Office supplies distributors attack procurement costs

By By Bob Mueller --

Once a low-visibility industry dominated by family-run businesses, office products distribution has in the past few years moved aggressively into the spotlight with national retail chains, growing e-commerce operations and sophisticated procurement programs. Heightened competition has led to aggressive pricing, a well-tuned distribution system, and a raft of new services and non-traditional product lines aimed at capturing a greater share of corporate spending.

A focus on price competition has turned the industry's resellers into commodities businesses, where service and delivery matter more than product differentiation. That's mostly been good for corporate buyers because it's nudged the resellers into concentrating on lowering procurement costs-historically high in proportion to product costs.

Estimates of the industry's size vary widely, and always have. That's partly because much of the industry is closely held, and partly because there isn't much agreement on what an office product is. The six large, publicly traded companies that dominate the office supply business account for about $35 billion in U.S. sales, roughly half the industry's total, according to more conservative estimates. Staples, Office Depot and Office Max operate highly visible big-box stores that cater mostly to the so-called SOHO (small office/home office) market. But Staples and Office Depot also have significant contract businesses aimed at midsize and larger commercial accounts, and all three have relatively small (compared to store sales) but growing e-commerce operations.

Three other companies-Boise Cascade Office Products, Corporate Express and USOP (US Office Products) cater primarily to contract customers and operate from distribution centers and sales offices, rather than retail stores. All three have e-commerce sites, but sell primarily through outbound sales forces.

The Big Six operate on a big scale. Office Depot (the largest of the six), Staples and Office Max each have between 800 and 1,000 retail stores. Boise has 46 distribution centers and 1,200 salespeople; Corporate Express operates 31 distribution centers in the U.S., along with additional sales offices. All operate internationally, some directly and some through subsidiary companies.

Somewhere between 5,000 to 6,000 independent dealers serve local and regional mid-market companies and, through marketing and buying cooperatives, some also serve national accounts. Many of the independents are survivors of a massive consolidation in the mid-1980s that cut their population from perhaps 15,000 to today's number. Some of the larger independents were acquired by the national companies and became the core of their contract business. Many of the direct mail office suppliers, a SOHO (small office/home office) market mainstay, have been rolled into the Big Six. Quill, for example, is now part of Staples; Reliable is part of Boise Cascade; and Viking Office Products is part of Office Depot.

Not every dealer inventories merchandise, but most do-typically a core line of somewhere between 6,000 and 10,000 faster-moving SKUs, according to Kathleen Dvorak, vice president of investor relations and financial administration at United Stationers. For slower-moving and more specialized products, they rely on wholesalers like United and S.P. Richards, the two dominant general-line distributors. Originally, says Dvorak, office supply wholesalers did what wholesalers do in most industries-they bought in big quantities, sold in smaller quantities, and made their living on a few points' spread in pricing and lots of volume.

Today, she continues, "wholesaler" probably isn't even accurate. Instead, United is in effect a backup warehousing and distribution operation. When a Staples or a Corporate Express advertises 40,000 items, most come out of wholesaler stock, and if a dealer's customer orders an item that's not in its core inventory, it's supplied by the wholesaler and the customer is none the wiser. In fact, says Dvorak, some of the dealers it serves have ordering systems that automatically roll over to United if the reseller doesn't have an item in stock.

A key to success in the contract segment of the industry is the ability to deliver complete orders quickly-next-day delivery is standard. That dictates well-stocked distribution centers, and lots of them. United operates 77.

One of the advantages the big, national outfits originally offered their customers was rock-bottom pricing. Thanks to their size, they were able to buy directly from suppliers at low prices and pass the savings along to their customers-even relatively low-volume customers. The independents, by contrast, were often part of a two-tier distribution system, and some couldn't even put together large enough orders to buy direct from manufacturers.

Today, thanks in large part to the growth of buying groups, independents say they're getting the same deals as the national outfits, and are price-competitive with them. Price differences still exist among the office supply outlets, especially on negotiated contract deals, but with increasing commoditization has come a greater emphasis on reducing customers' total acquisition cost.

"We've done some studies," says Mark Hoffman, president, North American office products, at Corporate Express. "There's still a lot of opportunity to cut costs, and we're working with people not only to be competitive on price, but we're also trying to help people streamline their processes."

Others note similar trends. "People are being asked to do more with less," says Jim Pollman, New England regional sales director for Office Depot. As purchasing professionals spread their buying over more commodity lines, office supplies become a low percentage of their overall spending, and high transaction costs become all the more glaring. "We want to understand what their needs are and take cost out of the business," he adds.

Private procurement systems in individual organizations are also becoming increasingly common, says Dave Goudge, senior vice president of marketing for Boise Cascade Office Products. Boise provides catalog content-alongside content from suppliers of other commodity lines-and the system screens purchases for authorization, budget limits and similar restrictions before passing the order through.

Web strategy varies from company to company, and some distributors employ multiple strategies. Staples, for example, operates Staples.com for its SOHO customers, StaplesLink.com for contract customers, Quill.com for its mail-order customers. A fourth site, BusinessDepot.com, serves Canadian customers. Corporate customers can shop in stores or online and automatically get their contract prices (or the retail price, if that's lower) and get a single, consolidated invoice, according to Anne-Marie Keane, vice president of business-to-business e-commerce.

Why buy from one of the Big Six rather than another, or from an independent? Predictably, each of the big resellers has put together an assortment of services and outlets it believes give it an advantage over the others. Goudge counsels corporate buyers to look for reliable, committed service, significant investments in technology and solid management.

Hoffman cites his firm's business-to-business focus as a plus for its corporate customers. "We're not being pulled in multiple directions," he says. Further, the company's recent acquisition by Dutch-owned Burhmann Corp. gives it a strong presence in Europe and Australia, and puts it in a good position to handle international contract business.

Local, highly personalized service keeps the independent dealers favor, says Jim McGarry, president of the Independent Office Products and Furniture Association. "Customers are telling us that they want the same type of opportunities in working with a dealer that they'd have with any large, multinational or national company. They're very comfortable with their local business relationship, however. So as long as the independent dealer is competitive in both service and price, that's a model customers continue to support."

The office products industry is predicting only modest growth in 2001. In a recent survey of independent dealers, anticipated sales changes for the year ranged from small declines to 10% increases, but nearly half expected increases of 5% or less, and those results are from a survey conducted last year.

How will the industry support future growth? Partly, says McGarry, growth among independents will come from selling in greater depth to existing customers. Beyond that, branching into non-traditional product lines could offer additional opportunities.

Some of the publicly held companies are also looking to expanded product and service offerings for growth. Staples, for instance, offers stationery and sign printing, Web hosting, IT (information technology) consulting, employee benefits plans and more, mostly through third-party providers.

On the contract side, growth in the future is likely to come at the expense of competitors, says Corporate Express' Hoffman. "A lot of it's going to be share. I think the industry is going to show moderate growth, and I think success will go to those who penetrate and take share from other people." Office Depot's Pollman agrees: "We have a very large existing base of customers, and we have goals for account penetration. If our customers are dealing with multiple suppliers, we need to find out what products they're ordering from other companies, because we can offer those solutions, too."

It's still possible to grow through acquisition, says Boise's Goudge, but there's not much left to acquire. "We see the economy slowing rapidly, especially in the large-business sector. That means fewer white-collar workers and, typically, lower sales. Consequently, in order to grow in that large-business sector, you have to take share-and I think all of us continue to be absolutely focused on taking market share. Adding product lines can help, but you still have to out-service your competitor in a world where it's really hard to do that."