Office Products: trends analysis

The office products catalog business just ain’t what it used to be. Having had their margins squeezed tighter and tighter by rapidly mounting competition from volume-driven superstore retailers and dot-com upstarts over the past few years, catalog purveyors of office products have struggled, have merged or been acquired, or have given up and closed their doors. The plucky survivors, whether flying solo or operating as part of an office products retail conglomerate, have to stick to what they do best: supplying a wide array of products – via their print and online selling channels – and offering customers better service than anyone else. And while their future may wind up online, their present calls for increased efficiency, better database marketing, and fewer blind catalog mailings.

The shift in how office products catalogers do business began more than a decade ago. Throughout much of the ’90s, office products catalogers fought tooth and nail against the heavily financed and extremely efficient national retail superstore chains in a clash that would reshape the office products landscape. By the late 1990s, the battle wound down, and the superstores basically prevailed.

The superstore giants, OfficeMax, Office Depot, and Staples, “went into the smaller cities, while capturing the larger markets,” says Bruce Nelson, president/CEO of the Viking Office Products domestic catalog unit of Office Depot, and president of Office Depot International (which includes Viking’s foreign catalog operations). “They took growth from the catalog industry, because they grew faster than the overall industry did.” (Consider that in the mid-1990s, there were fewer than 1,000 office products superstores in the U.S.; today, there are more than 2,300.)

This influx of the retail behemoths effectively transformed what was once a highly fragmented market of countless local mom-and-pop retailers, assorted medium-size catalogers, and regional distributors into a centralized volume-driven business dominated by the big boys.

But the change did not mark the end of the office products catalog market. Two years ago, Staples bought Quill Corp., which with sales of more than $600 million is among the largest office products catalogers in the country. A month after that, Office Depot bought the nation’s largest office products catalog mailer, Viking Office Products, which does $600 million in sales domestically and more than $1 billion abroad. Four years earlier, Boise Cascade had purchased number-three cataloger Reliable Corp., whose sales currently run in excess of $300 million.

Rather than being absorbed by and assimilated into their corporate parents, however, all three catalogers have continued to grow and prosper under their existing management, while helping their parent firms expand their marketing channels worldwide.

Today, the office products catalog industry “has found a new equilibrium,” says Quill Corp. cofounder Jack Miller, who recently retired as president/CEO of the Staples catalog division and is an adviser and board chairman at motivational products cataloger Successories. “We had an equilibrium before the superstores came in more than 10 years ago. Then they came in and disrupted the dealer base in office products, leading to a consolidation from 14,000 dealers to 6,000 today. All the poor operators – dealers, distributors, catalogers – got shaken out. But many of those dealers are now part of buying groups, so they’re negotiating with manufacturers on a more equal basis” in relation to superstores.

But with the superstores leveraging their volume-buying capability and offering products at rock-bottom prices, “this has forced a situation where product margins are difficult to maintain,” says Rick Black, president/CEO of Reliable Corp. Now, he says, “everyone in the industry has to focus on operating efficiencies.”

Indeed, to continue to succeed, office products catalogers have to work a lot harder and pare down operations and costs. Viking, for instance, has made numerous changes in the way it does business over just the past five years. Because the influx of competition has driven down pricing and squeezed margins, the mailer has been “forced to produce more specialty catalogs and become more competitive on price,” Nelson says. “As a result, it has caused our overall margins to decline, raising the cost of doing business and forcing us to get smarter about our operating costs.”

Although he can’t specify an average, Nelson notes that Viking’s overall margins have declined over the past few years, “because of the competitiveness. Customers are aware of the broader range, and they clearly have more choices.”

Viking and other mailers have also had to offset significant margin declines in paper-related products. “Selling prices for paper goods today are actually less than they were five years ago,” says Nelson, who adds that overall catalog response has declined during that period due to the increased competition. “As a result, you have to sell more units – which drives up logistics and warehouse costs – just to keep up with the revenue, which is flat.” Other products whose prices and margins have declined include cables, storage units, and floppy disks.

With this in mind, office products catalogers such as Quill have entered other categories, such as food for office kitchens and break rooms. “The margins for items such as coffee, tea, crackers, and hot chocolate are decent,” Miller says.

But by expanding their product lines today, office products catalogers are “right back where we were years ago when we carried shipping room supplies, janitorial supplies, light bulbs, and all other kinds of stuff,” Miller says. When computer supplies became prevalent among office products catalogers, “we carried the boards that had to be wired,” he adds. “But for a while, we dropped many of these things and went more to pure office supplies. Now we’re back where we were 35 years ago. I think we’ll continue to do that.”

Likewise, Mike Hampton, vice president of marketing for Des Plaines, IL-based United Stationers,a $3.4 billion office products wholesale distributor that supplies many catalogers, notes that office products resellers of all kinds are expanding well beyond their traditional boundaries. “For example, not that many years ago, we were simply not in the janitorial supplies business,” he says. “But we began to enter that category recently. We realized this was a great opportunity for our dealers to capture existing demand while complementing a situation in which customers are trying to source more goods and services from fewer suppliers.”

“There has been a major change in the product mix over the past five years,” agrees Viking’s Nelson. In the past, writing instruments, loose-leaf binders, and related supplies were the dominant sales categories. Today, he says, the fastest-growing product segment “is computer ink, laserjet paper, and other computer supplies.”

A `healthy’ outlook

Despite a high-pressure business environment dominated by the need to cut costs, diversify product offerings, and improve efficiency, and the continued trend of consolidation, most agree that the outlook for the office products catalog segment remains positive. “There may be only a few major catalog companies left in office products, but the market is healthy,” says Dan Binder, retail analyst for the New York-based investment banking firm Brown Brothers Harriman.

The continuing proliferation of small (fewer than 100 employees) and midsize (100-1,000 employees) businesses in the U.S. augurs well for the future of office products catalogers, which concentrate on selling to these markets. “We have had a gradual increase in market share of the small and midsize buying sector in office products,” Reliable’s Black says. “And we’re getting a proportional market share of new customers to the number of new customers that the superstores bring in.” In fact, he says, if you track it over the past 10 years, “the catalog market share in office products has been somewhat greater than same-store growth.”

As for the home office market, “there’s a huge win in [home offices] for the superstores, but not a lot in it for catalogers,” says Nelson. “Home-based businesses have to go someplace to buy supplies, and they tend to want to walk to get them. The problem with the catalog model and home-based businesses is that it’s harder to get the lifetime value model to work. A home-based operator comes into a store just to buy a stapler – how long does it last?”

The e-future

James Gilmour, editor of Office Products International magazine, based in Hitchin, England, estimates that the market for office products superstores will reach saturation in the U.S. in about three years. “There is space for about another 3,600 stores to profitably support themselves,” he says.

With this in mind, Viking’s Nelson believes that in the near future, “a significant portion of our business will come through e-commerce.” He adds that Viking’s catalog circulation will continue to decline, “because we’ve learned how to mail smarter.” Overall, he says, “it will cause more shopping on the Web. But frankly, it just must decrease because of rising postal costs.”

Moreover, Reliable’s Black says that catalogers are ideally situated to leverage the Internet, because of their expertise with the targeting capabilities provided by database marketing, as opposed to brick-and-mortar retailers. “It’s quite easy for catalogers to adjust how they’ll market. They’re not committed to the infrastructures of stores.”

All signs and research certainly point to more Web buying in the future – regardless of product category. But in office supplies, “there will still be plenty of customers who prefer to flip through pages of catalogs and shop that way,” Binder of Brown Brothers Harriman says. “Any time you add a distribution channel, there’s the question of whether other channels will survive. If catalogers take the holistic approach to their business and cater to their customers, giving them added value and the choice of ordering channels, then catalogers can succeed.”

Miller of Quill and Successories agrees that “there’s a future for print catalogs, because reaching prospects and customers with mailings is still a very good and efficient marketing technique. I don’t like the Web catalogs,” he says, “but people will gravitate more and more to the Internet for office products. There is a lot of business out there, and the good sharp marketers will do well. I’m very optimistic about the mail order business.”

While catalog and other office products customers are demanding lower prices and better service, they’re also less willing to buy in large volumes, says Mark Hampton, vice president of marketing for United Stationers, an office products wholesale distributor. “Five or 10 years ago, a 5,000-person office had a tendency to order its office supplies in bulk and maintain its own inventory of consumables,” he says. “Today, that’s not the case. Customers maintain little, if any, inventory of office products, and most requisitioners are ordering on their own behalf,” and not relying on one central ordering system. In addition, Hampton points out, “more of them are opting for the just-in-time theory,” forcing catalogers to provide faster delivery than in the past.

As Viking Office Products president/CEO Bruce Nelson says, “Service levels among catalogers have risen in the past five years, and it’s much harder for customers to distinguish service levels than it was back then.” As a result, although Viking continues to raise the service bar on its industry – for example, by increasing the number of zones to which it can provide same-day shipping – it has reeled in its aggressive prospecting over the past five years to improve its bottom line.

“We’ve been forced to get smarter about our operating costs, and use more data warehousing to make more personalized and specific offers to customers,” Nelson says.

Specifically, Viking has “radically changed the number of contacts that segments of our customer base have received,” says Nelson (without getting into exact numbers). “Some customer segments have received substantially fewer books, some more. Five years ago, they pretty much all got the same number of books, more or less. We basically mailed a lot of catalogs to all our customers until the response rate proved us wrong or right. Today, we set mailing plans based on indices that can give us predictive behavior.” During this time, Viking has spent “millions” of dollars on an internal database marketing software program and on hardware to analyze its customer relationships. “It has paid off in a huge way – the return is extraordinary,” Nelson says. “It’s the only way we’ve been able to decrease mailings 2% and still have 10% revenue growth.”

While Reliable president/CEO Rick Black won’t get into specifics, his company, too, has been able to lower its marketing costs through increased use of database marketing in recent years. “With the advent of very sophisticated database marketing technology, we have more enhanced targeting capabilities, and we are building more customer relationships on a one-to-one basis than in the past,” he says.

The investment that many office products catalogers have made in elevating service seems to be paying off. According to research conducted by Reliable catalog parent firm Boise Cascade Office Products, office products customers are more comfortable buying from catalogs than from retail or online marketers. “We’ve found people who aren’t comfortable with the customer service at stores or the Web,” says Reliable’s director of marketing, Kevin Kurchy. “But they’re fine with the service from Viking, Quill, and Reliable.”

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