MDM Interview: United Stationers - The Role of a Master Distributor

United Stationers, with sales approaching $5 billion, is a master distributor of business, foodservice and janitorial supplies, and recently moved into the industrial space with the purchase of ORS Nasco, a master distributor of industrial supplies with sales of close to $300 million.

MDM recently sat down with United Stationers’ CEO Dick Gochnauer to talk about United’s recent move into the industrial sector, as well as what the company is seeing in the various market segments it serves. United Stationers has recently embarked on a journey to expand its e-commerce capabilities with its distributor customers.

It also plans to spread best practices from its core competency – office products distribution – into other segments: JanSan (served by its subsidiary Lagasse, Inc.) and now, industrial via ORS Nasco. Here is Part I of that interview. In Part II of this interview, to run Feb. 25, 2008, Gochnauer addresses the topics of employment recruitment, private label and data-sharing.

Dick Gochnauer: Growth has come from a number of places, including acquisitions. We bought Sweet Paper (in 2005) as a vehicle to move into the foodservice consumables business, because that was probably the fastest-growing segment of our Lagasse business.

As we introduced the breakroom and cleaning supplies to our office products dealers, the need for a broader product line was becoming more evident. So Sweet filled that void and got us into products and relationships we didn’t have. That’s one of our fastest growing categories.

The second – we continue to open up new channels and we’ve been investing heavily in marketing and e-commerce. We have a fair amount of growth coming from companies historically not selling our products on the Web but that now are. This diversification with ORS Nasco will move us into another place where we can look for growth.

DG: We look for five criteria for acquisitions. This is one of the few that hit all five. … We look for a strong management team, which ORS had. We look for a pure wholesaler structure; generally master distributors are a mixed bag, selling wholesale and direct to the end users. But with ORS Nasco, we had no problem there.

We are looking for profitable growth. Getting behind this company is a growth engine on the top and bottom lines for us. Also, this is an attractive industry – we feel the industrial market has a strong need for a pure wholesaler.

There are synergies with Lagasse and our Office Supply business, particularly in customers and product line. The team is working on how we take advantage of those while keeping the organizations autonomous and focused on their market segments. We want to take some of their products not only to Lagasse but also to the office products side, so that there’s growth beyond just what you’ll see in the ORS structure.

MDM: Master distribution in industrial channels seems to have seen resurgence in recent years. With consolidation and polarization in the market, master distribution has served as a playing field-leveler for smaller independents. Is this true in the other sectors you serve?

DG: That was one of the primary motivations for moving into this space. We actually see the industrial channel as a vertical that needs a wholesale position more than the office products area. I say that because this sector has more products, more manufacturers and more customers, which means more fragmentation.

So the cost of delivering direct to a distributor is very high for both the distributor and a manufacturer. That’s where the role of a pure wholesaler can take costs out of the supply chain and at the same time improve customer service.

There is not just the aggregation of product in the market for economies of scale – there’s also a need to aggregate content as everybody is moving to the Web. Industrial is behind JanSan which is behind office products, but it will get there. As we invest in office products, we’ll take that to JanSan, and then we’ll take that to industrial.

They’ll move to what we call an e-catalog. With an e-catalog, content is king, and the ability to do shopping online, and to get more detailed information around products and do cross-selling and up-selling capabilities, and deliver brand messages from manufacturers onto the desktop of the person making the buying decision – it’s all very powerful stuff.

DG: Even as advanced as office products is in the supply chain, on average 50 percent of what the dealer will sell they buy direct from the manufacturer. It makes sense for them to take delivery themselves for high-volume items.

There is not only a role for the buying group there, but you shouldn’t underestimate the value for distributors to get together at buying group meetings and talk to their peers in noncompetitive markets to learn best practices and find out what’s going on. That’s a high value.

DG: What you’re finding today is that the role of a wholesaler has grown more important. If you can’t grow because your customers aren’t buying more of what you sold them, then another way to grow is to sell them products they didn’t previously buy from you. In today’s environment you don’t want to invest in square footage or inventory to go there. A pure wholesaler allows you to avoid both of those investments.

It brings you not only the product but also marketing materials you can drop off so you have a program. And you can go to the customer and say we can offer you more today – and because I’m relying on a pure wholesaler, I have short lead times even though I don’t stock the product. That’s appealing.

What you find in industries slow to change is that they think the keys to success are oftentimes not what they actually are. For example, for me to be successful, I need to be able to claim I’m buying direct from the manufacturer. For me to be successful, I need to have that inventory sitting in my warehouse.

But in fact, the most successful and enlightened distributors have learned how to minimize the inventory in their warehouses, turn more, and where it makes sense, use the two-step process to lower costs. Psychologically that’s difficult for companies to get their arms around.

DG: That’s right. There are two places where we add value: marketing and logistics. And you need economies of scale for both. The thing is, you can run the same marketing campaign in one geography as your fellow distributor does in another, and it’s not a problem. We have evolved our program so that you can tailor it to your needs with products and prices.

With the Internet, we can help them more than we have in the past. We’ve been investing with software suppliers to tailor a solution that will work for distributors. Distributors that use this software can plug into our marketing campaign and data-mining capabilities so that we can bring more exciting opportunities for their customers than they can do on their own by far.

In office products we are connected electronically to our distributor customers, and they’re connected with their customers. Some of their customers are starting to order using the system, which is an ERP system that includes a front office and a back office. The front office is the Web store where their customers order. That is tied into their back office database which is tied into us.

DG: What we did was partner with SAP to configure their software to our vertical. In addition, Microsoft has entered the picture, and they have two different software packages out, and so we’ve been working with them along with ECI and other software providers in our space. Now we don’t want to be in the software business, quite frankly, but we’ve been funding development so that there are systems that will work for small companies that are integrated and allow us to fulfill this vision. The more solutions and alternatives that are out there, the better.

We’ve been investing heavily into technology to capture data and create content and store that content in a way that will enhance it and allow you to get more information than you ever could from a paper catalog. It will allow cross-sell and up-sell capabilities – for example, if someone buys this, then it will offer a companion product as well. It all comes back to an investment in data structures and content.

DG: Three years. We published our e-catalog in December. Now you can go online to biggestbook.com to see it. The software will be available in the second or third quarter of this year; some of our customers are in beta tests.

MDM: As you continue to build your online and marketing capabilities, how do you see your competition changing in 10 years? Is it the Graingers or MSCs? Big boxes? Or alternate channels?

DG: We actually don’t see ourselves as a threat to the Graingers of the world. We see ourselves as being more of a friend to the distributor and manufacturer. Things going direct today will be going through a pure wholesaler, which will help the small distributor. Some of our large customers say we give guns to the peasants.

To some extent that’s true. We enable a small business to strive and compete against larger competitors. You can get economies on logistics and purchasing and you can gain economies on marketing.

Then a distributor can use local business and customer intimacy and flexibility to differentiate from larger distributors and compete more effectively. Combine those, and the smaller distributor can survive and be very healthy going forward.

MDM Interview: The Role of a Master Distributor

United Stationers on its place in the supply chain