OPI: Good morning Rob, thanks for finding the time to have a chat with me. Perhaps we should start with a rundown of how the year has been so far for Office Products Depot (OPD)?
RM: OPD has seen strong growth this year – on average 8 per cent across the group. That’s a significant lift on the average 3 per cent for April 2004 to March 2005. Two key areas are responsible for that growth. One is OPD’s promotional and brand development strategy undertaken this year, which focuses on brand awareness and drives product demand. The second is the way our shareholder/dealers have focused on deriving growth from their existing customer base and a single minded approach to business retention.
The New Zealand economy has been strong and consumer confidence has been reflected in our business results over the past two years.
OPI: How many dealer members do you have and are the numbers growing or decreasing?
RM: OPD has 36 principal shareholders with dealerships in 40 locations. While that has remained consistent over the past three years, we have strategically identified the need to increase the number. We are in the process of recruiting among the remaining independents and evaluating greenfield opportunities in key locations throughout New Zealand, with a goal of establishing and maintaining 50 dealership locations nationwide.
OPI: Where does OPD stand in the marketplace at the moment? What are total sales and how does this relate to competitors?
RM: OPD is second in the B2B market behind Boise/ OfficeMax. We currently hold an 11 per cent share of the B2B market. Our goal is to achieve a market share position of 15 per cent by 2010.
OPI: So Boise/OfficeMax is still dominant over there, but how is Corporate Express faring?
RM: Boise/OfficeMax does hold a dominant position in the B2B market with about 34 per cent market share gained after years in the business. But other market players like OPD have become more focused in their market segment approach and customer offering. This has placed pressure on the major corporate players and inevitably places pressure on their market share position.
As for Corporate Express – it is number three in B2B. It has maintained a level position with its revenue increases coming from furniture and promotional products according to our research. It, too, is looking for growth through acquisition among the independent community.
OPI: And how is the New Zealand OP market shaping up at the moment? What is its current size, growth rate etc.
RM: The New Zealand OP market has been valued as high as NZ$2 billion ($1.4 billion), and if everything is taken into account that may be true. However, we monitor the B2B market segment, that’s our model. Our research shows us that this segment is currently worth around NZ$900 million, excluding furniture.
The figures suggest that traditional stationery sales are relatively flat, with sector growth coming from technology (IT) and furniture. The cafeteria and janitorial segments are also showing some growth. Overall, we estimate growth to be at around 3-5 per cent with IT providing a good part of that.
A noticeable trend in the NZ market can be seen in the supply channels. There is a definite rationalisation in products and also in the distribution channels to the OP market.
Suppliers are searching for alternative solutions to the margin erosion in their business and are considering acquisition opportunities that strengthen their overall market position. I believe this is a trend that is likely to continue as the pressure on margins grows.
Unquestionably, the market is oversupplied and some rationalisation may be required.
Trends toward private label products has increased significantly among the main resellers in New Zealand and this trend is likely to grow over the next two years, which in itself brings a new dimension to the industry.
OPI: What challenges are you facing in the market? Are they specific to New Zealand or fairly typical of global trends?
RM: New Zealand is a microcosm of many typical OP markets, with many of the challenges, trends, peaks and troughs much the same. But another big challenge for NZ is oversupply. The resulting competition is eroding selling prices and margins for both vendors and resellers which ultimately flow through to the end consumer as a benefit. There will need to be some rationalisation, in my view, to sustain a profitable position for stakeholders going forward.
However, in recognising that position OPD sees benefits stemming from some rationalisation particularly where duplication reduces customer confusion and the cost pressures on resellers in stock management and holding costs.
OPI: What are the unique characteristics of the New Zealand OP market?
RM: NZ is a small market overall and consist predominantly of SMEs. But despite that, it is sophisticated in areas such as the use of technology products, telecoms and payment channels. International research has shown Kiwis to be early adopters of IT. That means our businesses have to be up to the mark to meet that desire.
OPI: Is there much of an OP manufacturing industry in New Zealand, or are products predominantly imported?
RM: NZ’s OP products are predominantly imported. Croxley (which is owned by Boise Cascade) does some manufacturing, but the whole manufacturing base is relatively small and is under tremendous pressure to compete with goods out of Asia.
The recent strength of the NZ dollar (at $0.70), firm labour laws and an unregulated import market are among other challenges that manufacturers face.
OPI: How many independent dealers are there in general throughout New Zealand and what is their growth pattern?
RM: New Zealand has about 70 well established independent OP dealers. The number of independent dealers has remained static, but we have noted big changes in their businesses.
OP dealerships were once traditional family-run businesses, but there’s a new generation of skilled and experienced people coming into those businesses, and they have the capital backing to fund the growth in these business. The whole sector has seen an expertise shift which is positive for the future of the industry.
OPI: How are dealers faring when it comes to beating off the challenge of the power channel players?
RM: Dealers unaligned with buying groups such as OPD would have to be under tremendous pressure through simply not having the buying strength. Their longevity would have to be questionable.
Dealers in the OPD group enjoy the same buying power as their major corporate competitors. This position has been obtained through consistent growth of the OPD group and the forming of a strategic partnership with Office National (ON), and the group’s ongoing participation with and membership of Business Products Group International (BPGI).
Again, I believe the future for unaligned independents in the OP market as being extremely vulnerable. Many unaligned independents choose to ignore this growing pressure and remain fiercely independent, placing pride before good business sense.
OPI: Do NZ dealers feel the same pressure from hypermarkets such as Wal-Mart, Woolworths etc that sell low-cost, fast-moving office supplies, as most dealers do throughout the world?
RM: That’s not currently particularly relevant to the NZ B2B market, but it is on our radar. Through Woolworths (Australian owned supermarket) and Kmart, there has been some offering of back-to-school and retail stationery lines. These businesses are principally targeting the retail consumer, but do invariably attract some B2B customers.
OPI: Is this an increasing concern?
RM: We expect some pressure in time as the hypermarket concept prevails, but with the number of dealerships aligned to OPD and the style of business we run, we feel ready to meet that challenge and to offer our customers unparalleled service and value.
One of our greatest weapons is our storewide network, and the convenience of location. That, combined with people who are highly knowledgeable and have confidence in the product and the customer service culture, gives us a pretty powerful arsenal.
Coupled with this, OPD has also secured strategic supply partnerships that will ensure we meet the challenges in the short, medium and long term.
OPI: What is your view on the stocking versus stockless dealer debate? Which strategy do you favour?
RM: Our dealerships are a complete unit, which sees shareholders involved in management, stocking, providing a service and operating a showroom. We believe growing such a tangible asset is a far greater driver for our dealers than running a non-stocking location reliant on a centralised warehouse system.
OPD has researched the centralised warehouse model and concluded the cost of that model is too great and carries too much risk. The benefit to the group would be outweighed by the costs of running such a centralised warehouse.
I’ve noted some instances around the world where independents that have gone into a centralised system have now reverted back and changed the way they manage their distribution model.
OPI: How do you feel about dealer groups acting as distributors? Does it depend on how strong the relevant country’s existing wholesale network is?
RM: In New Zealand we have such a strong wholesale distribution network, where the supply to market is same day, that dealer groups see no value in doing it themselves.
OPD is in the process of importing out of Asia and is using existing wholesale networks to manage the logistics. We have done the sourcing, agreed the terms and the product pricing and are working with our wholesale distributors to manage the logistics from supply source to market.
In my view, dealer groups don’t have the logistics management expertise required. It’s a highly skilled profession that needs focus to survive on narrow margins. Dabbling in this carries a huge risk.
Besides that, it would shift the groups focus away from what they are in business for – delivering value to the shareholders and focusing on providing profitable growth and brand equity for the group.
OPI: What are the dominant wholesalers in NZ?
RM: The dominant wholesalers in NZ are all nationwide operators. They include Croxley (part of the wider Boise family), Spicers, Acco, Esselte and Ingram Micro.
OPI: At the end of 2003 you hooked up with Australian counterpart Office National. Can you give me a detailed rundown of how this partnership works, why it came about and how successful or otherwise it has proved to be?
RM: Our strategic alliance provides ON with exclusive rights under licence to use the Office Products Depot brand in Australia. It also provides the rights to pick up on the brand promotional strategies used in New Zealand.
ON manages all the OPD operations in Australia. OPD New Zealand’s involvement is purely from a brand management perspective and for strategic positioning.
The arrangement is based purely on mutual gain. It came about because OPD and ON were looking at the wider view of how we could strengthen our collective positions in Australasia. It has been tremendously successful and we have confirmed that the cultures of the two groups are very much aligned.
In the first 18 months of operations, the alliance has driven significant opportunities for buying under private label. We have used the management expertise of both companies, especially when it comes to IT and marketing. In fact, we are installing the same technology platform to operate our businesses.
The board of directors of both organisations meet on a regular basis to discuss the strategic direction of each group and to continue to align strategies wherever possible.
In my view, this alliance should be held up as an excellent example of how two independent groups could work together to strengthen their respective and collective positions.
OPI: When the alliance was announced, it was met with some controversy by Australian dealer group Office Choice. I remember it being unhappy that OPD, as a fellow BPGI member, was trying to recruit Office Choice members when it was also meant to be sharing business strategies as part of BPGI. Looking back, what are your feelings about that time?
RM: The way that the independent dealer sector will survive is through wider market associations. The board of OPD recognised this early and chose that strategic path. We have taken the first step towards creating a highly competitive group in Australasia. It wouldn’t surprise me to see our associations widen again in the future and incorporate other groups.
Our goal when we set up the ON agreement was to recruit it to the BPGI group. That’s happened and we have all got on with business since that time. We have been sharing common strategies with all BPGI members and working together in a professional manner, For example, through BPGI, we recently signed a supply contract with several Australasian suppliers.
OPI: But how are things between OPD and Office Choice now?
RM: I think we all recognise there is strength in numbers. We are working with Office Choice, but I would like to explore a stronger three-way strategic alliance between OPD, ON and Office Choice to maximise the opportunities available to a larger group in Australasia, especially as the supply chains from China and greater Asia strengthen.
OPI: Do you regret that the row happened or was it simply unavoidable?
RM: We live in a fast-paced global environment where change is inevitable. Every organisation is likely to experience considerable internal pains in reaching its future directional decisions.
Both groups have had to separately work through and agree their respective directions and get on with business. Things have moved on. Our focus is on the future and we will continue to work with the management team of Office Choice and remain optimistic that they will seize the opportunity of participating in a three-way alliance in the foreseeable future.
OPI: I notice that in July of last year you also joined the board of BPGI. How has this appointment helped you to put the New Zealand market’s issues on the agenda at BPGI?
RM: OPD being part of BPGI, and my subsequent appointment to the board, have helped improve our positioning tremendously. Through BPGI, we are able to leverage supply opportunities and be part of a global organisation focused on delivering value to the shareholders of the respective groups.
One of the significant benefits of BPGI is its monitoring of global trends in OP. We’re a small player, but it is important to watch developing trends and gauge how they may impact on our market. However, I feel we contribute to BPGI too. OPD is a well supplied and highly competitive business that has been successful in its sector. We have been able to contribute to BPGI members’ decision-making and have provided experience in assisting other organisations in their brand strategies.
OPI: How is your private label brand progressing?
RM: OPD’s private label offering is expanding. We started with Orange, but we are in the throes of substantially growing the range and repositioning it as OPD Officeware. Our private label is already well recognised in our bulk products (like paper), but we are expanding to a range of around 150 product lines.
That move is being fast-tracked with product out of China. We have locked on to the range of products used through the BPGI group and its supply channels and been able to piggy-back on the BPGI volume ensuring we obtain best-in-country-pricing in the lines we source.