attractive for vendors to be working with a partner that deals with branded goods only.
OPI: You also have something like a ‘brand shop’, haven’t you?
TV: Yes, we do. We’ve been offering our dealer partners access to this online shop/catalogue of branded office supplies since 2006. It’s very well used, with over 4,000 dealers signed up at the moment. Basically, they have to spend €1,000 a month in the shop to get a 10% rebate at the end of that month. There’s also a similar concept for technology products where dealers get a 5% rebate at the end of the calendar year if they order at least €3,000 worth of products. Initiatives like these help both vendors and dealers create brand awareness and loyalty.
OPI: You mention independents – do they make up your core customer base?
TV: Definitely. About 80% of our business comes from traditional independent dealers, often with a small retail presence. The remaining 20% of revenues are generated through web-based operators, some very large ones, some smaller ones.
We increasingly work with companies that think like us and work like us. By that, I mean they believe in and work with modern technology, are IT-led and are often using web-based shops and web platforms. It’s often the larger clients that operate like that, but the traditional ones are also catching up.
OPI: Do you work with Amazon?
TV: We don’t. Amazon is a very two-edged sword and a difficult concept for independent dealers in Germany. On the one hand, Amazon cannibalises their revenues while on the other hand it’s of course also a path to generate sales.
OPI: Let’s move on to your competitors. Presumably they are quite different now to what they were years ago?
TV: Yes. When we started out with only computer accessories, the large distributors like Ingram Micro and Tech Data didn’t exist in Germany. That all started with Computer 2000 (now part of Tech Data) and most of the competitors at the time were small regional or national competitors that then merged with the global businesses.
With the much more expanded range we have today, the situation is quite different. ADVEO is probably our biggest competitor now, in France as well as in Germany. In Germany, PBS Deutschland should be added to the list, and of course we also compete with Büroring and Soennenecken, as they both offer distribution facilities.
I don’t think ADVEO is much bigger than soft-carrier in Germany anymore, but in France it’s considerably larger. The French market, in wholesale terms, is very consolidated already, much of it due to previous Spicers acquisitions. It’s now completely dominated by ADVEO but I believe this presents real opportunities for an agile operator like soft-carrier. We are independent and we can offer an alternative. We may not be the first call wholesaler for many, but we are often chosen to be the secondary source of supply.
It’s a very interesting situation in France, The market is under enormous pressure – much more so than in Germany – and it’s growing very well for us, even in 2013 when we are suffering losses in other markets.
OPI: Calipage dealers in France are of course linked to ADVEO, so are you losing out on that front?
TV: Even Calipage dealers are customers and often we are their secondary supplier, although ADVEO would rather they weren’t.
But without doubt, Calipage is a very strong brand in France – quite different than in Germany – partly for reasons of convenience and partly because of a lack of alternatives, and soon there won’t be many independent dealers left that are not tied into such a scheme.
But I don’t see that as a threat, rather as an opportunity. Such a strong tendency towards monopolisation always leads – if the state allows it – to the emergence and thriving of alternative independent organisations that have the freedom to establish something new with others and to develop their businesses. We are such an independent.
OPI: So going back to the competition, what’s the situation with PBS Deutschland – you don’t hear much from them?
TV: I can’t say much about that, except that the situation is very tense there and that, as you say, it’s gone very quiet. But, to be honest, it’s very quiet in the market as a whole, almost for the past year now. Since last autumn, there’s been enormous pressure on the market and we simply don’t know how our various competitors will hold out.
OPI: Why since last autumn in particular?
TV: I don’t know. It’s as if a button was pressed. All the conversations we’ve been having, especially with OP manufacturers, show that they have suffered enormous setbacks – up to a 20% loss in revenues, and in the area of printer supplies, in some months it’s been up to 30-40%.
Why this started happening towards the end of last year is a mystery to me, especially in Germany, where the market is in a better state than in many other countries. It’s affecting th
whole industry – manufacturers, competitors, resellers; I don’t know if it’s due to the growing paperless office, the conservation of resources or even the saturation and overstocking by end-users.
In the technology category, it’s even worse – negative growth wherever you look. The PC market in Germany shrunk by more than 20% in the first few months of 2013. The only products that are doing well are tablets and smartphones.
So much is being replaced by digital and virtual products now. I see it happening in my own company. We’re working on virtual desks, with virtual servers. We are still printing things like delivery notices, but even that is being scaled down substantially. Employees almost have to justify themselves nowadays if they print something.
OPI: On this note, I read that you haven’t had any printed catalogues since 2007. Is that because of environmental concerns?
TV: Let me put it like this: first and foremost, I’m an economist, but within that context I take environmental concerns very seriously. For example, if I can use a cardboard box from an order arrival again at order despatch, it’s firstly beneficial from a financial perspective. We don’t waste any material, we reuse wherever we can and all that obviously has an enormous impact on the environment, but my starting point is always whether it makes economic sense.
OPI: Going back to the struggles in the German market, you said earlier that revenues at soft-carrier have been fairly stable, so is this depressing situation not affecting you?
TV: Revenues are stable, correct, but what we are finding is that we have to work much harder for those revenues. We’re picking more positions, we’re sending out more orders and parcels. The trend is definitely that order sizes are getting smaller. Our customers are also demanding a lot more in terms of fulfilment services.
We deliver, for example, much more directly to the end-consumer now, on behalf of the dealers. This trend has developed enormously over the years, and since 2009 it’s certainly doubled. Many dealers see soft-carrier as their warehouse, a place where they can source their goods within 24 or 48 hours. They have a lot less capital tied up in logistics which they can invest back into their shop or B2B business. For web-based clients, it’s often the case anyway that they don’t have a warehouse, but even for the more traditional dealers, using us as their warehouse eases the pressure on cash flow.
OPI: Soennecken’s Dr Erdmann said last year that German dealers love their warehouses and are often reluctant to rely on just the wholesalers.
TV: That’s quite possibly the case for Soennecken members, often quite large dealers with very specific company structures. We definitely see the stockless model as a hugely growing trend.
OPI: What’s your opinion of the cooperatives – Soennecken, Büroring and all the various smaller and often associated groups?
TV: First and foremost it’s competition and those with a logistics operation often face the same pressures as we do. I wouldn’t like to judge whether cooperatives still have a role today and whether they are still necessary. In Germany certainly, companies that sign up to these cooperatives and groups are often very very loyal and longstanding members. It surprises me sometimes that these members don’t more often look for alternatives away from their chosen group.
I can’t really comment on the potential benefits of all the various groups and alliances, as this ‘pack mentality’ is fundamentally very alien to me. I don’t doubt that it makes sense for a small business to join an organisation which, by virtue of its size, has a different kind of purchasing power and can be more involved in the ‘bigger picture’, but often any entrepreneurial spirit and flexibility is somewhat left behind.
OPI: From a wholesale point of view then, I assume that the Interaction alliance doesn’t hold any appeal for you?
TV: That’s correct. It doesn’t suit my thinking or my way of working, probably because I am a loner after all. At soft-carrier, we have our own ideas and we’re doing pretty well in the markets where we compete.
OPI: There were hundreds of wholesalers in Germany not so many years ago, many more than in most other countries (see also ‘Hot Topic’ on page 40). What’s the situation like today?
TV: There are still an awful lot, many organised in various umbrella organisations like Egropa and InterES. The top companies are generating sales of around €20 million, the smaller ones are moving in the €2-€5 million range. These are all regional operators and many of them have shifted their areas of expertise to focus on specific categories, like packaging material or tobacco products, with office supplies or even just stationery as a little sideline.
OPI: So what sets soft-carrier apart from the competition?
TV: Much has to do with the relationship we have with the client. We don’t make a big fuss when we recruit and accept new customers. When we receive an enquiry, the potential customer doesn’t notice that they’re being credit-checked, for example. And if we consider that this customer is a potentially good customer for us, then they’ll have their goods the next day. We’re extremely unproblematic and we’re also very quick.
And of course we have an enormously broad range of goods in stock. Our competitors have maybe 12,000 items and the trend is downwards. We offer 50,000+, and that means choice.
OPI: Do you have any expansion plans?
TV: Well, we didn’t go to France looking for acquisitions, it was the other way around, so this is perhaps how I imagine the future. Unless you’re taking on a struggling company, there’s not really much happening at the moment: Spain, Italy, Greece, even the Netherlands all have their problems. And in Central and Eastern Europe, for example, where we’ve certainly kept an eye on what’s going on, contacts we’ve made haven’t been solid enough. So we’ll see – we are not averse to the idea, but we are also not desperate.
OPI: What does the future look like, for soft-carrier and the industry at large?
TV: Soft-carrier will continue to focus on its logistics activities, that’s our core function. We’re also working on a fairer pricing proposition for our customers, one that reflects size of order and number of picks within that order much more accurately and, as I said, fairly. The delivery of services mustn’t be undervalued either. For us, this includes a focus on social media and other web-related products and services.
OPI: What’s your opinion on managed print services (MPS), a popular service extension currently?
TV: We looked into this subject and we couldn’t see how we can find an interesting approach to it as distributors. Moreover, I very much view the whole MPS trend as a last ditch attempt to secure business in product categories that are in steep decline – it’s just a transitional model before printing dies out.
We’ve been massively affected by this; our toner and ink sales have been declining by anything up to 20% every year for the past five years. We realise what is happening and we’ve adjusted to it.
We all have to adjust to changing markets and to changing customer demands. The digitisation of products will play a big role in that. We have to come to terms with the fact that in the next few decades we’ll have fewer resources and we’ll move far fewer products. The pressure to consolidate or pull out of the market altogether will be considerable. But I think soft-carrier is well placed for the challenges ahead.