It’s unusual for the big boxes to refer to specific competitors in earnings conference calls, so the fact that Staples singled out Complete Office Supplies (COS) as a serious threat in Australia during its Q3 webcast speaks volumes for the influence that the business founded in 1976 by current CEO Dominique Lyone (pronounced lee-y-own-ee) is having in the contract segment.
Not that Lyone is unaccustomed to taking on the big guys; that has virtually been engrained in the company’s DNA since day one. Indeed, he has regularly had to turn down buyout offers over the years from the international players present in Australia – Staples, OfficeMax and Lyreco. With Staples and ‘Max in turnaround mode in Australia and struggling to reverse declining sales, COS is looking at double-digit top-line growth in the current financial year. Time for OPI to find out more about this dynamic reseller.
OPI: Let’s start with a quick introduction to the business: how did it begin and how have you developed it over 35 years?
Dominique Lyone: Well, I was born in Egypt where my father owned a tiny typewriter shop. He had been a typewriter mechanic by trade and I was following in his footsteps in Australia when I decided that stationery was a better option for my future, and at the age of 22 I started this company called Complete Office Supplies. I worked as a specialist, selling typewriter ribbons and carbon paper, the toner and paper of today.
OPI: So you started as a one-man-band?
DL: Yes. At the beginning it was really about not working for the man and being able to earn enough money for myself. I built the business to a size where we had a couple of retail stores and a commercial business, then things went horribly wrong in the mid-1980s and we came very close to bankruptcy.
OPI: But you made the decision to persevere and it looks like it paid off.
DL: We decided to get out of retail – which was a little bit too early for its time – stay in commercial and go from there. Not long after that, in the early 1990s, the big Americans and so on started coming in and buying all the private operators out. I made a call not to sell the business and to remain and compete.
OPI: Why did you choose not to sell?
DL: The core thinking behind that was that I couldn’t see anything that the big guys had that we didn’t, except access to a lot of capital. The supplies were the same, the tactics were the same; they had fundamentally more access to capital than what we had, so my vision was that if I could run a profitable business and create capital that way, I should be able to compete.
OPI: Have you had a call since then?
DL: I’ve had many calls. All of the majors have had over the years what I would call ongoing courtship of this business, but it remains not for sale.
OPI: OK, so give me a quick overview of the business as it is today: the size, locations, that kind of thing.
DL: So today, we focus completely on B2B in the medium, large and government sector. We have seven DCs in Australia, one in every capital city. All DCs work off the same IT system so it is a highly leveraged network. The core of the promise is order by 5.30pm today and receive the products tomorrow morning. And we’re doing that about 98.4% of the time; that’s the fill rate.
OPI: How does that compare with the competition?
DL: It’s better, we believe, than the two Americans, Staples and OfficeMax. Lyreco has a smaller range, so they’re in our space and not in our space, if I can put it that way.
OPI: And in terms of the size of the company, how many staff do you have?
DL: We’ve got about 300 staff at the moment. This last year we closed at the end of June, we did A$105 million (US$109 million).
OPI: How has your growth been in the last couple of years? Obviously, the economy has been tough.
DL: We’ve grown year on year for the last 15 years really. We haven’t had a year of going backwards, including the global financial crisis (GFC) year. So a lot of this operation is really about gaining market share from the two majors in the corporate and government space.
OPI: How have you been able to do that?
DL: I think fundamentally we consider that local ownership ultimately delivers a better service to the market and we match them head to head on any value-add that they have. I think the other thing that’s helped us is that, where technology years ago was something that big business had, today technology is an equaliser and you don’t have to be huge to be able to provide similar services. I mean, this business is all about systems and logistics and getting things done on time again and again and again. On the flip side of that we have had good support from the vendors in enabling us to bridge the gap between ourselves and the majors.
OPI: Sorry, could you just explain that?
DL: We believe that the pricing that we’re getting from vendors is close to the international players. It’s probably silly to say the same, but I think our terms are close, so providing I can keep my costs lower than them I should be able to compete.
OPI: I think if you said that your prices were the same, your vendors might get some calls from Staples and OfficeMax pretty soon.
DL: Well, our invoice costs are the same, which is how we work in this country, but we have slightly different back-end terms.
OPI: Based on volume, I suppose?
DL: Yes, based on volume, growth and other incentives that the suppliers might put to us. The other thing that’s helped us is that globalisation has opened up supply beyond our shores so products are not only available to me from within Australia. Now in 2012 I have a global buying platform and we’ve started bringing in an increasing amount of product direct from factories for our private label ranges.
OPI: What does that represent now in terms of your total supplies?
DL: Probably in the vicinity of 35% where we’re by-passing local suppliers completely.
OPI: That’s quite a high number already and seems to compare with the globals.
DL: Yes, we’ve been pretty aggressive with it.
OPI: Do these products tend to be in the traditional stationery categories or is it more widespread than that?
DL: No, primarily stationery. I guess where the product is getting commoditised the brand owners’ value has diminished, so it’s primarily in those high commodity areas such as stationery, toner, ink and paper.
OPI: Most markets have reported declines in traditional categories. Is that what you’re seeing as well?
DL: No doubt about it. There are a few things happening there. One that’s evident now, beyond a shadow of a doubt, is that the GFC reduced consumption and it hasn’t recovered to where it was. I think the other thing is technology; it’s obviously changing the filing and related areas of our business and there is, from what I’m reading, an overall reduction in paper consumption, so that has to affect everything else that lies under that. I’m not experiencing it personally because my paper sales are growing, but that’s because we’ve got a growing business.
OPI: What about categories such as jan/san? Are there opportunities there?
DL: We have a number of growth categories such as canteen, janitorial, furniture and a part of our business we call ‘creative’, which is promotional products. Janitorial is the fastest growing and is about 10% of our business, furniture is at around 10% and canteen now accounts for about 5%.
OPI: I saw that you launched something called Managed Services earlier this year. Can you talk a little bit about that?
DL: Yes, I guess the reason we did that separately to the core business is that it’s a service model as opposed to a product model. I think this channel is late in its run with managed print services (MPS); we tend to get into categories once there is enough mass and see that as a next part of growth of the business. But from outside of our channel the competition towards my toner business and paper business is increasingly being threatened by MPS players.
OPI: OEMs such as Xerox are pretty strong in Australia, aren’t they?
DL: Exactly. So one way to potentially combat that is to get into it ourselves and sell toner and paper by the click.
OPI: Are you working with established third-party providers for that or are you launching from scratch?
DL: No, no, I’m green fielding it. I’m investing in it completely as a green field versus taking a small percentage of the play. That’s not my style. I more want to establish a new business with a new model.
OPI: So how’s that been going?
DL: It’s proving challenging so far. I haven’t made any money out of it yet (laughs).
OPI: It’s what you would call a longer-term investment, then?
OPI: I know you’re a member of AOPD. How do you benefit from that?
DL: It’s really about being connected to other independents around the globe. Initially it was about doing international deals; there hasn’t been a great deal of that type of action, but the infrastructure is there for it to happen if opportunities come up.
OPI: Let’s take a quick look at your main competitors. Staples and ‘Max seem to be having some challenges; they’ve been downsizing and consolidating some operations in Australia and New Zealand. How do you view that?
DL: I think they do their thing and I do my thing, but whenever they go into major structural changes and redundancies and so on, over the years that’s been an opportunity for us because suddenly companies in that mode tend to go internal for a little bit. But I’m well aware that my major competitors are doing it tough in this market right now. They’ve made some big investments and business has reduced.
OPI: Are you seeing some very aggressive pricing? Is that an issue?
DL: Yes, we are. Staples has been extremely aggressive, particularly in the last few months. You’ll be aware there’s been a new CEO appointed to Australia and we’ve seen massive discounting and there seems to be a large pool of funds to prebate customers with something like 10% of their next three years’ spend right up front.
OPI: And how do you combat those kinds of tactics?
DL: I don’t believe it’s sustainable, so at the moment we’re doing what we tend to be good at and that’s retention, just staying close to our customers and playing our service card. In some cases we have lost some business to that offer, but in the majority so far we’ve been able to hold on. When you start doing some numbers on it, 10% of the next three years’ spend is some substantial dollars.
OPI: To what extent have you been able to pick up some sales talent from these guys as they let people go?
DL: I wish my managers wouldn’t hire ex-competition; ex-large competition specifically.
OPI: Why’s that?
DL: My view is that they don’t make their best people redundant. They also come with some baggage. If it’s been short term it can work, but if they’ve been there a long time the last thing I want to hear is: “This is how we did it at the other place.”
OPI: I understand that you won a place on the pan-government contract earlier this year.
DL: We did.
OPI: It sounded like quite a coup for COS.
DL: It was a coup and so far we’ve implemented about $15 million of that business, which is not appearing in published numbers yet. So this current year (to the end of June 2013) will be a double digit growth year for COS.
OPI: We hear about these public sector contracts, that they might look nice on the top line but they’re difficult to make money on.
DL: I think that all big chunks of business are difficult with margins and that’s certainly true about this piece of business as well, but it is almost a decade opportunity, or a two decade opportunity. Some of this business has not been in the market for 20-odd years so we’ve been quite aggressive in getting it. It is obviously at lower margins, but that’s just got
to make us smarter and run our business sharper.
OPI: Going back to the key strategy of grabbing share, how do you organise your sales teams?
DL: I guess one thing that we probably do better than others is that we’re relatively aggressive with business development and having hunters on the road. I think that was really a turning point in our business, differentiating hunters to farmers. In the last 18
months we’ve restructured more to a segmentation model. Simply put, organised by size of customer and some verticals such as government and education. Then the sales force is backed up by a team of telemarketers who do what we call ‘leakage recovery’
OPI: What about the SMB space? Is that something that you’re looking to develop? It seems everyone else is.
DL: COS hasn’t focused on that section of the market, but we do have some business there. There are some internal discussions at the moment about having an online retail style offer, like Staples, ‘Max or Officeworks do. Although 80% of our business is done through our website, it is very much designed for a contract-style business as opposed to retail-type business.
OPI: So you could be making a move into this online retail space?
DL: It is in discussion at the moment.
OPI: What’s your view of the smaller independent channel?
DL: I think a lot of the independents are doing it tough. It’s a tough market and, as the majors are pushed down into more mid-markets and the smaller accounts, that’s creating some challenges for the independents. The other major challenge they’re facing is online; you can google ‘office supplies’ in Australia these days and come up with a number of players who are doing a reasonably good online job. The smaller independents that do well are the ones that have got a nice, local niche, but it’s pretty tough for them to really grow to any significant size.
OPI: You’ve never had a desire to join one of the main dealer groups like Office Brands or Office Choice?
DL: No, unfortunately their value proposition doesn’t really suit what we do; there’s no real benefit – once you’re of this size – of being in a buying group. We did actually used to have our own COS group. We led the group with an independent dealer in every city, and then one by one they were poached and sold. And as they sold we started in that city. That was how we got to be national in the first place.
OPI: I haven’t asked you about Officeworks. I know they’re more retail focused, but I understand they’re trying to develop a B2B offer. Is that likely to encroach on your customer base?
DL: Yes, it will be another competitor for us to deal with. They’re definitely pushing into the online business, and endeavouring to push into the contract business. We haven’t seen any, what one would say, real wins there yet, but they’re a smart operator with some smart people and plenty of money behind them. So if they choose to be in the space, they will be in that space.
OPI: And obviously they also have that Australian-owned argument.
DL: I guess that neutralises one of our big arguments, but we’ll have to work through that as a management team and see how we combat it. We’ve been used to playing the David and Goliath game for 30 years, so this is just another Goliath.
OPI: If I was Officeworks I’d probably try to buy you guys, so have they been knocking on your door recently?
DL: They haven’t come to talk to me yet but I can see what you’re saying; that would make sense, but I’m not sure whether acquisition is part of their strategy.
OPI: You’ve still got the ‘not for sale’ sign hanging up on your door?
DL: We do. Ultimately, the market probably can’t continue with this many players, so something’s got to give. We don’t know whether anybody will retreat out of this market and put up the white flag and say ‘we give up; it’s too hard in Australia; there’s better money somewhere else’
OPI: If you were a betting man, who would you put money on to raise the white flag first?
DL: I’d say ‘Max.
OPI: There were rumours that they would exit Australia and New Zealand, but they’ve committed to these markets in their recent conference calls and highlighted their profitability.
DL: We’ll see. It is a profitable operation – I guess that’s probably why it would make sense to let it go. I don’t focus too much of my time on worrying about it, but as you asked me, I think that’s where I’d put my money. I think there has to be some level of consolidation at the contract level, anyway. It’s a very, very hot market today.
OPI: Do you think ‘Max and Staples could feasibly merge or would that run into anti-competition issues?
DL: I think they would run into some anti-competition issues.
OPI: Right, so you’ve got to look at a third player like Lyreco being involved somewhere, or someone else?
DL: Potentially, yes.
OPI: Or Officeworks if they want to get…
DL: Officeworks may run into the same problem.
OPI: Even on the contract side?
DL: I guess it’s how good they could argue the segmentation of the market. The authorities tend to look at the total market, but usually in an acquisition the parties involved want to argue the segments of the market itself.
OPI: What are your plans for yourself and for your business over the next few years? Are you ready to take a back seat?
DL: I have the occasional thought of me taking on a chairmanship and have a CEO run it, and that’s a possibility in the next five years or so. I have family in the business: two executive positions are held by my daughters. They’re very passionate about the business and they seem to have the same burning desire in them, so I’m hoping they’ll take it forward.