Buying groups help keep dealer prices competitive

By Bob Mueller -- Purchasing, 2/22/2001

The last half of the 1980s saw huge changes in office products distribution. Aggressive, publicly financed start-ups such as Staples and Office Depot brought the superstore concept to the industry and challenged the downtown stationery stores that had dominated the retail market for the better part of a century. On the commercial side, firms like Boise Cascade Office Products and Corporate Express posed similar threats to the contract, business-to-business side of the industry.

Some of the independent dealers were acquired by the newer national chains. Others simply folded. Of an estimated 10,000-plus dealers in business 20 years ago, perhaps as few as 4,000 survived. Among the many competitive pressures they face is matching the buying power-and hence the prices-of the so-called megadealers. More than 800 of them are combining their purchases from suppliers in three buying groups-and getting prices they say compare with those of the publicly traded giants.

Buying groups, it should be said, are nothing new in the office products industry. As many as a dozen, most of them regional, were in business before the megadealers arrived on the scene. Today, thanks to consolidation, there are three major groups, and even they pool their efforts-along with dealers in Europe and Australia-when negotiating with the industry's largest manufacturers.

"I think the pressure for consolidation comes from the need to gain critical mass in terms of buying power and the ability to negotiate competitive contracts," says Greg Fish, executive director of TriMega in Des Plaines, Ill. "Today, you have organizations like Staples, Office Depot and Office Max, which are anywhere from $8 to $10 billion in annual sales. On the commercial side of the industry, you have organizations like Corporate Express and Boise that are in excess of $4 billion in sales. The buying groups had to consolidate in order to aggregate buying power and also to reduce the cost of their administrative overheads."

TriMega, with 44 members, is the smallest of the three groups in number of members, but the dealers who've joined average around $20 million in sales-on the larger side as independent office products resellers go. The largest group is is.group, based in Indianapolis, with 480 dealers and sales of just over $3 billion, or about $6.25 million per member. The third group, the National Purchasing Association (NPA) in Jackson, Miss., has just under 300 members. They range in size from about $1 million to $47 million in sales.

All three groups negotiate independently with manufacturers, as well as through the international organization, Business Products Group International (BPGI). Is.group, for example, buys on about 25 contracts negotiated through BPGI and on another 176 it has negotiated itself. Negotiations are usually annual.

Depending on how the negotiations work out, NPA offers manufacturers several different levels of participation. "They can come in either as an exclusive vendor; they can come in as shared; they can come in as favored or dominant in a particular category," says CEO Frank Fonteyn. "We can shift business to one vendor or another through our marketing materials. So if someone is exclusive, that means the only company in that product category in our catalog is that one vendor. If a company is a dominant vendor, it may share the category with someone else, but it's going to have the dominant position and the larger displays and so forth."

Since its members are ultimately independent businesses, is.group's Chief Operating Officer Grady Taylor points out, the group isn't in a position to dictate exclusivity to them. "We definitely have influence with our dealers, but ultimately they still decide whether to support a particular vendor or not.

Supplier prices depend mostly on sales volume, and variances either way from the negotiated volumes are taken into account during the next round of talks. "If we happen not to perform for a particular supplier, the supplier has the right to come back and say, 'We need to change this,'" Taylor says.

Besides moving products, the buying groups offer other services to suppliers. Individual buying group members purchase on open contracts, and both is.group and NPA serve as a single billing point for their members. (Suppliers invoice TriMega dealers individually.) "Eighty-five percent of the products our members buy are invoiced to NPA," says Fonteyn. "The members order directly from the suppliers, and the suppliers ship directly to them. The suppliers invoice us, we pay them, and in turn bill the dealers. The dealers like it because it consolidates the paperwork. We also have all the bells and whistles of EDI and automatic cash handling, so we can extend terms to our dealers that are more favorable than those that our vendors extend to us."

There's another, subtler service buying groups provide suppliers, says Taylor. The consolidation at the industry's retail level and the dominance of a handful of megadealers concentrates buying volume in the hands of a small number of firms. "If you've got 20% of your volume going through Boise, for example, and they throw you out the door, you've still got a production line to worry about. Most suppliers are trying to keep multiple players in the channel so they don't have so much of their business riding on one or two of the publicly traded companies. The reality is, it's in the supplier's best interest to keep us competitive because it gives them another way to get to the end user."

Each of the three groups offers its members a variety of merchandising services. Is.group publishes a 2,400 SKU catalog twice a year and a 5,000 SKU catalog annually, and is working on a 10,000 SKU catalog for 2001. NPA publishes a 5,000 SKU annual catalog that comes in different pricing versions-retail, commercial, a "superstore" version that goes up against megadealer catalogs-to give members marketing tools that best match their business models. TriMega doesn't publish its own catalogs, but supports catalogs produced by two of its members, Hartford Office Supply and Forms and Supply. All three groups have Web sites, and is.group is working on an Internet marketplace for office products.

All three groups welcome new members and look for financial stability, a good credit rating and independent ownership when they consider applications.

Why should buyers purchase office products from buying group members? "The people who belong to these buying groups are well positioned in a number of respects," says Fonteyn. "They can give you the best prices in the world because they are buying at the very best possible prices." Adds Taylor, "I think there's a perception in the marketplace that we're not competitive with the larger, publicly traded players, and that's just not so. By the time you add all the infrastructure and layers that these bigger companies have, there's no way an independent dealer is not competitive anymore."