Big Interview with Simon Drakeford: Power Player

Euroffice CEO Simon Drakeford tells OPI why the Office Power model will make independent dealers more prosperous

Simon Drakeford’s entrepreneurial spirit has just been recognised by his industry peers after he collected the Professional of the Year accolade at this year’s European Office Products Awards (see page 27). Not only has he overseen the growth of Euroffice in the past seven years to a £36 million ($53 million) online reseller, he is now looking to leverage its e-commerce and technology expertise in the form of Office Power, a solution for dealers to reduce fixed costs and improve profitability.

OPI caught up with Drakeford to learn more about progress at Office Power and for his thoughts on recent developments in the UK business supplies market.

OPI: We reported in January on your most recent published accounts to the end of March 2014. Can you provide an update on business since then?

Simon Drakeford: I understand where you were coming from with those numbers, but they painted a bit of a distorted picture, so I’d like the opportunity to correct that. 

The first thing to say is that technology-focused businesses like ours tend to have heavy periods of investment. Last year and, to some extent, this year have been significant investment years for us in Germany and in Office Power, and that was why you saw negative figures compared to the prior year; we haven’t invested like that since I joined in 2007. 

For the current financial year, revenue is generally flat year on year, while EBITDA is up around 200%. Full-year EBITDA will probably be around £2.5 million in the core trading groups. My point is that it has been a good year this year, but last year was by no means as bad as it looked. 

OPI: If you strip out those investments and one-offs, how do the years compare?

SD: This year is better for two main reasons. Firstly, there was a greater impact from Spicers’ problems in the previous year and, secondly, we’ve been better at managing our margin in our core business – largely due to optimising our Google costs. 

OPI: What’s your strategy for growing the core business?

SD: We think there is single-digit growth there. You could grow it dramatically, but it’s difficult to do that and sustain profit – and we want to sustain profit so that we can invest in Office Power. Most of the businesses in our sector that are really growing fast online aren’t making much, if any, profit.

So you have to get the balance right between revenue growth and profit. In the online space, with a lot of businesses operating at a loss, we’ve got to model ourselves on where we think the right level of growth is. And for us that is about contribution optimisation. 

OPI: How has the Euroffice business in Italy been performing?

SD: That’s been stable, but both Italy and Germany are focused on profit and burn rate as opposed to pure growth. Our strategy is to make them strong and stable, and make them ready for Office Power expansion, as well as grow profits.

Office Power benefits from a ‘mother ship’ to feed off, and building those businesses so they have sound operational management and processes and a strong supply chain, etc, makes Office Power possible. 

OPI: What about other markets? You’ve talked about France before.

SD: Not in the short term. We would like to prove that the model can succeed in Italy and Germany first. France, though, would be the logical next market. 

OPI: You’ve already referred to Office Power and I can sense you’re itching to talk about it! Just remind our readers about its rationale and why you took this step.

SD: Our core market has become saturated; there is increased cost, increased competition, declining revenues and margin. It’s an industry in chronic decline. Then there’s Amazon, of course. We’ve still got a massive office products industry, but one of the most challenged channels is the small dealer channel. Our strengths as a company are in marketing and technology and selling office products online, so rather than build an offline sales channel we wanted to enable one, because that’s what we’re good at. 

That gives a compelling multichannel model – which is something I firmly believe in – so if a customer wants to buy online they can buy online, but at the same time if they want that person-to-person sell they can do that as well.

The timing was right for us because you’ve got to have that ‘want’ before ‘need’; I talk about a ‘want to need continuum’ of change. A lot of dealers don’t want to change, but they’re beginning to understand that it will eventually turn to a need. I think dealers are beginning to want to change. 

OPI: In a lot of cases you’re asking your dealers to change their business model. That’s quite a leap of faith for them to take, isn’t it?

SD: It is, but you have to look at the alternatives. And if you look at the performance of the dealers we have on the platform, then it’s less of a leap of faith.

OPI: Do you have any numbers?

SD: We’ve got 15 dealers at the moment and going through the platform we’ve got about £5 million of contracted revenue. I’ll leave you to do the maths on the average size, but there are some bigger ones and smaller ones in there. 

I think the most important number is that the average dealer net contribution is 20%. I describe that as profit after the COGS [cost of goods sold], the delivery, the customer service, debt, financial processing, administration, warehousing, etc. So that’s almost net profit before their sales costs. 

OPI: What exactly are you doing for these dealers?

SD: There’s the website, of course, and the fulfilment; we do a lot of their marketing, answer the phone for them branded in their name – which no one else does; the system does a lot of query management, debt management, invoicing, cash collection, etc. It’s a fairly advanced CRM system: there’s advanced reporting and a content management system. The efficiency comes from the fact that the system replaces a lot of manual processes and does an excellent job of selling the product. 

OPI: 15 dealers – that doesn’t sound a great deal.

SD: Is 15 where I want it to be? No, because there are so many dealers out there and I know that Office Power works and I can make them more prosperous. 

I will admit that Office Power is currently underperforming against its potential. Awareness is our biggest problem, which is a shame because – and I know anyone would say this in my position – I believe we have the best offering. So it’s a case of getting the message out there and meeting with the dealers.

OPI: What kind of dealers are you looking to attract?

SD: At the moment our sweet spot is about £200,000-£2 million. We think there are about 1,500 of these dealers in the UK, but we will only take a dealer if we believe we can make them more prosperous – we spend a lot of time and analysis proving this. 

OPI: Some say that giving up that last-mile delivery to a third party will cost dealers their identity.

SD: Euroffice is one of the most successful dealers in the UK and we’ve never had a last-mile concern, so I think that is just a perception. The reality is that quite a lot of these dealers already use drop-shipping. They keep a van for some deliveries and they can do that under our model, but they will just make less profit if they do.

I believe that you can build a stronger identity through a quality, branded website and portal than you can through a delivery vehicle. We are all about strengthening dealers’ brand identity through all touch points of our service model.

It’s a fact that with current margins going where they are going, the majority of traditional dealers will have to change if they want to survive. And the critical part is that they should change when they want to change before they need to change. If they wait until the ‘need’ stage, it’s not necessarily too late, but it’s more complicated and they will probably have already lost a significant number of customers. That’s a fact, and I’m hoping our industry isn’t too traditional to see that.

OPI: Time to talk about Spicers, I think. Euroffice has been closely associated with Spicers for the past 15 years. How badly did their supply issues affect you?

SD: It certainly wasn’t a picnic! In fact, it was the biggest threat to our relationship in 15 years, and we’ve had a fairly stormy marriage. Our quotas got quite low with Spicers.

OPI: How easy was it for you to go to other sources such as VOW?

SD: It’s a lot easier now than it was. While we had those channels and processes in place across some categories, it was more difficult across others. And so we won’t find ourselves in that position again. 

We now have a balance and the ability to move that balance with much more dexterity than we had before.

OPI: What is the overall volume going through Spicers?

SD: A lot lower than it was. The number fluctuates – it’s up on what it was two months ago, but was down a few months prior to that; by the time this article gets published it will have changed again.

OPI: But is there a strategy to up the sourcing from other suppliers?

SD: The strategy is based on pure market forces. And these forces are price, availability and service levels.

OPI: Is that something you’ve been looking at closely for the past 18 months or so?

SD: Absolutely. Since we got more scared than we thought we needed to be, multi-sourcing has been a key focus for us. I think we became complacent, and whilst we always had other suppliers in, we’ve become more focused on the ease with which we can or cannot switch volume of demand to other fulfilment areas. 

OPI: Spicers has been involved in the market consolidation in the UK [merging with OfficeTeam]. Were you surprised by the Spicers and Vasanta deals last year?

SD: Not really. It’s clear that when you have an industry with a lot of overcapacity and in chronic decline, vertical M&A is a bit more obvious. Even in the US, there is a lot of integration between the wholesalers and some of their biggest customers which is not that different from the vertical integration we’ve seen in the UK, so it shouldn’t have been as much of a surprise as it was.

OPI: To what extent do you view the wholesalers as competition, now they have resellers in their groups?

SD: It doesn’t bother me because you have to believe in competition. So if a SPOT salesperson is doing a better job than you, you have to up your game to beat them.

OPI: Anything you can say on your own future plans?

SD: I’m genuinely excited by Office Power and it feels like we have only just scratched the surface of what we can achieve. We have a great piece of technology that works and I’m really enjoying taking it forward. So I’m not quite ready to hang up my stationery boots just yet. 

Big Interview Xtra

OPI: You said revenue is flat. Are you happy with that?

SD: There is dull single-digit revenue growth to be had in the core online space, but it’s becoming more difficult to drive really exciting, profitable growth. The UK trading companies are stable this year; we have seen a bit of a decline in international, but that’s because we have dialled down some of the investment in Germany, which has meant the revenue has come down as well.

Overall, it’s been a resilient performance because we’ve increased our contribution percentage significantly so more of the revenue is dropping to the bottom line.

You also need to take into account that for half of the previous year we were replatforming, and that can have a significant impact on the trading focus. We invested approximately £3 million in this platform if you include Office Power and it future-proofs the technology for the foreseeable future. When I did that last time in 2007, it had a significant impact to the business and it took us about 18 months to return to our previous strengths.

OPI: What was different this time around?

SD: Last time we were half the size we are now and we under invested in the process. This time, it wasn’t without hiccups but we properly resourced it.

OPI: What are the main improvements in the new platform?

SD: It’s definitely a better platform in terms of performance and is more flexible for future enhancements. But it’s really one of those things where you have to keep the technology up to date; so, better features, better technology, better processes; it’s more scalable, and it’s a single architecture, so all of our businesses are using the same platform. Mobile is launching in a couple of months as well.

OPI: I didn’t think you were going down the mobile route. Has that changed?

SD: No, we were always going to do that, but it wasn’t a priority. In our core industry with our customer base, there’s a very good reason to have it; it was just that two years ago when everyone was asking us what our mobile strategy was, I had more important things to focus on such as replatforming and Office Power. So it’s just a case of priority – and while I’m excited about mobile, I’m even more excited about Office Power.

OPI: You said you made some changes with Google. Why did you do that?

SD: We needed to do that because there is increasingly more competition on Google, our costs were going up and our underlying profitability was being impacted. So we needed to change the way we optimised our key word bidding. Actually, it has been more profitable and the results have not been significantly impacted so we are pleased with that. We’ve got more new business customers this year than in the previous year in a more efficient way.

OPI: So what have you done exactly?

SD: We sprinkled some magic dust on millions of key words (laughs). Basically, we changed the way we optimise the key words, that’s all I will say. There’s a little bit of ‘secret sauce’ that we’ve got and that is the difficult part of selling online – trying to get the traffic in a profitable way.

OPI: To what extent do you have a loyal customer base? Or is it a constant search for new business?

SD: It’s a bit of both. Our customer base has become less loyal as competition has increased. We have a loyalty programme and we have own ongoing CRM programmes and email communications, with very heavily personalised offers and promotions. We have hundreds of different segments and different pricing strategies – all of the stuff you need to drive loyalty, and that loyalty is absolutely critical, particularly when you are seeing such increased competition.

OPI: What’s your view of the UK online market for office products? It seems everyone is offering ‘cheap office supplies’ on the web.

SD: More and more dealers are either prepared to invest online or can get there without any significant capital investment, which dramatically increases competition. You have companies like Google that have a vested interest in increasing the number of online players and, consequently, they do drive up the competitive nature of the space.

What you get is more dealers that are operating at a loss, but they don’t realise that; just look at Amazon Marketplace and what’s going on there. The volume of product being sold on Marketplace is extraordinary, but I would estimate that between 60-70% of those resellers could be operating at a net loss. They have to pay Amazon 15%, net of VAT, then they have to distribute the product; so they have to make a very high gross margin to cover operational and distribution costs and pay the Amazon fee. And the sale price on Amazon means you have to sell at what could be below the contribution profit line. Even if it’s not, one the fixed costs have been absorbed, there’s little room left for net profit.

OPI: Do you sell through Amazon at all?

SD: We’ve dabbled on Amazon in several guises before; Amazon can have its uses, but the only one that really profits from selling on Amazon is Amazon itself. They make money when they get a guaranteed contribution, which is what they get from Marketplace commission.

OPI: Where do you think will Amazon go?

SD: As I said at the recent BOSS conference on the future of office supplies, I think they will flip their model. They’ve done it in other industries – they’ll get to a point where they have a certain level of market share and feel they have enough data – they own all the data – and they’ll start buying more and more direct from vendors and distributing themselves.

For the vendors, Amazon has a place, mainly because they don’t do much with own-branded products, but the wholesalers and the resellers will suffer, I think. Amazon will believe they can make more money selling direct rather than by having an extra chain in the link. And they’ve done it in other industries, cameras being a prime example – they changed the camera industry by doing that.

OPI: Do you need a certain level of scale in the core business for Office Power to work?

SD: It helps in terms of buying power, which we don’t have in Germany yet. But the buying power can be superseded by the unique efficiencies that technology brings. We’re certainly not the only people with buying power, but I believe we’re the only people with a technology platform like the one we’ve got, and as people tell me – but if you have both [buying power and technology efficiencies], that makes it easier, of course.

OPI: Can you just take the Office Power model and drop it in markets like Italy and Germany?

SD: Technically, it would be simple. There would be some changes based on different invoicing and accounting laws and we’d need a partner. ADVEO is our natural partner because we wholesale with them in both markets. Italy is ripe for Office Power and I think it has exciting potential.

OPI: You’ve been critical of dealer groups in the past, haven’t you?

SD: This may sound strange, but I have a lot of admiration for many of the dealer groups – because they are very entrepreneurial, lifestyle businesses that have exploited a niche in the failings of the traditional wholesaler to add value. And if the wholesaler’s model is that they add value, then why do dealer groups need to exist? That’s my question.

I have been famously quoted as saying dealer groups are the ‘ugly wart on the side of the wholesaler’. That doesn’t mean to say that the groups are ugly – warts wouldn’t describe themselves as ugly, in fact they’re very efficient at growing. But the person on whom the wart grows describes them as ugly because they don’t like them there – and I think that’s how a wholesaler, in some cases, would view a dealer group.

When there was enough margin for that type of model, I can understand why they existed. Whether there is enough value add for the dealers moving forward as margins shrink and shrink is another matter.

OPI: Do you think there will be consolidation in the dealer group channel?

SD: If you think why M&A happens, there are two key reasons: either you’ve got a strategic fit or some synergies. With the lifestyle dealer groups, there’s not that much synergy in a merger. In terms of dealer groups being bought by wholesalers – which is something else that has been on the table for a long time – what would the wholesaler be buying? Essentially a relationship with the dealer, and in that case the relationship needs to be unique to the one that the wholesaler already has.

I’m not an expert by any means but I don’t see how mass consolidation of the groups could happen. I think you’ll just get them changing their business model or they’ll die. That’s something you’ll have to ask the groups themselves

OPI: What changes do you think they’ll need to make?

SD: A lot of them are trying to do what Office Power is doing. So they’ll find better ways of adding value in a modern world – where that value isn’t margin – through systems or marketing, or they’ll batten down the hatches as the tide comes in.

There’s an interesting article for OPI somewhere on the relationship between dealers and dealer groups and what the dealer benefit actually is. I’m not the right guy to ask because I’m confused by it myself. I get the co-ops because the dealers feel like they own part of it; the privately-held entrepreneurial groups, I don’t totally understand.