Financial crises are nothing new for Russian entrepreneurs – think back to the debt crises of 1998 and 2008 – and it looks like another tough time ahead for the country’s economy as falling oil prices and sanctions imposed due to the conflict in Ukraine have led to a 40% drop in the value of the rouble to the dollar towards the end of 2014.
Despite this less-than-rosy economic outlook, Andrey Kudryashev, co-owner and Development Director of Moscow-based Pragmatic – Staples’ strategic partner in Russia and a former Reseller of the Year winner at the European Office Products Awards – is refusing to get drawn into a price war, instead focusing on the added value that the firm’s business model can offer to its customers.
OPI: Firstly, how did you get into the stationery/office products business?
Andrey Kudryashev: In 1998, the financial crisis in Russia caused an unemployment wave to sweep through the country and I lost my job at a foreign technology company. The same year, on an MBA course, I became acquainted with my future business partner Mikhail Kravtsov. At the time he already had his business – he was the owner of the Pragmatic company which was distributing Fellowes and Atlanta products in Russia, and he invited me to develop the business.
OPI: Can you provide a brief overview of Pragmatic and its development?
AK: As far back as 1998, through talking to our suppliers, we were aware of the main channels of sales for their goods in Europe and the US. We understood that in developed markets, apart from superstore networks and dealers, there was another interesting channel called contract stationery.
In Russia at the time there was nothing similar in a pure form. There were resellers of stationery through shops; there were even companies that published product catalogues, but there weren’t any companies that built relationships with customers like a partner, on a long-term and mutually advantageous basis.
We liked the idea and formulated its key points for ourselves: the need to sell, not through price lists, but through a catalogue, with an optimal range, attractive presentation of products and a good price offering.
Furthermore, it was necessary to focus on the availability of products. After all, if a customer chose a picture in a catalogue, they had to receive exactly that item; and not in a day or week, but the next day. So we needed to have products already available at the time of order. All this was designed to develop a feeling of reliability, comfort and convenience from working with us – in other words, a feeling of a fully-fledged partnership.
The next important point was specialisation. All resellers at the time worked on the principle of a universal seller, and by this I mean a personal account manager who totally served a customer: took orders, controlled shipments, answered all questions, etc.
We went in a different direction. Personal account managers are still necessary, we said, but they have to concentrate on a global contact with a customer – on prospection, agreement of terms and conditions, the maintenance and development of relations – while technical matters have to be referred to a specialised department where individual competences can lead to more efficiency.
Account managers can’t always be reached by phone, they can get sick, they might be dealing with another customer and, after all, managers can have so many customers that in practice they can’t phone around or visit all of them. Therefore we created the customer service department which undertook the operational relationship with a customer.
The second important function of this department was to challenge the customer service stereotype which existed in the market at that time – that is, the larger a customer, the more attention is paid to it by the manager and, conversely, if a customer is small it might receive no attention at all. Irrespective of customer size, we decided to give them all equal levels of service in terms of quality.
Such technological effectiveness of work processes together with the qualitative product proposal in the form of a catalogue were big differentiating factors which provided us with the opportunity to grow considerably. By 2005 we had already become the number two player in the Moscow market and today we maintain this position within the corporate services segment.
OPI: In the past, we had news stories about the tremendous sales growth at Pragmatic – have you been able to maintain this growth?
AK: The continuous growth of the company was halted by the economic crisis of 2008 and we experienced a sales decline of about 30%. But, just as in 1998, 2008 didn’t become a hindrance for our business and we continued to develop further. The annual turnover of the company in 2013 was RUB2.2 billion ($41 million), and in 2014 we expect to grow revenues to about RUB2.5 billion.
OPI: How many employees do you have?
AK: Pragmatic has more than 500 employees.
OPI: How many sales reps do you have?
AK: About 150, if we speak about those who work directly with end customers. All sales representatives are company staff members
OPI: How difficult is it to find, train and retain talented sales people?
AK: It has always been difficult to find a really talented sales person and the situation hasn’t changed. The only thing that has changed over the past ten years is the cost of such employees for the company: it has multiplied several times over.
OPI: Where are your headquarters and other locations?
AK: The headquarters are in Moscow, from where all business process management is performed. Since 2006 we have also operated an office in St Petersburg.
OPI: What is the ownership of Pragmatic and how has this changed over the years?
AK: During the development of our company the ownership structure has not changed. It is owned by me and my partner Mikhail Kravtsov.
OPI: How is your customer base split between large corporations, small and medium businesses, government customers, etc?
AK: Today, large corporations make up 60% of our sales, which is a change from previous years when their share didn’t exceed 50%. But that is more to do with our own deficiencies in the SMB segment, which is something we are actively working on correcting.
OPI: What have you been doing wrong in the SMB segment?
AK: The main issue is the cost of working with such customers. As I already said, the cost of employing sales reps has increased dramatically, but we have not seen a proportional increase in labour productivity. Until now we have not found satisfactory solutions to this issue and we continue to work on it.
OPI: How has the Russian OP/stationery market evolved over the past few years?
AK: Before the crisis of 2008 the market was growing very well. After 2008, consumer spending began to recover, but nevertheless couldn’t return completely to pre-crisis levels. There was a very large number of private labels, players like Metro appeared that started to have some impact and their presence became noticeable.
Generally speaking, in Moscow there were not many fundamental changes; the main changes happened in the regions, where large federal wholesalers sprung up and began to take a dominant lead within the wholesale channel.
OPI: Who do you view as your main competitors and what do you believe sets you apart from them?
AK: There are many players in the Russian market today, but, frankly speaking, none of them are major competitors for us. Our main competitor at the moment is an inability on the part of customers to properly understand and put a value on their own costs.
After all, the bulk of our potential customers are guided by the price of each specific product, but we offer a different approach: to value, not the actual price of a product, but the total cost of ownership of this product, taking into consideration logistics, accounting expenses and other hidden costs.
As an example I would like to cite our contract with Sberbank of Russia, the largest financial institution in the country. At the time of the contract tender, our pricing proposal was 10% higher than that of our immediate competitor.
However, when we began our collaboration and introduced all the services into the customer’s business (and this is thousands of offices), just on direct costs we managed to save the customer 40% of the annual contract amount (tens of millions of roubles) by unifying the product range.
In addition, we decreased indirect costs by centralising deliveries and eliminating its warehouse buffer stock from three months’ stock to just one day’s – this saving alone was estimated by the customer to be another 30% of the annual contract cost! The same year, we won a Sberbank innovation award where the main assessment criterion was the achievement of maximum monetary efficiency in a project.
In Sberbank’s case, we managed to explain our model and approach; however, in the mass market – where the customer is focused solely on the product price – that is by no means the case.
However, we do have some cause for optimism. After all, in the present economic climate customers will increasingly ask themselves how they can spend less; but it might be more logical to do the contrary – more expensive and better quality products actually last longer and cost less in the longer term. So we have to educate customers on how they look at making savings.
OPI: How has the market been affected by the crisis in Ukraine and sanctions against Russia?
AK: The situation in Ukraine is a human tragedy and it is awful.
If we look at how these events and the sanctions imposed against Russia have affected, or rather will affect, the office products market, some of the consequences have been the fall in the value of the rouble, changes in oil prices and a general decrease in business activity. That said, I think that the real impact of all these issues is still ahead of us.
OPI: What concerns do you have about the Russian economy over the next 12-24 months?
AK: The main problem is obvious: the decline in the rouble exchange rate against the US dollar. We already experienced it in 2008 and we know what to expect.
It will lead to a decrease in customers’ purchasing power – they will concentrate only on essential products and there will be a move towards private label products and low-priced items.
OPI: I assume most of your products are imported and have therefore become more expensive with the fall in the rouble. Has this meant you have had to raise your prices?
AK: Yes, naturally, we had to raise product prices. However, price increases are not the same as the rate of change of the rouble exchange rate – this is connected with a long logistics chain. Besides, we have customers with long-term contracts where prices are fixed, especially with the international customers through our Staples partnership. Here we are compelled to look for some compromise solutions.
OPI: As you mention, you are Staples’ global contracts partner for the Russian market. What does this do in terms of your reputation in the market?
AK: Staples isn’t such a well-known brand in the Russian market that it can seriously influence our work with local customers. However, with global customers our partnership undoubtedly works to our advantage: there are customers that we simply wouldn’t work with without the partnership with Staples.
But where our partnership plays the biggest role, of course, is with suppliers. For them, our cooperation with Staples is the guarantor of the reliability and seriousness of our company.
OPI: What have you been able to learn from Staples during this time?
AK: For us, Staples is a global corporation which has extensive and unique experience. We consider it a source of knowledge and practical experience which, as far as possible, we try to emulate ourselves.
It is difficult to pick out one particular thing as being the most significant in our partnership, but without a doubt, the fact that we have this cooperation with Staples is very important for us.
OPI: When does this agreement with Staples expire? And do you expect to renew it?
AK: From our point of view the partnership is developing successfully and we expect that it will continue for the mutual benefit of both parties.
OPI: Where do you see yourself in five years’ time?
AK: Of course, in the same business. I am sure we will overcome all of today’s challenges and continue to have a major impact on the market, taking a significant position on it.
OPI: Do you just focus on [the] core markets of Moscow and St Petersburg? If not, how do you extend your reach into other areas of Russia?
Andrey Kudryashev: According to our estimates, Moscow and St Petersburg make up to half of the volume of the whole Russian market for office products, so we do focus our efforts there. However, among our customers there are companies which have a national footprint; they demand from that we deliver to different regions and naturally we fulfil their requests. For this purpose we have third-party logistics partners that help us to carry out deliveries to the regions of Russia.
OPI: How do you handle logistics and distribution in your main markets?
AK: We have our own delivery service and fleet of delivery vans. If a customer places an order before 6 pm, they receive the delivery the next day. Also, we try to pay a lot of attention to the appearance of our drivers and their training to the service standards in our company.
OPI: What warehousing and distribution facilities do you have?
AK: The area of our modern warehouse is 15,000 sq m (150,000 sq ft). All processes are completely automated by means of a warehouse management system, which allows us to minimise the number of errors and to accelerate the input of data into the system. In the warehouse, 7,000 catalogue products are constantly stocked, the service level is about 98% and the turnover of stock is maintained at the level of 24 days.
OPI: I see you are offering a logistics and warehousing service; what is this exactly and how is it developing?
AK: It all started with the fact that some of our customers had a need for additional logistic services from our part. And we understood that in terms of providing additional services in the sphere of logistics we didn’t need to make major changes to our systems. We already had well-established business processes and we are able to offer customers the additional services in the format of 3PL logistics.
OPI: To what extent do you rely on national or regional wholesalers?
AK: During the past five years we have tried to achieve the maximum possible number of direct contracts. As of today, we carry out the vast majority of purchases directly from vendors either from Europe or from their Russian warehouses, whichever is more profitable from the point of view of the supply logistics.
It gives the opportunity to react quickly to the demand changes and to improve the service level of availability of products for customers. We work with several national wholesalers, using them only as a fail-safe option in case the main supplier has no products; after all the service level is one of our key competitive advantages.
OPI: How sophisticated is the wholesaling channel in Russia? Are there any national players?
AK: According to our estimates, national players make up 40% of the wholesaling channel, which speaks well for the high potential for its consolidation. They are growing due to the better logistics efficiency and the level of service that complicates the life of small, local wholesalers.
National players always have better purchase prices and less logistic expenses; they have integrated marketing programmes which also allow them to reduce the costs under integrated channel catalogues for their dealers.
OPI: You rebranded a few years ago from Pragmatic Express to Pragmatic. Why was that?
AK: Yes, in 2011 we worked on the brand. At the time we had no uniform corporate visual identity; the logo was in one style, the information on private label products in another, the catalogue in a third and the website was also different. In addition, the graphic style of the old logo was already obsolete at the time. So we decided to unite all the elements of design into a single corporate style and the name of the company was simplified to focus on the most significant word.
Pragmatic product categories
|
Category |
2002-2008 Share of total sales |
2009-2014 Share of total sales |
|
Stationery |
58 % |
35 % |
|
Copy paper |
20 % |
30 % |
|
EOS |
8 % |
8 % |
|
FM |
7 % |
14 % |
|
Breakroom |
4 % |
9 % |
|
Furniture |
3 % |
4 % |
OPI: There’s been a shift in recent years in your main product categories [see table, ‘Pragmatic product categories’]. What are the reasons for this?
AK: After the crisis of 2008, the consumer’s spending power was considerably reduced. This was expressed, first of all, in a shift of demand from a wider range towards the minimum, essential set of products as many company reduced spending on non-core items.
Secondly, customers, trying to minimise the number of suppliers of non-core products, wanted to have the opportunity to order everything from one place. This caused the increased popularity in such categories as foodstuffs and household goods.
It is worth noting that the sharp increase in share of low margin paper and the decrease in high margin traditional stationery have seriously affected the overall level of profitability of this business on the market in the whole.
OPI: What actions have you had to take to deal with this reduced profitability?
AK: We tried to compensate it with growing product categories such as FM and breakroom.
If we look at the range in the catalogue, then over the past five years our commercial range of products has grown from 5,000 to 7,000 SKUs. This has been due solely to expansion in the growing breakroom and FM product categories.
OPI: How has the digitisation of the office impacted the workplace in Russia and the consumption of traditional products?
AK: Frankly speaking, we still don’t see any special influence.
OPI: What about private label? Is this something you have developed?
AK: Yes, we have been moving in this direction and we have extensive plans concerning our private label development. Despite the fact that we are still at the very beginning and the range is limited, the Pragmatic private label is already the fifth best-selling brand for us this year.
OPI: What product lines do you have private label in?
AK: We have private label in paper products, stationery and household goods, and we plan to expand the line in all key product categories.
OPI: To what extent have you been developing service-led offerings such as managed print services, etc?
AK: We know about the development of these kinds of offerings in the western markets, but so far we have concentrated on increasing the level of quality in our current services.
OPI: What percentage of your sales is from online?
AK: Today, the share of online sales is more than 50%.
OPI: Do you have an open website for all consumers, or is it only available for your contract customers?
AK: Currently, our website isn’t intended for attracting new customers. Rather, it is a way for us to interact more efficiently with existing customers on a number of commercial and technical levels.
OPI: What tools have you developed for mobile commerce, for use with smartphones and tablets? Do you have any apps?
AK: At the moment there is the task of developing such an application.
OPI: The market in Russia is dominated by local players. What are the barriers that prevent the big global players entering the Russian market (except by strategic partnerships)? Will this change, do you think?
AK: Answering this question, I wouldn’t want to discuss once again aspects of business culture, logistics, the unpredictability of the market and the situation in the country in the whole. These are eternal questions to which some companies find the answers and others don’t.
The question of entering the market is only about the economic feasibility of investments. The return on investment is different for different companies in different markets. Perhaps our foreign colleagues consider the return on investment in the European or other world markets to be more attractive than entering the Russian market.
OPI: What are customers mostly looking for in a supplier like you? Best prices; most reliable service; biggest range of products (a one-stop shop); best payment/credit terms?
AK: Customer expectations evolve depending on how long they have partnered with us. So initial expectations are generally centred on price; until a customer actually starts to do business with us, all talk about services remains just talk. But the situation soon changes and it is the role of the sales representative – and the company as a whole – to draw attention away from the pricing proposal and towards the areas which are more significant in terms of long-lasting cooperation: the real savings, service, quality, reliability, etc. And for our regular customers, the price for products today is not the only defining question.
OPI: To what extent are customers loyal? Or do they chop and change looking for the best price?
AK: Everything depends on the customer and on the quality of work of the sales representative who works with the customer. If the sales rep is qualified enough and shows the customer the benefit of our cooperation, the question of searching for better prices elsewhere doesn’t even arise.
According to our estimates, if the customer receives high-quality service, he is ready to accept a price difference of about 10-15%. However, what we still see is that about one-third of customers will always continue to look for a better pricing proposal.
OPI: What are you goals for the next 12-24 months?
AK: From this moment on we plan to improve our position on the market. We will concentrate on servicing just the corporate segment and intend to develop new services and enhance existing ones. On the whole, we will focus on things that we are already good at, but improve them.
OPI: We talk a lot about change in the office supplies industry. To what extent do resellers in Russia need to change and how do you plan to evolve Pragmatic?
AK: Of course, Russian resellers need to change, most importantly by reacting to the trends in the OP market and evolving customer needs. Today, we are seeing the growth of more impersonal interaction with customers – through electronic services, mobile applications, internet, telemarketing, etc.
We have our finger on the pulse and we plan to develop ourselves in this direction. We will endeavour to be in tune with global trends and take the lead in those areas which we consider necessary for our development.
