OP veteran Rick Needle is charged with leading UK independent dealers through stormy waters and steering them towards a brighter and more secure future.
As chief executive of the UK’s largest dealer group Integra, chairman of office supplies association BOSS and a leading player in BPGI, Rick is perfectly placed to deliver his verdict on the condition of today’s market.
Here he tells OPI of his aims and objectives for the future as well as his thoughts on the threats affecting independent dealers around the world and how the independents can develop into the growing breed of super-dealers.
OPI: What have been the biggest differences you’ve noticed in the industry over the past 20 years?
Rick Needle: The big concerns of the late Eighties and early Nineties were the global players that were coming into the UK. Viking was establishing itself in those days and there were big concerns from the wholesalers about how their businesses were going to be affected. A lot of consolidators were coming in to buy dealerships, although a lot of the deals didn’t work out and many dealers regretted selling their businesses at that time. But it was a key driving force for independent dealers to band together and form dealer groups and, although they had existed before, they didn’t really become powerful until that time. It was in direct response to the consolidators coming in. The people who didn’t want to sell banded together and over the years this metamorphosed into strong groups like Integra today.
OPI: What challenges do the independent dealers face today?
RN: The consolidation process goes on but the independent dealers still account for the largest sector of the market when all their sales are combined. There is still an enormous amount of merger, acquisition and disposal activity within the independent dealer sector. We’re finding that large and medium-sized dealerships are more frequently buying each other out. This works out pretty well because the Integra members that sell their businesses tend to sell to other Integra members and that’s a source of internal growth within the group itself. It is important that the purchasing power and critical mass remains within Integra.
OPI: There is a lot of market movement, what is the future?
RN: Looking ahead, the number of independent dealers will continue to decline. We are still seeing start-ups appear, however, especially as a result of fall-out from some of the large corporates – some of their salespeople may leave and set up small dealerships. There is definite growth there. It is quite interesting when you look back and then look at some of the bigger dealers now. Many of them didn’t even exist ten years ago and that shows there is still some opportunity in the market for entrepreneurs to set themselves up and position their businesses quite competitively against the global players.
Although the number of dealers will decline, I do think there will be an increasing number of what I call super-dealers, which are business that are turning over £10 million, £20 million or even £30 million. They are ideally placed to compete effectively against the Lyrecos and Office Depots of this world and at the same time be able to target effectively the bottom end of the market as well. Obviously a lot will depend on how slick they are in terms of eCommerce, which is now accounting for a larger and larger proportion of overall sales. A lot of our bigger dealers are now doing as much as 50 or 60 percent of their sales online and dealers that are focused on this opportunity are doing particularly well.
In terms of other trends, I can see further consolidation on the manufacturing front. UK manufacturers are finding it particularly difficult to compete and a lot have already moved overseas, particularly to Eastern Europe. I see the whole issue of global sourcing as a continuing trend.
The development of own brands will continue to develop on the basis of Far Eastern sourcing – a lot of the major manufacturers will find it more and more difficult to maintain and create brands because of the smaller number of purchasing points and increasing dominance of global players. Manufacturers will continue to rely on the smaller independents to offer a wide portfolio of their products because a lot of the multi-nationals will be so focused on own brand. The independent dealers with the backing of their wholesalers have a product range of 20,000 plus – it is in the interests of the manufacturer to maintain that.
OPI: What do you think of TriMega’s latest initiatives?
RN: We’re aware of some of the TriMega strategies. BPGI has talked in the past about establishing its own global brand and that remains on the agenda, though the jury is still out on whether that will actually happen. Most of the dealer groups already have their own private labels and those brands may be long-established in their local country markets. It may be the case that the dealer groups could decide to consolidate into one global brand which would then give us a real opportunity to narrow the price gap with the bigger global players.
OPI: What are the advantages of the super-dealers?
RN: Once a dealer gets to a certain size and turnover they have the credibility with blue chip clients to be able to tender for business alongside the corporates. They also have the critical mass and size to purchase effectively – not as well as the big players and they never will have, but they are able to run with a relatively low operating to expense ratio. Once they get to a certain size they can grow the top line without significantly increasing their overheads. They can take on some of the significant players and also compete with the smaller firms as well. The challenge is getting to that size in the first place and there are various pain barriers they must go through before they can reach that critical mass. We have several dealers that have turnover in excess of £10 million or £20 million. A lot of these dealers are cooperating amongst themselves in terms of distribution. Three or four of them who are strong geographically will have a distribution arrangement between themselves to deliver on behalf of each other to the outlets of clients nationwide.
OPI: What are your thoughts on is.group?
RN: I’m obviously not party to what’s going on there, but all I can say from being on the outside looking in is that it’s a pretty tragic situation when a dealer group finds itself in a situation like that. Obviously a number of dealers have left the group over the past couple of years because they disagreed with the overall strategy of moving to warehousing. The financial consequences of that are clear but I’m unsure as to the exact implications. Some of the big dealers left to join TriMega so thank goodness they still remain part of BPGI and the spend is maintained.
Dealer groups have had a rough ride generally over the past couple of years – you can compare the splits in the US with the situation with United over here. Dealer groups have gone out of business before and they will go out of business again.
There was an organisation called Osta that went into liquidation seven years ago, and their downfall was brought about because they also went into warehousing and distribution and were unable to manage it. The historical pointers are already there to warn dealer groups away from warehousing and the most recent example is what happened with Europa in the UK. It was a not-for-profit organisation which was run on behalf of individual dealer groups such as Integra, Momenta and Nemo and it was very successful for about nine years. It was initially extremely successful in driving down costs for the dealers but a couple of the groups decided to pull out. Eventually it was decided that it was no longer viable to continue and we reluctantly had to wind Europa up this year.
The signs are already there to warn the dealer groups to really focus on what they do best, which is purchasing, marketing and IT, as well as providing training programmes for the dealers.
OPI: How damaging was the collapse of United?
RN: What happened with United was a great tragedy. They were part of Europa, which was the umbrella logistics service for four dealer groups. As they started to fragment it was clear their critical mass became diluted. It wasn’t a collapse, it was gradual erosion, the salami continued to be sliced. Unfortunately due to bad management and not listening to what the dealers wanted, they encountered trouble, the dealers started voting with their feet and the group basically fragmented into several smaller associations. It had no adverse effect on Integra as we progressively picked up some of the bigger and more advanced dealers from United.
From our point of view it was beneficial, but in terms of the bigger picture it tarnished the reputation of dealer groups, which is very unfortunate. It went against our long-term vision of seeing more consolidation and mergers of dealer groups to increase our critical mass, which we need in the marketplace.
The trend I would like to see over the next five years is not actually happening and I hope that will be reversed. We are extremely keen to encourage alliances and partnerships with other dealer groups – some of the smaller associations that were formed as part of the fall-out from United will soon face the reality of their situation and realise they will not be able to survive on enthusiasm alone.
OPI: Why invest in providing a retail consultancy?
RN: Integra has got about 100 of its dealers involved in some form of retail outlet, some of them have multiple outlets. The retail sector has struggled over the past few years and we felt Integra should be providing a greater level of expertise than perhaps they had themselves. We have invested in a retail consultant who goes to our dealers and advises them on store lay-out, product mix and the format of a store. In addition, they can also advise on what brands to sell and what sectors to focus in on. It has been incredibly successful.
Competition has increased recently in the retail sector with a lot of the supermarkets now developing stationery sections. But the reality is that although they take their share of the fast-moving commodity types of stationery lines, the independent dealers can win hands-down on selection, advice to the customer and developing niche areas such as arts and crafts. Since we introduced it a few months ago, we have almost without exception seen a significant and immediate increase in turnover and margins. We found retailers were focusing in on pricing which was far too low, they were unable to price products that could actually provide far healthier margins than perhaps they were used to. That goes back to the product mix and examining lines which are different from those available in the superstores, high-street stores and the supermarkets to offer a unique opportunity.
We look at basic store lay-out to see if the products are located in the right place to maximise footfall, we ensure products are priced correctly to provide special offers to draw people into the store and then draw people to purchase other products which they weren’t originally intending to buy.
It’s all about internal design, internal point of sale material and promotion material to turn the retailer into a destination store rather than an outlet people pop into as they walk past. A classic example is in the product mix and the product range. In most instances we identified that through improved layout the retailer can actually increase the product range by 20, 30 or even 40 percent. Opportunities like that immediately increase sales in terms of purchases per visit.
OPI: What are the market trends affecting the independent dealer?
RN: There is clearly increasing pressure from the corporates. Over the next five years one of the key areas will be price deflation and that is being driven by the global players – that will put pressure on dealer margins. Our dealers are still reporting average 34 or 35 percent margins. But the larger dealers who are competing more directly with the large contract stationers are reporting margins in the high twenties, where the smaller and medium businesses are reporting margins in the high thirties. It also depends on the speciality, for example EOS lines have notoriously slim margins but furniture dealers are doing particularly well. A lot of our dealers are expanding their product range with computer products they recognise high ticket items are extremely rewarding.
OPI: Will the decline in the number of dealers be voluntary or involuntary?
RN: This will be an ongoing steady trend which will primarily be due to merger and acquisition activity and disposals. Dealers are merging their businesses to enable them to become more competitive. A lot also depends on the succession plans independent dealers either have or don’t have. I think that is a major issue. The majority of disposals are because the proprietor doesn’t have a natural successor to follow him, maybe his family are not interested in taking on his mantle. A lot of guys in their fifties and sixties are looking for an exit and either dispose of their business to a company that is looking to grow or just wind the business down. Unfortunately a lot of businesses that are in that category tend not to be very aggressive and therefore they’re not going for growth and if you don’t go for growth you don’t stand still, you end up going backwards – there is no halfway house. It is quite interesting to look at the dealers who are doing the acquiring, they tend to be guys in their thirties or early forties who probably set up their own dealerships ten or 15 years ago and are still extremely hungry and still extremely aggressive and are out there looking to develop through either organic growth or acquisition. Those are the guys who will over the years turn into the super-dealers by being dynamic.
OPI: Can a definitive blueprint be developed to ensure dealer success?
RN: I don’t think it could be because it would already have been tabled and put into use. The reality is very few dealerships have similar business models, depending on whether they are stocking dealers or stockless dealers, their product specialisation and their customer base. However, there are some common traits that are required in order to be successful and that stems from the proprietor or the owner of the business and his personal drive and enthusiasm. Soft issues like that are crucial, they are the big differentiators and mean the difference between success and failure.
The hard areas that all dealers need to be aware of are based on technology and their systems. They need to understand what is happening within their business, which products are selling and which are providing the margins. They need systems, particularly gap analysis to identify within the existing client base where there is further opportunity. One truism is that the dealer who thinks he has got all of his clients’ business is quite often kidding himself. Even though there is a continuing trend towards the total business solution with customers wanting to reduce the number of purchases, they will still be buying the dealer’s products from various sources. It’s a question of being smart and identifying those opportunities from within existing accounts. All dealers should have at least some very basic key performance indicators to monitor monthly and make sure they are on track with the business plan. It is essential the measures and monitors are in place to ensure they are moving forward in the right direction.
OPI: You place a huge importance on the leader.
RN: You need someone at the top to drive the business forward but you do need systems that are utilised in the correct way to get the full potential. A lot of dealers may have very sophisticated systems but may only utilise half or less of their functionality. The advantage the more progressive big dealers have over the multi-nationals is their flexibility, their focus on the customer, their knowledge of the customer base and the enthusiasm those proprietors share with their sales forces. They are faster on their feet and that personal touch with the customer can never be emulated by huge organisations that have hundreds and hundreds of sales reps in the field with very high turnovers of staff and, by definition, very little continuity. That personal quality of the leader will always be the biggest differentiator compared to the big organisations. They should take advantage of their ability to take quick decisions, which the super-tankers of the office products world can’t do. We have to get the message across to the dealers that their success depends largely on their passion – that’s an attribute the global players don’t generally have. Dealers have their own business and therefore have that special commitment and that should be translated through to their staff and customers. Everything emanates from the flexibility and enthusiasm of a small business compared to a faceless global conglomerate.
OPI: What barriers exist for the small to medium-sized dealer to grow?
RN: There are three key areas to fuel growth for any dealer. The first is to really drill into their current customer base through a gap analysis. Most dealers will find that there is low-hanging fruit to be had from increasing the product range or increasing the value of the order and that goes back to the close relationship the independent has with his customer. There are lots of niche areas that the corporates are not very good at, they have a fairly rigid business model which is adopted throughout the organisation. If a client wants advice across product sectors, the large players find it difficult to provide that all-embracing service.
The second area is all about winning new business and the independent dealer should not be afraid to go toe-to-toe with the corporates for large contracts. They’ll probably never be able to supply the FTSE 100 as the prime supplier but there are bags of opportunities to pick up all sorts of business in niche sectors that those blue chips are looking for. Dealers should look to be a number two or even a number three in huge accounts that are currently serviced by the large corporates and that would be extremely lucrative for them from a sales and margin point of view.
Winning new business is really all about clever pricing as well. A lot of dealers don’t matrix price effectively – they tend to still go in with a blanket discount without looking at possible loss leaders or analyse the customer’s product mix and be extremely competitive on key lines. The consolidated sales of all Integra dealers is around £700 million, which values our network as holding five or six percent of the UK market. That means there is another 94 or 95 percent of the market to go for. It is a huge market with huge opportunity for those people who are prepared to roll their sleeves up and work hard and go for it.
The third area is the acquisition route. Dealers wanting to grow should be looking to acquire or merge with other like-minded dealers. There is clearly an opportunity for those companies that are looking for step-up growth and developing their existing business without the long slog of going out to win new accounts.