Small Stationers Battle the Big Boys

When Pete Sloan founded South Coast Stationers in 1969, Southern California’s burgeoning economy had developed a ravenous appetite for pencils, paper clips and file folders.

For two decades, Sloan and a small cadre of family-owned competitors in Southern California prospered by selling the hundreds of items that retailers, law firms, hospitals and accountants needed to run their offices. Profit margins were fat, competition was gentlemanly and even marginal players could turn a profit.

By the early 1990s, though, polite competition had given way to an all-out war, as an army of well-capitalized office product chains marched into the region.

Office Depot, Staples and OfficeMax built huge superstores, revved up sophisticated marketing machines and used the promise of lower-cost products to lure customers from local stationers.

The resulting office products industry realignment has been painful. A number of independent office product companies and some first-generation superstores either failed or sold out to competitors.

Office Depot snapped up Los Angeles-based Eastman Inc., which sells office products to corporate accounts. South Coast in Costa Mesa acquired the remains of Palm Stationers, once Orange County’s largest retail chain. Tam’s Stationers, which opened its first store in 1947 near USC, sought bankruptcy protection twice before calling it quits.

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And the war has intensified.

The nation’s two largest chains--Staples and Office Depot--have proposed a $4-billion merger that federal regulators are opposing as a violation of antitrust laws. Small players are trying to cut their costs by forging buying cooperatives patterned after Ace Hardware and True Value. And consumers are being deluged with advertising as competitors fight for market share.

So far, observers say, the continuing consolidation has fueled lower prices for consumers. But, as is the case whenever powerful forces reshape an industry, there are no guarantees that consumers will continue to benefit from dramatic change.

Sloan, whose viewpoint is colored by his role as an independent businessman, has traveled to Washington in recent weeks to lobby against the Staples-Office Depot merger with Federal Trade Commission officials.

Despite the continuing threat from large competitors, the 59-year-old businessman remains optimistic about the fate of small, well-run office supply firms like South Coast.

“The superstores may have won the aerial war, and a lot of the little guys have been killed on the ground. But we’re winning the fight in the trenches. They may want to try and take over Southern California, but it won’t work,” Sloan said.

Nationwide, the number of independent stationers has fallen to between 3,000 and 5,000 from an estimated 13,000 storefronts in 1988. (Statewide figures were unavailable.) At the same time, the three big chains grew from just a handful of stores to a cumulative total of 1,600.

By Sloan’s count, Southern California now has nearly five times the office products retail space it had just a decade ago. Big chains like OfficeMax, which recently announced a major expansion into Southern California, continue to build new stores.

But Sloan wonders how long the boom can last: “You look at the population growth in the last 10 years and you look at the number of superstores that have opened, and there’s no way it can be supported.”

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Just over a decade ago, the Wharton School of Business in Philadelphia described the nation’s office products retail sector as a highly lucrative business for manufacturers, wholesalers and retailers.

“We had the best of all worlds,” acknowledged Barry West, a co-owner of Newport Stationers in Newport Beach. “We were doing business in a growing area, and everything was absolutely bumping along. We had high prices, high profit margins, and a lot of stationers were doing extremely well.”

Few consumers really knew what they should be paying for file folders, typing paper and erasers. And, in retrospect, it is easy to see why shoppers flocked to chains that used retail concepts honed by the likes of Toys R Us and other superstore operators.

“As retailers, we were 10 to 15 years behind the curve in terms of what we needed to be doing for customers,” said Frank Trowbridge, co-owner of a Santa Cruz office products company and president of a buying cooperative that represents 200 independent stationers.

The chains have been growing quickly, powered by proceeds from public stock offerings. They also are using their massive purchasing power to bypass middlemen and wring discounts from manufacturers.

Independents watched grimly as chains like Staples, which spends an average of $1.4 million for each new location, invaded.

David Guernsey, who owns a 26-year-old office products company on the outskirts of Washington, D.C., recalls how superstores changed the competitive arena: “My biggest competitor at the time was doing $100 million in sales. But in fairly rapid order, we found ourselves looking at billion-dollar companies with equity financing.

“There had never been an animal like that in our business before,” he said.

Operators who have survived the onslaught say it can take as long as two years for an independent to regain equilibrium once the chains come to town. Survivors also say they’ve stayed in business by finding niches where big chains can’t easily maneuver.

Newport Stationers, which opened its doors on Lido Island in 1969, long enjoyed a reputation as the place in Orange County to buy upscale stationery and office products. But the chain’s dependence on retail customers--walk-in traffic historically generated half of its revenue--almost led to its demise. During the early 1990s, business stalled as California’s lengthy economic slowdown drove shoppers away in search of lower prices.

“For four or five years, we couldn’t get a fix on the right business,” West said. “It took us a while, but we finally got our act together.”

The new battle plan dramatically reshaped the family-owned company West founded in 1964 with his brother, Colin, and their mother, Sylvia.

The Wests closed one of their four stores and refocused their marketing at their remaining locations. A high-end store near John Wayne Airport broadened its inventory to include paper plates, decorator napkins and upscale personal stationery, and they’ve started selling high-end office equipment and furniture.

Walk-in traffic now accounts for just 20% of the privately held company’s revenue. Printing and equipment repairs--in essence, new businesses--drive 40% of revenue. The company’s remaining sales come from an outside sales force that sells supplies to small and medium-size businesses.

Some small operators, including Tam’s Stationers, which had expanded to 23 locations, never discovered a safe harbor.

Mission Viejo-based Tam’s, which entered Bankruptcy Court twice in recent years, ended up liquidating its assets in February.

“Tam’s was simply unable to compete with the big chains,” said Marc Winthrop, a Newport Beach attorney who handled both of the company’s bankruptcies. “They were basically driven out of business by the big boxes.”

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Small office products companies are caught in the same kind of vise that’s squeezing independent hardware stores. And they’re using some of the same survival techniques that hardware stores are using to compete against large chains like Home Depot and HomeBase.

Sloan, who’s selling South Coast to his son, Steve, now serves as marketing director for Office Network, a Hoover, Ala.-based buying cooperative whose members generate $400 million in cumulative retail sales.

Sloan is producing four-color product catalogs that members are using to counter slick advertising from the big chains. It’s been a frustrating process, though, because consumers tend to believe big chains enjoy an inherent pricing advantage.

Guernsey, a board member of Independent Stationers, an Indianapolis-based buying cooperative whose 230 members generate $1.5 billion in cumulative revenue, argues that consumers now realize that small shops can be competitive.

But industry observers say the true test of the cooperatives will be whether they can earn the level of consumer trust that the True Value and Ace Hardware brands carry.

“That’s where we’re heading,” Sloan said. “I could imagine the day when the ‘Office Network’ name is as important as the buying power we get from the cooperative.”

Steve Sloan, who now runs South Coast Stationers, argues that his future is as bright as the dream his father had in 1969. The 33-year-old businessman says that his outside sales force, warehouse staff and fleet of delivery trucks are luring disgruntled customers away from the big chains.

“We opened 498 new accounts last year and almost all of them were Office Depot or Staples customers,” said Steve Sloan. “We’re in business to take back market share from the super stores.”

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If independents believe that they can prosper in the face of a superstore invasion, why are they lining up to lobby the FTC against Staples’ $4-billion deal to acquire Office Depot?

“I think that what Staples and Office Depot are trying to do is wrong,” Sloan said. “It’s morally reprehensible to try and dominate the entire market with one big company. The true definition of free enterprise is a lot of independent companies, not a huge monolith.”

Staples spokeswoman Susan Grieb said that the two companies intend to fight in court for the right to merge.

“The FTC clearly lacks an understanding of the office products industry,” she said. “We believe that an unbiased judge will see the efficiencies that will result from this merger . . . and it’s our intent to seek an expedited hearing on the matter so we can resolve it.”