Private equity group Litorina is transforming the Swedish OP market. OPI finds out more
A major announcement in the Swedish office products market was made at the beginning of April with the creation of a new reseller brand called OCAY – pronounced, for obvious reasons,’OK’. The new brand evolved out of last year’s merger of local dealers Gullbergs and Kontorsvaruhuset (I’ll leave you to try and pronounce that one!).
These developments have been driven by private equity firm Litorina Capital which established Scandinavian Office Group in 2012, installing Tomas Bergström at the helm. Following an integration period, Bergström’s brief is to now double the company’s sales from today’s figure of SKr1.1 billion ($170 million).
OPI caught up with the OCAY CEO to see how he intends to achieve that goal.
OPI: Perhaps you could begin with an overview of the last couple of years, up to the creation of OCAY last month.
Tomas Bergström: Well, the initiative was taken by our majority owner, Litorina Capital, which is a private equity house in Sweden. They obviously saw an opportunity in a changing industry to lead a consolidation programme. So, in the summer of 2012 we formed the parent company – Scandinavian Office Group – to then acquire Gullbergs in August of that year. Gullbergs was – and is – a very successful small-to-medium-sized player with roughly $80 million of sales, and has been strong in the south of Sweden for the last 15-20 years.
That was the first step and already then, of course, there were thoughts about expanding further. And a year ago we acquired Kontorsvaruhuset, which basically had done the same thing as Gullbergs, but in the north of Sweden, so the two companies were very complementary.
OPI: So when Scandinavian Office Group was formed, the plan was always to bring Gullbergs and Kontorsvaruhuset together?
TB: It was. I think we had done a fairly good job in researching the market and we knew what we hoped the next step would be. But, then again, you never know. You need to come through everything, but that was the plan, yes.
OPI: What’s been the main the focus since then? A number of integration issues and challenges to deal with, I imagine.
TB: Very much so. A lot of internal focus. We were very early in communicating the organisation, the leadership etc, and spent most of last year optimising headcount and so on. That’s energy-consuming for everybody, but I think is necessary to do early in a process like this.
And secondly, we’ve been trying to consolidate our supplier base. We’re now through with 90-95% of that and have consolidated into common agreements and common assortments. But that’s really just the beginning of a very long tail of suppliers and there’s still much to be done there, but we’ve done a fair bit.
OPI: What about the systems side?
TB: We’ve migrated onto a common platform and that has been a big project for us. We’ve been on the same system for a few weeks and we opened up the new e-commerce platform at the beginning of April, so that feels very good. Changing and integrating, and migrating ERPs is something very scary, of course, and you have to educate half the organisation on the new system – I think we have some more stabilising to do, but we are over the main hurdles.
OPI: Do you think there any comparisons you can make between the massive merger between Office Depot and OfficeMax that is going on now and what you’ve been going through in the last year or so?
TB: I don’t know really. I believe with all mergers, regardless of size, you have the same integration challenges. You need to make things efficient first and get the direction straight and then get on with execution. It’s more a question of general similarities, I think.
OPI: You decided to create a new identity with OCAY, bringing everyone together under a new name. How has that been received?
TB: We actually launched this internally in January, so we had a common secret for three months. But now I can see that exploding. Everybody’s proud and eager to come out and tell the customers and the markets, and so far it feels very good. I don’t believe in dual branding, so we began the transition in April and it will take about two months to rebrand the stores and everything.
OPI: You mention the stores. Perhaps you could remind us of your business model.
TB: Our business is 99% B2B. I think one thing to understand is that when we talk about [office supply] stores in Sweden they’re B2B stores. We are not B2C-focused at all; I notice sometimes when you talk about stores internationally people are referring to B2C whereas we only talk about B2B. In that context also, our stores are not in city centres; they are outside in industrial zones and business areas.
We now have 38 stores across Sweden from the north to the very south, and these are a very important part of our multichannel strategy. We can see that many other players are closing down their stores in Sweden, but for us it will be important to differentiate ourselves with our local presence and knowledge.
OPI: But are you not seeing the same challenges at retail as, say, Staples and Office Depot?
TB: We are, definitely. Customer behaviour is changing, of course, and we need to do a lot with the stores in terms of their optimal size…
OPI: What’s the typical size of your stores?
TB: On average, I would say about 2,000 sq m [20,000 sq ft].
OPI: Really? That’s quite large.
TB: Yes, and over time that will need to be optimised and we’ll need to think about the assortments – how do you drive traffic through the stores? So yes, we have many of the same challenges as the global players.
OPI: Is that a side of the business that you’ve had a chance to really address yet?
TB: I believe it’s a longer-term project. Over the last year we’ve focused more on building the other channels – such as online, which we felt was a bit behind the market and the competition.
With the launch of this new site on 1 April, we are at least on a par with everybody else and it’s going to be very interesting to see how that develops, both as a channel standalone and then together with the stores and the sales force. It’s the combination of the channels that’s interesting for us going forward.
OPI: Do you have things like ‘click and collect’ where people can order online and, if they want, go and pick up the things in the store?
TB: Exactly, that’s a feature we launched with the new site, and that’s one way in which we can leverage our store network.
OPI: I understand you have 130 sales reps; are they employed directly by the company or do they work on a kind of freelance basis? How does that work in Sweden?
TB: They are fully employed by us and meeting many customers every day. I think that over the course of a year we physically meet 100,000 existing and potentially new clients. So we have lots of encounters every day across the country, and that’s also a differentiation point for us.
OPI: What do the others tend to have then? Fewer reps?
TB: Yes, I think they have had a stronger focus on online, perhaps concentrating on larger, key accounts with their sales forces. We’ve come from a situation where we’ve been strong primarily in the SMB segment.
We do have a unit which penetrates larger accounts, but we are not yet as big there as we would like to be. Our focus on the public sector is also something that we are looking into and today we have about 10% of the business with that.
OPI: Those larger contracts and the public sector accounts; is it the globals that tend to dominate that market?
TB: Yes, the big ones I would say. And then you have some other players in the Swedish market that are focused on that segment.
OPI: What about these globals looking at your SMB customers and trying to eat into your market a bit more?
TB: Well, I expect them to do it and they say that they will do it! But I think that what they do in a global context doesn’t really support them focusing so much on the SMB segment in a small country like Sweden. But of course, we feel strong competition from them; they are very skilled and have enormous resources, so they keep us awake, for sure.
OPI: What particular advantages do you think you have in the SMB space?
TB: We like to differentiate ourselves with our local presence, the relationships, being Swedish players – that’s where we try to have the edge.
We have a decentralised structure with regional sales managers across the whole country and we like to be very local while still, of course, having the scale to invest in online and assortment and those sorts of things.
OPI: When you look at the traditional office stationery category, what does that currently represent in terms of overall sales?
TB: The traditional office products and stationery categories are 30-35% of sales so I think we have quite a healthy balance.
Of course, paper is declining somewhat, but the rest of our traditional categories are more or less flat for us, which could be due to our SMB focus; these customers are perhaps less inclined to adapt to these new technological trends – although they will, of course, eventually.
OPI: So where would you see growth coming from? Jan/san, cleaning, breakroom?
TB: Definitely. Those categories are about 30% of our sales and growing. Growing for us as well as for the industry in general, so that’s very interesting.
OPI: What about areas like packaging and furniture?
TB: They are still fairly small categories for us, but interesting nonetheless. Of course, we would like to be able to supply customers with everything for the workplace, and furniture is definitely an interesting category.
OPI: You have three distribution centres. Do they operate independently or is one of them the main one and the other two are hubs?
TB: I would say that two of them are main hubs and the third one is perhaps a complementary site. It’s something that we’ve now put in place and we’ll operate out of these three in the medium term. They enable us to cover the whole of Sweden.
OPI: And that’s after consolidating the Gullbergs and Kontorsvaruhuset distribution networks?
TB: We’ve closed a number of centres over the last year to consolidate into these three.
OPI: Your sales are about SKr1.1 billion ($170 million). What can you say about your recent financial performance?
TB: Well, I can say in terms of the top line that we decreased in the low single digits in 2013.
OPI: Is that in line with the market, would you say?
TB: My interpretation is that the market in 2013 was more or less flat, so I think we’ve decreased by slightly more. But given everything that we have been through, practically turning everything upside down, we are very satisfied with that performance.
If you do what we did last year, it takes energy out of the organisation and, to be honest, it was a conscious decision to do everything at once. Now, one year after that, we’re ready to grow again. It feels good to have all that behind us, of course.
OPI: What are some of the projects that you’ve got planned for the next 12 months or so to really develop your new brand name and to grow sales?
TB: We have a strategic plan in place that we laid out last year and we’re now in the middle of executing it on a number of initiatives. The focus for this year is, of course, to continue to stabilise the company after the integration. We also need to continue to invest in our online and digital presence.
I think we have a job to do in our channel strategy to make sure we achieve the most cost-efficient penetration for each customer segment – that’s an important thing for us in our multichannel approach. We will continue to work on our assortment and fine-tune our supply chain. So it’s going to be a challenging year, but we are clear about what we’re going to do.
OPI: You’ve mentioned online a couple of times. When you look at that SMB customer and the availability of online purchasing for them, do you see that as the main competitor?
TB: I would say so. I also think the SMB customer is visiting our stores a lot – and probably those of our competitors. So for that segment the combination of stores and online is important.
We need to make sure our sales force is selling to higher value customers and then direct smaller customers to stores and online. That’s one aspect of our channel strategy.
OPI: What are you doing with data and being able to provide a personal experience for each customer?
TB: It’s still early days for us, but we have started and we have those features now where we can personalise the content on the website when you’re logged in as a customer. We still need to develop our capabilities in assembling, interpreting and acting on data and market intelligence and so on, but we are moving in the right direction.
OPI: I understand you’ve established a sourcing office in Asia in the past year or so?
TB: We have. We have a few people on the ground in Hong Kong and China, and we have already had shipments coming this way. Not so much at this point, but this is something we are ready to grow when we have a consolidated assortment.
OPI: Will you have a private label brand called OCAY?
TB: We already have that as of 1 April. We have some products for sale under that brand and it’s something we will develop over the next few years.
OPI: What’s your goal for private label?
TB: I can’t set out a specific growth path, but it’s definitely going to take share. I still think, from an overall industry perspective, that it’s increasingly important to work with the OEM suppliers to drive innovation and development. My view is that industrywide, the balance between private label and OEM products is perhaps where it needs to be, but we are coming into this from a low base and are definitely going to increase.
OPI: Looking at the Swedish market overall, where do you sit in the competitive landscape?
TB: First of all, what is the market? That’s an interesting question and we spent a lot of time on that during our strategic planning last year. We have defined the market at $2.5 billion, about SKr17 billion. That’s somewhat of an increase from the definition previously published by the industry association, which I think was SKr5-SKr6 billion, but we’ve now included other relevant areas such as jan/san, workwear, safety and so on.
So the addressable size, for us, is $2.5 billion. If you define the market that way, I think Staples is the market leader with, we estimate, roughly 10% of the market. We then share second place with Office Depot in Sweden, followed by Lyreco. But then again, you have players from other sectors coming into the market and sector convergence is blurring those traditional lines.
OPI: Do you think there will be consolidation between the traditional jan/san and office supply resellers?
TB: I’m not sure about that, but there’s definitely still consolidation to be done below that. A large part of the market is still made up of small regional players. Unless they are able to change in line with what’s happening, I believe it’s going to be tough to be medium-sized. So we believe that there will be continued consolidation and as part of our strategy we would like to be active in that.
OPI: Both within Sweden and externally, I understand?
TB: Yes, we have an ambition to have a Nordic presence within the next 3-5 years, so that’s part of the plan. It’s not going to happen this year, but maybe later.
OPI: Because if you’re looking at doubling sales in the next 3-5 years that would suggest some pretty major acquisition activity.
TB: That’s right. To reach that objective will require acquisitions – definitely.
OPI: Any markets you will focus on in particular?
TB: We haven’t finalised that. We’re talking about a Nordic presence, which can mean any of those countries.
OPI: Someone like Wulff might be a good-value acquisition target at this time. But I know you won’t be able to comment on that.
TB: No, I can’t answer that. I have the highest respect for them, but as a matter of fact we don’t come up against that particular competitor very much in the market. I think they are perhaps focused more on the EOS segment and on larger accounts than we are so we don’t meet them that often.
OPI: Are you ready now to make acquisitions if the opportunity comes up, or do you still feel you need a bit more time to consolidate internally?
TB: We are getting ready. With things like that, you never know when they come up so I think you always need to be ready. We have said that we are interested in taking part in the consolidation process so we’ll see what happens. It’s not something I think of when I wake up in the morning, and currently we have lots of things to do internally.
OPI: What do you think of when you wake up in the morning?
TB: Well, about what we’ve been doing recently: launching the new brand, stabilising the new platform, making sure that we have talent in the right place, dealing with the new structure, making sure that employees feel engaged and that they know what’s going on, those type of things.
With that in place, our customers will be well taken care of and new ones will find their way to us.
OPI: What is the strategic plan of your investors? You mentioned to me previously the possibility of an IPO-quality company within the next 3-5 years. Is that their investment cycle?
TB: That’s really something you should be asking them – that’s my politically correct answer. But I think investors of this type, their horizon is typically 3-7 years. I’ve worked with them before; I like the ownership model, and they are very focused, very rational and good at building value. What happens in the end could be an IPO or another structure. What we have said internally is that, in terms of governance and structure and so on, we should have IPO quality. And then, if that’s the route they select, it will be decided at a much later date.
OPI: How you view yourself internationally, in terms of belonging to industry groups such as BPGI or Interaction. Is that something you might look at?
TB: We don’t have that on our radar screen at the moment. We have lots of things to do in Sweden to start with. Secondly, we talked about the Nordics, so our next step could be that we team up there in some way, but it’s not something we’re discussing right now.
OPI: And finally, a bit about yourself. What’s your own background in office supplies?
TB: Well, I’ve been here now for almost two years, so not very long. I have a finance background and have worked on business development and M&A and so on. I love building companies, doing business, working with other people and celebrating wins.
OPI: You said you’ve worked with the owners of Litorina before.
TB: Yes, I was with another company that they actually still own, so I know them from before. We had a very successful relationship and I guess it made things easier when we looked at this opportunity.
OPI: So after two years what’s your view of the office supplies industry?
TB: It’s changing much faster than I thought in the beginning. Everybody’s realising that now, and if you’re not ready to change and adapt too, I think it will be difficult. We took all the pain last year and we are now ready to go forward; it’s a very exciting time.