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OPI-Dick Gochnauer Interview - Ussco.com

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the big interview

Dick

Gochnauer

by Martin O’Rourke

Office Products International • December 2003


the big interview

From McDonald’s to United Stationers, trust matters

for CEO Dick Gochnauer. But can he help mend

bridges in sometimes fraught OP relationships?

OPI: Dick, if we can begin, it’s about 18 months since

you joined the industry - do you still feel like the

new kid on the block?

DG: A little less so. But still, this is an industry with veterans

who’ve been in it all of their lives, so I’ll probably

always feel a bit like the new kid on the block.

OPI: When you replaced Randy Larrimore as CEO did

you have a radical vision, or was it fine tuning?

DG: Fine tuning. United was a well run company, not a

turnaround situation. Clearly, we had suffered like the

industry but part was a self-inflicted wound because we’d

moved off into a new 3PL venture that did not work.

OPI: Have you found it very different from food?

DG: I’ve been surprised at the parallels.The food industry

had gone through a period of high growth, and so the focus

was on how to service the customer. Then before this industry

dip, it went into a period of very slow growth, particularly

the fast food sector and costs and other factors became

issues. The bar was raised, and those companies that were

able to step up survived - those that didn’t, didn’t.

Both industries rely on the independent entrepreneur

to serve the customer fairly extensively. In fast food it’s

franchisees, in our industry it’s independent dealers.

OPI: And the corporations?

DG: Having both gives an industry some strength and some

unique challenges. In McDonald’s case it has about 80% of

its restaurants run by franchisees. It has tried different ratios

and it keeps coming back to something in that ballpark. Large

corporations cannot service certain customer segments as

well. They don’t run as good a restaurant. They’re not as

clean. Customer satisfaction scores aren’t as good. The

financial results and sales results aren’t as strong. That

points to the spirit of free enterprise, of owning your own

business and the kind of pride in ownership that goes with

that. Ultimately, independent dealers and corporations have

a role and it would be a shame if we lost that.

OPI:What impression did you have of the industry

before you came in? Was it black and white?

DG: The less you know, the more it looks black and white

and straightforward. As you get into it you realise how

complex it is, and the unique challenges it faces.

OPI: Talking of the dealers, issues raised in OPI

recently by independent dealers, such as Al

Lynden’s ‘trojan horse’ letter (see OPI September

2003, page 11) must have struck a chord with you.

DG: It’s clearly a topic that needs to be on the agenda so

that there is some clarity as to what is and isn’t happening,

what the intentions are, and where people are going.

OPI: Do you see more consolidation of the dealer base?

DG: Well, we are seeing the bigger dealers get bigger. We

hope dealers of all sizes remain viable and healthy, and

Office Products International • December 2003


the big interview

that is our expectation. And, of course, the independent

dealer represents by far the largest share of our business,

so it’s an important part of our customer base.

OPI: Let’s move on to the US wholesale industry.

Were you surprised at Daisytek’s fall from grace?

DG: Not too surprised. It was a virtual rather than an

asset-rich company. Once you lose your funding, can’t pay

suppliers and don’t have inventory, it doesn’t take long

for customers to switch. And so the flight was very rapid.

“Companies who have drifted off

purely in pursuit of greed, have got

into big trouble, reinforcing the

position that it’s dangerous territory”

OPI: A flawed business model?

DG: Clearly. What was not fully appreciated was the difficulty

and the amount of capital required to enter into the

full line supply of office products. This industry is built on

speed, and the only way you’re going to get speed and low

cost is to have inventory in local markets. That requires

huge investments in physical facilities and inventory. A

slightly lower price while giving up on service, is not a

proposition that will sell, so it was an underestimation of

what it required to get into that segment of the business.

OPI: Ostensibly, that leaves you and SP Richards. Is

that a good thing?

DG: It was SP Richards and United before Daisytek as well,

because it was not a full line supplier. It’s when it tried to

become a full line supplier that it exacerbated its problems.

So really the industry has been served for sometime by two

national wholesalers. All customers need at least two

choices. Whether you need three or four remains to be

seen. Here you’ve got two good options - both well run,

well financed and healthy. So each dealer has a choice.

OPI: Do you expect the likes of Tech Data, Synnex,

Ingram Micro to try and move into the market or

will they stay niche orientated?

DG: It would be a whole different

service proposition for

them and requires a different

business model. I think

they’ll continue to be active

players in the segment that

makes sense for them.

OPI: You bought

Daisytek Inc for a

knock down price of $1

million. What does it

offer you?

DG: We were interested in

the intellectual property. It

has some software capabilities

too and clearly we

get the customer lists and

suppliers and there is

some information that I’m

sure will be new to us. It

had a software engine that

allows you to do some

product comparisons and

which the industry had

been using. We wanted to

make sure the industry

didn’t lose this, so we’ll

try to keep that available.

OPI: So some of the

things Daisytek did

were very impressive.

DG: Yes. It didn’t get

where it got to without

delivering some good

products and service to

the industry.

OPI: Will you keep that

name - Daisytek Inc?

DG: I don’t know - it wasn’t

our primary focus. I don’t

snapshot

age: 53

job title: CEO and president of

United Stationers

lives: Winnetka, Illinois

favourite food: hamburgers!

favourite restaurant: McDonald’s

favourite drink: iced tea

loves: The City of Hope

hates: dysfunction

education: under graduate degree

in engineering from North

Western, and MBA from Harvard

alternative career: in the nonprofit

world

favourite past time:

volunteering

holiday destination: Colorado

skiing

biggest fear: Not responding

fast enough to customers

biggest hope: the industry

learns to collaborate better

nickname: none

know whether or not there is some future use for that name.

OPI: We’ll move onto your results over the period

you’ve been there. Sales of $923 million for Q4 2002;

$970 million for Q1 2003; and $955 million for Q2

2003. Why the fluctuation?

DG: That’s normal. January is a big month, so you get some

extra pop in the first quarter. People cut off purchases but

January is the new budget period so they’re replenishing

inventories. Our sales for the first half of 2003 were up

about 4%, heavily driven by growth on the computer consumables

side. The good news is that furniture has gone

from big negatives to closer to flat, so that’s moving in the

right direction, but certainly not driving any sales growth.

OPI: Are you happy with sales overall?

DG: I’m concerned about the more traditional office products

segment, because that hasn’t picked up. The brakes are still

on in large companies in terms of spending, and the control

of spending, even to the point where companies talk

about how you get a choice of one pen or one pencil and if

Office Products International • December 2003


the big interview

you want a different brand, you buy your own. So that kind

of thinking towards office products will keep the lid on until

staff numbers grow. But I’m hopeful that as times get better

and companies are more confident, they’ll take a broader

view and a more realistic view of their office supply purchases,

and recognise that actually this is an area where we

can add value.

OPI: Do you feel the economy has bottomed out?

DG: We’re not anticipating it turning the industry around,

so we’ve got to take control of our own destiny and do

what we need to do to make things happen. And if

things do work out as a lot of people are forecasting and

predicting, then that’s great. I hope it does, obviously.

“The best endorsement is manufacturers

sourcing in China and putting their

brand there. You wouldn’t do that if you

didn’t have confidence in the quality”

OPI: You don’t feel bullish?

DG: I do, but over the long term - it’s just a question of

when. The concern that we have is that although things are

starting to bounce back, companies have learned how to operate

more efficiently with fewer people, and they’ve also been

forced to outsource more things from overseas particularly.

OPI: Your share price is looking good. What would

you attribute that to?

DG: Part of it is an expectation that the economy is going

to improve and that we will benefit from that. Wall

Street knows how high a fixed cost wholesalers face, and

so it’s witnessed the impact of lower sales in 2002 on

profitability and the expectation is that as sales start

turning around, earnings will follow suit. We’ve been

doing a lot of talking about how we improve efficiencies

and how we drive waste out for the whole supply chain

and Wall Street has seen some good signs coming out of

some of the other public companies in our industry.

OPI: You seem to be holistic in

your approach to business. How

do you stand on issues like CSR?

DG: All companies must be good

community citizens. We’ve an obligation

beyond just making a

profit for our shareholders, or

providing employment for our

associates. It’s not just right from

a moral point of view, but also

from a company view. Staff want

to know their company cares, and

there are lots of ways to show

that. Research shows companies

with a very strong value system

outperform those without it. And,

clearly, companies who have drifted

off purely in the pursuit of

greed, have got into big trouble,

reinforcing the position

that it’s dangerous territory.

OPI: Is that something

McDonald’s embodied?

DG: McDonald’s did, very

strongly. They run Ronald

McDonald houses and they are really quite phenomenal.

I’d hold them up as an outstanding example of understanding

the importance of being more than just a company

that makes a profit.

OPI: Have you got links with China?

DG: We have an office there and links with sources there.

These days Asia Pacific is increasingly the manufacturing

location of choice for office products, for the obvious reasons.

We’re struggling with how to deliver consumers greater

value, and obviously keeping the quality up and lowering

the cost. Second is that we’re importing more. I can’t imagine

why we wouldn’t continue to have an office there.

OPI: Is the quality of goods out of China up to scratch?

DG: As long as the manufacturers have clear quality specs

and that process is managed right, there is good quality

product. The best endorsement is manufacturers sourcing

there and putting their brand there - you wouldn’t do

that if you didn’t have confidence in the quality.

OPI: You talked of trust (see OPI November 2003,

‘food for thought’, page 68) as a culture within the

business. How do you manage the inevitable conflicts

between dealers, resellers and manufacturers?

DG: You’ve got to keep the end goal in mind, which is how

to best serve our customers. The independent dealers have

the wholesaler relationship, the relationship with a provider

of systems - IT, back office systems - and they may or may

not have a relationship with a buying group and most do.

A dealer said to me: “I depend on these three groups,

and what scares me is that they don’t work well together,

and view each other to some extent as competition. And

yet I need to depend on all three of them and collaborate

with them, and integrate what they do into my business.”

Office Products International • December 2003


the big interview

He’s absolutely right of course. We’ve

got to focus on how to service dealers

and make them successful so that the

end user sees that there is a seamless

integration of all these groups behind

the scenes so the customer has a very

pleasant and a low cost experience.

OPI: In other words classic compromise

and negotiation - give a

little, take a little.

DG: Yes, and focusing on if your customer

is healthy and successful - contribute to that and

you’ll be healthy.

OPI: Last year, I attended the OPMA meeting where

Jim Fahey (SVP merchandising) and John Kreidel spoke

from is.group and there was some friendly banter in

terms of their relationships with the dealers. How are

your relations with the dealer groups?

DG: Well, they’re not where they should be and we’re trying

to reach out and say “let’s see if we can’t put the past

behind us”. And so I would say we’re at the very start of

trying to build trust with dealer groups, and it doesn’t

happen without a lot of effort - it’s going to take a lot of

willingness on both sides. I really don’t know the history

of how we got to this point and I actually don’t spend a

whole lot of time trying to figure it out. I’d rather spend

time focusing on where we could help each other.

“We’re at the very start of trying to build

trust with dealer groups, and it doesn’t

happen without a lot of effort - it’s going

to take a lot of will on both sides”

OPI: You said quite recently, since Daisytek went, that

a lot of the business you picked up is low margin computer

consumables. Why exactly is it low margin?

DG: Partly because there are fewer manufacturers to choose

from and it’s treated more like a commodity product. And

it’s sold less on service and more on price differentiation.

It’s just a very competitive side of the business. It’s not too

dissimilar from paper products.

OPI: Can it be changed or is it a fundamental mind shift?

DG: I don’t know. I think it could if the manufacturers

worked to support a change. Such low margins on some

of these products are actually not healthy for the manufacturers

either, because they’ve got a salesforce out there

selling their products and the more they sell, the more

trouble they are in financially.

OPI: You also said product mix is a challenging issue.

Why is that?

DG: When the economy is tight, people cut discretionary

spends. Instead of buying the more expensive pen or pencil

we’ll buy a cheaper pencil. And so the industry shifts to

lower margin products and away from some of the higher

margin more discretionary items. Our

industry lives on selling a mix and

you have to have the right mix. The

challenge is that the higher margin

products and the discretionary products

haven’t been purchased as they

have in the past.

The second trend is that computer

products are driving a higher percentage

of sales, and I don’t see that

trend changing. You’ve got those

two trends. So obviously a healthier economy in tandem

with the hope that offices begin to purchase more discretionary

items again will benefit everyone in our industry.

OPI: When it comes to cost-cutting, how do you do it?

DG: I purposefully labelled ours a war on waste, because the

first thing people think is, “OK, we’re going to cut people”.

In reality, our industry has a great deal of waste. That

would probably be one of the deltas between this industry

and food. It has been much more cost conscious for a much

longer period of time, and so a lot of the waste has already

been removed. For example, we put over $20 million a

year of product on distress trailers. That doesn’t include the

cost of shipping, picking the order, wrapping it, shipping

it to a dealer, shipping it to the customer, the paperwork of

getting it back from the customer and back to us. We lose

a lot of money on that.

OPI: What scope is there for you or SP Richards to

expand the international network?

DG: Well, United is in both Mexico and Canada. For us,

it’s via the Azerty businesses. But in Canada for example,

we are now offering office supplies as well as the computer

product lines that Azerty has. So North America makes

some sense. We haven’t been able to determine the value

we could create by going to Europe or Asia.

OPI: Would you pick up Daisytek’s Australia baton?

DG: We’re not sure. Logistics and marketing skill sets are

unique to some extent by market. You have to learn those.

If we don’t think we can come with any unique business

proposition or anything that we could do that will benefit

the industry, then it doesn’t make sense for us to go.

OPI: Dick, on that note, thank you. Your time has

been much appreciated.

Office Products International • December 2003

Reprinted with kind permission from OPI

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