Volume 3, Edition 3

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Who will Dominate the Online Office Supplies Space?
By George Karibian, CEO, Euroffice
Reproduced with the permission of Office Products Dealer

Market transformations create exciting times and an aftermath of winners and losers. In the transition from vacuum tube to transistor and finally microchip, established players like Motorola restructured their competencies and reaped fortunes. Those who resisted change met the same fate as the vacuum tube. Meanwhile, aggressive entrants like Intel emerged from nowhere to dominate their share of the cake.

George Karibian, CEO of UK-based Euroffice, explains how the Office Products industry is no less vulnerable to transformations than the microchip industry.
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The Internet revolution was expected to deliver the greatest transformation to our industry. First, it would enable us to reach an unprecedented number of customers at a huge cost advantage. Second, it would provide massive operating efficiencies and scalability. The Internet unfortunately got off to a bad start by over-promising and under-performing. But it is now finally coming of age, delivering real value to a world with realistic expectations. This new landscape is characterised by three types of players, each with its own very different approach: Established Players, Pure Plays and Small Offline Dealers.

Established Players
Leading Office Products executives are bullish on the Internet, but they have been reluctant to lead the charge. For years, they have been operating in mature market conditions that call for incremental strategies. Success meant shaving costs and focusing on marginal revenue gains. With the advent of the Internet, their approach remained unchanged. It was both incremental and defensive.

Incremental strategies tend to fail when it comes to the Internet. Walmart.com tried it. After two false starts, it did the unimaginable and shut down for two weeks. FT.com’s initial launch was also a failed incremental affair. It took a complete overhaul of strategy, organisation and technology to make Wallmart.com and FT.com the best in class websites that they are today.

Established Players in the office products industry have shied away from bold strategies primarily because they fear cannibalisation. They view the transition online as a migration of customers from a high price to a low price channel. This puts at risk substantial turnover and profit in the short term. What many fail to realise is that if they do not cannibalise their own channels, their competitors will eventually do it for them. Dell recognised this early on and was able to leverage the web to maximise its reach, provide high levels of service, and minimise costs.

The figures are impressive by any standard. However, they mask the significant fact that 50 to 70% consists of large contract business. Essentially, Internet has replaced electronic ordering via EDI. Replacing one technology with another has delivered operational efficiencies. The figures also mask the fact that many online orders are generated by customers browsing a printed catalogue.

It is no accident that the Established Players are generating most of their online sales via the contract and catalogue strategies. Both approaches succeed in transitioning customers online while minimising the risk of placing them only a click away from competitors. This is a good defensive strategy, but one that fails to take advantage of the Internet’s formidable ability to reach a mass market.

With their full coffers, impressive management teams and ambitious business models, Pure Plays were billed to “change the rules of the game.”Popular business models included RFQ (e.g. Bizbuyer, Mondus), Marketplaces (e.g. Ezoka, PurchasePro), Subscription (e.g. UseColour), Hybrids (e.g. Grouptrade), E-procurement Intermediaries (e.g. Xbridge). All had ambitions of becoming the Intel of the office products industry. But very few even managed to survive. The Established Players may be disadvantaged by their slow and defensive culture, but they could teach the Pure Plays some fundamentals about execution. After all, they are the survivors of an on-going natural selection process –albeit offline. They know their industry, understand the importance of service & fulfilment, and operate with financial discipline.

This scenario is not peculiar only to the office products industry. Webvan.com, one of the pioneer Pure Play grocers, never grasped that gross margins would eventually have to cover operating costs and provide a profit for investors. In contrast, a more established UK based Tesco.com, has developed a strong business in only a couple of years and is already breaking even.

The few Office Products Pure Plays that have succeeded (e.g. Euroffice.co.uk) have a few things in common. They never lost sight of the fact that they were in the business of selling office products. The Internet for them is merely another channel –even if it is their only channel. They recognised early on how critical it would be to turn the Internet into major competitive advantages such as marketing reach, operating costs and service levels.

The Internet is ideal for pursuing the SME segment (£2 billion in the UK). Viking has had exceptional success in this segment via the catalogue channel. For the most part, however, offline players have found SME’s very elusive. It is too costly a market to pursue via traditional sales forces. Servicing SME’s in an offline environment can also be costly relative to the low lifetime value of the customer. Successful Pure Plays have capitalised on these offline weaknesses. They are able to leverage the Internet to acquire SME’s cost effectively and to provide very high levels of service with minimal human intervention –thereby lower costs.

The Small Offline Dealers
The Internet is a daunting challenge for the Small Offline Dealer. First, the cost of the right technology is prohibitive. They could opt for some of the off-the-shelf packages offered by Buying Groups, but these are band-aid solutions.

Second, they are already three years behind on the learning curve. And more critically they have missed the 1st mover advantage required to get on search engines and develop online partners.

Finally, they face the same risk of short-term cannibalisation issues faced by the Established Players –only in this case it could wipe out their business. This is exacerbated by the fact that an online channel would also expose the higher margins these Small Offline Dealers must charge to cover their relatively high cost of overheads and low volume buying terms.

Conclusion
The Established Player’s incremental approach to the Internet had one major flaw: it gave a window of opportunity to the potential Intel’s of our industry. Pure Plays were quick to jump on this window of opportunity which lasted two-years. It called for bold ideas and flawless execution. They had one channel –the Internet—and often only one chance to get it right. Most failed, often in spectacular fashion. The few left standing are well positioned to take the lead.

On the other hand, the Small Offline Dealers have been shut out of the online market. To attempt it now is too late and prohibitively expensive. Their best option is to partner with the strong Pure Plays. But they are unlikely to make this a high priority.

Ultimately, there will only be room for 4 or 5 dominant online players. In the meantime, broadband up-take will drive continued growth of the online space. The winners will include Established Players coming at the market from the top down. And in the SME segment working their way upwards will be a couple of Pure Plays who managed to get things right.
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For the latest news on the UK office products industry, see: http://www.officeproductsdealer.co.uk

For more information on euroffice, see: http://www.euroffice.co.uk