Benedikt Erdmann has been head of leading German dealer group Soennecken – a business of many parts – since 1996. In the other half of this interview (published in the February issue of OPI), Erdmann discusses Soennecken’s unique dealer group-cum-wholesaler model. Here he goes into further details about the group’s direct model.
OPI: Let’s talk about the business that you got into recently of dealing with larger contracts on a direct basis. I know that caused some discussion in the market at first; have things settled down now?
BE: There are two aspects. First of all, it’s very successful because we’ve won 30% of tenders we’ve entered.
OPI: The bad news is there’s probably no money in them.
BE: No, we’re making money with all of them but the problem is we only have six.
OPI: Six big contracts can still be a meaningful number?
BE: The key thing is that if we want a new customer we have a realistic chance of getting them. But we have a list of potential customers and this list is too short. We have a system where our members can protect customers that they want to acquire and the situation is a little bit absurd because we have a list of 405 customers that we would like to acquire for Soennecken. The list of customers we are allowed to acquire has 69 on it. I would be happy if members would supply them but they don’t.
OPI: Spicers in the UK is now venturing into the direct arena taking a collaborative approach, working with the dealer. Do you see that as a way around the problem that you have?
BE: I don’t know enough about the British market; in the German market this would not be successful. With larger accounts, larger than €500,000 a year, companies want to have one supplier. Our competitors are Staples and Lyreco and they have a very strict business model, so going to a customer together with a member is much too complicated. Our members would like to but it would not work, we’ve tried it two or three times.
OPI: So what is the solution? How are you going to explain to members that their ambition is not realistic and that they’re better off enjoying the benefit through the rebate?
BE: That takes time. It’s a cultural change. We have to talk and talk and talk for a long time. A cooperative in general is not a business model for quick success, but if you have the time to do that it can be very successful in the long term.
OPI: You’ve won some business, albeit only a few contracts; what lessons have you learned?
BE: We’ve learned how complicated the business of our members is.
OPI: That’s good.
BE: It’s very helpful when talking to our members about their business. We learned a lot and it’s a hard business, sometimes much more complicated than wholesale. That was a good lesson for the whole company. Secondly, we learned that all the technical requirements and solutions we are asked to deliver aren’t a problem for us. We have the IT services, we have the products, we have the logistics systems. What is a little bit tricky is the sales situation, pricing; we’re low on a lot of our pricing.
OPI: Are you losing money on some products?
BE: Right. So to participate in a tender is a bit of a gamble, but OK, that’s the way it is. We’ve got some customers and I don’t think we’ve done a bad job.
OPI: Why do you think those customers chose you ahead of Lyreco, Office Depot or Staples?
BE: I think because our approach is very honest. We say what we can do and what we can’t. And if we don’t make money with the company we tell them.
OPI: Do your competitors lose money on some contracts?
BE: Perhaps. For example, our first customer wanted to fix prices on paper for two years. We said: ‘No, it’s a guarantee to lose money.’ So maybe our competitors do it but we tell customers we’ll make sure they get the products. And they say: ‘OK, that’s a fair approach.’ They changed this obstruction in their tender and we won it. So I think some customers like the way we talk to them.
OPI: How many private label SKUs do you have?
OPI: Have they become more important as the recession has started to take hold?
BE: Not really. To be honest we have had strong growth with brand products.
OPI: Why do you think that is?
BE: Because we’re not really price focused with Soennecken. I think we could do much better if we could go on a lower price level, but we want to make money. We’re focused on the margin situation for our members and we need a minimum price for products.
OPI: Private label is increasingly important to other dealer groups and wholesalers.
BE: Yes, that’s what I said; we’re completely different.
OPI: OK, tell us about your interesting arrangement with PBS Deutschland. How did that happen and how is that relationship evolving?
BE: The main reason for the membership of PBS Deutschland is that we needed a supplier for our retail shops. The retail members wanted Soennecken LogServe, our warehouse, to deliver all their papeterie – what we call retail – products. I think there’s a market for a specific wholesale business in Germany, which is very traditional. There are only one or maybe two players in the wholesale business in Germany that have growth right now and one is PBS Deutschland.
OPI: So I understand how it works from the supplier perspective, PBS Deutschland has relationships with a number of vendors that were key to your retail members. Then it became your largest member and your largest customer?
OPI: So what do you supply them with?
BE: They’re buying, via Soennecken, products from contract suppliers like Leitz.
OPI: And it’s more economical for them to do that through you than direct?
BE: Absolutely, they get the dividend of about 2.6%.
OPI: And do you compete with them anywhere or have you defined territories?
BE: Yes, Alka [part of PBS, based near Hanover] and Soennecken are in competition.
OPI: That’s OK?
BE: That’s fine, we can live with that.
OPI: How big is PBS Deutschland?
BE: Let’s say it’s the largest member.
OPI: Do your dealers see logic in that relationship?
BE: Yes absolutely. From the supplier aspect we have gained a 30% or 40% increase with PBS Deutschland.
OPI: And do you have plans on doing anything further with them? Closer cooperation?
BE: No, not now. Maybe in the next couple of years. They’re expanding to southeast Europe right now so we should wait and see. I think what they’re doing is very successful. It’s a new start in every new country and it takes a lot of awareness and business management capacity.
OPI: We touched briefly on the economy in Germany. How is the eurozone crisis affecting the office supplies industry here?
BE: Today, I think the market is flat. Some competitors report -2% or -3%; we have +1%. Our members are between -2% and +2% so on average it’s flat. That’s the B2B market. The B2C market is much more complicated. I think we have a big, big problem with customers using the internet for shopping; they’re not shopping in the cities anymore. Our shops are less frequented than last year; by the end of June we had 5% fewer customers in shops and that’s going to be a big problem over the next couple of years.
OPI: The number of stationery shops that you have in Germany is far higher than most other markets in Europe, with the exception of some of the southern European markets?
BE: Yes, we’re doing a lot so that it stays that way.
OPI: But do you think e-commerce and a younger generation coming through will start to impact that number?
BE: Absolutely, absolutely. We have a yearly decrease in the number of shops of about 4% or 5%. I think this will accelerate.
OPI: Are members that are closing shops still managing to keep some of that business but online?
BE: I don’t think that’s a solution for retail because internet prices are much lower. Shops have fixed costs and that’s not the right business model. I think the only solution is to use the internet to create impulses for people via social media to visit the shops personally. There are many opportunities but most shop owners don’t have any idea how to do it. That’s what we try to do; we try to help them and give some ideas.
OPI: But it’s very difficult; everybody’s trying to get noticed on the internet. Isn’t it inevitable that most of these small shops in Germany will shut down?
BE: No, not most of the small shops but maybe they’ll lose about 10% or 20% of turnover in the next couple of years. I think the job we have is to get turnover with other products, we have to be a little bit creative to get customers back in shops.
OPI: Well it’s the same problem that the big box superstores are having on a much larger scale.
BE: Yes, also in other industries. Look at Metro, for example. The big warehouses in Germany all have the same problem. It’s not the problem of small shops; it’s a general problem in retail.
OPI: What impact is Amazon having in Germany?
BE: I think for our business right now it’s overestimated, but it will change in the next two or three years.
OPI: As a wholesaler, is there an opportunity for you to work with them?
BE: With Amazon? No. That’s not an opportunity for us because the pricing model of Amazon isn’t very smart. The prices are going down and down. They take fast-moving goods in their own warehouse and would let us deliver all the slow moving goods for low prices. That’s not a model for making money – the only person that makes money with that is Amazon. So we will compete along with our members. Amazon tried to acquire us as a supplier for their platform and we decided not to do it. That was a strategic decision.
OPI: So if Amazon does have an impact at some point, will that be in B2C, B2B or everywhere?
BE: I think it will affect the B2B market with smaller customers and the whole market for the B2C market, especially for products with a price above €5 or €6.
OPI: You have other well-established online players in Germany such as the Otto Group that will fight pretty hard. That will be an interesting battle.
BE: Yes, absolutely, especially the Otto Group. It’s not easy for them right now because the catalogue turnover is going down.
OPI: Are the changing behaviours of consumers, particularly young people, affecting the products they purchase? They have laptops and tablets, they consume fewer files and they print less paper.
BE: Yes, absolutely. We carried out some market research this year in our retail shops and there are some very interesting insights. First of all, writing products are a key reason to go to a shop, but writing is getting less important. What we have is an old fashioned product that’s not trendy or requested. Also, more than 60% of our customers are female, young mothers who come with their children. The children are customers until the age of 10, 11, 12 and then we lose them because we’re not trendy anymore. They then come back when they go to university or have children.
OPI: So where do they go in that six-, seven-year period?
BE: I think the internet; they don’t go shopping anymore at all. But the most dangerous competitors for us are drug stores such as Müller; they are very trendy.
OPI: So how do you view the future for your members and other independent resellers in Germany?
BE: I tell you that in ten years we’ll have about 25% fewer members and those we have will make about 20% more in turnover.
OPI: So you see members consolidating and merging?
BE: Absolutely, the bigger members are growing and the smallest members are shrinking. Not everybody but that’s in general.
OPI: When you see a dealer in financial difficulty, do you help them and encourage them to look at alternatives?
BE: Yes, this morning I got a list of about 55 members that are being coached by our consulting company. They’re not necessarily in trouble, but looking for advice. The good news for us is that about 10% of our members are using our consulting service right now, and in total I think our employees have consulted 50-60% of our members at some point. So we know a lot about our members, we know their structure. We have a deep insight into their numbers as we’re in very close contact and that’s a big advantage because we see things and we can do things before they get in trouble.
Paperworld: A test of time
OPI: I’m going to ask you about Paperworld. The German dealer community is a very strong part of why Paperworld continues to exist; what are your views on its future?
BE: We used to be an exhibitor, but we haven’t been there for three years. I think the problem for Paperworld is that it’s not absolutely necessary to be there anymore. There are so many companies, so many huge brands such as 3M or Esselte that are in the hotels but don’t exhibit anymore. Most of our members don’t go anymore, so we would need a really good reason to come back. There should be a strategic change at Paperworld, to have a completely different concept.
OPI: Why aren’t your members attending the fair?
BE: There are several reasons: first of all because of the missing big brands; second, because of cost; third, Soennecken is not there anymore; fourth, there are alternatives, other smaller fairs. But the most important reason from my point of view is that it’s not a place you have to be; it’s not the social melting pot it used to be ten years ago. It used to be excellent. Ten years ago it would have been absolutely impossible for me not to be there because I would have been so afraid that everybody would be talking about me because everybody was talking about everybody, and this has changed completely. I think 50% of the important people in the industry don’t attend Paperworld anymore.
OPI: A lot of the CEOs of the multinational business just come in for the European Office Products Awards dinner.
BE: Yes, and that’s what we’re doing. It’s a pity because I think Paperworld is a shop window for our industry but it’s not affordable anymore. Margins are too small. So I think the message to Messe Frankfurt should be “change”. It’s not getting better with the concept they have right now.
OPI: Have you told them that?
OPI: Are they listening?
BE: I don’t know but they haven’t changed anything so far. Let’s hope for the best.