21 minute read
Big Interview
by OPI
CRISIS: the mother of
REINVENTION
Already challenged as an industry, coronavirus has tipped the scales for many in terms of addressing some latent as well as glaring issues in their organisations. But there’s much to be proud of, says EO Group’s Simon Drakeford, and the only way is up
Special Issue TECHNOLOGY SOLUTIONS
One of the pioneers in the e-commerce game, EO Group has been entrepreneurial and inventive over the past 22 years, in the process creating and cementing a highly technology-driven business. CEO Simon Drakeford, well-known in the UK business supplies industry, currently also as Chairman of trade federation BOSS, is the first to admit that it hasn’t always been plain sailing, with plenty of adjustments and pivots needed.
He’s immensely proud not only of what his company has achieved and, importantly, how it’s positioned itself for the future, particularly with the Office Power technology and services business, but also of how our industry has rallied in these most recent, difficult times. As he told OPI CEO Steve Hilleard in this interview, coronavirus may have given some operators the much needed impetus to align, restructure and reinvent.
OPI: Could you give a brief synopsis of EO Group as it currently stands?
Simon Drakeford: Sure. As you know, the first company in the group was Euroffice, our e-commerce business, which started in 1999. In 2013, we launched a new entity called Office Power – a combination of technology we have built in-house with services that we offer to support dealers in our industry. As the company grew and our offering diversified, around five years ago we introduced EO Group which serves as an umbrella brand for all our businesses.
We now have three divisions in the group. One is our direct business, currently comprising our e-commerce operators Euroffice and UK Office Direct. They’re two different brands, but are both online, stockless resellers. Then we have Office Power which is our technology and services provider that supports traditional dealers in our sector.
Finally, we have a Software-as-a-Service (SaaS) business with our bespoke proprietary technology platform at the centre of it. This platform is used by our direct businesses, Office Power dealers as well as individual independent licensees.
OPI: You also had some interests in continental Europe at some stage I believe.
SD: That’s correct. We went into Italy with Euroffice in 2009 and then into Germany in 2013. Italy worked well for a while, but we sold that business at the end of 2019 to enable us to focus on our UK and technology businesses.
With regards to Germany, we didn’t stay in that market very long. We are still a small agile operator and we didn’t have the bandwidth to manage both Office Power and the German operation at the same time, so we needed to prioritise and focus our efforts.
These were some of the key company milestones over the years.
Special Issue VENDOR SPECIAL
OPI: The Euroffice MBO that you headed 11 years ago was a big personal milestone for you I would expect?
SD: Definitely. I hadn’t necessarily anticipated being in the industry for this long. I joined the company in 2007 and about three and a half years
I joined the company in 2007 and about three and a half years later, we swapped our investors to PE firm Darwin. It seemed the right time for an MBO and Darwin backed me to lead it
later, we swapped our investors to PE firm Darwin. It seemed the right time for an MBO and Darwin backed me to lead it.
It was an exciting time and I still feel very well supported by a strong board and growth-orientated PE investors. They’ve been great partners for me and my leadership team over the past decade.
OPI: That support over the past year or two has been vital I should think.
SD: Yes. It’s been very challenging and when things are difficult, you really rely on your support network. There’s a huge amount of experience on that board and also coming directly from the Chairman, John Browett.
John is well known in business circles, having worked for a broad range of companies including Dixons Carphone, Apple, Monsoon and Dunelm. He now does consultancy work and supports small to medium-sized businesses he likes. An incredibly clever and emotionally intelligent man – you don’t always get that together.
OPI: Is Euroffice’s founder George Karibian still involved in the company?
SD: He’s still a major shareholder, highly influential and available on the end of the phone.
OPI: OK, let’s get to the crux of it and talk about finances. You’re a privately-held business, so I’m not sure what you’re willing to share.
SD: In 2020, we were about £43 million ($59 million) as a group. EBITDA at the time had dropped to roughly £800,000. Then we hit the skids, as everyone did. We’re growing nicely again now but overall, for the financial year, revenues were approximately £30 million – that’s about 30% down or 25% excluding the impact of the Italy sale.
We made some very difficult decisions early on in the pandemic. It was the right thing to do, I have no doubt, but it was very painful. We didn’t want to leave any stone unturned, and decided to act quickly and deeply.
So we did that and our profit actually increased, with EBITDA up 43% to £1.2 million.
OPI: Where did you make cuts?
SD: We pretty much chopped everything. One expense was Google advertising spend. We also cut about 30% of our fixed overheads which was sad, because we’re a relatively small business with a strong culture. We had built strong relationships with our people, so that was intensely difficult.
We have a young, dynamic workforce which is in high demand. As such, we had some natural attrition and that made it a little easier. We also put a hiring freeze in place, so the pain was twofold: in the first instance, having the difficult conversations with people you really don’t want to let go; and then the extra bandwidth the remaining staff in the business had to take on because there were just fewer people to do those tasks. It’s been a pretty tough year for everyone and we were no exception.
OPI: What was the rationale behind cutting advertising spend? Isn’t that counterintuitive given the work-from-home (WFH) situation and the space you occupy in the e-commerce arena – arguably one of the more resilient channels in our industry right now?
SD: Perhaps. But we’re a B2B business – we don’t make money on consumers. We want to sell into offices. Average order size and gross margin are two of our KPIs. All these people working from home presents two key challenges: the first one is they consume about 60% less traditional stationery when doing that, so order sizes are smaller; secondly, the cost of distribution is higher for obvious reasons.
It’s more difficult servicing WFH customers with our business model. Targeting consumers purely for the top line is dangerous; if you don’t have a strong brand, you do not make any money.
During the first lockdown, our traffic went up dramatically and we saw a spike in orders. But it was lower-quality traffic which impacted the bottom line. Cutting advertising spend was an obvious decision.
OPI: You’re referring to your direct online businesses here I’m sure. What about Office Power – how important is that in terms of the overall top line you mentioned?
SD: It’s the largest part of our business right now based on run rate. In total, Office Power makes up about 40% of revenues.
OPI: Last time we did a Big Interview with you, about six years ago, you referred to a lack of awareness as the biggest stumbling block for Office Power’s progression. You seem to be motoring along quite nicely now with the platform. How many Office Power dealers are there currently?
SD: We work with about 65 dealer partners of various sizes – compared to 15 back in 2015. We have good awareness of the brand now, and have enhanced that through building a very strong community before, but especially throughout, the pandemic. We opened up our content and support networks to all dealers, not just our current partners, and this was received very well.
OPI: We can clear these misconceptions up right here. What is Office Power?
SD: Let me start with what it is not. People perceive Office Power to be a one-stop, one-size-fits-all solution whereby dealers outsource all of the functions of their business to us. That’s not it.
Office Power is a highly flexible technology and services provider that allows dealers to tailor the overall solution to their specific needs. There are many options available to them as to how they want to configure their partnership with us. This gives dealers complete control of how they want to run their business: where they buy from, what products they sell, what prices they sell at and how they do the fulfilment. They can just use our best-in-class technology and configure their service model around it.
To make our proposition extra relevant and versatile, we’ve spent the past 18 months building a whole new, even more flexible product we’ve launched this July. Power Select typically enables larger dealers that may want no services.
Power Full, which is what the majority of dealers are using at the moment, is where we partner with businesses to give them our technology and a full range of services, typically operational ones, but some commercial and marketing solutions as well.
With Power Select, dealers can choose exactly which services they want. As such, it’s a much more configurable solution, particularly for those that might want our technology but don’t want the myriad of operational options because they have their own scale and it doesn’t make sense for them.
OPI: You’re frequently compared to Nectere…
SD: We are and it’s unfortunate. There are some similarities between our businesses, but I don’t like being compared to Nectere and I’m sure Paul
(Musgrove) feels the same about Office Power. We are very different enterprises with different models in terms of technology, purchasing and distribution. We’re also, in essence and unlike Nectere – not about financial restructuring.
In a complicated, commoditised and margin-tight supply chain, it makes sense for dealers to partner with an expert and outsource their technology and some services – we are that specialist. This is a very common trend in other industries too, and they are changing at the rapid pace we are.
OPI: Has Office Power grown during COVID?
SD: Yes, both in terms of the top line and number of dealers using the platform. The business model is definitely more relevant than ever. COVID has extrapolated e-commerce and pushed many companies to re-assess whether they have the best systems and processes in place to be able to compete successfully in the future.
OPI: How have dealers fared overall during this difficult period? I remember you saying in a blog post earlier this year that most dealer businesses which have got this far will likely survive and come out of the situation intact. Do you stand by that comment?
SD: I do. What the blog said is that the traditional dealer channel is quite resilient by the nature of its agility. Yes, we will see some fallout, but it’ll be a slow death rather than a dramatic one. Businesses die all the time, especially in a sector like ours which is massively challenged.
This conversation comes around every so often when a crisis hits, like the financial one in 2008. The expectation then was that the reserves of independents would run out and we would see a massive decline. Well, it didn’t happen.
To be frank, I see more challenges in the bigger, more leveraged businesses, not for dealers which can afford to be agile.
OPI: Anyone you have in mind in particular? SD: No, I’m not talking about a specific business.
OPI: But there are several obvious ones…
SD: Obviously, Staples and Office Depot were highly leveraged if they are the ones you’re referring to. Their turnaround PE companies were unlikely to ever get an exciting exit, particularly given COVID, so they’ve been divesting these operators bit by bit.
They won’t necessarily disappear, but they will be dramatically different to what they once were. That’s all I would say. SD: I am. My perception is that the fear of not changing for the first time is greater than the fear of change. What COVID has done is become the catalyst for change which addressed some of the inertia which existed in our sector.
Everybody knew we had to change, but there wasn’t a really compelling reason to do so. Coronavirus and all the distress it caused businesses became that reason.
I now see a lot of dealers engaging in agile strategic planning and possibly restructuring some areas of their business which either aren’t efficient or are preventing them from successfully meeting their customer needs. Outsourcing is one of the models to achieve this – I would say that because it’s what I do in my business, of course, but I also believe it’s very true.
By the same token and while I’m broadly optimistic, I believe much of the distress our industry faces isn’t actually being seen yet because everything is being propped up by government funding and the support schemes out there. As such, the need to change will ramp up dramatically once that funding support disappears, rather than right now.
OPI: One industry casualty at the top of the supply chain – and not a coronavirus victim – was Spicers. You were a substantial, long-term partner of that wholesaler. How has its demise impacted EO Group? Beforehand even, when did alarm bells first start ringing?
SD: Well, alarm bells ring the whole time when you rely heavily on a significant partner or at least they should be, because when you have a high dependency on another provider, it’s something you always have to keep a close eye on.
We were aware Spicers was challenged pre-pandemic. You don’t need to be a rocket scientist to work out that when you combine huge declines in turnover with highly-leveraged, asset-based lending businesses, there’s going to be a problem.
We had taken a significant percentage of our spend and outsourced it to other suppliers as early as 2019. As such, we were technologically and operationally plugged in, had competitive commercial terms and could then – when we had to – move considerable volume very quickly when Spicers collapsed. VOW was one of these suppliers obviously, and it was very supportive during that period and continues to be so.
Was there an impact? Absolutely – there was a huge amount of disruption and plenty of firefighting. Could we optimise a different sourcing strategy quickly? Yes, we could. Were we supported by VOW? 100%. All in all, it could have been horrendous, but we had planned this scenario out as best we could.
OPI: What about Exertis Supplies which, I believe, has been a real benefactor. Has that operator become an important partner for you?
SD: Everyone’s important, but no, we don’t put a substantial amount of volume through Exertis. The majority of our spend is with VOW now and we’re
loyal to this wholesaler. We work with hundreds of other suppliers and have always done that. And our Office Power dealer partners can buy from wherever they want to help drive their growth.
OPI: Is it also a case of once bitten, twice shy, as in not falling into the trap again of being too dependent on one supplier?
SD: It’s fine to be reliant on one entity as long as that supplier is dependable, and there is no reason why I anticipate VOW to not be dependable.
The reason for us adjusting our spend or sourcing some product elsewhere is because our and our dealers partners’ suppliers need to best fit the type of demand. This helps fuel growth.
OPI: You’ve already briefly touched on the larger contract players. We’re starting to see the endgame for Staples now, while Depot is embarking on a slightly different strategy. Speaking about the UK market specifically, how do you see that landscape panning out for players occupying the contract, government and big business space?
SD: I’m not an expert here because it’s not something we do, so I’ll be very generic. The contract space is tough because I think Amazon Business is making good headway. It’s also hard as margins are thin and volumes depressed.
In the past, you could still turn a profit, even on thin margins because of the volume. In these recent COVID times, however, I would imagine this has been a particularly difficult space. Probably propped up by emerging categories related to COVID though.
OPI: Talking of Amazon – this company is obviously right in your path and a formidable competitor, as are other businesses like eBay or OnBuy. Is that hampering your direct resellers’ – Euroffice and UK Office Direct – ability to compete?
SD: I think Amazon is formidable, to use your words. But I don’t believe it’s too dominating in Euroffice’s space yet. We are servicing small businesses with credit accounts which are highly configured and specific to our sector in terms of product range, customer experience and digital sales and marketing tools.
Amazon Business is eating more and more lunch in our space, don’t get me wrong, but not as much as it is doing so in the contract segment. And obviously, it completely cleans up in the consumer demographic, but that’s not our game either as we can’t profitably service consumers.
Euroffice is still a big, successful and profitable business and it’s growing once again.
OPI: But could you foresee a day when you might decide to focus more on Office Power and less on the legacy businesses?
SD: (laughs) Yes, I can see that day because forecasting every conceivable scenario is my job. Office Power is very relevant with an incredible technology stack and business model, particularly with the new Power Select product where you can configure what services you want.
I genuinely believe there is no better positioned business model in our sector, and we’re only scratching the surface, just being in the UK. So overall, Office Power is small with plenty of potential while Euroffice is very established with headwinds.
OPI: Another component of our industry are dealer groups and in the UK there are quite a few of them. You’ve been fairly critical in the past and were quoted as saying they were “the ugly warts on the side of the wholesaler”. What are your views now?
SD: Yes, I did say that about 12 years ago and slightly regret the resonance of this quote. But while I may not use quite the same words, I think the logic still stands. The purpose of a dealer group – or actually buying group is a better term – is to add value to the supply chain. If that same value is what the wholesalers are trying to add, you get this dynamic – the ugly wart I so unfortunately referred to – on the side that the wholesaler struggles to control.
The concept of grouping together to address some of the issues in our industry is a positive one if it adds value. But you really need to interrogate if
A technology brainstorming session at EO Group
OPI: Buying groups largely exist because of the relationships they have with the vendor community – and all they entail, including rebate programmes and so on. We haven’t spoken yet about this particular segment. Some manufacturers have had a pretty torrid time, with resellers constantly being urged to get out of traditional supplies and into other products and services. What’s your view?
SD: I think as an industry we do talk ourselves down quite a lot, saying our products aren’t very sexy, for instance. Maybe they’re not, but I do believe that relationships people have with their work tools are actually very deep, perhaps second only to the relationships they have with their mobile devices. And these work tools include stationery and all manner of business supplies.
Yes, it’s a sector in chronic decline because of changing working behaviours and patterns, but it’s still a massive market. The problem with declining industries is that they get labelled as dogs, but they’re not. They just need some restructuring.
I’ve really enjoyed seeing examples of how vendors have pivoted during COVID-19, in the same way dealers have moved into areas such as PPE. It shows the entrepreneurship and the dynamism that exists in our industry. They’ve evolved what and how they manufacture to address the change in the market.
Our industry stacks up really well if you look at what it’s done. I’m going to put my BOSS hat on for a moment and very passionately and with great conviction and fervour talk up some of the success stories of how dynamic our sector has been. I am very much rooted in the supplies and stationery industry, and I will vehemently rally against those who categorise it as being dull, small and insignificant. It’s not.
OPI: I completely agree, but we’re hugely immersed in this industry – outsiders aren’t. How do we change the narrative, redefine what we are and portray that to a wider audience?
SD: Good question. Our sector is very culturally pleasant compared with other industries I’ve worked in. We should be more bullish about what we do. Forget the product for a minute, because that product sometimes creates confusion.
We supply businesses. And what we’ve seen during COVID is that despite the fact these businesses have done different things or gone to different places, we’ve still supplied them. So the business supplies label is a good one.
No, we’re not sexy, that’d be a stretch, but what we do is impressive and important.
OPI: You’ve briefly mentioned BOSS already. I don’t imagine you expected, when you took on the mantle of Chairman of the federation in 2019, that your tenure would include dealing with a global pandemic. What have been the priorities at BOSS?
SD: It’s been a challenge. But our amazing CEO Amy Hutchinson has made my job as Chairman more successful and immeasurably easier. In this type of role, you have to delegate, but a fundamental requirement of doing so is confidence and quality in who you delegate to. I have an abundance of confidence in Amy.
I think BOSS has become so much more relevant during COVID, not only as a result of the services, but also the networking and the knowledge that we provide.
Strange as this may sound, the pandemic has been a positive for the federation. It needed change and – I’m probably going to get told off for saying this – there was a danger of it suffering the same inertia the rest of the industry is sometimes being accused of.
Before COVID, we were already trying to inject a change agenda and hiring Amy was part of it, but the pandemic has given us a vehicle to really drive that change. I believe BOSS is incredibly relevant now and I really like some of the stuff we’re doing.
OPI: You used the word ‘bullish’ earlier. To wrap up, how bullish are you, post-coronavirus, about the future of the industry? What do you think we will be reflecting on in five years’ time – if you’re still around then, of course?
SD: (laughs) I hope I will be! I’m getting a bit traditional – something I’ve never been accused of in the past. But I do believe offices will return to more like what they were before the pandemic than we currently think. The initial experiment of homeworking had everyone giddy and excited but, despite the upsides, I don’t think we fully understand the negative implications of that yet.
I don’t believe staff will return to the office 100% of the time, but for operational, hands-on roles, I would be surprised if it was less than 60%.
It’s also a generational and a social thing. Yes, of course, everyone likes a better work-life balance and we’ve now seen what is possible. However, ultimately business is done by people, with people and through people.
Communication is what knits it all together and you don’t get this in the same way through Zoom because you’re only using two senses – your eyes and your ears, and in a quite often limited way. There’s a lot more to it, including body language, emotional intelligence and influencing. As a result of all that, I’m convinced what we’re offering will continue to be in high demand going forward. It’ll just look different.
Overall, I feel optimistic about our sector. It needs restructuring and a bit of correction in the supply chain. But never forget how relevant our product is and what an amazing job we have done in terms of pivoting in recent times.
