Big Interview

KEEP CALM & collaborate

A fervent advocate of the independent dealer channel, Independent Suppliers Group CEO Mike Gentile urges his members – and our various industry constituents – to be open-minded and embrace the changes that are needed to succeed in an ever-evolving sector

In 2018, when OPI last spoke to Mike Gentile for a Big Interview, there was much talk about a ‘big-tent philosophy’. Since that time, the vision has come to pass, and the tent has grown immeasurably. Now solely at the helm of the merged Independent Suppliers Group (ISG) following the departure last year of Mike Maggio, Gentile had little time to dwell on the new status quo, having already been thrust into the middle of a global pandemic several months earlier.

Many years of experience, an unflappable disposition, and a razor-sharp focus on the independent dealer channel (IDC) have enabled him to keep calm and guide the group’s members towards a post-COVID world.

OPI CEO Steve Hilleard spoke to the long-standing and highly-respected US industry executive for this extended celebratory 30th anniversary issue – and, of course, ahead of the much-anticipated Industry Week, powered by ISG, which is due to take place in Orlando, Florida, this November.

OPI: ISG, as it stands currently and in its previous iterations, has been featured many times in OPI over the years, so let’s start with the present. What does ISG look like in the middle of 2021?

Mike Gentile: Right now, we have 794 members. We lost some dealers in the past few months due to attrition and M&A activity.

ISG is a big-tent organisation for several entities. As a member-owned cooperative, we have approximately 570 shareholders, but we also have Access members which are non-shareholders. Those members value the programmes and services that ISG offers. The group further comprises IS Contract – our contract furniture group; INTEC, our technology and managed services group of resellers; Federal Base Supply Stores; and national accounts organisation EPIC Business Essentials.

Overall, we do over $500 million in direct buy, with combined member revenues of $6.9 billion. Our mission statement is that “ISG empowers its members with purchasing programmes, sales and marketing tools, and leverages the combined size, strength, knowledge and experience so its members can succeed in their marketplace”.

OPI: How would you say the numbers are trending, year on year? Obviously, you have the pandemic effect to figure out, but is the underlying trend moving forward?

MG: Our membership count is somewhat linear. We lost members due to M&A activity in the channel and some dealers closed their doors, but fortunately, we also added 28 new dealers. Some are non-traditional OP resellers.

In 2019, we did close to $540 million in direct buy, so during the pandemic we were down approximately 18%. But we are coming back now because members are buying more direct, and we have added many new suppliers.

OPI: The purpose of the merger with TriMega Purchasing Association and Pinnacle Affiliates was to reduce redundant operating expenses across the three groups and leverage dealers’ combined strengths. To what extent have those two primary objectives been achieved so far?

[The merger] took over $1 million out in operating expenses [...] It amounted to a 42% reduction in combined costs

MG: The merger occurred in July 2019, and it’s been an interesting two years. We had a change in leadership when Mike Maggio moved on to S.P. Richards (SPR) and we also had – or still have – a pandemic. It meant we had to pivot.

Everyone believed in the merger – it was done for the right reason, and we had the right people in the room making it happen. We combined two operating systems and created a group of 800 members. We took over $1 million out in operating expenses – this included a reduction in headcount, headquarters expenses and synergies in various areas. It amounted to a 42% reduction in combined costs.

We improved our supplier programmes by leveraging the consolidated purchasing power. In addition, we shortened the time for rebate distribution so we can get these into the hands of our members sooner, particularly during the pandemic. We also had the ability, through our strong financial position and the support from many of our suppliers, to extend payment terms during the pandemic. I would say, all in all, not a bad story during difficult times.

OPI: Anything pressing on the agenda you haven’t accomplished yet?

MG: Where do I begin? Technology is a key issue for the entire IDC. As a group, we would like to streamline our internal processes to further reduce operating expenses and create greater efficiencies for our members and suppliers. ISG will continue to grow through strategic alliances and partnerships.

We also scaled back our support staff significantly – now we need to reinvest again in many areas.

OPI: In May, we had the news of what seems like a bit of a splinter organisation – Supply Chain Investment Group (SCIG). What is that group of predominantly larger dealers aiming to achieve, and what impact will it potentially have on ISG and the bulk of your membership?

MG: One wonderful thing about the IDC is that it’s made up of incredibly creative and entrepreneurial people. They’re always exploring if there are better ways of doing things to be more competitive.

This fiercely independent aspect also means it’s sometimes like trying to keep frogs in a wheelbarrow. And that’s fine because

the wheelbarrow is moving forward. I’m not complaining, because this is why the IDC is resilient and vibrant.

That said, SCIG has assured us its initiatives will complement ISG and not create a conflict at all. The hope is that a rising tide will raise all boats.

OPI: Even more recently, there was news about your RDC. Who initiated this change of RDC partner from Essendant to SPR?

MG: You know the trials and tribulations we’ve had with the RDC model over the years. The fact remains that the RDC is cost-effective and more operationally efficient for dealers to buy direct. They can lower their inventory investment, increase their inventory turn, and increase working capital. This is what it’s all about.

Without delving into too much history, when we got out of this business as a group, what was United Stationers at the time said it would be willing to act as our 3PL. The ten-year contract we had was up for renewal, we discussed it last year and Essendant didn’t want to continue with the current model.

ISG, meanwhile, did not want to abandon it in its entirety because of the clear benefits, so we put out an RFP and sent it to four potential parties. Two responded: SPR with a concept very similar to the current RDC model, Essendant with a different idea.

There are a few very effective dealer group RDC models across the globe – I had a chance to visit many of them during my term as Chairman of BPGI. No model should be stagnant, it must be flexible to meet the ever-changing market and our members’ needs.

OPI: What specifically did Essendant propose that ISG wasn’t happy with? Is it this carton programme, announced almost at the same time as the switch to SPR?

MG: Yes, it is. It’s called the Essendant Carton Program (ECP). It’s a programme with a defined product list. No direct manufacturer rebates – just a net programme.

OPI: Is that the only difference?

MG: It’s the primary one. The RDC model is rebateable and our dealers get direct buy credit from the manufacturer.

OPI: Is the new arrangement set for another ten-year period?

MG: No, not as long. We will continue to morph into other models we think would be operationally and cost-effectively beneficial to our members.

OPI: What would you like to see?

MG: Well, there are many stranded costs and process duplicity in our supply chain that burdens suppliers and challenges them to be more competitive to our members. My question: is there a more streamlined supply chain model that could be developed and implemented which would reduce suppliers’ soft and hard dollar distribution costs they incur to service the IDC while also enhancing the value of the wholesalers’ ability to service the IDC? If there is, it could result in lower cost of goods and more efficient service levels to our members. I’m confident such a model can be developed with the right parties involved that have common goals and interests.

OPI: This has been a topic at industry events for years and nobody’s nailed the specifics yet. What comprises these costs you’re referring to, and what model would eliminate them?

MG: There’s very effective technology in the market today that could be utilised to streamline the logistics and supply chain process which, quite frankly, hasn’t materially changed in decades.

Is there a more streamlined supply chain model [...] which would reduce suppliers’ soft and hard dollar distribution costs they incur to service the IDC?

At the same time, it’s important to enhance product category e-content currently unavailable to independents. I always refer to this as the ‘dealers’ digital dilemma’.

Next, manufacturers should partner more with the wholesalers because they have the distribution capabilities needed. A dealer group should not be in that business if those services are available in the channel already.

But you’re absolutely right, we’ve discussed this at numerous OPI forums. Most industry stakeholders agree, then all the head-nodding ends because we get wrapped up in our own issues or feel threatened by the need to change. So many in our industry talk about the need to change but are hesitant to do so themselves. Doing nothing is not an option anymore.

I am committed to exploring proactive strategies with any interested industry partner.

OPI: If there’s one positive to come out of COVID, I guess it’s that it’s given us all a sense of renewed vigour and purpose. What’s your pandemic-related view of the impact on the overall landscape of the industry and, in particular, the IDC?

MG: It’s obviously caused significant personal sacrifice and professional angst for many, let’s not forget that. But it’s also been a bit of a wake-up call in our industry in terms of expanding the product categories we go to market with. ISG added 17 new suppliers and we did it fast.

We were faced with an unprecedented situation in April 2020. No one went to work. End-user demand for the products we sell or the services our dealers provide just flat-out ended. I doubt any company had this scenario in its business plan. There was no choice – our members had to pivot.

They enhanced their e-commerce systems. We helped with numerous webinars on how to do it. They adjusted their delivery and service offerings, and they re-configured their sales organisations. Zoom replaced many phone conversations.

As for ISG, we accelerated our quarterly rebate distributions and extended payment terms, with the help of our supplier partners.

OPI: I’m sure some dealers did what you’ve just mentioned better than others. What qualities differentiated the successful ones from those now in danger of going out of business?

MG: Part of it has to do with geographic location in the US. Many dealers that were significantly impacted by the pandemic really stepped up. Others had stressed balance sheets so COVID caused them to closed their doors.

A dozen or so ended up selling to fellow independents while some sold to the national competition. The M&A activity by Staples and Office Depot was their only source of growth because of their already severely stretched operating models.

I will candidly say I am confident and optimistic that the IDC remains resilient and will come out of this period stronger.

OPI: How nervous are you about more casualties once the full effects of this pandemic have come to fruition and the stimulus and financial relief measures are finally behind us?

MG: It’s a concern. This is why we’re constantly networking with our members so if someone is seriously thinking of selling and divesting, we might be able to find them a suitor within the group.

At the same time, we’re going to continue to grow our group with other ancillary and adjacent entities, in essence expanding ISG’s tent.

OPI: Can you give any specifics?

MG: There are many disparate groups within the jan/san industry, for example, or within safety, breakroom, school supplies and MRO. We continue to have discussions with a number of these groups to establish the viability of alliances, possibly some M&A activity, etc.

You’ll see more of that happening in the next 12 to 18 months. Again, the pandemic has been a stimulus for those discussions.

OPI: You mentioned EPIC Business Essentials at the start of our chat. EPIC’s customer demographic – large corporate accounts – has arguably been worse affected than some others. How’s EPIC 2.0 trending, and what are you hoping for as we exit this dreadful period?

MG: So far this year, 31 new dealers have been participating in the programme, making it a total of over 270 members. We added 19 supplier business partners. They believe in the model, and we now have some financially supporting it. And we’ve added 157 new accounts in 2021.

To your point about how it was affected by the pandemic, a significant percentage of the account portfolio within EPIC is education and the public sector, so the answer is significantly. Both verticals are coming back now thankfully, and we expect a very robust back-to-school season, for instance – we’ve already been seeing this in our sales figures for July and August.

We have been able, with the financial support from the ISG board and our supplier partners, to

enhance our e-commerce Orderpoint platform so it’s a hybrid platform, whereby orders are systemically sent to a servicing dealer. We’re implementing this model right now, sort of EPIC 2.5.

We want to work with the wholesalers on this because there’s an opportunity to help reduce their supply chain expenses by eliminating some of the costs of drop shipments which they do on behalf of dealers. Why not give that order to a local dealer to provide quality local service to that account, along with local sales representation?

Dealers are willing to pay for technology if there’s value in it

OPI: Does the substantial increase in participating dealers impact the harmony within the group of affiliated dealers? Once you start getting several independents in one particular metropolitan area, is it a problem sharing the business out fairly?

MG: We thought this could be an issue when we first started the programme years ago, but it hasn’t been. Dealers feel threatened by the national competitors, especially by their predatory pricing schemes. But they value the local service their fellow dealer offers.

As long as we select the right members to provide the right service, we win most of the time.

OPI: Back in 2018 and before the merger, EPIC Business Essentials had sales of about $60 million. You said at the time it was scalable to $300 million. Is that figure still achievable post-COVID and, if so, what sort of timescale would you put on it?

MG: If we’re able to effectively implement the enhanced Orderpoint model and grow within healthcare, regional commercial accounts, the public sector, and partner with our wholesalers, it’s very achievable.

Particularly with what’s happening with the national big boxes, I think the timing couldn’t be better for us to scale to over $550 million.

OPI: You said before technology was an area where dealers are still comparatively inadequate. Has COVID changed that?

MG: Well, COVID increased awareness that e-commerce capabilities within the IDC needed to be enhanced, but it didn’t address some of the core deficiencies. One of them is content – I’ve said this so many times before.

The independent dealer goes to market with a content load on their front end that is determined by the wholesaler. The wholesaler decides what the dealer can sell to the end user. That’s not how Staples and Depot go to market – no one tells them what they’re going to sell. Their content is based on end-user demand, as it should be.

We surveyed our major manufacturers, asking them how many SKUs they syndicate to the big box competitors and Amazon as opposed to the wholesalers. The wholesaler figure was 30%, 40% or 50% lower – they didn’t want the content for the other SKUs because they don’t stock them. This madness has to change because, if end users don’t see the SKUs on dealers’ websites, they think they can’t buy them. Where does the end-user go? Well, we know the answer to that question.

OPI: Are we going to see some change here? Mike Maggio, a former colleague of yours, has heard you raise the point many times.

MG: I am optimistic that SPR recognises what I’ve referred to as the aforementioned dealers’ digital dilemma, and is willing to work with us and other parties in our channel to enhance the e-content our members can go to market with.

The next question is: how does the dealer source these products, how does the supply chain work, how can it all be done efficiently? If we can get the right people in the room and think about what’s best for the dealer, it’s very doable. And then we all win!

I can see the heads nodding while people are reading this. There are a lot of complicated things in the world – this isn’t one of them.

OPI: From a dealer technology perspective, accusations have often been levelled at the software providers, saying they haven’t done enough to keep the technology as world class as it should be. Talk to them and they bemoan the fact that dealers don’t like spending money on technology. Who’s right and who’s wrong or is it a mixture of both?

MG: You’ve nailed it – there’s always a lot of understandable finger pointing. The OP industry is not a growth industry for ECI, for example, and this provider has performed well under Ron Books’ leadership to diversify into many verticals which have been accretive to that entire organisation’s profitability.

But at the same time, it has not been as proactive or progressive in enhancing the technology for our channel. Dealers are willing to pay for technology if there’s value in it.