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Audit Report Review: Office Depot
contract - State of California

California scheming
State suckers for Depot duplicity?

3^rd category con-tract...sharp practice on a tiny core spend…the web of deceit…the $2.5M payback…the Epylon charade…oh and, a slap on the wrists…until new contract placed (Feb'09?) state will continue with Depot. Why?

8 Sep 08
I just received a copy of the 84 page Audit Report by Rick Gillam commissioned by the Procurement Department (PD) of the State of California. Sadly, I ploughed through and discovered some absolute gems that I was not clear on before. I'd like to share them with you.

Please click on BIG Issues to read the full analysis.

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4 Sep 08
Sainsbury's, the UK's #3  supermarket chain,  is stepping up its effort to persuade shoppers to switch to its own-brand products as the battle for depleted consumer spending intensifies. Justin King, CEO (also a non executive director of Staples), said the price "gap between brand and own label is as wide as it's ever been". He added: "We're going to give them [large brands] more of a fight."

Sainsbury-sponsored research found that 62% of shoppers said they were more likely to buy supermarket own-brand products than a year ago. The grocer's "switch & save" campaign is likely to add to tension with big suppliers.

Other research from Asda, the UK's #2 supermarket chain (part of Wal-Mart), last Monday found more evidence of low confidence in the economy. Out of 10,000 Asda shoppers surveyed by TNS, the market research company, 58% said they had reduced shopping for clothing and other non-essential items, while almost 50% said they had cut back on eating in restaurants.

Although both pieces of research are self-serving, they are supported by growing evidence elsewhere that shoppers are changing their behaviour significantly in anticipation of more straitened economic circumstances.Both Carrefour, the French supermarket group, and Ahold, its Dutch peer, last week said they were focusing more on own-brand goods, which are typically cheaper for consumers but carry higher profit margins for retailers.

He said previous product lines that used to be bastions of big brands, such as pet foods and cleaning products – "products that had real technical advantages" – were now changing as customers switched to own-brand versions as they improved in quality. "Often, of course, it is the brand house themselves that supply us with the products," he added. The UK consumer buys a higher proportion of own label than pretty much anywhere in the world."

Asda is to publish the index of its consumers' sentiment every quarter.

Power has shifted inexorably to bigbox resellers who are obsessed with private brand development as they boost their buying teams to source directly from China at low cost. Manufacturers appear to be helpless as their biggest customers sidestep them and become their biggest competitors. This shift  is nothing new. The process has just become more cost effective and widespread. As a result manufactures margins have been squeezed and innovation funds have been severely reduced, in order to create the market differentials that give original brands the edge.

Time to Rethink the innovation process.
Nevertheless, manufacturers must fight back strongly and revitalise and rethink the innovation process. We are not just talking about new colours, shapes, sizes, packaging and green versions. Manufacturers need to think about pricing and aiding resellers who commit long term to becoming original brand champions. We are talking about competitive pricing and user marketing support. We are talking about the power of personalised emarketing, video demos of productivity benefits and 24/7 open webstore links.  

Unfortunately, manufacturers best marketing partners in the past have been the bigbox players e.g Staples and Viking. Independent dealers marketing efforts have been boring, vanilla, me-too type flyers which have been uninspiring. These 'spray and pray' efforts have failed to capture the imagination of users and in many cases reached the 'prevention buyer' type aka. Gary Gatekeeper only. Now these 'original' marketing partners are competitors with their 'private' brands.

The power of emarketing and open webstores means that these objections are being removed…rapidly. Now manufacturers with an inspiring productivity message can reach Lucy, the typical user chooser (and bypass Gary, the prevention buyer) with an integrated personalised emarketing campaign.  linked to open webstores. This means that they can get their message across to Lucy in a pure, undiluted and interactive way. Moreover, all with the cooperation of independent resellers.

Fortunately, there is a new trend emerging where leading dealers are starting to move away from own brand, to enthusiastically support original brands. A great example of this is W.B.Mason the $750m megadealer from Boston.

There has never been a better time to support the resurgent reseller channel. The original way is the best way. Be brave…Go to it!

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Manufacturers were helpless. Their top sellers were replicated, leaving them with lower margins and less funds to invest in innovation and differentials to maintain premium status.

The future looked bleak especially for traditional paper based manufacturers, filemakers, book and pad makers etc. Yes, leading companies like Esselte, Acco, Avery, Jet , JD's , Settens have either withdrawn, shut down or closed manufacturing facilities.

Lessons from food retailers
The same 'private label' pressures have applied here, particularly in the UK. Continuous innovation has enabled Coca Cola, Kelloggs, Cadbury, Nescafe, Beechams, Dove, Nivea, Flash, Evian, Boddingtons, Tropicana and Colgate to maintain leadership. These trusted household brands have been upgraded, improved, undergone makeovers based on 'touchpoint' reviews with consumers.

Complacent manufacturers have been marginalised or ousted from the shelves e.g Walls, Lux, J-Cloth, Bird's Eye, Robinson's  and McVities. Their rate of innovation slowed allowing the house brands Tesco, Wal-Mart to replicate a sitting target.

Tesco's in the UK the #1 food store with 30%+ of the market has intensified its private label presence in stores. It now provides a 'good, better, best' choice…introducing the Finest range to match the quality leader M&S. The effect has been to boost sales and profits, probably at the expense of complacent manufacturers brands.

Meanwhile, Waitrose (Trader Joe in the US is similar) the upscale grocery store group has focused on manufacturers brands only…organic, ethical, local produce. This has provided tremendous opportunities for national and regional brands providing the key ingredients of great quality and innovative/differential thinking is applied.

Innovation has to be real not an illusion.

The innovation challenge for OP manufacturers.
Given all the negative pressure on margins and watching your best customers effectively killing your core brands is not a comfortable position. It's very much a 'like it or lump it' and 'grit your teeth' situation. Meanwhile innovate …innovate…innovate!

There are many participants in the industry who believe that brands are not important and users don't care. Try switch selling an alternative to Post It Notes to a businesswoman. There is no such thing as a commodity.

To compensate for lower gross profits, a new and big advantage for manufacturers today is that for the first time they can communicate directly with users via the web at a much lower cost than traditional and existing marketing method i.e. heavy duty printed catalogs.

Manufacturers who are succeeding in brand innovation and communicating directly with users for the whole channels benefit include:

·         3M with their Post-It Supersticky notes in funky colours

·         Fellowes shredders…magazine, airport display panels, radio

·         HP wireless printers, colourful laptops

·         Logitech sleek sexy mice, remotes

·         Safco seating

·         Green Mountain Coffee Roasters – Fairtade ethical K-cup

·         Pilot Pen and Pentel…new shapes, new designs, new writing experience

These manufactures are true marketers continuously studying and listening to users. They are not sitting on their laurels relying on a strong brand name with little differentiation to house brands. They create edges: make things easy; productivity gains...saving time, money or space; make touchpoints simple; make packaging transparent and minimalistic; make accessibility, applications, and functionality powerful benefits.

This is real innovation…not an illusion.

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Wholesalers and manufacturers' challenge
The dangers of duopoly
Invest and inspire the independents.

3 Sep 08

In witnessing the absorption of the US #3 wholesaler Action Emco within SPRichards and United Stationers, Mike Gentile (see pic below), the CEO of is.group, the US #2 dealer group, warns of the risk of a wholesale duopoly.  

Gentile said "I believe that it is in the wholesalers' best interests and I would also like to add the manufacturing community, to begin to truly focus their attention on the independent dealers within our industry. These same dealers have demonstrated time and time again, that they know how to create and sustain demand in the SMB space (70%+ of market).  The independent dealer wakes up every day and gets "orders" while the big boxes churn and burn customers."

Dealers the strategic partners
"Our wholesalers and manufacturers both have stated that our channel is their strategic customer.  They really need to look at what the future will bring, and start to make serious headway in working even more closely with independent dealers and dealer groups.  Now is their best opportunity to demonstrate to us that they truly do want to be our partner." urged Gentile

"There are numerous mutually beneficial synergistic opportunities that must be explored amongst the buying groups, wholesalers and manufacturers that would result in increased independent dealer market share. The wholesalers no longer need to be concerned about creating conflicts with their Big Box customers." reasoned Gentile 

Gentile emphasised "Now is the time to put aside egos, disagreements regarding disparate business models and local independent dealer competition, and for ALL to realize that there is an opportunity for all parties and stake holders of our channel to work together during this unique period in our industry's history."

Editor's Comment

Gentile's comments are highly relevant given the Staples Express merger. It will focus the minds of the wholesalers as they get less volumes from the power channel. I'm not sure there will be a merger between Max/Depot…that really would be a disastrous prospect for the industry and their shareholders.

Regardless of further consolidation, the leading wholesalers in the US and the UK, also a duopoly in the traditional OP space (Spicers/VOW exc. Kingfield), need to review their strategic partnership plans with the independent dealers.

On the positive side, we feel wholesalers need to faclitate differential marketing plans and not necessarily try and drive uniform 'spray and pray' mailings across the spectrum. It seems to us that all US/UK wholesale marketing materials are similar and vanilla. One size doesn't fit all in the marketplace and wholesalers should try and facilitate 'personalisation' by working with groups and each dealer. Manufacturers need to make sure their original brands are prominently positioned and not just seen as a teaser for private brands e.g 'original' priced at $5 and 'private' priced at $4 adjacent. The differentials need to obvious e.g accessibility, application, packaging etc.

Manufacturers and wholesalers face a big test which could become a major issue over the next 12 months: the conflict between the big-box drive for increased sales of private label…now averaging 30%+  of office supplies sales and original brands. Surely this is where manufacturers, wholesalers can work together more closely?

Why not provide competitively lower product pricing for resellers, and invest more in direct marketing to users tailored to the target audience, so that dealers can piggy back these marketing campaigns with their brand of personal, local, fast and flexible service. An irresistible combination…providing original brands at private brand prices. That really would set the right agenda and put original and private label in direct conflict. Surely, a better scenario than any false brand sincerity shown by big-box players now?

This would mean of course that dealers would have to genuinely support manufacturers in marketing and selling of original brands where applicable and not get dragged back into the habitual focus on commodities.

Strategic partnerships need trust and energy to make the above programmes work in favour of original brand manufacturers, OP wholesalers and dealers. Wholesalers hold the key to an exciting future providing they do not try and dominate or control the marketing agenda for manufacturers and resellers. If they can facilitate differential marketing programmes the OP independent channel will become a resurgent powerhouse movement…not dissimilar to the IT supply marketplace

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Depot denials
drag on
Weak, "not compensation" whitewash, explanation for 
California $2.5M overcharges

30 Aug 08
The South Florida Business Journal yesterday reported that Office Depot had agreed to repay California State $2.5 million for what state officials said were overpayments made to the office supply company.

"In the spirit of cooperation and customer satisfaction, OD agreed to provide $2.5m to the state as an additional discount on these items," the company noted in its statement. "OD consistently priced these particular items for the duration of the contract, which OD considered 'off-contract' purchases."

OD and DGS agreed to an additional discount of approximately $2.5 million, which, the company said was not compensation for overcharges.

Editor's Comment
We've read the auditor's report and the Mercury News report from Thursday. Reading the above statements from Depot you'd think the overcharges were accidental and a rare occurrence.

Witness these contrived statements: "In the spirit of cooperation and customer satisfaction" ..."consistently priced"…"additional discount" …"was not compensation for overcharges"…"the state saved 30% over the rates OD charges retail customers for the same items". Finally, giving unsuspecting observers the impression that all is cosy and forgiven "the contract…has been extended until Feb 2009".

Well that's alright then, thumbs up for Depot. Let's all forget about Depot's dodgy behaviour in NC, Georgia, Nebraska, California, Florida, HCA and the US Communities. Oh and not to mention the scams with small dealers in California, cheating superstore customers in California and double counting contract sales via superstores. Oh, we nearly forgot, giving customers the impression they were saving money by moving from List-price based discounts to web-price based discounts, when on average they were 3% higher and varied at least weekly.

Most of Depot's response is dismissive generalisations. Two questions need to be challenged and require further explanation: Why pay $2.5m as a goodwill gesture if it wasn't related to overcharges? The state saved 30% on what retail customers would pay? We don't believe this for a second…show the comparison price chart.

The whole response above smacks of whitewash propaganda…again. Depot in denial…again. How can shareholders, employees, customers, the states and local government employees, trust this deceitfully managed company?

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Call Centres are Stall Centres

Automated tel-hell

Don't copycat the corporates…stay human

28 Aug 08

How familiar are these empty phrases when contacting any major corporation e.g. bank, insurance or utility company today:

• Your call is important to us
• All our agents are busy assisting other customers

The reason we raise these issues is not to remind you of the tel-hell that you've all experienced at some point. We have noted the increased incidence of independent OP dealers copying the automation process.  Even the big banks realise the error of their ways and Washington Mutual, LloydsTSB and NatWest are moving back to personalised banking and human contact.

Our advice is don't under any circumstances copy the corporates, avoid automation with customer contact, don't use robotic voice systems which substitute for the live human voice. Personal human contact is your edge…don't dilute the experience.

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Channel Info issues: Pricing and Groups
Herding cats or headless chickens
Resellers ready on cost reduction,
not so hot at price-increase seduction

28 Aug 08

I just read the August edition of the excellent Channel Info magazine after being away for a few weeks. There were 3 issues raised, on which I'd like to comment:

Price Increases?
Esselte's MD Chris Exner suggested that the OP industry has its 'head in the sand' and raised the question "Why is no-one talking about this? He continued "It is imperative that dealers pass these price increases on in full".

Exner urged dealers to look at their business models and take cost out at every level in order to survive. He said there would be a lot fewer players in the market and only the smartest will survive. Exner suggested that smart dealers will pass on the costs and focus on selling added value and tap into user trends.

I agree that dealers should pass on the costs in full. See 'The BIG Squeeeze' articles below. Buyer and user sentiment is ready, so don't disappoint them. The problem is the powerhouse wholesalers and resellers are pushing back hard in order to maximise short term profitability and setting a bad example.

Amazingly, all the big retailers inc. Tesco, Woolworth's and the big boxes are behaving in a crazy way and intensifying the price war rather than behaving responsibly.

This makes it doubly difficult for dealers. However, the main problem is dealers' lack of confidence in passing on price increases. They lack match practice. Serious inflation has not happened for 20 years or more and they lack the skills to present the case to buyers, even though higher energy and euro costs seem blatantly obvious.

Exner is correct the cost increases must be passed on in full, but he seems out of touch on dealer operating cost levels. The advent of stockless dealers back in the mid-90's means that their rapidly growing ranks have already addressed cost reduction issues. Cost reduction has never been an issue for dealers, it's the selling and marketing bit, the  price increase seduction process, where they need the help.

Finally, because of the growing population of office/IT dealers and their low cost models, there are going to be far more dealers not less in the future. Low cost, easy entry stockless models facilitated by wholesalers means the return of a golden age for  independent dealers, matching the glorious 80's.

Fertile fragmentation is the hot trend in the UK and the US.

Group leadership?

'Is it really not possible to have a dealer group run by dealers for  dealers' asks CI editor Caron Bentley (see pic right).

The short answer is no. The origin of groups was as a buying co-operative, a timeless phenomenon. In the 80's dealers wanted to aggregate purchasing power to defend against the emerging big-box players.

In the 90's, the agenda moved on to marketing groups, as brilliant marketers emerged like Viking, Eastman, Lyreco and Staples. They demonstrated that buying power was only one ingredient of their success. Dealer groups like Basicnet, OfficeSMART and OfficeTeam emerged with user friendly catalogs and single source selling and marketing programmes, including training and dealer development to enable dealers to compete effectively up front.

Professional sales, marketing and leadership skills were not commonplace in most dealers and that was the core ingredient that the new dealer group leaders added. When this is absent the dealer group reverts to type and tends to copy what they interpret as the core strength of the power players…buy low and sell low.

I suppose it is possible to run a dealer group successfully without a professional leader…but I've never seen one in 30 years. We know that trying to motivate and lead a group of entrepreneurial dealers is like herding cats, but it can work.

In the case of the United dealer group, their original plan was to stay loose on leadership and aggregate guidance by committee. We suspect that this was an expedient move, to maximise rebates. Well sooner or later the chickens come home to roost…especially the headless variety.

In United's case it was sooner and now they will get the leadership they need in Advantia…providing of course that real marketing programmes to reach the user choosers are provided: office productivity systems delivered in a personalised and eco-friendly way.

Contract Stationer experience?

I knew a while back about Integra's appointment of an ex-Corporate Express sales person as sales director. I noted the addition of another with contract stationery experience in April.

Integra and dealers beware. It is very difficult for an ex-power channel Goliath type, to adapt and teach an independent dealer David type, how to go to market. There are few examples where a corporate selling type can adapt to the dynamic environment of smaller dealers.

Ex-bigbox sellers are so used to selling from strength that they go in with low price contract prices and rarely have to talk about personalised and value added services. In short they don't understand the dealer's mentality. Enterprising ex-manufacturer and wholesaler types understand much better that harnessing the skills of the top strikers, farmers and emerging sales people within the independent dealer community may be a better route.;

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The BIG Squeeeze – Part 2

Distributors are agents not super-customers
Lessons for OP resellers from the IT market

26 Aug 08

The inbox was jammed in response to last week's Frost Bites article entitled 'The BIG Squeeeze'. It seems that there are plenty of manufacturers out there who are suffering severe suppression in silence.

Manufacturers never want to mention names for obvious reasons, but the sentiment is clear. "There is so much scope to improve the co-operation between manufacturers and distributors". "Let's learn from the IT business" and "How can we divert marketing funds used as wholesaler support allowances into true user marketing investment?" These were typical of the huge dilemma facing manufacturers and brand marketers.

Since the power channels gathered strength in 80's via wholesaling, via the publicly quoted superstores and contract sationers of the 90's the manufacturers have taken a back seat in the traditional OP marketplace. Perhaps only 3M, Avery, Esselte and Avery have resisted the power and managed to divert funds into direct marketing. Others like Fellowes, Really Useful, Safco have done their marketing thing regardless.

The new and correct model surely is in the IT space where HP, Brother, Logitech, Canon, Dell, Belkin, Microsoft, Sony etc. market directly to the user with the distribution support of wholesalers and the selling support of resellers. Wholesalers get a margin and rebates; dealers get a margin and marketing allowances if they commit and get results.

Accountabilities are clear, whereas in the traditional OP space they are fuzzy and favour the power players. It is going to be difficult to shift funds away from wholesalers and bigbox resellers now that the structure has been set.

The silver lining behind the cloud, is that traditional direct marketing has been expensive and print/mail based and new direct marketing is email based. Emarketing to users means that that partnerships must be formed with progressive dealers who personalize their marketing approach.

Currently, all emarketing efforts I've seen from Staples and Viking; HP, Acco and Esselte are all spam equivalents e.g. today's offer to anyone breathing is 50% Staples Brand products.

I can recall the time, when Avery were investing in their new consumer marketing programme 10 years ago. They faced the distributors and groups head on and explained they were switching their marketing spend from trade support to direct marketing. We protested vehemently, but they carried on and invested. They were right even though it was painful.

The priority should be more to do with partner and category selection, not product. Once the category has been chosen, distributors should support the range to the maximum.

I can recall all the product selection meetings when we as wholesalers or resellers sat in judgement of new product proposals before they were catalogued. What did we know? The manufacturer often had invested serious money in research and development, design and production and we would pass opinion on whether we liked it or not…rather than whether it would sell. Hey, don't you think manufacturers may have considered that before producing the prototype?

We were exercising our power. The question is how that power is used…positively or negatively…with the user's benefit in mind or to maximise short term profitability? The new message must be to co-operate not squeeze the lifeblood out of manufacturers.

Our joint goal must be to reach users more efficiently. Currently the squeeze is on manufacturers' cost recovery. This means that Innovation, R&D, design, development projects, marketing and technology investment will be squeezed too.

It is in all channel partners interests to listen, analyse and make sure that in inflationary times we co-operate and encourage innovation to inspire the flow of new office productivity ideas from the original brand manufacturers
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US and UK economic gloom

Resilience to resist
recession risks

European downward trends far worse

The answer depends on whether this slowdown turns out to be a hiccup or the start to a prolonged period of zero or negative growth. In the former case, the temporary slowdown will soon be forgotten - or will be remembered merely as the statistical by-product of a correction in house prices that was inevitable and overdue.

However, if, as is widely assumed, the stalling of the economy in the second quarter marks the beginning of a recession lasting into next year, then the implications will spread well beyond the statistical yearbooks and estate agents' windows. Unemployment and business bankruptcies will rise sharply, government finances will sink deep into deficit, sterling will plunge and housing and equity markets will suffer years of poor, depressed conditions, as they did in the early 1980s and between 1990 and 1995.

Almost everyone in Britain, with the possible exceptions of Gordon Brown and Alistair Darling, seems to agree with the latter prognosis.

Conventional wisdom asserts that after a decade of profligate self-delusion, Britain has reverted to its traditional position as the sick man of Europe; indeed, that Britain is one of the sickest economies in the world. Regular readers of this column should be familiar with certain aspects of this view.

Although I initially underestimated the depth and duration of the global credit crunch, I have argued throughout the past 12 months that Britain would be more vulnerable than the United States or any other big economy to whatever global financial problems did emerge.

The message was similar to the one I was trying to convey: the state of the British economy - and, certainly, of the property market - is, indeed, worse than it has been for 15 years and, in my view, much worse than the situation in America.

But before we prepare for the rains of fire and blood, we should recall two observations: first, that the past 15 years have been a period of exceptional prosperity and, secondly, that US economic and housing statistics, despite all the apocalyptic prophecies, are showing clear signs of stabilisation and even improvement.

So although it is overoptimistic to expect any quick return to the boom conditions that preceded the credit crunch, it is a gross exaggeration to compare the problems of today with the worst economic and financial crises of the past decades. And, indeed, the sentiment on the British economy has swung so far to the pessimistic extreme that the big surprises - and the big financial opportunities - in the coming year will probably be on the upside.

To see what I mean, compare the market sentiment about Britain with the economic reality. The pound, after suffering another swoon in the wake of Friday's GDP figures, is unequivocally regarded as the world's weakest important currency. British house prices have been collapsing since the spring by more than 2% a month - an annualised rate of 25-30%, which is far steeper than the US suffered even at the worse point of its housing crisis.

This collapse in house prices is widely expected to trigger enormous losses on mortgage lending, even though there is little evidence of a close relationship between house prices and mortgage defaults, which depend mainly on interest rates and changes in unemployment. As a result of the market fears about their mortgage books, British banks, including such too-big-to-fail giants as Royal Bank of Scotland, HBOS and Barclays, which face no conceivable funding problems in any plausible economic scenario, are trading at valuations implying that they are almost insolvent.

What may seem more surprising against this background of universal gloom is that Britain still has by far the highest interest rates of any G7 country - and, therefore, the greatest scope for monetary easing. At the latest meeting of the Monetary Policy Committee (MPC), there was a three-way split in the vote - one member wanted a rate cut, another proposed a rate increase and the seven others split the difference by voting for no change.

Many commentators have inferred from this that the Bank either does not know what it is doing (a plausible conjecture after Northern Rock) or that it is prepared to accept a total collapse of the economy to get inflation back to target. But could there be some other explanation for the MPC's reluctance to ease?

For example, last week's retail sales figures, which were much stronger than expected, showed year-on-year growth of 2.1% in Britain, compared with a decline of 3.1% in the eurozone. Admittedly, retail sales are erratic and suspicious at present, but manufacturing production conveys a similarly reassuring message - down by only 1.2% on a 12-month basis, compared with the plunge of 6.8% in both 1991 and 2002. And the same can be said of employment, purchasing-managers surveys, GDP and many other statistics - all are quite weak, but show no signs of the economic catastrophe that equity and housing markets seem to imply. (Note: Recession is defined as 2 successive quarters of negative GDP)

Of course, it could be that consumers and manufacturers are simply in denial and that Britain's real economy will collapse once the public starts to understand the disaster anticipated by stock market investors. It could be, however, that consumers and businesses have noticed what is happening in the economy and have simply drawn different conclusions from those of the markets. It is hard to imagine that anybody in Britain is unaware of the housing slump and the credit crunch and, as I have noted previously, financial markets are frequently plain wrong, especially near economic turning points.

It is quite possible, then, that Britain's real economy will simply turn out to be less sensitive to housing and credit problems than the financial markets assume. It is equally possible, however, that the economy will continue to deteriorate in the coming months, as is widely expected. If this happens, and the next few months' statistics confirm that the economy is continuing to weaken, there is every reason to expect a strong, rapid response in terms of interest-rate reductions from the Bank of England. That cannot, of course, be said of the European Central Bank - which is why, despite all the present gloom, Britain is highly unlikely to become the sick man of Europe.

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Q2'08 Financial Review –
Manufacturers and Wholesalers

Manufacturers hit
by power failure
Innovation the key success ingredient

22 Aug 08

HP's results are in now, bringing to a near conclusion the Q2'08 round of financial results for the leading public companies in the OP marketplace.

We only await Staples results now, due on 3 September now. You can read the individual results analysis in detail by scrolling back in Latest News.

HP's sales results were impressive up organically by 5% (organic growth = real same currency) with net profitability rapidly approaching 10%/sales. HP, Logitech, Xerox and 3M turned in the best performances for the manufacturing community.

We interpret the common ingredient in the success of the these 4 as innovation. HP have reinvented themselves with new laptop and printer models…the latter boosting sales of original supplies to the detriment of remanufacturers and compatible suppliers. Logitech's tremendous progress up 18% in Q2'08 is quite simply an innovation enterprise with a tremendous flow of new IT peripherals e.g. remotes, pointers. Xerox's revival has been focused on document services and the growth of colour devices. 3M is simply an innovation machine with new Post-It Note colours and shapes driven to market by high user awareness and celebrity endorsement.

 
Generally, Q2'08 was a story of heavy cost inflation on the input side and trying to recover those in price increases in the distribution channels. The difficulties experienced by the power channel players has made this process difficult. Apart from lower retail sales volumes, averaging 10%+ down  in Q2'08, resellers like Office Depot and Officemax, have their own set of management problems which have impacted massively on manufacturers demand.

Avery, Acco, Newell, Imation and even 3M were all negatively affected by a combination of factors relating to the power channel. With retail volumes down in the USA caused by the home mortgage crisis, the reaction of the big-box players has been to retrench, destock and fight inflationary cost price increases from embattled manufacturers.

Papermakers, apart from International Paper, all suffered from heavy energy cost increases and the inertia of transferring those into price increases. The market was very aggressive which made progress difficult. UPM, Stora Enso and M-real were all down 3% or more. The only companies showing positive progress were: MeadWestVaco with their office and consumer division showing 1% ahead as a result of innovation (again!)and good product placements; and IP with strong progress in the US market and internationally.

IT manufacturers exc.HP and Xerox, had a tough time. Canon were down 2%, Lexmark down 6% particularly in the consumer sector; and Imation were flat and seem absorbed by the integration challenges with TDK.

It is worth noting that wholesalers in the US and UK reflected the market weaknesses except Synnex. United and SPRichards showed positive growth with their main independent dealer customer base, but were dragged back by the decline of the bigbox players. IT wholesalers: Ingram Micro's growth rates slowed to +2% overall and +4% in the Americas; TechData grew by 2.35% overall, down 3% in the Americas, but up strongly by 7% in Europe. Synnex continued their impressive progress up with an impressive and  consistent growth rate of 11%.

Be Innovative!!

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The BIG Squeeeze

Are certain power players guilty
of applying unrealistic pressure?

21 Aug 08

But, some of the OP wholesalers and big-box resellers in the middle have been uncompromising and pushed back hard against accepting any increases from hard pressed manufacturers. Some wholesalers are stating that their agreements allow for only one increase a year. Some wholesalers have already passed on anticipated increases to dealers, but have yet to accept them from manufacturers!

The result, in recent months, is that manufacturers margins have been devastated as the power channel refused to listen to reason in July, with prospects for a second increase in January limited. The pressure on private label manufacturers from the power players has intensified even more. Two forces are at work here: transparency of costs and accountability and the growing selling emphasis that resellers are placing on private brands to boost volumes and margins in a price sensitive market.

The ex-growth cost reductionists

The sharpest operators with the reputation for intransigence have ironically been the 'cost reductionist' operators. These wholesalers or bigbox resellers have weak growth strategies and put tremendous pressure on manufacturers to reduce prices, extend credit periods, pay marketing allowances, return products that haven't sold and seek retention rebates. They effectively, try and get suppliers to feed their bottom line and compensate for their inability to sell and market successfully.

The prime examples of this are Office Depot in Europe and the US and Spicers in Europe. Both great companies with phenomenal purchasing power, but who have gone ex-growth in recent years.

Putting pressure on suppliers is nothing new of course. Unit costs have to be controlled tightly and negotiated firmly. What matters though is the way in which it's done…the fairness, the listening, the understanding, the empathy in trying to maximise results in terms of profitable sales to users. Those operators between manufacturers and users are transient intermediaries and must add value to justify their long term role. These partners should therefore co-operate. 

Unfortunately, the power conscious wholesalers and resellers take a superior line and exercise their 'super-customer' status to bludgeon improved margins at the manufacturers' expense. This pressure in most cases is motivated by quarterly public reporting, which seeks to improve earnings per share. When sales volumes are weak…the vendors become the sitting target.

Office supplies manufacturers
– the weakest link

It's not difficult to find examples of casualties in recent years from power channel pressure. We know they are 'traditional' filing and stationery manufacturers, but Setten&Durward, Jet Stationery, Tollit&Harvey, Shawcross & Dickinson, and John Dickinson have all suffered from relentless demands to cut costs, especially on private label goods and either out of business or have been acquired.

If we look at the big brand manufacturers, they too are under tremendous pressure. Acco, Avery and Esselte have all experienced sales volume falls this year largely at the hands of poor sales performance by big box resellers. The reaction of the resellers has been to pour on more pressure. Examples mentioned by manufacturers recently include: seeking extended payment periods or discounts to maintain current patterns; maintain soft marketing allowances even though rebate thresholds have not been met; finance 2-for-1 or 3-for-2 promotions at manufacturers expense; return unsold stock for full credit.

Moreover, the power players continued to rationalise product ranges and suppliers by introducing or intensifying programmes like 'preferred vendor' schemes, which sound fine when you are 'in', but too often disguise the intent to squeeze an extra 5% for temporary exclusivity. The next demand is to cut ranges or limit space for new product. These super-intermediaries start to take over manufacturers pricing policies, control their promotional plans with old fashioned disorientated promotional activity and dictate their commercial lives.

Manufacturers live in fear of their future. Their margins are squeeeeezed and as a result their funds for research and development are minimised. The knock on effect is a limited flow of new products and lower funds available to invest in direct marketing via user advertising e.g. TV/radio, billboards, magazines and user promotions.

The future is bright…
the future is personalised emarketing

Surely there is a better way going forward? A way for manufacturers to communicate directly with  users with the latest office productivity ideas…saving time, money and space, new colours, smaller sizes, personalised and user friendly devices, ergonomic peripherals etc.

Direct marketing using printed material is so old hat…the future is personalised emarketing campaigns from a user's local dealer representative orchestrated for manufacturers by marketing partners. The campaigns are created by manufacturers, personalised for dealers and emailed personally to Lucy the typical user chooser and not the junior buyer. Can you imagine how much money has been wasted promoting shredders to Sally Saver who has no authority to purchase…when Lucy who has, hasn't seen any promotional details,  nor heard of the local office supplier?

The future is bright. Firstly, manufacturers should have the courage of their convictions and start to disinvest their marketing funds from wholesalers engaged in wasteful catalogue and flyer promotional activity. Leaders Avery, HP and 3M have started this process. They should invest in personalised emarketing campaigns via market orientated dealers and resellers.

Secondly, they should invest in (15-30 seconds max) video demonstrations of every product in their portfolio highlighting the productivity benefits to users. This creates an entertaining way to get their message across, effectively…edutainment. Then they can achieve the best of both worlds…pure direct, marketing to user choosers via the personalised service of local single source resellers.

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Max exodus

Don Civgin latest top executive to defect

and seek "opportunity" elsewhere

20 Aug 08
OfficeMax, the #3 US OP big-box player, today announced that the highly respected EVP and CFO Don Civgin (pic below) resigned his position effective 29August, 2008 to join All State, the $24Bn insurance giant based in Northbrook (IL). Is there any body left who understands the OP business?

"Don has provided sound business and financial counsel during his tenure with the company and we wish him the best with his future endeavours," said Sam Duncan, CEO. "We believe the current senior management and finance teams are well-positioned to absorb Don's responsibilities in the near term, until a permanent replacement is named." Praise indeed!

Civgin joined OfficeMax from GBC in October 2005 shortly after Sam Duncan arrived to lead the "Turnaround Plan". We can  recall the merger between the excellent and much admired Boise Office Solutions (then $3.5Bn sales) contract supplies company and the third rated superstore OfficeMax ($4.8Bn sales) back in late 2003.

In early 2005, the new grouping went through a really difficult period following  revelations of bad accounting relating to vendor's marketing allowances in the Max retail division. The CFO Anderson and retail chief Peterson were fired and the much admired CEO Chris Milliken resigned on principle.

From April 2005, Duncan's new regime set about trying to turnaround Max by cutting costs, rationalisation and trying to run down the contract division and firing good sales people. Since then there has been a mass exodus of talented and highly respected operators: Phillip DePaul; the legendary Boise chief Mike Rowsey who resigned on principle when asked to fire 120+ sales people; his successful successor Harry Dochelli; Ted Walters, the California chief who joined Complete; Steve Schwartz, the ex-United/Prime chief; Carol Moerdyk, SVP International division and now Civgin.

Some may have noticed Duncan's style when he describes the loss of an important executive as listed above. He thanks them for their contribution in an underwhelming way and then states that they left "to pursue another opportunity" as though Max was inferior. In almost all the above cases the executives left because of frustration and poor leadership from Duncan. Good people don't normally leave the OP market.

Duncan is a retailer and has shown no understanding of the OP contract market. When he decided to look for a deputy and potential successor in 2007, many were predicting that Civgin would be the ideal choice, to add his deep and respected knowledge of the OP business to the inexperience of Duncan. Certainly it was Civgin who was the respected contact point for Wall St. analysts.

Instead, amazingly and without employing a search firm, Duncan unilaterally appointed his old crony Sam Martin, as the new COO, a guy who had followed Duncan through 3-4 previous companies. Martin is another retailer who doesn't understand the OP business.

Today's announcement caused Goldman Sachs analyst Matthew Fassler to downgrade OfficeMax to "Neutral" from "Buy." "We view Civgin as the executive who delivered the numbers, and in some respects, held the team together, in a very tough environment," Fassler wrote in a research note to investors.

So what's left? Not a lot! Apart from Reuben Slone and Ryan Viero there's nothing and prospects are bleak with both retail and contract divisions in freefall down double digit %'s, as Sam's 'profitable customers only, selection process' continues.

Interestingly, since the merger back in Q4'03, the Max retail division has fallen away by 25% to an annual rate of $3.6Bn under the expert watch of retailer Duncan. Meanwhile, the ex-Boise contract division under the guidance of Rowsey grew rapidly to $4.8Bn in 2007…up an impressive 33%. Now under Duncan's leadership contract sales are likely to dive to as low as $4.2Bn down 12% in 2008.

Play it again Sam!

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By James Wilson, Positive Office Group

19 Aug 08

Last month the freshly named VOW announced the merger of the ex-Kingfield wholesale company with ISA Retail the special wholesale arm serving major retail customers like the Post Office, Tesco and Morrisons under the leadership of Ian Sinclair

So has anyone figured what grocery has got to do with office products - more specifically office products sold by independent dealers who use wholesale support as opposed to own stock and logistics? Unfortunately I think the answer is not a lot! I get the bit about 'pooling the support networks' - that's all about cost reduction and intellectual efficiency and perhaps there's more to come as the invigorated VOW positions itself for growth in a tough market.

Evidence of this is the acceptance of VOW's direct route to market via ISA Supplies Team, accounting for some 20%+ of their total business. Indeed were it not for that route to market perhaps dealers would not be getting the deal they need to run their business from a business that excels logistically and offers a wide range of products. The problem only rears its head when there is proof of direct competition and we've not heard much about that since the ISA/Kingfield merger. Indeed on merge it was stated that ISA Supplies Team would have independent management to ensure clear channel discipline and we are assured that this is the case under new chief Jerry Fowler.

Of course in a zero growth market, which office supplies certainly was prior to the economic downturn it's important to drive down costs, leverage the best out of the combined management team and no doubt meet the sales growth required by the owners, Electra Private Equity Plc, who no doubt have set a 7-8% sales growth target. In a static market (at best) this can only come from taking market share.

The Hanmar demise will add little to either Spicers or VOW turnover, so VOW either have to take it from existing channel wholesalers and distributors or broaden the product offering to catch more of the channel 'long tail'. The long tail is a great opportunity to gain maximum customer value and therefore loyalty but it comes at a price - chasing the last 5% of anything is hugely expensive whilst acquiring more of the same - increasing volumes on existing stock is not only without cost, reduces the share of fixed costs which lead to greater profitability (surely what Electra had in mind) and ultimately a better price for the wholesaler's customers.

Adding substantial sales by way of acquisition is an immediate step function once the costs of acquisition and rationalisation have taken place - just ask any of the many dealers in the US and UK that are doing exactly that. Adding in 50% more sales whilst taking out substantial pieces of the cost of sales builds a stronger, more efficient business.

Could this happen in wholesale? I can't see why not. There may be some issues of monopoly, but taken across the channel as a whole the combined business of VOW and Spicers are unlikely to be viewed as much. Except, of course, by the independent dealers who rely on wholesale support and the choice of wholesaler in order to leverage a better deal.

Editor's Comment

There have been persistent, unconfirmed rumours that VOW is making a play to acquire Spicers from David S Smith. This would create the "superwholesaler" giant that Vasanta chairman Alan Barclay (pic above) talked about a year ago when the Kingfield/ISA merger happened. Combined sales would reach £1.2Bn ($2.4Bn) across Europe. We don't feel there will be any monopoly situations to deal with as Westcoast has acquired both Orion and XMA in recent years to reach £900m in sales. There is also Ingram Micro, C2000 (TechData), Paperlinx, Antalis and a host of paper, IT, furniture and FM suppliers.

The challenge would lie in the rationalisation of RDC's and duplicated management. The cost saving potential is huge and of course it would take away the cost of competitive pre-bates!

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How deep is your love?

Relationships are
not enough

What gets measured gets done

14 Aug 08

The admirable Tom Buxton of Interbiz Group says that 'Relationships' is the single biggest way you can become 'Anti-Staples'. We don't disagree, but it's just not enough...not nearly enough.

Surely, relationships are warm, fuzzy and imprecise. So how will you know if you have a strong, good or weak relationship with your customer? What people say and what people do can be poles apart. Many people will say that their office supplier provides a personal, flexible and friendly service, but then place the bulk of their purchases with other big box, web or mail order suppliers.

I must have visited 2000+ OP dealers around the world in the past 25 years and it is my estimation that dealers' share of their best customers potential business was only 40-50% at best. A dealer's typical reaction to this challenging revelation was incredulity. Closer scrutiny often revealed that dealers were measuring potential OP spend with levels as low as $500/person. Today in the US when including refreshment and hygiene supplies (a.k.a. Jan-san, break-room or FM supplies) average spends $1400/person (Proficiency Index study, June 2008 for a typical 50 person business).

Lower potential spend assumptions lead to complacency and inertia. You have a great relationship with buyer Sally Saver and purchasing manager, Gary Gatekeeper, but the executive decision for the bulk of the spend in IT, marketing/studio , accounting and conference supplies lies deeper within the organization, with Lucy, the typical executive decision maker. Lucy (see pic below) doesn't even know your sales rep, he's never ventured past Gary, never spoken to Ian in IT responsible for 30% of spend, never mind spoken to Lucy…who would welcome the opportunity to save money sourcing from a single source.

A strong relationship with buyers is not enough. You need to reach deeper within the organization to meet with Lucy, the typical user chooser.

The legendary Irwin Helford, and creator of personalized mailing service with Viking, may not have known any of his customers personally, buyers or users, but he did study their buying behaviour. Viking measured customer account spend levels, comparing typically Sep'08 with Sep'07 or year to date comparisons 2008 v 2007. Helford's philosophy was if a user spent more this year v last, that the customer loved us more; spend less, they loved us less. Study of customer spend trends sparked Viking's promotional activity.

OP dealers should reinforce their personal relationships by seeking to extend their reach inside the organization with the eco-productivity proposition "Cut costs…carbon emissions" by single sourcing from your local OP supplier.

Dealers should then measure retention and share of customer potential spend by installing an intelligent CRM system. Moreover, these should be reinforced with regular communications designed to promote eco-friendly office productivity…not just 3 for 2 bargains on ring binders.

I repeat these communications should go way beyond the buyer to reach Lucy, the user chooser. Lucy values close working relationships too, but currently no rep contacts her personally or via email with ideas on how to save time money and space in her office. Typically, Lucy loves office productivity solutions.

How deep is your love? Most dealers affection is superficial and limited to the buyers. we urge you to employ a full time marketer to set up an intimate user database and start communicating the wealth of office productivity ideas via personalised emarketing and 24/7 open webstores to Lucy.

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If you need guidance on the how to instal marketing systems  that 'delivers office productivity in a personalised and eco friendly way' call Peter Frost on +44 1932 784887 or email peter@positiveofficegroup.com and/or book your free place at Positive Marketing Partners launch meeting on Thursday 11 Sep 2008 at the Courtyard North Hotel , Atlanta Airport starting at 10am through to 4pm.

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Loss leading lessons
How big box retailers adapt to softer markets

15 Aug 08
Parents shopping for back-to-school gear could be forgiven for walking into a store nowadays and thinking they have gone through a time warp.

With 1930s prices for pens, glue, notebooks and even T-shirts, the season seems more "Back to the Future" than back to school. A penny these days buys eight No. 2 pencils at Staples or a wooden ruler at OfficeMax. Fifty cents buys a watercolor set at Target. A box of 24 Crayola crayons is the cost of a gumball — 25 cents. Or, as Sharon Hartley, vice president for United States marketing and sales for Crayola, put it: "Sixteen boxes of a 24-pack equals a gallon of gas."

Such pocket-change bargains, known as loss leaders, are not a novel strategy for retailers, of course.

Thrift is the theme this back-to-school year: people are spending less, consolidating shopping trips, forgoing discretionary items and going without new wardrobes and backpacks. And stores are trying to play to the public mood.

"I've seen a much higher prevalence of those types of big attention-grabber promotions this season," said Stacy Janiak, an analyst with Deloitte. "The one-cent deals, the bundling of products or three-for-two deals; I've seen a lot of that, much more than in the past."

Loss leaders are called that because by selling items at a loss or even giving them away, stores can lure in shoppers who will buy other, more profitable items. Drawn by the prospect of free glue, Laura Janowski, 23, stocked up on school supplies for her siblings, 12 and 14, at a Staples store in Rolling Meadows, Ill., this week. "Now, I just need to find the 9-cent filler paper and 33-cent index cards," she said.

Ms. Janiak of Deloitte said 71% of households would cut their spending on back-to-school items this year, with 48% planning to reduce spending by more than $100. Deborah Weinswig, an analyst with Citigroup, said 75% of consumers planned to spend less than $400 on back-to-school shopping, up from 45% last year. "Everyone is just much more price focused," Ms. Weinswig said.

It is perhaps no surprise, then, that Wal-Mart on Thursday announced record earnings for the three months ending in July. The bargain retailer's profit rose to $3.4 billion, up from $2.9 billion. Sales at American stores open at least a year, known as same-store sales and a measure of retail health, rose to 4.5% (not including fuel) for the quarter, up from 1.9% last year."Their sweet spot within the customer framework are items below $10 and items that customers are familiar with," said Bill Dreher, an analyst with Deutsche Bank Securities. "It's working."

Andrew Schneider, director of global brand management for Staples, said compelling penny offers bring customers into stores. "And they then will discover the wide range of products we have," he said. Analysts agree that in an economic downturn penny deals help retailers retain, if not gain, customers. More important, the eye-popping deals can keep a retailer at the top of consumers' minds.

"Can you afford to sell something for a penny?" said Marshal Cohen, NPD Group's chief industry analyst. "The answer is, you can't afford not to."In addition to price, a big appeal of discounters is that they offer one-stop shopping, saving consumers fuel.

Editor's Comment
What big box players are doing now for school stuff is typical of their office supplies pricing behaviour. It should serve to remind independent dealers about the power of matrix pricing and managing customer account profitability based on a quarter or a years activity, and not on transaction by transaction basis.

In our experience too many dealers look critically at wafer-thin product line margins e.g. paper and HP ink cartridges, and decide 'there's no money it'. There are still too many dealers that apply consistent cost-plus pricing or list-less -%discount models across all demand/category bands without balancing the mix to achieve first, a gross profit target.  Secondly, to achieve a net profit target which takes account of cost-to-serve e.g. delivery frequency etc.

If you need help on installing matrix pricing models to enable you to match or beat the big-box players or to benchmark and measure customer account profitability call Peter Frost on +44 1932 784887 or email peter@positiveofficegroup.com

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'Save money, live better'

Wal-Mart to
Wal-Marketing

It's Official: Marketing beats the slowdown

13 Aug 08

Wal-Mart Stores, the world's largest retailer, will report Q2'08 results tomorrow and is expected to report sales of $102Bn up around 7% for both the US Stores division and Sam's Club. Comparative sales for the same stores, open for 1 year were up 3% in both July and in the 6 months year to date. This is remarkable progress when you compare the results of the big box OP retailers down by over 10% in Q2'08.

Wal-Mart also saw momentum building in back-to-school offerings across the store and expects that momentum to carry through the August period. Customers are responding well to the "Do the math and save" messaging in advertising and in-store communications on products ranging from Lap-top computers to glue sticks

Wal-Mart has delivered strong sales growth…repeatedly beating expectations …at a time when retailers have been gasping for breath. A new marketing campaign started back in September 2007 has brought eye opening results. "Marketing had been considered a support function at Wal-Mart" said Stephen Quinn, the ex-PepsiCo marketer who was promoted to CMO last year. "I had to convince people that it could have a direct impact on sales". It has…see the results below.

CEO's Review

"In a difficult economy, Wal-Mart's clear price leadership position, continued to meet the needs of our customers," said Eduardo Castro-Wright, CEO. "Better merchandise presentation, our everyday low price message and an improved store experience resonate with customers. With the end of the stimulus checks, we know consumers are spending more cautiously, and we continue to see a pronounced paycheck cycle at the end of the month. We also continue to see improvement in our customer traffic, relative to last year."

During the July four-week period, comparable store sales increased in grocery, entertainment and health and wellness. Although comparable store sales in home and apparel were slightly negative during the period, the stores had much cleaner inventory in these areas and therefore, much less clearance than in the same period last year. Grocery was driven by strong sales in both food and consumables. Flat-panel televisions, video games, game accessories and digital media led the entertainment merchandise unit. Apparel was aided by strengths in juniors and new brands, including l.e.i. and Ocean Pacific (Op).

Advertising advances
The strength of the Op brand, has been aided substantially, by the back-to-school TV campaign. This features a clean looking teenager wearing the California surf brand which seems to satisfy fashion craving without breaking the bank. Whilst on the surface the ad may not appear too different from past efforts, its creation has been part of the new 'Save money, Live better' campaign resulting from dramatic changes behind the scenes started last September.

When Quinn joined Wal-Mart back in 2005 the behemoth was slumping. Consumers complained that the stores were too big and aisles to difficult bto navigate. Advocacy groups blasted their treatment of employees. Big box stores were losing their cachet.

The company got panicky enough to try and emulate its much smaller but cooler rival Target. Wal-Mart introduced relatively chic clothing and pricier home goods. The results were forgettable to be kind. One reason it failed was its insular mindset.

Wal-Mart was inward looking not outward looking. Quinn has changed all that. He applied practices common to consumer driven brands like PepsiCo's Frito Lay, where he was CMO. Quinn spent 2 years doing quantitative research, to determine why consumers shop at a retailer and what they want.

When, for example, a pharmacy customer told researchers that they broke pills in half because they couldn't afford the full prescription, Wal-Mart conceived the wildly successful $4 prescription drug plan.

Its most profitable customers…
are its most price sensitive

Perhaps the most important research revelation was the discovery that its most profitable customers were also its most price sensitive. That told the Wal-mart team that they did not have to mimic Target; the low price mantra still resonated. "We simply needed to communicate the message in a modern way" said Quinn.

Whilst heavily criticized by Advertising Age; they described the tagline as awful, poorly punctuated and forgettable, we feel it does hit the spot with the target marketplace. Whilst we generally agree with AdAge on their views about crummy, worthless and forgettable taglines, we feel the Sam Walton's message shines through.

As mild as the changes may look from the outside, they represent a significant cultural shift. Though Quinn had the support of Group CEO Lee Scott, many of the mid-level executives resisted. Also not to be underestimated was the impact of the economic downturn.

Suddenly Wal-Mart has the tight message at the right time. The new marketing approach is "one of the key elements behind the company's turnaround". Since the new campaign launched last September, the retailer's long stagnant stock has risen 32%. Customers save money and all associated with Wal-Mart live better too.  

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Fertile  fragmentation  beats 

consolidation

The world is dividing, not converging

9 Aug 08

This has obviously been fuelled by the recent merger of Staples and CXP and a spate of regional dealer roll-ups in the USA, UK and Europe.But, the world is fragmenting more than ever. There are more choices of computer, more colours, more coffee flavours, more car makers and models, more micro breweries, more magazines, more TV/radio stations, more countries, more distributors and more different types of OP dealers.

Yes there was a massive consolidation of OP distributors in the US from 14000 down to 5000 OP dealers in the mid 90's following the onslaught of the superstores. This has levelled off to around 4000 today, but there are many thousands more IT and web resellers than before, enabled by the global wholesalers Ingram Micro and TechData.

Some manufacturers suggested recently that consolidation in distribution was a good thing.

How can that be? More consolidation may reduce costs from factory to distributor, but it hardly helps original brands in reaching users.

Look at what has happened in the grocery business. Fewer distributors leads to the emergence of a powerful own brand obsession.

Witness the financial reports of Staples, Depot, Max and latterly CXP. They have talked incessantly, about growing their private label brands to improve margins. In fact, big-box brand sales mix share is now around the 30-40% mark.

Hurt by the growth of private label and parallel sourcing of product from China et al, the enlightened manufacturers have invested in innovative differences and used direct marketing campaigns in conjunction with specialist web resellers to gain wider user awareness. Witness 3M, Fellowes, Logitech, Acco and Sanford's recent campaigns.

The key to a fantastic future for original brands is fertile fragmentation of markets. General OP wholesalers should realise this and drop their copycat goals to rationalise ranges and create their own private label commodities. Sure they need to keep dealers competitive on core items like paper and ink, but in my experience dealers source these from specialist distributors, not general line wholesalers.

If wholesalers conducted more frequent user market reviews with manufacturers, they could adapt original product ranges to suit latest demand trends, rather than their tendency to cutback based on space or cost reduction criteria. This would provide a wider choice and innovative edge for resellers, rather than trying to replicate big box resellers with copycat marketing campaigns.

Fragmentation in the empowered internet world is the inevitable trend. Manufacturers and wholesalers have an enormous opportunity to feed the independent resellers and help them market to users. We reported on a great example recently with the rapid growth of BuyOnlineNow, who piggyback manufacturers' direct marketing campaigns so successfully, by providing a rapid online and delivery service. Local dealers can do the same in an optimal eco-friendly way.

Inevitably, distributor consolidation kills innovation and competition. Fertile fragmentation in the marketplace should win everytime providing independent dealers embrace the type of consolidation that matters: providing a time, space and money saving, eco friendly single source local service, across a wide portfolio of product categories.

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Office Depot shareholders know this!
Q2 record loss the least of investors' worries?
Talk of Depot/Max merger is fallacious fantasy

By Nicholas Yulico, TheStreet.com

8 Aug 08
We've been holidaying in Southern California this week and picked up on this story in TheStreet.com later than we'd wanted. Here is Yulico's article plus our comments below:

What's potentially more troubling is that the Florida attorney general's office has opened an investigation of the office-supplies retailer for alleged overcharging of government clients, but somehow Office Depot hasn't disclosed this information to investors.

While Office Depot may not have violated any laws relating to shareholder disclosure, the Florida investigation carries important ramifications for investors, especially because it could hamper a takeover of the company. Depot's stock -- which is down more than 70% over the past year -- rallied briefly last week after Goldman Sachs analysts said that a merger with Office Max would help stem the sector's troubles.

Delray Beach, Fla.-based Office Depot reported last week that it swung to a $2m loss in Q2'08, down from a profit of $106m a year ago. Analysts blamed sluggish sales and high fixed costs for the poor results.

Outside of the difficult business environment, Office Depot is also facing possible legal troubles related to its business of supplying office materials to government agencies.

The Florida attorney general's investigation relates to allegations from a whistle-blowing former Office Depot employee who described a bait-and-switch-like campaign by the company to overcharge state and local agencies purchasing materials. The Florida attorney general's office declined to comment on the matter but confirmed that its investigation began in May of this year.

"Office Depot is disguising price increases to government accounts by fraudulently increasing list pricing, not correctly applying discounts, and switching customers to a higher-cost price plan without their knowledge," David Sherwin, a former Office Depot account manager turned whistleblower, tells TheStreet.com. (leader Jim Cramer pic right)

Sherwin estimates these policies resulted in a 5% to 10% overcharge annually on the $700 million (US Communities) agreement with government contracts, or about $35 million to $70 million annually. Many of these charges were in Florida, California and Georgia, but also took place in 43 other states, he says.

Curiously, Office Depot has still not disclosed the investigation to investors in its filings with the Securities and Exchange Commission, but the company did respond to TheStreet.com's inquiry into the matter.

"The company intends to fully cooperate with the Attorney General's office in its investigation and to vigorously defend any allegations of wrong doing," Office Depot spokesman Jason Shockley said in an emailed statement.

"We believe the civil investigation being conducted by the Attorney General arises from allegations made by a former disgruntled employee, who was terminated for workplace misconduct," Shockley said. "Office Depot denies any allegations of intentional wrong doing, and we look forward to cooperating with the Attorney General's office in its review."

Earlier this year, the State of Georgia cancelled a $40 million annual contract with Office Depot after a government agency said it warned the company about incorrectly priced items. The California Legislature is currently exploring allegations of overcharges from Office Depot's $25 million annual contract with the state, according to a South Florida Sun-Sentinel article in early July.

So why hasn't the civil investigation by Florida Attorney General Bill McCollum that began in May been disclosed to investors?

"The SEC rules require only a description of 'material pending legal proceedings, other than ordinary routine litigation incident to the business,' " says Shockley, the Depot spokesman. "Government inquiries, including those from states' attorney generals, are not uncommon, and often resolve themselves at a preliminary stage. The referenced matter does not trigger mandated disclosure."

In its latest 10-Q filing, Office Depot said sales under government contracts amounts to less than 5% of its sales so far this year.

At this point, no one knows the ultimate ramifications -- if any -- from this investigation. But what's pretty clear is that it's hard to imagine how Office Depot and Office Max would consummate a merger before this dust cloud settles.

Editor's Comment
This is a good piece from a Wall St. analyst. Usually they describe the big box players as retailers, when the majority of their sales are business delivery and customer relationships. Here Yulico gets straight to the point about Depot's non disclosure of alleged fraudulent activity and any possible contingent liability.

Goldman Sachs' suggestion that 'a merger with Office Max would help stem the sector's troubles', shows a blatant and typical lack of understanding of the OP market by investment analysts. Both Depot and Max are basket cases for different reasons, but the OP sector is healthy and growing e.g. Staples, W.B.Mason, Lyreco and a host of thriving independent dealers.

Max is a rapidly declining $8bn mix of a once great contract office supplier (Boise) with a third rate retailer. The 'Turnaround Sam's' Duncan and Martin are retailers who don't understand the power of customer relationships and continue to cut the muscle and select fewer more profitable customers. Max is a hospital job which probably needs to sell the retail arm to Best Buy and rebuild the contract business under the Boise name.

Declining Depot ($14Bn) is simply riddled with incompetence from the top down. They've made massive strategic errors by outsourcing customer service, vanquishing the vaunted Viking brand and murdering the merger with Allied. Moreover, the heady mix of 'calculated customer confusion' caused by systematic overcharging, not just state and government contracts, but we suspect all contract business; the Epylon scam in California bypassing local office dealers; falsifying and double counting sales figures; the directing of sales forces to offer higher web-based  pricing whilst giving customers the impression they were lower or just not telling them; and finally, the huge suspicion that they are engaged in a major conspiracy with the US Communities ($700m annual contract).  

These are major, major problems which the current management can't resolve. It will need a new injection of OP professional leaders and management experience to sort out Depot after Odland&Co and the alleged fraud and conspiracy baggage have been terminated.

The thought of merging Depot and Max makes not an iota of sense. It would be a multiple basket case of 2+1= 1.5 over a protracted 3 years even with a genius in charge. Another business gift for the independent dealers? The suggestion should be withdrawn as fallacious fantasy.
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ODgate Scandal:
US Communities conspiracy?

Exposed: Depot and US Communities Collusion

"Not offering both (pricing) options could present ammunition for the independents if they catch wind of this" Hamill, US Communities chief

29 July 08

We have seen copies of minutes of a meeting held on 12 March 2008 between US Communities (USC) chiefs Steve Hamill and Kevin Juhring (ex-Office Depot director), LA County managers and senior Depot sales executives discussing the issue of offering the controversial Option 2 pricing to state and local government agency customers. LA County negotiate the contract with Depot on behalf of the USC.

'Option 2' pricing referred to below as 'retail less', is a discount rate offered from the current Depot webstore retail price. This retail price is varied from week to week and from region to region. There are probably up to 100 different Depot regions and pricing plans, making auditing of prices virtually impossible.

Generally speaking, our analysis confirmed by whistleblower ex- Depot  senior account manager  David Sherwin is that 'retail less' is 2-3%points higher pricing and Depot sales people have been directed to sell in 'retail less' pricing….evidenced by numerous email instructions.

Calculated confusion

The whole tenor of the minutes describes a situation where everyone is cosily familiar and protective towards the current contracts. The behaviour, I think you will agree, is defensive and freely refers to internal audits as though they were commonplace and reassuring. In other words 'at USC we are a non-profit organisation…you should trust us…we'll get the auditors in to prove it…now go away'.

Relevant extracts from minutes on USC letterheading were as follows:

"The independent dealer group has also opened up issues with the State of CA/Depot contract and in the blog site of the independent dealers have started to attack the US Communities program."

"Joe Sandoval (LA County Purchasing Manager) mention that LA County was getting out ahead of the issue particularly with these independents writing a letter to the Governor. The County has started an internal audit to verify the contract pricing."

"The issue of the sales force leading with the 'retail less' offering and not offering the 'list less' and giving the agencies an option has created some problems. Agencies could be paying a higher price by not offering the 'list less' model."

"Joe recommended that the contract be amended to remove 'retail less' offering. Dave T (Trudnokski, VP Government Sales, Office Depot) feels this option should remain in place because in certain accounts it is the more beneficial option."

"Steve Hamill (GM, US Communities) mentione there needs to be a process put in place to communicate to the sales force that they should be presenting both options and letting the end user make the decision for their agencies. Not having the sales force offer both options  could present ammunition for the independent dealers, if they were to catch wind of this.

Dave T is going to draft a letter that is going to be signed by himself or Steve Schmidt (President of Office Depot BSD, pic right) to the sales force that will confirm the following:

• 'Retail less' is a limited alternative to be used only in limited circumstances
• The 'list less' option is the standard and primary offering to the customer.
• Customers interested in the 'retail less' option to be given a cost comparison between 'retail less' an 'list less'

Joe mentioned in the interests of credibility of the program we need to engage an indepent auditor to look at the pricing. Dave agreed. Steve Hamill mentioned that we will talk further about this. There is a provision in the contract for to work through bringing in an auditor. Kevin Juhring will take the lead on identifying an auditor.

Dealer Alert!

There was an interesting footnote from Chris Penny (Depot's director of local government sales) stating that since the conversion from Georgia contract to US Communities (after Depot were suspended) Georgia agencies had purchased $1.8m in 3 weeks. What is interesting to note is the number of GA agencies and state universities that had elected to continue to use Depot through the LA County contract until the state does a new office supply solicitation.

Sounds like it was time for a smirk around the table?

Editor's Comment

Not much to add here as all the facts speak for themselves. Depot and USC behave in a very guilty and protective manner. Can you imagine a similar situation between an independent dealer and one of his major accounts considering the threat of Office Depot or OfficeMax making representations? It's no wonder, I suppose, given that Depot has had an uninterrupted contract with USC since 1996 and its grown to $700m and is highly lucrative to both Depot (huge unchallenged margin, no sales commission) and USC (huge rebates, no extra costs)

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Engage the desires
of multitasking businesswomen
Touchpoint research exposes gaps
in marketing measurement systems

25 July 08
Is your communications budget properly aligned to the changing media consumption habits of UK users? Do you understand the cumulative effects of different media channels working together, as distinct from their separate workings? Are you up to speed with fast-changing new phenomena such as social networking and internet access to traditional TV and newspaper content?

The latest round of the IPA's Touchpoints survey throws some fresh light on such thorny questions. Using PDAs (plus questionnaires) to track a sample of 5,400 UK consumers' activities, the survey offers a snapshot of modern lifestyles.

One thing's for sure/ consumers' love affair with the media shows no signs of abating. According to the Touchpoints 2 data, the average adult spends 24% of his or her waking time watching TV during the week (plus 13% of their time listening to radio, 10% using the internet, and 3% reading a newspaper or magazine). The figures are even higher at weekends. TV consumption has actually risen over the past two years, partly thanks to the internet: 18% of all adults have watched TV via the internet (rising to 29% for under 25s).

Multitasking becoming mainstream
Meanwhile the internet itself continues to blossom. Penetration has jumped from 58% to 73% over the past two years and usage is up 43% on weekdays and 23% at weekends. We're managing to fit it all in, it seems, by ever more multitasking. One small example: 36% of all texting takes place in front of the TV.

Within these averages there are of course significant demographic differences. ABC1s use the internet far more than C2Des and the 15-24s' media consumption profiles are very different to those of their parents. Fifty-eight per cent of 15- to 24-year-olds use social networking sites compared with just 12% of 45- to 54-year-olds. For 15- to 24-year-olds, entertainment is the main reason for using the internet (70%) followed by socialising. For their parents, accessing information comes top.

If consumers' love affair with media continues abated however, it's not necessarily the same for marketing and advertising. 82% of adults feel that some TV ads appear so often they become irritated by them (though 41% of C2DEs think the ads are better than the programmes). 66% of consumers are annoyed by the amount of direct mail that comes through their door (up from 52% in 2005). 60% agree that commercial messages via mobile phones are intrusive, with 62% of 15- to 24-year olds saying they ignore all commercial text messages they receive.

If Touchpoints does its job properly it should help address such negatives. The context is a bizarre status quo where each medium (TV, radio, newspapers and so on) is measured as a separate silo and where none of these siloed metrics is able to talk to each other. Result: a whole adds up to less than the parts. Brand managers may instruct their media buyers to target 25- to 44-year-old ABC1 females, and media buyers may buy schedules across different media according to this specification, but they have precious little idea about what weighting to give each media or whether different media acting in synergy increase impact or are merely duplicating.

Consumer centric
Touchpoints transcends this siloed lunacy by taking a consumer-centric approach, to focus on consumers' complete portfolio of media consumption. It also links media consumption data to an array of other variables such as TGI, what people do with their time (by half-hour slots), where they travel and how, what their shopping habits are, what their attitudes to things such as advertising and the environment are, and even what their mood is. The goal: a far rounder picture of consumer lifestyles.

The potential cross-correlations are massive (one agency beef being that it leaves them with too much data to crunch). Nevertheless, seeing a target group's media consumption habits in the context of everything else they do can generate new insights. For example, 40% of News of the World readers go shopping on a Sunday and half of them read the paper before they go out. This makes the paper a much more attractive advertising proposition to furniture, DIY and other retailers.

More generally, such an ability to use the right channel for the right purpose/message at the right time is a holy grail for marketers. The closer we get to this holy grail the less negative consumer perceptions of marketing and advertising are likely to be. The question is how?

The eye of the beholder
At the Touchpoints press conference, Vizeum joint managing director Grant Millar re-emphasised the need to go beyond traditional interruption models of advertising. BBH head of channel insight Richard Helyar went on to quote Aristotle: "If communication is to change behaviour it must be grounded in the desire and interests of the receivers."

Helyar's take on Aristotle was to argue in favour of "engagement". People don't engage with channels but "with ideas - big ideas", he declared. The underlying mental model here is that advertising reaches into consumers' minds via their eyeballs (or ears) to plant a message that changes their attitudes and behaviours. The more powerful the message (the bigger the idea), the more it changes consumer minds, and the bigger the change in attitudes and behaviours, the more effective it is.

But is this the whole truth? Does it have anything to do with Aristotle's suggestion that the effectiveness of a piece of communication is a by-product of its utility to its receiver?

Put the same piece of advertising into each of these contexts and it's likely to generate very different responses (and response rates), not because of the content of the ad itself but because of the current purposes and modes of the information user. If user purpose and mode rather than message power are critical to advertising effectiveness, then any media buying currency that treats all eyeballs as equivalents (for example, cost per thousand) is measuring the wrong thing. It may even be meaningless.

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ODgate Scandal – The plot thickens and widens

Nonprofit or Con-profit?

Where do the Communities $MMM rebates go?

24 Jul 08

US Communities and California Communities the trading partners of Office Depot are Nonprofit organisations run exclusively by Stephen Hamill and Gerry Burke owners of a for-profit company called HB Capital Resources.

During the course of our investigatory work into the mysterious workings of Depot and the 'Communities' we discovered articles by Orange County Register's Brian Joseph (pic below) who was conducting investigations into 'an obscure public agency (that) operates outside the public view, often awarding financial benefits to private business. Critics call it a bad way to do the public's business.'

Joseph's report in OCR (click here)on 22 May 2008 continued in its opening paragraph's with: 'The agency, the California Statewide Communities Development Authority, issued about $4.2 billion in tax free bonds in 2007, ranking behind only the states of California, Ohio and New York. County supervisors and city council members statewide formed the agency. Last year, their political associations pocketed $4 million from it. The Bay Area businessmen (HB Capital Resources) who staff it made even more. They collected $10 million.

For 20 years, they have operated out of the public view, using a public agency to help finance their special interests while siphoning off tax revenue for projects of dubious public value.They have taken a public agency and made it a private benefit.

"This is the ultimate in invisible government," said Orange County Supervisor Chris Norby, who's been suspicious of the agency since he was a Fullerton City Councilman in the 1990s. "It's kind of the worst of both worlds," he said, "public and private."

So Joseph's findings follow a similar pattern to our own. We suspect that the US Communities is receiving rebates from its trading partners e.g. $14m on purchases of $700m from Office Depot, and accumulating $millions in funds. Joseph points to commissions,on property and bond issues. Joseph mentions $4.2Bn on bond issues with a net profit of $10m. Add to this another $14-20m say from the 15 contract partners of US Communities and the magnitude of the money involved gets seriously large. Relate this to the costs of running the operation, say 30 people at a top rate of $100,000 each, = a max of $3m and we see the massive extent of the profits that could be available.

Given that HB Capital Resources run the 'Communities' which are Nonprofit Government Agencies, where do all the funds go to equalise the revenue? To date Joseph has gone some way down the track and got copies of Form 700 'economic disclosure forms' which details the income sources of government officials.

We have seen copies of these for Burke and Hamill. Both have private personal companies in addition to HB. Burke has a company called Burke Revokeable Trust and Hamill has Hamill Law Offices. They have tick box to state the extent of the salaries  drawn from these companies, in addition to HB Capital. In all cases the upper limit box says $100,000+  which have been ticked. There is no $1M+ box which I'm sure would apply.

The opportunity and temptation for Burke and Hamill to invoice the Communities with $Millions is obvious. Th opportunity and temptation for their personal companies to bill for property consultancy and legal fees is also obvious.

The Form 700's  disclose multiple property interests. Burke has  interests in apartment buildings and Hamill has 6 higher value properties – 5 over $100,000 band  and 1 over $1m band. Where did they get the money?

There is a huge temptation for fraudulent practice here. The suspicious behaviour of Burke and Hamill; the covert operations, no elected officials at board meetings…just cronies; the non disclosure of revenues, the short 'special' meetings and 'non rejection' of huge $Millions bond issues; investing in private enterprise and reducing taxable revenue; the recruitment of the 'Depot 3' allegedly to maximise rebates and maximise US Communities contracts throughout the US; are all examples of shady dealings.

We checked on the history of Nonprofit Fraud and were not surprised to learn that it was not an uncommon practice. We recommend you read the following extract from a recent article by Jen Miller *** below. This 'Communities Conspiracy Case' looks like being a landmark case of Nonprofit fraud which should be re-titled Con-Profit. We think there is $Millions each year being syphoned away and we are quite confident that Depot's behaviour lends itself to make the average observer believe they are involved in a major conspiracy.

Watch this space daily, for more revelations from our growing list of insiders, whistleblowers and investigative journalists.

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Nonprofit Fraud

***by Jen Miller

Fraud occurs every day in the United States. However, especially in smaller, lower-capitalized companies such as nonprofit organizations, the full extent of the fraud problem is not clearly understood. In the most recent Report to the Nation on Occupational Fraud and Abuse (a report by the Association of Certified Fraud Examiners), nonprofits had the second highest median loss ($100,000 per fraud occurrence) of the organizations studied. See Chart below.

Fraud in a nonprofit not only affects the
organization economically, it also hits the organization where it really hurts—in its reputation. Because nonprofits rely heavily on private support, a blow to an organization's credibility could be crippling. So it is vital to understand how and why fraud is so prominent in nonprofits.

How and why?

The culture in a nonprofit is one of trust. The general perception of nonprofit workers is that they are compassionate and ethical people. Because it is difficult to imagine trusted colleagues perpetrating any sort of fraud, the organization frequently does not have the basic, formal controls in place that discourage fraud. This trusting environment is exactly what a dishonest employee exploits.

Within the Report to the Nation, billing schemes were identified as the number one cause of fraud in nonprofits. In Joseph T. Wells' book Occupational Fraud and Abuse he notes that "the perpetrator submits or alters an invoice which causes his employer to willingly issue a check." In these instances, the issuance of the check is actually a valid transaction. The fraudulent component of the scheme is the fictitious supporting documentation. The employee will either prepare completely fictitious invoices or inflate previously legitimate invoices. The cash is obtained by the fraudster by either setting up a fictitious vendor and cashing the check, or by collusion with a dishonest vendor.

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24 Jul 08

When faced with big news, big changes or fundamental market shifts there's a tendency to think that it doesn't affect you, that you're too small to be noticed or what the hell – it's them not me. Readership on this site has gone through the roof since the Office Depot story began to unfold, continue to unfold and  now beginning to unravel. Maybe for the same reason we all slow down to look at a car wreck with emotions of 'wow' and 'thank heavens it's not me'.

If you take that view that big events don't impact consider the huge oil price increases and the impact on the detail of your life. In the UK more people are catching trains, driving less, driving slower – achieving what years of environmental campaigning couldn't in just a few weeks.

Back to Office Depot and the events in far off states of Georgia, Florida and California – what's the impact for you? Well it's not too difficult to imagine that if such practices are true that they are true wherever they operate - in your country, in your county, in your town and in the customers you are trying to win. In time that will create a lack of trust with their customers and independent dealers will be among the beneficiaries – but only if you compete on price and service; the will to change will only stretch so far!

The web is a great equaliser. Allied to wholesaler direct deliveries you can be as big as you want, supply 20,000 plus product lines and you CAN compete on price. Analysis we have run shows that the biggest competitors have a discount mix of around 15%. Does that sound scary to dealers who are used to working at rrp less 40% on key lines? Didn't think so. In this business it's all about turning information into knowledge and knowledge into power.

Think positive, take the initiative and dare to win – after all there's a lot that could be up for grabs!

You can contact James Wilson on +44 7767 303021 or email james@positiveofficegroup.com

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Is the Depot pressure cooker
about to explode?

Life after Odland?
A silver lining lies behind the cloud for manufacturers and employees

16 Jul 08

Office Depot's Business Services Division (BSD) is up to its old tricks again… transferring the pressure it is feeling from appalling sales and profits performance back onto manufacturers and firing key sales and customer service people.

Every time they release a BSD sales person it means a loss of $1M+pa sales which conservatively will take at least 5 years to recover under new management …under the existing management 10 years+.

The desperate BSD chief Steve Schmidt seems hell bent on short term action to boost profit margins to compensate for the huge 'comedy of (strategic) errors' and executive self destruction.

We realise there are many great people working at Depot who were there at the start. We particularly feel for the Viking people who must contrast the exemplary leadership skills of the legendary Irwin Helford with the used-car salesman approach of current CEO Steve Odland.

We feel that the end is nigh for Odland. I know, we have been saying this for over a year now, but how much longer will shareholders tolerate this brand destruction? How much lower can the shares go? The company has lost $10Bn in market value in 18 months and is virtually worthless!

We detail below the intolerable pressures that suppliers and employees are currently experiencing. In spite of this, we suggest that employees and suppliers should try and be optimistic and look forward to life after Odland.

Help in the form of new experienced OP management can't be far away…may be the silver lining will shine through in time for the Christmas holiday period?

Pressure on manufacturers

Cost reduction demands

Depot is currently conducting  product line reviews. The process involves cutting product ranges and driving margin higher, appears  to be backfiring and is seen as an exercise in improving margins at their expense Depot. We hear that Depot is looking for product cost savings in the 7-10%  as part of their product line reviews, which has annoyed manufacturers who are seeking price increases to recover 10% cost hikes.

Improved payment terms demand

We understand that Depot is demanding that manufacturers improve payment terms by 1% discount for payment of goods within 60 days versus previous agreements of net 60 or net 90 days. Manufacturers  are defending this pressure vigorously and view it as just another desperate act aimed at squeezing them to improve their dire financial position.

Pressure on employees

Employee morale is terrible and at an all time low. You just have to go on the Google 'Office Depot news' and visit the Topix site to read tales of woe from current employees never mind the growing list of ex-OD'ers. Moreover, there are  rumours of more management changes coming this month. This follows the firing, retiring and laying off of 1000+ employees since Dec 07. These include the sales force/customer service exodus in December and May/June plus the Head Office casualties last month. In addition a number of long-serving executives have opted to leave the company.

There is another rumour circulating that Depot is planning a Sale-Lease-Back arrangement on its shiny new corporate headquarters (See 'Palace at Odlands' article Frost Bites  14 May 08).

Pressure on salespeople

Sales people are under severe pressure to reach their targets and behaving like wildmen in the marketplace. Pricing is indiscriminate and Depot sales people are not passing on heavy cost increases in paper and ink as an aggressive move to gain an edge over competitors.

Obviously, they are absorbing these cost increases in the short term and playing their usual game of manipulating list prices, webstore prices and switching codes on contracts to rebuild their margins later onto unsuspecting clients.

On top of this, we hear they are stepping up their prebating activity to the max. Prebating occurs when say, on a $1m contract they offer $100,000 upfront cash for a 2 year supply agreement  (effectively an advanced 5% discount). Again their practice has been to recover this money from systematic overcharging, discontinuing core-line codes and substituting with higher priced Depot branded products...and generally creating confusion and a disincentive for buyers to check that agreed contract prices are properly implemented.

He came in to boost the share value in April 2005, from the $20 level that caused the ousting of Bruce Nelson. Through the usual crude cost-cutting methods that typify a used-car salesman, he doubled the share price. The short term hero has since devastated the respected Office Depot brand and the company has lost $10Bn in market capitalisation, faces junk status and now we await the alleged fraud and conspiracy charges to unravel.

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Message to Analysts and Shareholders

Depot and Max…

dead in the water

The minority 'retail' business will recover…the majority 'delivery' business has gone forever.

15 July 08

So these 2 major "office supply retailers" as Wall Street investment analysts insist on describing them, have combined sales of $24Bn with a combined market capitalisation of $2.66Bn or a tiny 11% of sales. Meanwhile Staples with pre-Corporate Express (CXP) acquisition sales of $20Bn were valued at $15Bn, 75% sales. In fact, Lyreco with sales of $3.4Bn has a greater market value than Depot and Max combined, having recently been valued at $2,7Bn in the aborted CXP merger!

The Staples market capitalisation has been depressed because Wall Street has a downer on OP stocks caused by the shocking performance of Depot and Max in the management of their businesses,  and of course the effects of the economic slowdown.

Analysts insistence on referring to them as 'retailers' shows a massive misunderstanding of the OP business. Yes, the economic slowdown has hit the home and small business user. This has caused same-store sales levels to be down between 7-10% in the soon to be reported Q2'08 results. Yes, Staples' larger retail business has shown a lesser rate of decline, but they are not too dissimilar.

Remember too, that if consumer demand returns as anticipated in early 2009, the retail store volumes will return too. This will not be the case with the delivery business. Let us explain why.

The delivery business is now the majority of sales in each of the big box players as follows: Staples pre CXP was 41%/total sales, now post CXP acquisition is now 60%/sales; Depot 52%/sales and Max 52%/sales.

Analysts please note! (and the retailer chiefs of Depot Steve Odland and Max, Sam Duncan). The delivery business is a combination of direct mail catalog/web ordering and contract office supply. The best and most successful practitioners e.g Staples, Viking, WBMason and formerly Boise, have provided an irresistible combination of personalised marketing, personalised selling and personalised customer service…teleservice and delivery drivers. There is no substitute for this customer intimacy model.

All attempts to depersonalise and substitute for 'operational excellence' models have failed. Cutting back on sales people, outsourcing customer service, outsourcing delivery in local areas has failed. The retailer-led Depot and Max management don't understand this and its too late now to reverse the exodus of sales people and disaffected customers.

We understand that Depot have released/lost c1000 salespeople including the Allied acquistion fall-out…that's a minimum loss of $1Bn in sales. We know that Max released 120 sales people in May 07…that's at least $500m in sales as these guys were ex-top notch Boise Cascade people. These sales will not come back to Depot and Max. They are gone forever to Staples, W.B.Mason and independent dealers.

The reputations of OfficeDepot and OfficeMax are in the gutter and there is little hope of recovery and we believe only the prospect of a steeper decline. Their cost cutting retailer chiefs don't understand the business and have fired any senior executives with OP experience that do..

Depot's situation is dire, not only because of the total incompetence of the cold and remote CEO, Steve Odland and his bullyboy accomplice, the US delivery business chief Steve Schmidt, but their attempted cover up of the systematic and allegedly fraudulent overcharging of State and Local Government contracts (See the new BIG Issue column).

These contracts are worth $1.2Bn/year to Depot and there is strong evidence that overcharging is taking place in all of them, Schmidt, a relative newcomer to the delivery division, is in denial of the overcharging claims, and  has taken a defensive stance by resorting to lawyers to challenge the state customers e.g Georgia and California. A more considered approach would have seen Schmidt asking for time to investigate and making provision for contingent liabilities should customers' claims be justified. 

At the very least Depot should be providing 3% for overcharging say $36m and  for termination of contracts of say 25% sales or $300m at  profit contribution of 20% = $60M. That's a cool $96M in total.

Worse to come is the US Communities (USC) $700M contract situation (included in the $1.2Bn sales above) where there is strong evidence of conspiracy between the USC management and Depot. Please read the BIG Issue for more background. In short, 3 ex-Depot executives who were responsible for setting up the supply contract with USC (the Depot 3) have joined USC. They are responsible for managing the Depot contract which is a blatant conflict of interest.

Maximising rebates, a minimum of 1% or $7M, is obviously in the USC's interest as is getting state and local governments to buy from Depot even when there is overwhelming evidence of fraudulent overcharging and higher priced substitutions.

The USC contract has been a goldmine for Depot. Not only is it protected by the unfair clauses  preventing competitors to bid, there is no salesperson's commission payable, saving an estimated $30m pa, Moreover, it is perpetuated by a very suspect USC management led by Steve Hamill, who seem to have their fingers in many pies and have so far managed to avoid public scrutiny and operate virtually as a secret society . This was recently challenged…see Brian Joseph article ' Public Agency, Private Benefit' (click the link) and I don't think we have heard the last of this.

In summary, Max cannot recover without an infusion of new leadership. Ditto Depot. Some observers suggested a merger of the 2…that would be MAXIMUM devastation. Mind you both Depot and Max have sunk to such a low level that a private equity investor could snap them up cheaply and get some of the ex-delivery executives  back to start again from a lower base. Maybe Eric Bigeard at Lyreco can persuade investors to raise the $1Bn in cash  to buy OfficeMax, then sell the retail stores to Staples?

We feel the incompetence of Depot and Max…and the dishonesty of Depot, have dragged down the reputation of a great and dynamic OP industry, Whilst it's good for independents and Staples to feed off their self destruction, it's too easy a win. Healthy and honest competition is much better inspiration to grow.

Yes, we feel Depot and Max are holed below the waterline. If we take their combined market capitalisation at $2.66Bn, then deduct their long term debt and lease covenants of $2.5Bn+, there is zero left. Dead in the water is a better description.

Further reading reference:

BIG Issue: 13 July 08 – Depot defects are worldwide

Frost Bites: 28 Jun 08 – 'Depot 3' in US Communities conspiracy? See below.

Frost Bites: 3 June 08 – Inside the US Communities contract. See below

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Dealer Survey: Top 10 Future Success Factors

Customer Intimacy
rated #1 success factor

Matrix pricing and single source systems selling ranked high but direct mail to fail

11 July 08

136 dealers responded to the recent Dealer Survey asking them to rank the most important factors that will determine their success going forward. There were 20 marketing factors listed and dealers were asked to rate them. See Top 10 factors charted below.

Included in the top 10 factors were 5 relating to CRM…customer relationship management. These were providing more personalised service i.e. customer intimacy; building an intimate database of users; personalised emarketing; training reps in CRM and opening 24/7 open webstores. Strangely, the key catalyst in making this happen: the recruitment of a marketing manager was not rated in the top 10. Penketh's of Liverpool invested in Karen Abel (pic below) 3 years ago and the results have been tremendous....voted BREAKTHROUGH Marketing Manager of 2008.

Over the years, and there are more examples in this survey, dealers have expressed the desire to want  results, but have not invested in the means to do soon enough, foregoing  the advantage . Building a comprehensive database of users, personalised emarketing campaigns, relevant promotions driving users to an open webstore and building average order values will not happen without a full time marketing/CRM manager.

The second factor, identified by dealers was the need to master matrix pricing. This is simple 'supermarket' type pricing enabling dealers to offer competitive pricing on the core products (up to 400 products) balanced by higher margin pricing on non core products. The power channel has practised this for years causing dealers to believe that they buy amazingly well, when they are simply practicing a form of 'bait and switch' pricing strategy. In the US Rick Marlette's GOPD provide a service to independent dealers that enables them to 'match or beat' power channel pricing whilst increasing profitability. This service will shortly be available the UK via Positive Marketing Partners (contact James  Wilson*)

Thirdly, the need to specialise in selling in single source systems was recognised.  This was highlighted as an important training need for sales people together with the ability to sell-in new prospects with the office productivity argument: "We can help you save time, money and space". Our research showed that whilst dealers recognised the need to sell in a wider range of product categories and a 'specials' from a single source less than 20% dealers promote the service in practice.

Proficiency Index - Dealer Survey -                                              The Future Success Factors		Rating
1	Increasing representation and providing more personalised customer service…customer intimacy	88.2
2	Instal matrix pricing systems…to balance competitive pricing on the core contract items and higher margins on non core to achieve target account profitability	86.4
3	Develop an in-depth, real time customer intimate database with multiple contacts per customer	86.0
4	Personalised Emarketing on promotions and communications. not spray-and-pray mailings to users	84.8
5	Trained sales people with ability to sell single source systems	83.4
6	Start training employees in sales and marketing/ CRM skills	82.2
7	Promoting the specials service – providing a wider range of services to retain customers	81.6
8	Re-focus sales introduction to new accounts on Office Productivity i.e. helping them save time money and space	81.6
9	Provide 24/7 open webstores (no entry login/password) with an intelligent communication strategy, consistently implemented	80.6
10	Promoting online ordering from a personalised core contract list	80.6

Disappointingly, less dealers than expected, recognised the need to sell-in eco-productivity systems…cutting costs…cutting carbon and collecting waste packaging. This is a natural extesion of the single source argument and favours local dealers immensely. Another case of wanting an ideal result but not prepared to invest at an early stage.

Not surprisingly, creating a brand image that runs right through the company; setting up designated customer service teams including 'ambassador drivers'; refocusing marketing efforts on women; and introducing café style greeting areas, were not deemed as as important as the above factors. It does take longer for dealers to 'get' these innovative marketing ideas, but we encourage them to consider them seriously now and build it into a 5 year business plan to double sales and triple market value.

Again dealers recognised the need to prepare a business plan, but less popular was the work and follow up needed to benchmark actual performance against a plan or with their peer group. Take our advice, 'what gets measured gets done' and all the best practice leaders that we cover in Proficiency Index, measure, measure, measure and progress, progress, progress.

Lastly, we were not surprised that direct mailing with printed flyers and mini-catalogues was fast losing their appeal and effectiveness. At last dealers are recognising that the future is about emarketing and open webstores. They just need to invest in a marketing manager and then they can achieve their goals.

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Need advice on setting up customer intimacy systems including CRM database, personalised emarketing and open webstores; single source systems, matrix pricing and business planning/best practice benchmarking? Please call Peter Frost or *James Wilson on +44 1932 784887. Email: peter@positiveofficegroup.com or james@positive4officegroup.com

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Deluded Depot in denial
It's not the economy...stupid

Retail down 10% is the tip of the iceberg…
the deep decay is in the delivery division

8 July 08
Office Depot fell off a cliff today, the shares opened 23% down and quickly dived to sub $7.00 fully 33% down on yesterday's closing price. The price fluctuated around $7 for the rest of the day to close at $7.12.

Odland the $10Bn loser
Depot shares were already in the gutter, now Depot's CEO Steve Odland has managed a dramatic dive from a market capitalisation of $12Bn in Jan'07 to today's closing level of $1.8Bn…an 80% drop in the company's value or a $10.2Bn loss. Will Odland go down as the $10Bn loser?

Reading all the desperate headlines today, I was struck by the constant reference to Depot as a retailer when 52% of total sales are in the delivery business where the negative effects of the economic slowdown are less…although Odland and his delivery busines chief Steve Schmidt would have us believe differently.

The cause of the fall was the stockmarket's reaction to Depot reporting a 10% like-for-like fall in store sales in Q2'08 v Q2'07…a drop of 4.5%/points in operating profit margins to c2%/sales and finally a drop in overall company sales, which was not quantified. Of course, in true Odland style, the weak economy was blamed.

The weak economy hit consumers no doubt: "There's no question about the fact that consumers had a little boost with the rebate checks that they got in May, but overall they are very fearful as a result of gas prices, interest rates, their real estate coming down in value," Staples CFO John Mahoney told the CNBC network earlier today. "It's a time when consumers are really pulling in their horns," Mahoney added.

It is Depot's 'drop in overall sales' that we feel hides the real reason why they are in deep, deep trouble. The retail sales decline will be similar to OfficeMax's figures…their shares were down 12% today in sympathy. Yes, the economy has squeezed home and small office spending. However, in the SMB sector (offices with 10-500 employees), the economy is still growing and they will be increasing their spending by buying in to extended categories like IT, breakroom and hygiene supplies.

It's not the economy…stupid
Depot has tried to tell us that the economy, especially in Florida and California, has affected the Business Services Division. Staples analysis and independent dealers' results would tell us the opposite. Yes business users are spending less on existing product categories, but they are buying in to the new categories that they were sourcing from other suppliers before. Something we feel the chiefs at Depot and Max fail to understand.

The real cause of Depot's demise is a total lack of understanding of people: employees and customers in the delivery business. This is something we feel the investment analysts should heed too. Depot's 'comedy of errors' were huge and easy to enumerate:

1.      Outsourcing core customer service…a crime in an intimate business

2.      Dropping the Viking brand…its most profitable brand, #1 in Europe and now a huge boost to Quill/Staples in the US

3.      Acquiring Allied Office (NJ) and losing all their salespeople and sales to competitors

4.      Firing at least 1000+ sales and customer service people in the last few months, again feeding grateful competitors.

5.      Cancelling a Florida conference for 2000+ sales people when they needed a motivational lift

6.      The systematic overcharging, fraudulent and threatening behaviour, and sheer denial  involved with the State and Local Government contracts in North Carolina, Georgia, California, Nebraska and Florida.

7.      Last, but not least and what will be probably cause the final downfall of the current Depot regime, the alleged conspiracy involved with the $700m US Communities contract. This looks like the BIG one.

The most remarkable and disappointing thing from this massive #2 global OP business with sales of $15Bn, has been their guilty behaviour: defensive, in denial, threatening, insulting the accusers, and deflecting from responsibility.

It's not the economy…stupid. It's about a lack of integrity and intimacy with people and customers. Depot shareholders need to act and act quickly as their stock tumbles from the S&P/Fortune 500 into SmallCap territory…just like Max.

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An insider's view of the new rocket
scientists joining the OP industry.

29 Jun 08

Hits and Myths

Why do we have an inferiority complex about our industry? Why do some leading participants still insist this business is boring…dull…all about pens, paper and paperclips? Why is it the users love the products more than resellers do?

I've lived near the forefront of the industry for 30 years and yes the general line wholesalers are often accused of being box shifters, Yes, back in the 80's it was difficult meeting brain surgeons socially and capturing their imagination by telling tales of Tippex. Yes we did behave like a poor relations in a village style trade

I realise when outsiders join the industry, it must on the surface seem trivial, maybe small minded, incestuous, low tech and let's face it pretty simple. But, as always the devil is in the details and this is what floors (and flaws even) many overconfident outsiders coming into the marketplace.

Given all the above there is a tendency to put newcomers on a pedestal, to treat them like rocket scientists, expect their apparently superior intelligence to raise the standard, to sharpen up our dozy industry, to be our new geniuses, the new champions.

The truth may be quite different. Let's take a look back and bring ourselves quickly up to speed:

Evolution from Stationery to Office Products
to Office Productivity

In the 80's encyclopaedic knowledge of 30,000+ products and where to source them was a must for a great dealer. Now that's all up on the web, coded, categorised and classified with packs/pers all sorted.

The rapid growth of the OP industry was caused by the huge shift to the Information services economy away from the manufacturing economy, driven by the US. At the same time OP moved from back office to front office as mainstream tools for doing business.

This shift accelerated with the rapid emergence of the web and ecommerce. Saving time, money and space to gain productivity became a business priority. IT and OP manufacturers responded well, ranges grew and specialist distributors entered the fray.

Moreover, office workers became the majority. office products became respectable and workers comfort, hygiene, refreshment, safety and environment supplies increasingly important.

These shifts passed many dealers by, allowing new progressive players into the marketplace. These progressives focused on single source supply of OP, IT, print, furniture, and FM supplies..

Good IT systems, CRM and personalised emarketing are essential tools today for enable dealers to maximise and deepen their personal relationships with customers. Yes it's still very much a people, high touch business enhanced by technology.

In summary, the progressive dealer focus has become: delivering productivity in a personalised and eco-friendly way.

Users love what we sell…
the touch, the feel, the smell

In spite of the efforts of many distributors to commoditise the OP market, users particularly women love the products we sell. Whether it be post-it notes, pens, pads paper right through to mice, memory sticks or Blackberry's.

OP are regarded as productivity tools…important accoutrements to people's life at work…there is an emotional attachment. OP are enhanced by the latest funky colours and become fashion accessories and certainly not commodities.

OP Distributors attitudes

Retailers share of the OP has always been sub 20% of the total market enhanced by better stores, but attacked by the mail order companies. Retailers have tended to focus on knowing product, knowing product development and merchandising rather than understanding or building customer database of relationships,

Dealers know all about people and products. They know the catalog and particularly the fast moving office supplies. They have been slow to react to new product or new categories and have generally reacted to customer demand rather than introducing new categories to existing customers. Dealers have focused their attention on serving customers' by forging a strong relationship with the mainstream buyers.

Progressive dealers focus on productivity…saving time, money and space by providing a wide range of OP from one single source. They will use CRM to build an intimate knowledge of not only the buyers but all the user choosers in their clients business. We call these dealers PROPS…providers of Office Productivity Solutions.

Current OP Champions
Hands –on leaders featured in previous articles are the industry champions. These include: Sargent from Staples; Bigeard from Lyreco; Meehan from WBMason; Wayne Beecham from SPRichards; Joe Hemani at Westcoast; Guerrina De Luca at Logitech; Jack Truong from 3M and Stefan Hamelin at Groupe Hamelin.. There are many more less high profile entrepreneurs in manufacturing and at a dealer level who have succeeded without hitting the headlines eg. Commercial, Bluefish, Garveys. They love the business, love the detail, love the customers and love the products.

The arrival of the new 'Rocket Scientist'

Great Expectations! Newcomers entering the industry at management level are lauded by their recruiters. They are described as smart, intelligent, well educated, great background in fast moving consumer goods (FMCG), deep retail experience etc. "They are going to shake things up….they'll be a breath of fresh air" goes the PR. They are described as various levels of genius even rocket scientists…not that this will be needed in our 'paperclip' industry you understand.

The headline characters, both good and bad examples, arrive mainly with the power channel players and major manufacturers.. The good things happening at Staples and Lyreco have been counterbalanced by events with other major players

2005 was a banner year for bad outside recruits in the OP industry. Steve Odland arrived from car retailer Autozone with a reputation as a cost cutter. Last year Steve Schmidt arrived to lead the delivery business, the ex-CEO of researcher ACNielsen. At no point have they shown any inclination to grow, only to cut cost and outsource customer service and vanquish the Viking brand.

Sam Duncan ex ShopKo retailer took the reins at OfficeMax to be followed last year by ex colleague Sam Martin. Taking over from a very skilled CEO, Duncan has destroyed the value of the brand with his cost/people cutting 'Turnaraound Plan'  

What do all these new guys have in common? They are all well qualified and intelligent leaders mainly with retail experience. They don't seem to get the importance of customer relationships and team motivational needs.

There are many other examples of hired geniuses at less headlined players who have not succeeded or taken their new company forward. Look at some of the general line wholesalers in the USA and Europe. They have lost experienced and talented executives and replaced with star 'outsiders' with little effect.

I can think of more examples in FedexKinko, WHSmith and DSG International who have taken their company backwards as a result of trying to leverage the brand without providing any substance, innovation or core strategy.

Outsiders need to get inside the heads of people: customers and their sales teams.

Outsiders underestimate: the complexity…the multiple pricing for different customers; the intimacy of customer relationships; the need for motivational models for salespeople; the need for deep CRM beyond the buyer to the users; the need to measure results against true full OP potential, not just stationery products.

This is not a commodity business. This is a people business. This is a fashion and lifestyle business. This is the Office Productivity business requiring delivery in a personalised and eco-friendly way. Show some respect.

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ODgate Scandal gets
deeper and deeper and deeper

'Depot 3' in
US Communities conspiracy?

Doubts raised re cosy relationship involved in $700m supplies contract. Were the trio planted? Are USC chiefs acting in public interest?

The Florida fraud allegations have escalated to criminal investigations  relating to the USC contract in Lee County. Among the allegations against Depot has been the deliberate drive by Depot sales management to switch State contract pricing  from an 'Option 1 – List Less discount' to an 'Option 2 – Discount off Depot Webstore Price' . On average this is 5% more expensive, yet Depot lead the States to believe they are saving more money. Moreover,  this scam makes checking that pricing has been properly administered virtually unauditable…and  don't Depot know it!

The 'Depot 3' conspiracy?

The percep