The power players are upping the tempo in their war against the independent dealer channel. So what shape are dealers in to fight back and how do they repel the invasion on their home territory?
The battle for market share being waged in all echelons of the US reselling sector is fiercer than ever at the moment.
At retail level, at direct marketing level, and at contract level, the Staples’, OfficeMaxs and Depots of the world are locking horns on a regular basis.
While the difficulties at the likes of Corporate Express (CE) and Office Depot have been well publicised in recent times, just how is the independent dealer sector, in many ways the cornerstone of the US office products industry, faring in the constantly changing OP landscape?
While there has been no shortage of research carried out recently on the OP industry in the States, many of the findings are a little inconclusive as to where the balance of power is moving, if indeed it is moving at all.
In the US overall, 46 per cent of dealers consider their channel to be stronger than three years ago, but on the flip side most reckon that member numbers are falling.
is.group CEO John Kreidel claims that independents are "holding their own out there" and "doing well", but he concedes many are finding the going increasingly difficult and that competition is growing tougher. "The larger dealers seem to be doing exceedingly well," he points out, "but the smaller guys are having a little tougher time of it as competition increases around them every day on the street."
According to recently published MPA International research on the US office products market, there are currently only about 2,000-3,000 dealers out there that are "of any significance", down from 10,000-15,000 in the halcyon days of the 1980s, before the advent of the power channel.
And of those, the vast majority are considered to be small companies with sales of less than $5 million. Indeed, according to MPA, only about 50 are doing more than $20 million, less than 20 more than $35 million, and just three more than $100 million – Prime Office Products, WB Mason and the largest, Clifton, New Jersey-based Allied, which MPA reckons sold $300 million in 2003.
comeback kings
BPGI’s CEO Jim Preston says the trend of the big getting bigger and small getting smaller can, in part, be put down to the economy. He remarks: "I believe that history shows when the economy is tough that the very small dealer will exit the market but they will also re-enter when the economy strengthens."
But he points out that despite the soft economy, the SME sector of white collar workers has held up well. "This is the traditional strength of the independent," says Preston. "Our purchase numbers show this as every year our figures have grown when comparing the same dealers and the same vendors. Interest rates have been low which also tends to help the small entrepreneur."
According to MPA, there are signs that dealer numbers are creeping back, partly thanks to a number of so-called phoenix dealers (former dealers who sold out to CE and US Office Products) returning to the fray after their non-compete agreements have expired, and staff leaving larger companies to start up on their own. To back this belief up, it cites OP wholesalers reporting a net increase in their number of dealer accounts.
Allied president/COO Michael Brown is sceptical, however. He says: "I would be surprised if the amount of independent dealers was growing, but I would not be surprised if furniture only, print only, toner only or coffee only companies were adding office supplies to their offerings. I doubt anyone is looking at the office supply market as an untapped opportunity!"
Preston, too, says that the number of independents is declining, but does not believe that this is evidence of a channel in retreat. "It appears the number of independent dealers continues to decline," Preston says. "The very small dealers are selling out or merging with the mid-sized dealers. In absolute numbers therefore, the number of dealers is in decline. However, I don’t believe this tells the story of the success or lack of success of the independent channel."
And a recently commissioned is.group poll of dealers and manufacturers appears to back this belief up. According to findings, 52 per cent of dealers think there will be fewer independents around in three years’ time. Manufacturers are slightly more optimistic, but not by much.
fears
If some dealers are finding the going too tough, everyone is agreed as to where the pressure is coming from – the power channel. The big boys are increasingly looking to encroach on the traditional market of the independent – the SME sector with 5-100
employees. Staples, which recently snapped up Hartford Office Supply to spark fears of a new dealer roll-up (see ‘roll up, roll up’, OPI November 2004, page 34), enjoys what is believed to be double digit organic growth rates for its SME delivery business.
"Some power channel players are getting quite good at the middle market," says Preston. "Their strength will place increasing pressure on the independents."
Brown fears that the independent sector will struggle to make itself seen or heard in the face of the power channel’s onslaught. He says: "How many people that are graduating into the workforce today know who we are? Staples, Office Depot and OfficeMax are very well branded companies. The independents have to hope that their salespeople are touching their accounts frequently, or they will lose them to the young geniuses who grew up running the aisles of the superstores."
In fact, Brown believes these are tough days altogether. "I think the independent dealer channel is not so healthy," he says. "There are tremendous pressures on street margin right now, operating costs continue to increase each year and the dealers are having a hard time passing along those increases.
"Even though the US has added over two million new jobs over the last 12 months, I don’t know if that has translated into much new business for the independents."
Another perhaps surprising statistic to come out of the MPA research is that of the estimated 2,000-3,000 dealers out there, only 55 per cent belong to dealer groups. But Preston believes that as the power channel increasingly looks to flex its muscles and wink at the SME sector, this will change.
He says: "By belonging to a group, a dealer does surrender some flexibility. Dealers are prepared to give up some purchasing power for this flexibility. In the short term, this may look attractive but as the power channel players get better and better at targeting
the 5-100 white collar market, the competition is only going to get tougher. I believe that over the next five years the percentage that is not affiliated will shrink."
Preston concedes that the power channel will more and more look to dealers’ traditional customers to fuel its insatiable thirst for growth. And acting as a collective, believes Preston, is a key weapon. He adds: "The collective buying power and marketing resources of the groups will be even more critical to the success of the independents. We can compete by working together."
Another vital strategy in the independents’ battle for share is to play to their strengths and beat the drum to the beat of service, service, service. "Treat the customer like a customer," says Brown. "The reason the independent channel exists is not because customers can’t find the superstore next to their home or office, but it is because customers want to feel important. The larger players can’t make it cost effective to give customer care and personal attention to every account, so they have to automate it."
Preston agrees. "The keys remain the same," he says. "Focus on the customer. No one can provide superior service and ‘relationship’ to the customer than the independent. Understand the value proposition of the customer and be in a position to offer the best combination of price and service. It is not all price and it is not all service. Every customer does not require the same combination. Know your customer."
