Australia has rarely been out of office products news over the past 18 months or so, but the biggest stories have revolved around the big box operators in the country. Three of them have in fact been up for sale in this period — OfficeMax (as part of US-based Office Depot), Winc (formerly Staples Australia and New Zealand) and Officeworks.
Unbeknown to many, a fourth one was evidently up for sale too — Lyreco Australia — and it was fellow independent Complete Office Supplies (COS) that snapped up the struggling player in that market in May. COS itself has always had a firm ‘not for sale’ sign on its door, but founder and CEO Dominique Lyone realised the urgency for more scale when ‘Max and Winc went on the market (and made a bid for the former). This became even more important when the two eventually combined under the Platinum Equity umbrella.
At OPI‘s recent European Forum in London, UK, Heike Dieckmann caught up with Lyone to discuss the acquisition of Lyreco’s Australian business, his plans for COS going forward as well as the fast-evolving Australian marketplace as a whole.
OPI: You’ve been featured in these pages before when we went into some depth about your background and that of the company. In a nutshell, how would you describe COS now?
Dominique Lyone: I would call COS a typical contract channel player today. All our customers are B2B. About 50% of our business is from government, another 30-35% enterprise and then we’ve got a very long tail.
OPI: You had retail at some stage too, didn’t you?
DL: Yes, a long time ago. The reality is I know nothing about retail and for us it was a total failure. I’ve never attempted to go back there — it’s not me and it’s not what I do.
OPI: The most recent news coming from COS is of course the acquisition of Lyreco in Australia. Let’s start with the numbers. What does COS look like now as a result of adding Lyreco to the picture?
DL: Our combined revenues today are A$215 million (US$160 million). We have about 500 staff. In terms of logistics, Lyreco has five distribution centres (DCs). COS has seven. All of these are being consolidated so we’ll end up with seven again ultimately.
OPI: Are you closing all the Lyreco ones and keeping yours?
DL: No, in one instance we’re keeping Lyreco’s DC and closing ours. The Lyreco one is a better fit for what we need.
OPI: That implies a huge amount of previous overcapacity if you’re still working with seven DCs in total.
DL: That’s one of the core issues of the industry, isn’t it — we all have overcapacity in our infrastructure; it’s part of the reason we’re seeing so much consolidation.
OPI: What about staff — there must have been overcapacity there too?
DL: There was. On the day of the acquisition, we had 600 people — 350 from COS and 250 from Lyreco. We’ve rightsized that down to 500 already. The 100-staff adjustment has come from both sides — some from Lyreco and some from us. Our endeavour has been to keep the best of both and to reduce the pain of redundancies as much as possible. Sadly, it’s a reality of business.
OPI: Will this number go down further?
DL: No, it won’t. We’re in the middle of integration now and all personnel-related decisions have been made and are completed. COS going forward will have 500 employees.
On the positive side, bringing all the Lyreco people on board has been fantastic for us. To employ such a large number of knowledgeable staff would have taken me years to do otherwise.
OPI: Is attracting talent difficult in Australia or indeed in the industry?
DL: Recruiting the best people is always difficult in any market or geography, but talent within this industry is particularly hard to get, almost impossible in fact, because of all the non-competes between the various operators. With the Lyreco deal, we got access to a very large team of people who really know the business. That’s a significant bonus.
OPI: That means the 100 people you’ve just lost aren’t going to turn up at the doorstep of your competitors either…
DL: Some of them might eventually, once the non-competes have expired, but not imminently.
OPI: What other synergies are there as a result of the Lyreco acquisition? You mentioned your target audience before which so far has been government and big enterprises. That’s quite different from Lyreco’s, isn’t it?
DL: There are several pluses that come from the Lyreco acquisition. As you’ve just alluded to, one is that Lyreco did a better job than we did in Australia’s mid-market. We’ve now really immersed ourselves in that specific customer sector and are learning a lot about it in order to keep the momentum going. We, for example, went to Lyreco’s headquarters in France on this trip to Europe to talk to the executive team and try and learn as much as possible.
Another thing we gained with Lyreco was international customers. This wasn’t initially our intent, but part of the deal with Lyreco is a strategic agreement whereby we’re partnering with them in Australia and service all their international accounts in the country.
My understanding is that about 30% of the total Lyreco business is international. I don’t know how big a part of that percentage Australia is, but it certainly gives us a point of difference.
OPI: How much more are you now competing with Officeworks as a result of the get-together with Lyreco and its strong mid-market focus?
DL: Officeworks has always been a mighty competitor. It doesn’t compete with us that much in the top end of our business, but in the mid-market and in the SME segment there is significant competition.
Officeworks has a different model to us, of course, in that it’s bricks-and-mortar and also has a very strong online model. And it’s a very big organisation with revenues of A$2 billion. As such we’re probably better at the customer relationship. It’s certainly a big competitor, but we’re not as focused on Officeworks as we are on, say, Winc in Australia.
OPI: You mention that you’re already right in the middle of integration and I think you’re trying to complete that by the end of August, to coincide with what Platinum Equity is doing with OfficeMax and Winc Australia. That’s quite ambitious considering the deal only happened at the beginning of May.
DL: Yes, that’s the idea and I believe that this target is achievable. As you say, a big part of our fast pace on this is to make sure that we’re ready to compete when our main opposition has also gone through their integration period.
OPI: Let’s talk about that opposition. For a start, how do you think a merger with OfficeMax Australia would have played out had you been successful in your bid to acquire the company? Where would the synergies have been given that scenario?
DL: There are two aspects to the OfficeMax business in Australia. One part would have been quite similar to what we now have with Lyreco which is its government and enterprise business. The big difference — as opposed to Lyreco’s mid-market strength that I referred to — would have been a whole new business in education. OfficeMax leads the education sector in Australia and that would have been a completely new sector for us to dominate in. I believe almost 50% of OfficeMax’s business in the country is in education — that’s huge. The rest is in government and large corporates.
OPI: Not the mid-market then:
DL: No, not the mid-market — that’s something we gained with Lyreco that we would never have gained with OfficeMax.
OPI: The combined OfficeMax/Winc in Australia is your biggest competitor in the market I guess?
DL: Not only is it the number one competitor in the market, it’s also a new style of competitor because it’s owned by a private equity firm. We hope Platinum will focus on generating a swift return on its investment compared to our more traditional competitor, which has been a global operator with a branch in Australia that has been focused predominantly on growing the top line rather than profit. I see a shift that’s going to occur, away from a focus on growth, growth, growth, to a greater emphasis on returns.
The rivalry in the Australian marketplace between the previous four players — Staples, OfficeMax, Lyreco and COS — has significantly reduced our margins until almost everyone became unviable in their own right. What’s happening now is a complete restructure of the market.
OPI: Down from four to two — surely that means consolidation at the top end of the market is done?
DL: At the top end it is I agree, but I still foresee smaller dealers consolidating and buying each other out.
OPI: The ones organised in the buying groups?
DL: Yes, and there are a couple of things driving that, predominately succession issues and the fact that some people just want to get out of the business and do something else. There have been several instances of small dealers consolidating over the past 12 months.
OPI: What about COS — are you still looking for smaller acquisitions? You bought Office Organisation at the beginning of last year I believe.
DL: I‘m always on the lookout for opportunities, particularly in segments outside of the core categories, such as jan/san or furniture. Office Organisation is a great example where we expanded our scope in furniture.
OPI: So you’re looking at it from a breadth of product point of view.
DL: Adjacent categories, yes. I think the core is pretty well done from a consolidation standpoint in Australia.
OPI: What about COS in New Zealand? From what I last heard you were still interested in buying Winc New Zealand off Platinum — which it has to get rid of under an agreement with competition authority, the New Zealand Commerce Commission. Is Platinum even talking to you given the situation you had in Australia where you opposed the ‘Max/Winc deal?
DL: I can tell you that, when the future of the business supplies industry in New Zealand is discussed, there is a general consensus among all experienced OP leaders that Winc NZ is simply not viable as a standalone business. Without an experienced operator like COS with a trans-Tasman approach, buying power and systems in place, Winc NZ will fail and the country’s commercial OP market will quickly transition to a monopoly.
Of course, that’s very desirable to Platinum, but the regulator will have made a significant error of judgement for the second time with this deal. How it allowed the situation to get to this is unbelievable.
I welcome discussions with Platinum to buy Winc NZ and I remain hopeful that the firm will engage with us soon. Surely the regulator must have set a deadline.
OPI: Let’s go back to Australia where OfficeMax and Winc have permanently come together — or as permanently as private equity allows. Both companies needed to do something to revive their ailing fortunes. If I remember correctly and going back almost 20 years, Corporate Express Australia (CEA) in particular was a huge success in the country for a long time. What changed so drastically that revenues have fallen by about 30% since Staples took control of CEA in 2010?
DL: You’re right, CEA was a mighty competitor. I believe a big part of its success back then was that it had a local board, local management — an overall local outlook, despite the fact that it wasn’t really local and 50% owned by a Dutch company. The minute it became part of a much bigger entity — Staples — it kind of assumed branch status of a very far away parent company and started failing.
OPI: But now you have to contend with both Winc and ‘Max as a daunting A$1 billion entity. What’s your trump card and the core differentiator at COS?
DL: We’ve always been focused on the customer experience and we have strong family values in terms of service. It’s a completely different outlook. A family-owned and operated business is more than likely going to deliver better customer service than a company that ultimately is just in it for the ROI.
We live and breathe what we do and we’ve got next-generation succession plans in place, so we’re making decisions now that will impact the business in ten or 20 years’ time. Private equity firms talk about their exit before they’ve even bought a company.
OPI: Talking of succession, your two daughters are here at the forum with you. What’s your plan?
DL: My daughters have been in the business now for over 12 years, so they certainly are fully immersed in the company. We haven’t called a day for the changeover, but there will come a time in the not-too-distant future when I’ll probably become the chairman or take a different role in the business.
OPI: You alluded to family succession in the past, but without specifics. What has changed?
DL: My age for a start! My daughters have always been in the picture, but COS has been my dream and it’s something that I created, and I have never wanted to push that down the throat of my daughters, so it’s been a case of “do they actually want to succeed me?”. The past couple of years have left me with in no doubt of their desire to continue and take the company to the next generation.
OPI: What will their roles be — will one take the top job, with the other in a supporting role?
DL: No. They have very complementary skills — Belinda is very much about marketing and strategic procurement whereas Amie is more involved in logistics and customer service. At this stage their thinking will be along the lines of co-managing directors or co-CEOs.
OPI: On a broader topic, what does the Australian landscape looks like now from an independent point of view — what are Belinda and Amie facing?
DL: Independent dealers are under pressure, no question. Smaller operators are being pushed from Officeworks on the one side and from companies like us — that want to get into the mid-market — on the other.
There’s a number of really good independents that deliver great service, have a plan and are working on as well as in the business. And I think they will continue to do well.
I still see significant room for the independent. I’ve been in this industry for over 40 years and the conversation we’re having now about Amazon is almost the same conversation we had 25 years ago about the big boxes entering our space.
OPI: Amazon! I don’t think we’ve had a Big Interview in the past couple of years where Amazon wasn’t on the agenda. It’s still new to Australia, of course. How big a deal is it for you?
DL: We haven’t seen Amazon in our space yet in Australia. We hear plenty about it from other countries, but for the moment I believe there are lower hanging fruit for Amazon in Australia with electronics and other categories. But I have no doubt that the company will duplicate what it’s done in other geographies and do very well in our sector as well. As such, there’s certainly a risk and we take that risk very seriously.
For now, we have reasonable protection from Amazon with our top end of the business in the contract channel. But the potential threat is clearly there. The contract channel has always been made up of a basket of goods that is aggressively priced and you even out your margin with the non-basket. Amazon is likely to go for that non-basket. That could become problematic to the whole model of contract. It’s interesting that this topic has also come up here at your forum, so it’s certainly up for discussion how we deal with this challenge.
Broadly speaking, it’s about being aware of what’s going on in the industry and changing accordingly. As a general comment and to answer your question about independents, I firmly believe that small dealers bring a level of relationship to the market that the bigger guys just cannot compete with.
OPI: Including you?
DL: Including us. We’d like to think we could, but there’s a scale that you reach where that really local customer service is just not possible anymore. We talked about the acquisition of Office Organisation earlier. That was a A$2 million business when we bought it. The level of service that the people there delivered was phenomenal and something that we’ve not been able to keep up with, it’s as simple as that.
We learned a lot about the independent dealer community when we bought that business actually. And one thing was most definitely that the level of service some of the independents deliver could never be matched by any of the contract players or by Officeworks.
OPI: Why did you buy that company — what was the draw?
DL: It was mainly a category purchase. Like I said earlier, Office Organisation was very big on furniture and COS wasn’t. So again, it’s an adjacent product thing. But what I said about service also refers to its office supplies business — it was outstanding and very hard to compete with. And now to maintain.
OPI: Most smaller operators are organised in the two main buying groups in Australia I believe. Is there a case to be made for these two groups to merge and become stronger as a result? It’s always something that’s being talked about in the US — never more so than now with the current Essendant/Sycamore/SP Richards situation. What’s your view?
DL: It’s always a point of discussion here too. Is there a need for two? No, in my opinion. Would they be stronger as one? Yes, from a cost and overheads point of view. But both dealer groups have very specific identities and are increasingly finding their points of difference. I can’t see a change on the horizon as regards a possible coming together.
OPI: Finally, we talked about your expansion into new product categories, like jan/san and furniture. What about services — contractual solutions as opposed to transactional business, like managed print services or breakroom maintenance and service contracts — where do you stand on that?
DL: We’re not involved in any of it. I hear a lot about it, but I haven’t really figured out what services are viable in our segment.
OPI: That’s one for Belinda and Amie to work out perhaps! Thanks for fitting in this chat Dominique, in among all the discussions at the forum — it’s much appreciated.