The balance of power
by Andy Braithwaite
Now that Vasanta, parent company of VOW, has found new financing, does this mean a return to ‘normality’ for the UK’s number two OP wholesaler?
Ian Sinclair, Managing Director of VOW Europe – the UK’s second office products wholesaler with 2008 sales of around £310 million ($514 million) – blames a story in national newspaper
The Sunday Telegraph early in July 2009 for escalating the financial problems of parent company Vasanta that saw it seemingly teeter on the edge of collapse.
"We had struggled all year because we had some impact from the credit insurers at the beginning of the year and that caused quite a lot of disruption," he admitted to OPI. "However, we didn’t really feel any impact until the newspaper article in July. Until then everything was pretty much delivering on what was promised, but the article did spark a lot of concern and led to reluctance from some suppliers to supply us."
Former majority investor, private equity firm Electra, had already revealed in May that it had written down the value of its stake in Vasanta by £28 million ($45 million), or 95 percent of its previous carrying value, after the removal of credit insurance for Vasanta suppliers had led to a "significant increase" in its debt levels when it was forced to pay for goods on delivery. Vasanta was already a highly leveraged business, with the banks providing £180 million when the group was created in the private equity-backed MBO in 2007, at the height of the market.
Now the already serious position was turning into a critical one; the debt had jumped to £200 million and there was no cash to pay those suppliers who were demanding up front payment. In fact, according to one source, the search for a new equity partner had begun before July, and the deal announced with turnaround investment firm Endless at the end of the month, though still quick by private equity standards, had probably been in the making well before the fateful Sunday Telegraph article.
The refinancing saw Vasanta’s debt slashed by £150 million to £50 million as Endless took a 71 percent in the group, with the remaining 29 percent being owned by members of Vasanta’s bank lending syndicate. The private equity firm and banks also injected £30 million in cash into the business, mainly for working capital requirements that enabled VOW to pay its suppliers.
However, there was a period in July and August when VOW had some serious supply issues. Fill rates were allegedly down to as low as 78 percent for a time.
"It was the smaller VOW dealers who suffered the most," said one industry source. "Except for some successful dealers who have achieved critical mass, most dealers are relatively small.
Over the years they have had to make a choice and will typically have an account with only one of the wholesalers. Both wholesalers have set up minimum spends for credit accounts and a number of dealers cannot get or do not justify a daily delivery for free from both of the wholesalers. Those with VOW and who didn’t have a credit facility with Spicers are the ones who suffered when VOW was having problems."
But larger dealers were not immune either. One dealer who spends several million pounds a year with VOW said that problems with supply did cost his business money. "Our model is built on a VOW model where orders are effectively picked, packed, boxed and labelled and delivered to us here and we have a minimum amount of contact in our warehouse. We’ve been having to source from alternative suppliers and that’s been causing us operational issues where our people have to pick, pack and break boxes, etc. It’s inconvenient and it adds cost, but I wouldn’t say that it’s life threatening."
The exact impact of VOW’s supply problems on its long-term sales numbers is difficult to gauge.
"We’ve definitely gained market share over the last few months," says Spicers’ UK and Ireland Managing Director Ian Doherty. "We’ve gained more accounts than we’ve lost quite markedly in the last three months. I think we’re also gaining a higher share of spend from other customers who may leave VOW as a primary wholesaler."
However, VOW’s Ian Sinclair says that he is only aware of one customer actually switching permanently, though does admit that some accounts have switched some of their spend. "We’re working hard to gain that business back," he says, and OPI understands that there is a lot of negotiating activity between the wholesaler and dealer communities at the moment.
It would appear, though, that VOW has averted a large scale defection of customers. How much of that is due to VOW’s own performance during the crisis or to the shortcomings of its rival Spicers is another matter.
Credit must go to VOW’s Merchandise Director Nigel Mitchell for keeping the lines of communication open with suppliers. After all, the support of the suppliers was the key to VOW’s survival for a time. "I have to say that they handled the situation incredibly well," said one vendor. "It’s an example to any industry how to cope with that short-term problem. They stood by their commitments they made to us; they said that they’d pay us and they did, even though it was a bit late."
"Suppliers have been very supportive," added Ian Sinclair. "A lot of them have withdrawn credit insurance because basically they have had instructions from their parent companies or
international headquarters – this has impacted everyone, not just us."
However, there have been unconfirmed reports that some vendors did not honour their arrangements with VOW, keeping the wholesaler off-stock despite prior agreements. Ian Sinclair denied that VOW would be favouring any suppliers based on what has happened in the last few months, but it does appear that VOW now knows who its friends are and it wouldn’t be a surprise to see some vendors de-listed in next year’s catalogue.
With Spicers saying that it saw a ‘spike’ of activity in July, this suggests that any switching of business was mainly short-term, despite the Sawston-based wholesaler declaring at the time:
"We do have substantial additional capacity available in our network to support customers who wish to move to Spicers as their primary wholesaler. If there are dealers who are concerned, then they should talk to us."
This was described by OPI at the time as "scaremongering", but in fact perhaps Spicers did not actually go far enough. One major VOW dealer questioned whether Spicers’ current distribution model really has the capacity to take on a big surge of new dealers.
"They knew we had problems [with VOW] and they knew other dealers had problems. In their shoes I would have been out there in the marketplace trying to clean up," he says. "If they had come to me and told me they would give me the same terms and we can start on Monday morning, we might have been tempted to do that at one point and I know plenty of other dealers who would have been too. But that just didn’t happen. Their sales operation didn’t swing into action and maybe that’s deliberate on their part. Maybe they haven’t got the capacity to service that extra business."
Lack of ambition? Lack of ability? Or just unlucky timing for Spicers (and lucky for VOW) where a major internal review was taking place and new CEO George Adams had been at the helm for just a few weeks?
One reported major issue for VOW was that it didn’t have a direct purchasing account with HP for a period.
"HP didn’t stop doing business with us," underlines Ian Sinclair. "They were just doing things differently and that impacted our cash flow."
Any loss of HP business would obviously be a blow to VOW, but there are enough alternative suppliers in the EOS market – Westcoast, Computer 2000 and Alpha International to name but three – who can not only take up the slack, but provide real competition to the OP wholesale duo. VOW’s challenge now is to claw back the business that it has lost to these specialist suppliers.
While it may be relatively straightforward to find alternative sources of HP cartridges, the same cannot be said for basic office products if you are a dealer tied in to one of the wholesalers and their supply dries up.
Over the years, fewer and fewer manufacturers have found it attractive to go to small and medium-sized dealers and for many product categories direct buy is not an option.
What the VOW situation has done is make the dealer community realise how reliant they actually are on the wholesalers. The wholesalers have always been regarded as virtually infallible; the fact that VOW nearly collapsed has made dealers question the wisdom of having all their eggs in one basket.
But there are not a lot of viable alternatives. Magson’s folded last year while nascent wholesaler Ainsworth’s, where former VOW Sales Manager Gordon Profit is heading the sales and marketing effort, is said to be attracting some attention, but it is still early days for the company.
Some industry stalwarts believe that a natural choice to take up the third-option mantle would be Antalis. It dipped its toe in the wholesaling business after it took over the Europa distribution business in 2005, rebranding it Antalis Plus. However, this business folded late last year after what was seen as a flawed model that couldn’t compete with the wholesalers’ matrix pricing; Antalis Plus’ narrow product range and the lack of profitable second or third tier products that could offset the commodity items failed to get the support of the dealer network.
It was somewhat surprising that Antalis did not realise this sooner considering that it already runs quite successful full-service wholesaling operations in some parts of continental Europe.
The paper merchant has a distribution network of some 280 vehicles in the UK, warehousing capacity, has relationships already in place and is generally well-regarded within the industry.
But Antalis’ Tim Percival doesn’t see a return to a broader wholesaling offer, at least not in the near term.
"Our logistics and warehouses are not geared up for small pick," he explains. "Where we’ve been successful is the cut sheet market where we are dominant and we get other sales on the back of that. Certainly not pick and wrap and certainly not cartons; it would be pallets or multiples of pallets to the dealers.
"You focus on your core competencies when times are tough and our core competence is to deliver bulky products at the least possible cost. The wholesale model doesn’t fit in with that."
However, you do get the impression speaking to Percival that had the current situation taken place a couple of years ago things might have been different. "You never know, but there is no immediate plan to change our business focus," he says with a hint of frustration.
Another possibility (albeit a distant one) would be for one of the big EOS suppliers to add an office products offering, but they have hardly been trying to knock the door down to get in on the OP sector.
These guys are geared towards shifting fast moving, high value items; if they were really interested in office supplies, then there was a golden opportunity to snap up VOW. Their deafening lack of interest tells us where they stand.
While there may be no major broad range OP wholesaling alternative, opportunities do exist in niche product lines such as tea and coffee, and FM (facilities management) supplies if dealers are willing to forego the one-stop shop principle and be ready to do battle with new competitors in these areas.
One company that says it has seen an increase in the number of enquiries from dealers recently is Liverpool-based North West Tea (NWT), a specialist wholesaler in the beverages and catering sector which achieves around 10 percent of its turnover in the office supplies channel.
"As far as we are aware, we offer the largest range of tea, coffee and associated products in the UK with over 350 lines," says Sales Director Tom Farricker. "Our superior purchasing power allows dealers to make significant savings with us."
Farricker says that NWT has added several lines of janitorial products and that its product expertise allows it to work personally with the dealer to offer advice on the market and ranges, and to develop niches like speciality teas or Fair Trade products.
Companies like NWT could prove to be increasingly popular with progressive dealers who have the ability to stock some product and who can work around their minimum spend levels from their primary wholesaler and possibly forego some of the service levels that the wholesalers have developed.
Indeed, there has been some criticism levelled at the wholesalers about the product extensions, including FM, which they have attempted over the last couple of years.
Possibly to offset the lower margins generated by the increase of EOS in the overall mix, wholesalers – and dealers, too – are looking at other product areas that bring in a higher margin. The trouble is that if the OP wholesalers are effectively purchasing these products from other wholesalers and then selling them to their own dealers, it’s not realistic to expect the dealers to be able to compete with specialists in these areas who are sourcing more efficiently.
Admittedly, it’s more of a challenge for a Spicers or a VOW to enter these product segments because they command much lower volumes than, say, EOS. However, if they are going to help their dealers to sell the products, then enabling them to be more price competitive would be a good starting point.
OPI understands that some dealers are even considering going back to some form of stocking model, which would be a major reversal of the trend over the last few years towards the stockless (or mostly stockless) model.
"People are thinking about how can they possibly alleviate any chance of the recent situation ever happening again and it’s made them very wary," said one dealer. "We did look at that [returning to a stocking model] when VOW’s fill rates were at their worst, but decided not to. We’ve come out of the other side, but I know that some dealers and even groups are still considering the idea."
Whether that is a viable solution is highly questionable. Efforts should be made to continue to drive costs out of the supply chain and it’s difficult to see how carrying more stock would achieve that, despite the VOW scare.
Anyway, talk of turning back the clock like that will no doubt die down as VOW finds its feet again. Fill rates have gone up from their lowest point to 96 percent (the target is 98 percent) and feedback from the dealer community suggests that the situation has significantly improved in recent weeks.
There are still, of course, lingering doubts about the cash position of VOW.
The UK is unlikely to see a stabilisation in its unemployment rate until the back end of 2010 and already difficult trading conditions are likely to be compounded by fiscal restraints and lower consumer spending for some time to come.
However, the new investors have signalled their intent to put money into VOW by signing off the CapEx investment for the expansion of the Normanton facility as its new northern hub, a project which had been on hold. The site will become VOW’s main hub for the north of England and Scotland and will be roughly the same size as its acclaimed Arrow facility, 100 miles further south.
In fact, it could be argued that VOW has gone through (or is at least nearing the end of) its period of pain and – providing its cash position remains stable – has the potential to outperform its main rival when the recovery begins. That would seem to be the thinking of Endless who must be banking on a return to strong growth in 2010-2011 before it looks to cash in on its investment.
And they could be right. VOW will have a leaner, more efficient distribution network; it has recently centralised its customer services into a single location which, despite some grumblings from customers, will lead to a more consistent service; the emblematic Alan Barclay is back as Interim Group CEO (albeit on an iterim basis only) which will no doubt instil greater confidence in the business; and its new, improved e-commerce solution is purportedly ready to be rolled out.
As one industry source said: "In terms of efficiencies, we reckon that VOW is about three years ahead of Spicers and gaining. If you look at what they’ve done centralising functions and stripping cost out of the business at branch level, you have to say they are ahead of the game."
Spicers has certainly not been standing still of late, but is being compared to a cost heavy British Airways model to VOW’s leaner EasyJet. Investments are going to be required in its UK supply chain and Ian Doherty will be hoping that George Adams’ knowledge of the workings of the DS Smith Board will help to secure meaningful sums of cash. Much as the company is tied to its Sawston base, it is not the most convenient location in the UK for a central distribution platform.
One thing is for certain: both Spicers’ and VOW’s senior management are going to be under pressure from shareholders to improve profitability. With no near-term prospects for meaningful sales growth they have little choice but to chase margin, either by reducing costs further or making margin gains from their customers, i.e. the dealers.
While they say that profitability will be achieved through cost savings and efficiencies, it is unlikely that everything could be achieved that way; there is evidence to suggest that dealers are already being squeezed on certain programmes. And with larger dealers having greater negotiating power with the wholesalers, it looks like it’s the smaller dealers who are going to be the most vulnerable.
The focus in the coming months could well shift from the survival of a wholesaler to that of the small dealer community.