OPI-Dick Gochnauer Interview - Ussco.com

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