My first introduction to the industry came in the late 1980s when the services economy was moving full speed ahead. It was like a tailwind lifting all boats in the industry. Then came the superstore, a warehouse-like self-service store dropping the street price for everything office products to below 50% of where it had been prior. Industry insiders knew for a fact that this was an unsustainable fad that would sink on its own volition.
The original location of this truly unanticipated innovation was in Brighton, Massachusetts – right down the road from where I lived in downtown Boston. It became quickly apparent to me that this was a true innovation that would shake the industry to its core. Until then, the segment could best be described as an open community of mostly family (main street) enterprises, dominated by a handful of manufacturers and wholesalers.
The wholesalers especially performed a pivotal role with their catalogues and logistics centres. I did not realise at the time, but what was unfolding in front of my eyes was the transformation of what really was a somewhat sleepy industry into one of the most hyper-competitive ecosystems I had ever seen.
A paradigm shift
By the early 1990s it had become apparent that a paradigm shift was taking place, epic change in the face of a culture struggling to maintain its identity. The superstore – root cause of this paradigm shift – began to dominate practically all aspects of industrial and reseller communication.
Large buckets of outside capital started pouring into the industry. Initially, this was primarily to fuel the growth and roll-out of that innovative self-service warehouse where the costs were low and customer satisfaction high. Led by Staples and Office Depot, at one point there were fifteen or more contenders in the office supplies superstore space.
The battleground went global when the superstores found new growth opportunities overseas. Growth through acquisition became the play de jour. Staples first, several others second. This trajectory into international waters coincided with the creation of another mantra: multichannel operations combining revenue streams from superstore, mail order and contract all under one brand.
The whole idea in its most simple form was that volume would drive profitability across channels. Volume would and did generate price breaks from vendors and would drive competition going forward. The ideas made minced meat of what had come before. The community of independent resellers was decimated and the vendor community struggled to keep up. Fewer and fewer accounts with larger and larger volumes but not much in the way of growth in profit margins. To the contrary, the prevailing pattern was that ‘margin was to be sacrificed on the altar of volume’.
A race to the bottom was now in full swing. Before I go much further, note that the internationalisation of the industry was predominantly in the form of mergers and acquisitions. It was like a wildfire rapidly permeating entire continents. Often there is a contrarian in the mix and the office products industry was no exception. The contrarian in question was Viking, probably the most under-told success story in the industry even today. The person at the helm of this fine company at the time, Irwin Helford, had a very clear idea of who his customers were, much better than any of his competitors. He decided not to grow his international business through acquisitions but through greenfield operations, building everything from the ground up – seemingly the hard way.
Well, with naysayers loudly predicting an early demise, the start-up in London, UK, grew and grew – and then grew some more. Expansion of the model followed into most countries of Europe. At its zenith the international venture reached revenues of $2 billion, with profit margins that were the envy of the seemingly more powerful business models in the industry.
While all of this was going on, during the mid-to-late 1990s, something else was capturing the imagination and that was the roll-up of independent dealers into an amalgamation of a few purportedly more powerful entities. We are talking of course about USOP and Corporate Express. Funded with money generated from outside the industry, a small group of entrepreneurs managed to gobble up hundreds of independent dealers and roll them into national and eventually global organisations the likes of which no one had seen before.
Now we are at the turn of the century, and with China’s accession to the WTO secured, offshoring is starting in earnest. During the next seven years net imports of office products from China spike, coinciding with a spectacular expansion of private label programmes across the full spectrum of products.
The Digital Age
Innovation never stops it seems and a new external threat is looming over the horizon. Newly introduced digital technologies change the way we work, especially in offices. They also change the composition of what products we need and where we can buy them. Costco covers all bases of what a small digital office needs. Amazon – an innovator overlooked throughout most of the 1990s – is beginning to flex its muscle even in the office products industry. The internet and wireless technologies of different stripes introduce a quiet revolution the likes of which we have not seen before.
For the longest time, the now globally-dominant players in the office products industry cannot be bothered with these new threats until well into the new century. Store expansion programmes moved forward without respite. By 2008, it becomes clear that a multitude of forces – internal and external to the industry – provides a witch’s brew of change the potency of which we had not seen since the early 1990s. Now it was not the independent under siege, but the very global players that had disrupted so many lives a decade earlier. A paradigm shift of grand proportions once again.
By now it is 2016 and the Federal Trade Commission puts the kibosh on the intended merger between Office Depot and Staples. Office Depot is engaged in a decade-long struggle for its operational life, but black swan-like cash infusions miraculously keep the grim reaper away. The termination of the merger yields it another $250 million, enough to keep going for several more years and fund whatever restructuring programmes come to the fore.
The Zeitgeist is profoundly changing and ‘de-globalisation’, together with Brexit and ‘America First’ begin to dominate the narrative of the day. Office Depot Europe throws in the towel and the German PE firm Aurelius now gets the seeds of opportunity into a harvest that could have been.
More shoes to drop not only in the international realm, but domestically as well:
- Staples to spin off its own European operations? Very likely. It’s a story for 2017, maybe 2018.
- Manufacturing closer to end-users and consumers? Very possible.
- Private label? Losing its luster in many settings.
- Big box retail stores for office products? By 2020, half of them may be gone.
Entrepreneurial talent across the globe is stepping in to revitalise sections of an industry that had calcified beyond repair. Winners and losers abound across the entire spectrum. Opportunity beckons. A dynamic industry if there ever was one.
Tom Schinkel is a certified M&A advisor who works with owners and senior executives of mid-market businesses on issues of adapting to the digital age and on acquiring or divesting businesses. He does this through coaching, individual consulting, writing, training, meeting facilitation and conference speaking.