Head of the class

Feb 01, 1999 10:30 PM  By

The phrase “school supplies” typically conjures up images of chalkboard erasers and colored construction paper-unless you’re Dan Spalding, chairman/CEO of business-to-business cataloger School Specialty, for whom school supplies mean big bucks. Spalding describes his company as the largest supplier of “everything you need to run a school except textbooks.” With annual sales of nearly $600 million, School Specialty is roughly three times the size of its next-largest competitor, J.L. Hammett, and controls 9% of the fragmented $6.1 billion educational supplies market.

Last year was a particularly busy one for the Appleton, WI-based cataloger. In June, School Specialty spun off from office supplies marketer U.S. Office Products and simultaneously completed an initial public offering that brought in about $34 million. Then it bought three companies, including $180 million Beckley-Cardy Group.

School Specialty’s goal: $1 billion in sales by 2002. “We will continue to grow aggressively and take market share through our catalogs and distribution channels, and we’ll continue to acquire,” Spalding says.

If this goal seems impossibly ambitious, keep in mind that for the past several years, Spalding has boosted School Specialty’s sales at a blistering 37% compound annual rate. The company’s bottom line has been on growth spurt, too. Net income for the 12 months ended Jan. 24, 1998, hit $13.4 million, up tenfold from the $1.3 million earned in the year ended Dec. 31, 1994. “The company is very, very well run,” says Brandt Sakakeeny, vice president with investment firm Salomon Smith Barney in New York. “The managers are balance-sheet fanatics, and Spalding understands the business inside and out. I think he can quote [inventory] turns almost by product line”-an amazing feat, given the breadth and depth of School Specialty’s inventory comprising more than 60,000 individual SKUs.

But while School Specialty’s extensive product line might indicate otherwise, the 44-year-old Spalding contends that the company’s narrow focus, not his business acumen, is key to its success. It sells nothing but educational supplies to U.S. educators, from preschools to high schools. And the customer base, says president/chief operating officer David Vander Zanden, is easily defined: 16,000 school districts, 108,000 schools, and 3.1 million teachers.

Protractors, desks, and 1,000 paintbrushes School Specialty and Beckley-Cardy sell about 30,000 general education products, from protractors to lift-top desks. There’s only a 50% product overlap between these two general titles and the specialty catalog division, which includes science supplies title Frey Scientific and computer supplier Education Access. Moreover, the product differentiation within the specialty catalog group can get extremely refined. For instance, the Sax Arts & Crafts catalog sells a mind-boggling 1,000 varieties of paintbrushes.

Although about two-thirds of the company’s revenue now comes from the two general education brands, Spalding believes the specialty area holds the most promise for growth. For one thing, the specialty lines on average provide operating margins of about 9%, vs. 5% for the traditional lines. “It’s really economics 101,” Spalding says. “People will pay more for what they want than what they need.” An elementary school art teacher shopping from the Sax catalog, for instance, would be more likely to pay the 30% premium that sulfite construction paper commands over groundwood. (Groundwood is geared toward the preschool market, as it is torn, rather than cut.)

But many purchasing agents, concerned with supplying a number of schools, would be less knowledgeable about the difference in the papers, and less willing to pay for it. To compensate for such philosophical differences among its customers, School Specialty uses a two-prong sales approach. More than 300 sales representatives call on administrative decision-makers, such as purchasing agents for a school district, while the company mails more than 1 million general product catalogs and 9 million specialty catalogs a year, most directly to teachers.

“No one competitor can get its arms around us,” Spalding claims. “We go in the front door and the back door at a pretty equal pace,” by targeting both district administration and teachers.

Given School Specialty’s ability to successfully sell to teachers and administrators alike, you might think Spalding is limiting the company’s potential by refusing to reach beyond the educational market. Yet he knows firsthand how risky expanding a company’s target audience can be: When he joined School Specialty in 1988, it was losing about $1 million a year-because of its attempts to grow beyond the school market.

A marketing prodigy Spalding was enlisted as chairman/CEO of what was then known as Valley School Supply based largely on his success with a company he’d bought in 1975. Named Downers, reflecting its location in the basement of an Appleton theater, the company sold T-shirts emblazoned with school logos to college bookstores and sporting goods stores. Spalding and his business partner, Kim Vanderhyden, now communications manager of School Specialty, hired a national sales force and launched a catalog.

By 1980, Downers’ sales had increased from less than $200,000 to $20 million. Spalding attributes much of the growth to the fact that T-shirts were just taking off as a fashion item. But he admits that his and his sales team’s willingness to get out and hustle the products also helped: “The prior owner never left the building,” he says.

Also in 1980, Spalding and Vanderhyden expanded Downers via the acquisition of $5 million Jansport, maker of book bags and backpacks carried by high school and college kids around the country. At the time, Jansport also sold outdoor equipment such as tents and sleeping bags. But in what would prove a foreshadowing of his School Specialty strategy, Spalding decided to drop the other products to focus on backpacks. He directed the sales force away from sporting good stores and toward mass merchants, and enlisted a new advertising agency to create a campaign for the MTV audience. By 1985, Jansport’s sales had leaped to $20 million.

That year, Spalding sold his now $40 millionplus company to V.F. Corp., maker of Wrangler and Lee jeans, for an undisclosed price. “We were young and received an offer for more than we thought the company was worth,” he says. He stayed on until 1988, when his father, who had invested in Valley School Supply, persuaded the other major investors that Spalding had the acumen to turn the company around.

Founded by Ed Schrede in 1950 as Universal Paper and School Supply, the company in 1968 was sold to a group of investors who changed the name to Valley School Supply. The name, however, belied the company’s attempts to offset the seasonal nature of school supplies by getting into other businesses, such as selling to churches and operating retail stores. While the theory behind this strategy was sound-typically, more than 100% of a school supplier’s net income is earned between May and October-the ancillary businesses were all losing money, which Spalding blames on overdiversification and a lack of direction.

As he did with Jansport, Spalding narrowed the focus. He closed or sold seven businesses to concentrate on the education market. The work force fell from 180 to 80, and annual sales dropped from $35 million in 1988 to $22 million in 1990, but Valley School began turning a profit. “This was, strategically, pretty easy to do,” Spalding says.

By the end of 1995, the firm was renamed School Specialty and was raking in $150 million in sales (though it reported a net loss of $3.4 million, including $2.5 million in restructuring charges, largely from an unprofitable ’94 acquisition). Then, in 1996, School Specialty was purchased for an undisclosed amount by Washington-based b-to-b supplies behemoth U.S. Office Products (USOP). “It was a very well run company, and there was some degree of overlap with our business,” says Mark Director, executive vice president of USOP. “We felt we could help Dan build the business.”

Indeed, USOP’s deep pockets and aggressive goals accelerated School Specialty’s growth. During 1996 and 1997, it made 15 acquisitions worth about $200 million. But in January ’98, USOP reversed course. By now it owned a computer networking company, a business travel agency, and a print management firm. And as Spalding had done with Valley School, USOP management decided to narrow its focus. As a result, it spun off School Specialty and three subsidiaries.

Going it alone-again Vander Zanden joined School Specialty as USOP was preparing to spin it off. Like Spalding, the 44-year-old Vander Zanden had rapidly climbed the corporate ladder; prior to joining School Specialty, he was CEO of Ariens, a Brillion, WI-based manufacturer of lawn and garden equipment. Vander Zanden had helped reposition Ariens and boost its revenue by disposing of some underperforming operations, starting a contract business, and acquiring another firm in the industry.

With Vander Zanden on board, School Specialty continued buying up competitors. In July, just a month after it was let loose by USOP, School Specialty bought educational materials printer Hammond & Stephens, and software manufacturer Teacher DeskTop (worth a combined $10 million), and then Beckley-Cardy. This spending spree almost seemed designed to put to rest worries that School Specialty’s growth would slow now that it no longer had the financial support of USOP.

In fact, the company plans to continue to acquire more specialty product lines, Spalding says, particularly suppliers in the physical education, music, library, technology, math, and geography sectors. Spalding also wants to expand School Specialty’s presence across the country, particularly in California, Florida, and Texas, as most of the company’s sales come from north of the Mason-Dixon line. According to Spalding, about 100 of the 3,400 school suppliers in the country meet School Specialty’s two criteria for acquisition candidates: revenue of more than $10 million, and no retail sales. The company plans to remain true to its mission of selling only to educators.

Given the demographic outlook, this mission is apt to remain a profitable one. Thanks to the echo boom-a population explosion even larger than the baby boom-school enrollment is expected to climb by about 500,000 students each year for the next several years, according to the U.S. Department of Education. On top of that, voters are increasingly funding proposals for new schools or building renovations.

But remaining the big man on campus won’t be easy. Notable new competitors, in the form of office supplies superstores and mass merchants-many of which are larger and have more capital than School Specialty-are eroding the market. Spalding counters, however, that these retailers have nowhere near the breadth of supply of School Specialty. For instance, most office products stores stock about 5,000 products for the education market, about one-twelfth that offered by Spalding’s company.

And while acquisitions are an integral part of School Specialty’s growth plan, they can also be a challenge. Morale can drop and employee turnover can soar as employees worry about job security; operations get disrupted as systems are integrated.

In School Specialty’s favor, however, is that after more than 20 acquisitions in 10 years, it has learned to identify worthwhile purchases, address employees’ concerns, and integrate disparate systems. As proof, its operating margin has steadily climbed from 3.7% in 1994 to 6.3% in 1998.

So far, investors appear to like the company’s prospects. As of mid-December, the stock was trading at about $16 per share, just above its $15.50 initial offering price-a respectable showing, given the recent turmoil in the stock market, says Salomon Smith Barney’s Sakakeeny.

And the management team running School Specialty certainly appears ready and able to graduate to new challenges. “It’s a fun area to be in at this point in time,” Spalding says. “There are some huge opportunities.”

It was estimated that online sales this past holiday reached $2 billion, more than triple the previous year’s. Indeed, a number of catalogs racked up astounding online revenue increases.

San Francisco-based gadgets cataloger Sharper Image increased its Web sales 492% for the three weeks before Christmas. Omaha Steaks’ Sharon Grunkin says that the food cataloger’s ‘Net sales jumped 300% over the previous holiday season. America Online’s electronic mall, which includes a number of catalogers, rang up more than $150 million in December sales, more than double the previous year’s take. And the Macy’s Website received so much traffic-as many as 10 million hits a day-that the general merchandise giant had problems processing customer orders, according to spokeswoman Carol Sanger.