When private equity firm Sycamore Partners announced in May 2018 that it had made an offer for Essendant and intended to merge the wholesaler with Staples Inc, it raised questions about the motives behind this combination vis-Ã -vis the independent dealer channel (IDC). Was it a strategy based on growth potential or more of a disruptive move designed to divide and weaken the IDC?
It appears the answer lies in the former. According to Staples Inc CEO Sandy Douglas, a pillar of the company’s strategic focus is profitable and accelerated growth that revolves around providing an improved customer experience. And a big part of this apparently involves working in partnership with independent dealers.
“We are beginning to see significant opportunity in the marketplace to augment our go-to-market strategy with support for dealers,” reveals Douglas.
“We believe that the capabilities we are building at Staples good procurement, low costs, great products, technology and services can be used to significantly empower dealers towards a more innovative business model. Therefore, we are working on a strategy you might call it ‘Powered by Staples’ where we want to build partnerships with local dealers. We think that our scale, together with the intimate relationships and the local touch that dealers have, make for a combination that will enable us to be even more important to customers as we go forward.”
Quite what shape these ‘partnerships’ will take, it is too early to tell, but Douglas explains they could take “multiple forms”, possibly meaning things such as acquisitions, franchising, strategic partnerships, etc, with different models co-existing within a Staples-run dealer ecosystem that would sit side by side with Staples’ own national programme.
“What I would say is that dealers’ capital structure is their decision,” adds Douglas. “If they then wanted to sell to us, that is something we would work out; if dealers wanted to be independent and successful and growing, that would also work. But having dealers’ energy, their innovation and their relationships is the key part of the strategy it is not purely an effort to try and acquire them.”
Douglas is well aware that after more than 30 years of fierce competition between Staples and the IDC, many dealers will be extremely wary of partnering with Staples.
“This general opportunity is something we are excited about, but we recognise that in the history of the competitive environment in this industry, some dealers early on might have a bit of low trust in Staples. Therefore, our energies are now spent on having them understand what we are committed to doing and to give us a try. Obviously, over time, results speak for themselves and trust builds up or doesn’t based on your actions and the value you can create.”
He continue “The industry, particularly on the smaller side of the dealer channel, has been stressed due to a number of factors such as a lack of products, a lack of scale and a lack of innovation. We have found that the dealers we have spoken to admittedly a small group at this stage all want those capabilities.
“While they think that, at first, partnering with us is inconsistent with their business ethos, the more we talk about it the more interested they get. We believe this has a lot of opportunity to build out once we can win everybody’s trust.”
While Douglas declined to refer specifically to the Essendant situation, he add “You can look at all of our actions and come up with the same conclusion: we are very interested in taking the steps that will allow us to talk with, partner with and ultimately profitably grow with a wide range of locally-focused dealers in this business.
“We have studied the marketplace and listened to our customers and different experts, and we honestly believe that the scale of Staples, multiplied with local connections and the relationships the dealers have with their communities and the innovative approaches that we see from them, will make us a more competitive and successful business. And it will also help dealers be more successful because of the way we would lend our scale to them. All our actions flow from this central idea.”
One of the first dealers to react to Douglas’ comments after OPI initially broke the story on opi.net was Justin Miller, CEO of Tennessee-based dealer Highbar Trading. Miller admits to being “shocked” that partnering with dealers formed part of Staples’ plan. In a lengthy post on LinkedIn, Miller lays out what he sees as the pros and cons of Staples’ strategy. Two of the areas where he believes dealers might benefit from partnering with Staples are national accounts and cooperative contracts.
Gaining access to Staples’ national accounts delivery platform in terms of technology and/or delivery would help some dealers, he argues. “Dealers that are versed in corporate account needs and have invested in the proper technology tools to do so are having success today, but those that haven’t would certainly benefit from those tools,” he notes.
It’s a point echoed by another independent dealer that told OPI: “On the surface, a dealer partnering with Staples to provide local customer service to national accounts would appear to be a win-win situation. When I’ve talked with other dealers, they’ve expressed their concern regarding losing business due to the big boxes having a national accounts programme. While I don’t have any detailed facts to support my opinion, I do believe that some independent dealers would be willing to partner with Staples so long as it was profitable.”
Miller adds that Staples would be “crazy” not to open up access to cooperative contracts such as the National Joint Powers Alliance to dealers. “Typically, municipalities and governments want to work with local dealers, but they are too afraid to partner with them because no one ever gets fired or in trouble for using Staples,” he says.
“When a local dealer is chosen for a contract […], these contracts typically end up back in the hands of a chain player, either [Office] Depot or Staples with their lead cooperative contract. It’s not to say that there aren’t markets where the IDC is winning and has continued to win city contracts, but the chain stores own most of that market share.”
On the flip side, according to Miller, two major drawbacks are dealer trust and what happens to dealer data. “I don’t know whether to think that Staples has a distorted view of the IDC, but it’s called ‘independent’ for a reason. There are some dealers out there that are ready to move on and sell, or maybe they are struggling a little bit from an identity or financial crisis [point of view] where they are ready to partner with Staples on a deeper level, [but] there will have to be different levels of wholesale partnership.”
Miller describes the dealer data issue as “a whopper”. He say “Essendant has an enormous amount of end-user wrap-and-label data which is attached to its dealer customers. I can’t even begin to touch on how valuable that information is. Dealers will still be going after Staples’ business and it’s not like Staples is going to stop going after the IDC mid-market business either. How is this going to work?”
Mike Tucker, President/CEO of US trade association NOPA, sees the logic of the move from a Staples perspective, describing it as “the perfect strategy”.
“There is no downside, and independent dealers would certainly improve the [Staples] customer experience,” he told OPI. “Staples would have access to billions of dollars in profitable mid-market sales facilitated by local dealer relationships.”
Concerns for the IDC
From a dealer viewpoint, however, Tucker says there is much to be concerned about. “Staples has shown little love for its own sales force as evidenced by continual reductions in numbers and adjustments to compensation plans. How do a dealer’s customer service, warehouse, drivers, etc, fit into the Staples-run dealer ecosystem? I don’t think they do. What does ‘being more successful’ look like after six months, two years or five years?”
He continue “Once Staples has your customer information it can use it to compete against you. It’s no different from selling on the Amazon platform. The IDC needs to be wary of any impending mergers that don’t have its best interests at heart, long term.”
Industry veteran and current VP of Sales at ChargeTech Mike Netter, meanwhile, believes Staples’ strategy could be “very good for the industry if approached correctly” and that it would “bring more ‘balance’ to the marketplace with less disruption than another dealer buying spree”.
“The reality is, this will make the industry stronger,” he argues, pointing to factors such as making SP Richards more powerful because “smarter, larger independents” have the ability and the capital to be able to switch wholesalers and “flock” to Essendant’s direct rival. He also believes that smaller dealers, especially in harder-to-reach, non-metro areas, will become part of a network where they can co-market with Staples.
“Staples, in effect, picks up cross-dock and deeply penetrated sales forces in areas it has trouble getting to for little capital expenditure this is easier to manage and integrate [via owning Essendant],” he says.
However, a couple of resellers that would fall into the category of ‘smaller’ dealers were not enthusiastic about Staples’ strategy. Says one of them: “I feel once Staples’ hooks get set into the local dealer, profitability will be the focus, killing the flexible, entrepreneurial spirit of the IDC and ultimately negatively affecting the customer.”
Another add “I find it hard to believe that a large corporation which is used to eliminating the competition would want to partner with [smaller dealers]. Is it because it is starting to realise that the independent dealer knows more about customer service then it does?”
Quandary for larger dealers
What about the other end of the spectrum? One dealership that definitely falls into the larger category is Guernsey. CEO Dave Guernsey told OPI that there was not enough information yet available to make informed decisions, but he raises an important question. “Is the idea to use independents in a way that they would be restricted to the SMB space and leave regional and national accounts to Staples reps? If that’s the case, in my view, this would not appeal to larger dealers. We actively seek out opportunities with accounts that spend over $150,000 annually and need specialised services that answer their overall requirements.
“Very small accounts today are fixated on Amazon… they don’t need services. Medium-size accounts are viable targets and larger ones are very services-oriented. Guernsey would not accept being ruled out of pursuing larger accounts. If I understand the strategy correctly, I’m not a fan of Staples as my wholesaler partner.”
Jordan Kudler, President of New York-based dealer Crest Office Products and a board member of dealer group Independent Stationers (IS), is more forthright in his comments. “For most dealers within the IDC, Staples defies almost all of what the IDC stands for,” he states. “There is a completely different value proposition that the IDC promotes and delivers. In my opinion, if I, as an independent dealer that has spent decades messaging how we differentiate ourselves from Staples, Depot and the big boxes in general, were to now align myself with any of them, it would signal to my customers that I was hypocritical as well as disingenuous.”
He continue “Utilising Staples’ technology and marketing, as well as sourcing through them, would most likely be a one-way path to full acquisition. All in all, it appears to me that Staples has come to the realisation that it really doesn’t have the capacity to provide the high-touch service that end users truly value. After all, if it did, why would the IDC still exist?”
IS CEO Mike Gentile will no doubt have more to say on this topic in September’s OPI Big Interview. For the time being, he calls Staples’ strategy to partner with dealers “a soup sandwich”.
Disruptive and clever move
Commenting on the broader Sycamore/Staples move for Essendant, Ian Wist, Chairman of fellow dealer group TriMega, says that he wasn’t surprised by the development. “It is something that has been discussed and, although it is not something that we [the IDC] are looking forward to, we’ll make our plans accordingly if things go that way.”
Wist adds that, strategically, it would be a “very disruptive” move by Staples which could potentially “capsize” players in the mega-independent and independent channel. “It would be a clever move by Staples and perhaps a wise investment,” he says.
There is still a high degree of ‘if’ in this Staples strategy, of course. At the time of writing, Sycamore still hadn’t engaged with the Essendant board since 17 May and, to the best of our knowledge, had not signed a confidentiality agreement that would allow it to start due diligence on Essendant. Surely, if this strategy is to be taken at face value, then Sycamore should be moving post-haste to engage with Essendant and put in a formal bid?
As it stands, the Essendant board is still backing the proposed merger with SP Richards and this transaction is moving ahead as planned in terms of the US government’s antitrust process and pre-acquisition planning teams.
The ball is very much in Sycamore’s court at the moment. Why it is still hanging onto this ball remains something of a mystery for now.