Richard Scharmann has his irons in so many fires that he’s superbly placed to give OPI an overview of the European OP scene. Having been in the driving seat at multi-channel operator PBS Holding since 2008, his years as CEO have been dominated by challenges, first and foremost perhaps economically speaking, but also due to the sheer scale of integration work that he inherited from predecessor Anton Stahrlinger. And while the German market with its many wholesale acquisitions – and said integration efforts – no doubt caused the biggest headaches, Scharmann has always kept his eyes closely focused on Central Europe. This region, he says, represents the biggest opportunities in a currently stagnant, if not declining, OP market.
OPI: The beginning of a new year seems an opportune time to glance back over the past 12 months and also take a look at what the future might bring. Let’s start with last year, which had ‘eurozone crisis’ written all over it. What’s the takeaway for OP in general and PBS Holding in particular?
Richard Scharmann: In a nutshell, 2011 was more difficult than expected. At PBS Holding we thought we could leave the crisis of 2010 behind us, but we were wrong. It was even more difficult last year to maintain our margins, especially due to high raw material costs, and it was very difficult to pass on those prices to our end-customers. We had to work much harder than expected to achieve our budget in 2011.
We also didn’t see significant developments in any of the markets we operate in as a result of reduced sales. The only thing we could really do is be better than our competitors – that was the only chance of getting some positive results.
OPI: That sounds quite bleak. Who has been faring the best/worst in your opinion?
RS: Well, the globals certainly weren’t among the ones doing well. They’ve been focused on their internal problems and we have seen poor performances from them in the Central European markets where we compete in a head-to-head situation.
Right now, in fact, it’s interesting to see some mid-sized companies doing well – it’s those companies that have been the most effective. They are flexible, professional, and know how to deal with customers and be able to keep a close eye on margins.
OPI: Let’s talk specifics. What’s your take on Staples’, Depot’s and Lyreco’s performances in your geographical area?
RS: Office Depot has been performing poorly in Eastern Europe and it doesn’t seem to be getting any better. Staples, meanwhile, is not as aggressive as Depot, especially in the Eastern countries; they just focus on their existing business and run it professionally.
Lyreco simply sticks to its concept – keep on doing the things it is used to in its markets and in the long run this will achieve results. About four years ago Lyreco opened up a logistics facility in Bratislava, Slovakia, in order to serve Austria, Slovakia, the Czech Republic and Hungary. Going for four markets in one go is an aggressive approach, but their current revenues are not a phenomenal achievement in that time.
OPI: What are the key issues for everyone now?
RS: It goes back to the economy. Focus point one is to manage margins and profits. The market is not growing, raw materials and costs are rising, so you have to manage your margins and that is very difficult in a stagnating environment. Secondly, you have to create a very successful online business in line with perfect customer relationship management.
OPI: How are the members of wholesale alliance Interaction doing amidst all the troubles, especially in countries such as Greece and Spain?
RS: It’s an interesting point, because the figures we have are very positive. Especially our partners in Spain and Greece – Comercial del Sur and Plaisio – have been performing well with Interaction’s Q-Connect business and are increasing their profits. Yes, there is an overall stagnation in sales because the market is down – about 3-4% in Spain and 6% in Greece – but they are still growing Q-Connect because in times of crisis there is more focus on price-aggressive products.
OPI: But Plaisio isn’t doing so well, is it? They’ve had to close some stores I believe.
RS: They have a lot of things to sort out right now, correct, but part of it is also to do with the fact that a lot of business is shifting online. That’s particularly important for electronics products – Plaisio’s stronghold.
OPI: That brings me to retail in general, not a good place to be right now.
RS: No, it isn’t and overall the outlook for OP retailing is not good. There’s just no growth there, especially in markets like Germany and Austria where costs are still rising and the unions demand salary rises for employees. Specialist retailers are sporadically having a good quarter, but then it’s back down again.
OPI: Does that also apply to your retail franchise chain Skribo?
RS: Our retail sales are flat at the moment. We currently have 70 stores in Austria as part of the franchise concept and five that we own ourselves. In Germany we have close to 50 stores from our franchisees right now. We’re slowly starting to grow again in terms of sales, but I would still describe it as close to a flat environment.
Skribo is part of our wholesale business – about 33% of wholesaling at PBS Holding is done on the B2C side.
OPI: Do you have ambitions to increase the Skribo business in Germany and Austria or is that not a priority at the moment?
RS: Certainly in Germany it’s a priority and we’re aiming to develop the franchise space there significantly over the next two to three years. There’s one particular regional project we’ve been running this year and that’s to build up a Skribo base in Bavaria, with the target of having 50 franchise partners there over time. At the end of 2011, 35 contracts had been signed. This could be a very successful initiative for us, as we expand the concept from region to region.
OPI: What about the other segments of PBS Holding – how have they been holding up?
RS: As you know, we’re basically split into two business segments – wholesale and contract – and they’ve been performing quite differently.
The contract B2B business has been growing significantly and above average in those markets where we are active, such as Austria, Czech Republic, Hungary and Slovakia. We’ve been growing in those countries between 6-12%. Broken down, that’s 12% in Hungary, 10% in Austria, 7% in the Czech Republic and 6% in Slovakia. Most of this growth is linked to being able to develop our key accounts. On the other hand, we also didn’t lose any business and even took some share off our competitors.
OPI: So customer retention has been key?
RS: Yes, definitely. At times when you have to take great care of your margins, it’s even more important to maintain your current customer base rather than look for new adventures.
OPI: Is any of this growth due to acquisitions?
RS: No, it’s all organic growth. The second part, the wholesale business, meanwhile was quite flat with growth of only 2-3% in Austria and Germany. That’s stagnating sales in my view, as we had price increases of about 3%.
OPI: What were your overall sales in 2011 and also your overall growth?
RS: We now turn over about 1215 million ($282 million) and our overall sales growth in 2011 was about 5%. The business is roughly split into 55% wholesale and 45% contract. Retail as such is negligible as we only own five stores and the franchise business falls under the wholesale segment in terms of revenue.
OPI: What about profit margins?
RS: Margins are still quite good – between 3-5% in both the contract and wholesale business.
OPI: Wholesaling is an interesting place to be at the moment, especially given what’s happening at Unipapel and Spicers. What’s your view from a European perspective?
RS: It will be interesting indeed. The set-up of Unipapel is quite challenging, partially because the company has grown from a very small, local business to a pan-European giant in a short time. With Spicers, they will be five times as big as they were just three years ago.
More importantly perhaps, they are combining traditional office products with EOS and we’ve seen some examples before of how that doesn’t always work. When Kingfield Heath and ISA came together back in 2007, they had a tough time and it didn’t result in the big boom they had anticipated.
From a PBS Holding perspective, EOS accounts for 30% of our overall volume and is very important to us. Over the past five years we have twice evaluated EOS businesses that were for sale and in both situations we didn’t go through with it. Margins and profit in EOS are so small that you have to be very focused to run a business successfully. It’s even more difficult when you match this business with a comprehensive OP wholesale organisation. If you lose focus and just drop half a percent of profit you are out of the market and lose quite substantial amounts of money.
It’s difficult to handle both EOS and traditional OP efficiently and it will be interesting to see how Unipapel really puts those two business segments together on a European scale.
OPI: What’s the solution?
RS: There is no proof of concept that can be seen in the market. The question really is: where are the synergies for Unipapel getting Spicers? They have invested in this acquisition and now they need to get their money back, but where does it come from? In Germany at least, it will definitely not come from a growing market, so it has to come from the synergies that linking the two businesses bring.
OPI: And I guess you may benefit from the inevitable disruption that this coming together brings?
RS: I’m not sure about that. The disruption will only take place if they’re truly integrating the two businesses and changing aspects of the service structure – that’s when they are most likely to take their eyes off the customer. If it’s just a case of negotiating better prices, there’s little we can gain from it.
OPI: What are your plans for the German market where wholesaling has become so important to you? You’ve recently announced some logistics changes…
RS: Yes, PBS Deutschland and Alka will be fully integrated sometime in 2012 – we’re in the process of completing the logistics integration into two facilities in Hanover and south of Berlin, so our entire infrastructure will be consolidated in those two places. From there, we will serve both channels; PBS Deutschland has the full assortment for retailers while Alka caters for commercial customers. Both companies will use the infrastructure as they need it; it won’t be tied to any specific market concepts and channel programmes anymore. We’ve spent about 17 million to upscale the business which will give us a wholesale concept offering more than 35,000 SKUs with a comprehensive service and a tool set that is different to, say, Spicers and soft-carrier.
OPI: Any more acquisitions on the horizon from a wholesale perspective?
RS: Not on the same scale. We’ve had seven acquisitions in Germany and close to doubled our sales with them, but when you’re doing this kind of thing for a company of our size, it puts a real drain on management resources. We would only do it again if it’s a wonderful opportunity with plenty of benefits – and I cannot see any candidates that would fit the bill right now.
OPI: So are acquisitions ruled out per se?
RS: No, they’re not. We would certainly acquire smaller companies in the 120-25 million bracket, because that’s what we can manage quite easily. As you know, we’ve recently bought Kanex in Slovakia which eventually will fall under our Büroprofi operations.
Kanex is a 12 million contract stationer and is an acquisition that very much forms part of our controlled business development. In these difficult times, we’re looking very closely at our balance sheets and profit/loss figures. Smaller acquisitions are much easier to control and also to integrate. Companies like Kanex are also ideal for us, because they would typically be too small for the globals – the whole integration issue versus the amount of sales you can expect make them unappealing to the big boxes. For us, meanwhile, it’s ideal – we can handle the integration, the price tag is attractive and there is not too much risk linked with that kind of acquisition because even if you fail it won’t kill you.
So that’s basically our approach for new markets or those where we want to expand. These types of micro acquisitions allow you to enlarge your foothold in a market in a fairly controlled fashion. We also always aim to break even within 18 months of purchase, which is possible for that kind of transaction.
OPI: Are you concentrating on the contract business for any potential acquisitions?
RS: Not necessarily. We’re looking at any options, so if there is an opportunity in contract in Hungary, we will try to manage it; if there is an opportunity to acquire an old-fashioned wholesale business in Germany, we will take a look at that.
OPI: How does geography factor into that?
RS: We have two approaches. Basically, it’s the central European region that is the most interesting for us. We still see room to grow there, even in Hungary where we’re already number one in the market. We recently talked about potential acquisitions in Romania, we’re in discussions with companies in Croatia, and we’re having a close look right now at Poland.
That said, there will also be consolidation among the many smaller players on the German wholesale side, but this will take longer, because existing structures change very slowly in Germany.
OPI: Acquisition equals consolidation – where will it happen?
RS: There definitely will be consolidation in the German wholesale market, because there are far too many small players around – as many as 60 some guess – and many of them aren’t making any money. But I wouldn’t foresee a merger between any of the big players in the next few years.
I don’t see a lot of aggressive movement on the contract side. All the globals are busy managing their existing businesses and are not really focusing on the growing markets in Eastern Europe. Maybe there’ll be some activity in already existing markets for the globals where they’ve already built up their bases.
Full name: Dr Richard Scharmann MBA
Born: Wels, Austria
Education: Graduated in Business Studies at Linz University, Austria; MBA Corporate Finance from Rotman Business School, Toronto, Canada
2009: Chairman of Interaction
2008: CEO/Partner, PBS Holding
2006: Deputy CEO/Partner, PBS Holding
2005: VP Aircraft Engines, Bombardier Recreational Products
1994-2005: Worked for various subsidiaries at PBS Holding
1992: Assistant Professor, University of Linz
• Founded: 1788 as a printing house; trading activities since 1844; wholesale operation since 1945
• Headquartered: Wels, Austria
• 2011 sales: 1,215 million
• Employees: 864
• Business segments: Retail B2C (Skribo); B2B (Büroprofi dealer network); contract (Büro Handel, PBS Hungaria, Buroprofi CZ/SK, Biroprodaja); wholesale (PBS Austria, PBS Deutschland, Alka)
• Geographical coverage: Austria, Germany, Slovakia, Slovenia, Hungary, Czech Republic