The big food fight

What do you do when your biggest competitor starts to encroach on your turf? Pick up your cudgel and take the fight to them.

That’s the strategy the 150-member co-op Office National has chosen against the larger Corporate Express in the tough market of office supplies.

For some time the two companies have co-existed quite happily.

Corporate Express, a business-to-business specialist, owns the big end of town with a customer list full of the Fortune 500.

Office National is a hybrid of B2B and retail, which is split 80-20. The pitch is that ON members are SMB owners selling to other SMB owners, and for this reason understand their needs that much better.

But times are tough, and margins not what they used to be.

Corporate Express is moving downwards into SMB, which gave ON just the one choice, says CEO Andrew Boath – to go for the corporates.

“It started off as, ‘Boy, wouldn’t it be nice to get some really large business’. But as Corporate Express are coming down and squeezing us, now this is a stay-in-business proposition. We need to be able to compete at this level.”

Office National is relying on two weapons to beat off the intruder.

The first is a genuine advantage that Corporate Express cannot match.

Built on the remnants of the old Sharp photocopier dealer network, all ON members are able to service the business machines they sell.

This gives SMB owners a one-stop shop and service.

Even better is that more often than not the member is local, thanks to the 170 stores scattered across the country.

Boath says he is hoping this will appeal to corporate customers too, most of which will be just around the corner, whether it’s the head office or a regional branch.

“The old, “I can drop it off on my way home”, or, “Yes I can get that to you this afternoon”, is all possible with the footprint that we’ve got.”

The second weapon is a new e-commerce platform to replace the tired, first-generation online shop, which requires rekeying data and manual processing.

Office National went all out and bought the model used by one of the world’s largest office suppliers, the US-based Staples, for just under a million dollars.

Once installed, the site will provide customised “intranets” for each customer, with favourite items, downloadable receipts and invoices, and separate ordering and authorisation.

These are the bells and whistles that Corporate Express already provides, and Boath says that with the added services play, Office National will be well placed to nab some low-hanging corporate accounts.

“I don’t think our business model is ever going to sustain the real top end of town, but we need to be more competitive at the upper end of our customer base so that we can not only defend our turf but also go and win some business.

“We need to get this system into place so we have 150 members behaving as one under the umbrella of an e-commerce platform.”

The nationally distributed co-operative is a strange beast, sitting somewhere between pure retail (like Officeworks) and B2B (Corporate Express).

The flexibility of a co-op helps drive costs down.

Instead of 170 sites in key retail space, most are located in light industrial areas near the SMB markets they serve.

Rather than carrying a lot of stock, the co-op operates on a just-in-time basis, with inventory in and inventory out on a pre-order basis.

There is no state or national distribution infrastructure, and members deal directly with suppliers and distributors.

“So we have 150 warehouses across Australia - little ones!” says Boath.

Just over half of turnover comes from office supplies, which includes lucrative paper and toner sales.

A fifth comes from business machines, and 10 percent from servicing.

The service skills are mostly carried by the Sharp dealers, who set up high-end copier shops in regional areas away from Sharp Direct.

Business machines being as similar as they are, most ON technicians are capable of servicing any machine ON sells, whether MFP, printer or computer.

The disadvantage is that they are not all authorised to carry out the work by the manufacturer. ON is carrying out an audit of the network to discover which are appointed agents for each brand for service and warranty.

“One of our challenges is that some of our members will be strong supporters of say a Brother or a Canon or even a Sharp because of the way their business has evolved.

“When they’re asked for advice, they really stand behind their manufacturer. So a Sharp dealer will sell a Sharp printer, a Sharp copier, because that’s what they know they can service, they can sell, they can provide the full service for.”

The services side is crucial in an industry that sees continual erosion of hardware margins.

ON members, whose backgrounds are mostly in print, know this more than most.

“There used to be money made in financing high-end photocopiers. I can remember a day when fax machines were so expensive people used to lease them.

“Now for a hundred dollars you have this thing that sits on your desk, it faxes, it scans, it prints, it photocopies, and when the toner runs out you throw it away and buy a new one because it’s cheaper than the toner replacement.”

The money now is in services and consumables, which dovetails neatly with the co-op’s model as a provider of one-stop service and sales.

Boath says office workers become attached to machines that work, and will pay for more expensive toner rather than go through the hassle of getting another printer.

However, toner and its healthy margin is a heavily contested market, from within Australia and without. Grey imports can undercut official products by 30 percent or more, and then there are toner discount specialists.

Boath says ON members are protected to an extent by the relationship with customers who are happy to stay with the one reseller for all their needs rather than shop around each time.

But there are other ways of ensuring customer lock-in.

“We found ourselves being locked out of some customers because they had a print solution and said, ‘I don’t even know what I pay for my toner cartridge, I just pay cent[s] per page.’ So we had to get into this to be able to compete.”

Office National belatedly jumped onto the print services bandwagon with PrintSoft, which it hosts for its members.

A reseller attaches a USB key to a customer’s network and downloads data from every network attached printer, then calculates the total cost of consumables, analyses which machines are over- or underutilised, and sets up automatic flags to email him when toner is running low.

The aim is to move the customer to a cents per copy model and take away the stress of having to order toner or send machines in for servicing.

ON has just finished adding the PrintSoft curriculum to its sales academy, which recruits, trains and inducts sales staff for its members, as well as retraining existing employees.

Six members signed up during the pilot phase; Boath says he has high hopes for the program but has not yet set targets.

Boath says he sees several trends greasing the wheels of his members. Monitors are dropping in price, tempting offices to upgrade in size or replace power- and space-hungry CRTs.

One more driver is the affordability of MFPs, which is driving out mono inkjet and (to a lesser degree) low-end laser printers.

Some manufacturers have seen falls of the latter of up to 20 percent year on year.

IT managers are now recommending against centralised network printers for the personal desktop machine, says Boath.

“I mean these things are so cheap they are almost like a desk accessory. Everyone can have their own.”

Another trend is the falling cost of colour laser, which is prompting many SMBs to refresh their old monos.

Then there is the category which Boath calls office accessories, which covers wireless peripherals and USB-connected novelties, such as coffee-mug warmers, fans and lights.

“People are upgrading what they put on their desk, it’s like a status symbol.”

These trends in printing show how far the concept of “Green IT” has to go.

The ability to print on both pages, known as duplex, is reserved for high-end printers and MFPs – there are very few entry-level machines with the capability.

And the distributed printing model increases the number of machines, with their extra electricity demand and consumables, decreasing efficiency and increasing waste.

Boath says the best environmentally minded push from the print manufacturers is recycled cartridges and toners; a new tactic for some but hardly news to the industry.

The e-commerce platform will eventually replace the foundation stone of office supplies; the humble catalogue.

Boath says the old-fashioned glossy is still one of ON’s most efficient selling tools. It provides a quick and easy way to glance through a wide range of low-value items and check their prices.

But its days are numbered. ON is pushing its members to mine customer databases for email marketing campaigns using electronic flyers that also have pages that can be turned and torn off for future reference.

The trend to online shopping is simply a result of generational change more than anything else.

“If you have a look at our target market, they are female and in the junior administration cum reception roles. The Y Generation is starting to fill these roles and they shop almost exclusively online,” says Boath.

Boath looks to Corporate Express as a benchmark, which claims that 70 percent of turnover is through the web. ON is only doing 25 percent, a figure the new e-commerce platform should boost considerably.

The more business done electronically, the more costs are saved.

“It is so much more efficient for a customer to be ordering online, and for that order to come automatically through to our member and generate a picking slip in a warehouse. That’s a huge amount of cost to take out of the business in terms of order capture, order entry and order fulfilment.”

ON is carefully pursuing expansion plans through its NZ counterpart, Office Products Depot, for which it holds the master licence agreement in Australia.

Boath says that the only way to grow the co-op beyond its annual rate of 10 new members is to build a second brand, but without impeding on the business of current owners.

The Office National brand itself is similarly licensed out to a South African co-op. ON itself is 100 percent owned by its membership.

Boath sounds positive about the future, especially the coming stoush with Corporate Express.

He is only a year into his term at ON, and was previously working in the food and beverage franchise industry with multinational brands like Danone, National Foods, Dairy Farmers and Cadbury Schweppes.

Food and beverage is a much more mature market where the Coles-Woolworths duopoly calls the shots, and there is with little room for new ideas.

“I mean, how many ways can you sell a biscuit?”

IT by contrast is very dynamic. “There is a lot more opportunity to have an impact on the outcome, which is really refreshing.

“It’s a market that’s a hell of a lot more prone to innovation and within categories there are huge swings which create opportunities, whether that be what’s happening with printers or the move to colour laser, or even just all of those computer accessories.”

If there are any parallels between office supplies and food and beverage, Corporate Express and Office National are heading for one big food fight.

Sholto Macpherson