CREATING A FRANCHISE GIANT - THE STORY OF PAPER PLUS
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From our archives - March 2006. Garry Donoghue oversaw the transformation of a company that started out as a simple buying group into the biggest retail franchise in New Zealand. Here Garry, who retired as CEO of Paper Plus in 2005, shares the strategies that went into building the organisation and fending off competition.
Life-changing events sneak up on you and usually are only recognisable in retrospect. For me, after a career in general management my life changed when I was appointed to head the Georgie Pie fast food chain for Progressive Enterprises. What changed my life was not Georgie Pie itself or working in the dynamic fast food industry, but having the opportunity to work with franchisees. Not only did I discover a quick and engaging rapport with people who actually owned their own businesses, but the omission of the traditional bull-shit was an enlightening difference from the corporate business module.
When my time at Georgie Pie came to an end I was keen to stay in this exciting new world of franchising and saw an advert for the CEO role at Paper Plus. Without the Georgie Pie experience, the appointment committee could well have passed over my application, but my luck was in and I started an exciting new journey in December 1996.
Paper Plus is an unusual franchise in that it is owned not by a single franchisor or by a corporation but by the franchisees themselves. The company was founded in 1983 when a small group of ambitious independent stores banded together to form a buying group to compete with the big boys - principally Whitcoulls. Within a year, phenomenal growth led to the creation of an expanded co-operative and, as the years passed, the group buying and promotion activities grew. New members joining would also buy a share in the company - members selling out would need to sell that share. The system still works today, even with the full format business franchise system that Paper Plus has now become, and it provides the company with great internal strength and certainty.
Early on, though, the growing need to agree on marketing and advertising strategies and adopt a common image to enable everyone to make the most of the advertising spend did, of course, lead to some tensions. Group members who had joined purely for the buying advantages were now facing the prospect of the Paper Plus brand being bigger than their own name in the advertising and even on the front of their stores. For a while, many were co-branded as ‘John Smith's Paper Plus', and there was inevitable resistance from some - especially when, as they pointed out, they were actually the owners of the company that was asking them to change.
Fortunately Colin Coverdale, my predecessor as Chief Executive, was an effective and professional change agent. Colin held the reins for three years, and in that time turned the group from being a somewhat loose but loyal group of ‘co-operative' member shareholders into a stronger brand with a strategic edge and a sharp system. The new model was the foundation of what the group is today.
When I became CEO, the first challenge I faced in 1997 was the transfer of management and administration functions from Wellington to Auckland. Paper Plus was not in tune with its supply base partly because of the Wellington location, and it was also under-represented in the largest commercial market. The move was not without some fall-out, because some good people would not make the move to Auckland and in fact in the end only two people made the adjustment. This meant new appointments, including financial controller, marketing manager, stationery manager, key support staff and a personal assistant.
While this was unsettling for group members at the time, the huge advantage of recruiting a new team is the opportunity to work them into the ‘desired culture' for a franchise/owner-operated organisation. Developing a culture of adherence to shareholder values is critical for creating the right working environment with owner operators.
Personnel aside, the big issues for Paper Plus at that time were:
1. The competitive threat from other book and stationery retailers.
2. Our own under-representation in the Auckland market.
3. Our weak franchise agreement and rules.
4. Weak adherence to brand values.
5. Low use of technology across the system.
6. ‘Self' had a stronger influence than ‘us' in the minds of our operators.
7. Weak balance sheet.
8. Only a minority of stores had strong representation within the book category.
9. Stationery as a category was in for significant change.
10. Relatively weak buying/supplier leverage.
All of these areas needed to be addressed to protect the investments of our member shareholders and realise the long-term potential of the Paper Plus group. Fortunately, there was broad recognition of the need to change and a will to do so.
The retail sector in 1996 was on the verge of dramatic and decade-long change, most of which was potentially threatening to Paper Plus.
The Warehouse was expanding rapidly and beginning to enter some of the smaller markets in New Zealand, where it would have a ‘vacuum cleaner' effect - new stores would literally suck out $15-20 million annually of retail business within their catchment area. From a direct product-by-product perspective, Paper Plus businesses would usually hold ground against the Red Shed, but small town and mainstreet businesses were ‘hit for six'. Hundreds of non-branded retail businesses folded - some our competitors, many our customers. The positive spin was that branded retailers generally survived, and thanks to the work done previously Paper Plus operators were in this group.
In 1997 Paper Plus joined with the Fly Buys reward programme with the aim of growing and protecting our business. It was a big call for the member shareholders to vote for the Fly Buys programme but it proved to be a winner. Store owners could utilise the programme to thwart the ‘price' factor of The Warehouse and strengthen the loyalty of both personal and business customers. Fly Buys remains an important part of the Paper Plus strategy as The Warehouse continues to be a competitive threat.
For mainstream multi-category retailers, such as ourselves, the most severe and frightening threat is that of the ‘category killer'. For Paper Plus, Warehouse Stationery and Borders Books fall into this area.
Paper Plus in the late 1990's was a predominantly stationery business that also sold books, magazines, greeting cards and some gift-style product. In 1996, Warehouse Stationery had ten stores predominantly in the Auckland market and was clearly a competitive brand that could wreak significant damage on the Paper Plus group. Today (2006) there are 40 Warehouse Stationery stores, which has certainly had an impact on stationery sales, but fortunately our product mix is now more broadly-based and when a Blue Barn opens the remainder of the Paper Plus merchandising categories tend to hold up. Only one Paper Plus store has ever closed as a result of competition from Warehouse Stationery.
The other major competitive threat was, of course, Whitcoulls, predominantly through historic brand strength and being a truly professional retail operator. In all but a small number of stores Whitcoulls would out-trade a Paper Plus business, but Paper Plus members have learned a lot from this adversary and the competition is now closer than ever.
Direct threats also came from London Books and Books & More. This threat was different in that as well as competing for customers, we also competed for potential franchisees. The Books & More model included an embedded NZ Post franchise within the brand, and this factor can significantly reduce the ‘risk profile' of a multi-category small business, making franchises very attractive. Books & More franchisees were also like-minded people and were often difficult to compete with. Where a Paper Plus owner would join a Rotary Club, his/her adversary would join the Lions Club. This scenario would be played out in communities all over New Zealand.
Such competitive pressures brought out the real value of the unique ownership structure of the franchise. Through the strategic and board process, as well as their own experiences, Paper Plus shareholders were attuned to the threats and were prepared to align themselves to strategies to either protect or grow their businesses. Where shareholders adopted aggressive strategies against competition, without exception their businesses held ground.
They agreed to tighter franchise arrangements, renewed and redesigned their stores, aggressively adopted technology, aligned competitive store offerings and arranged the purchase of existing stores on the market to maintain a presence wherever a Paper Plus was represented. Without exception, shareholders were only ever in the mood to fight for and hold share. It was the Paper Plus spirit at its best - and it worked.
The expansion of the retail market in the 90s was matched by an increasing brand profile for Paper Plus, and growth was particularly evident in the previously under-represented market of Auckland. In 1997, Paper Plus had 10 stores in greater Auckland and today(2006) there are 25. Paper Plus brands have found favour with major shopping centres, airport and even hospital developers, and we found the brand could be made to work in those higher rental sites.
As mentioned, Paper Plus was in a fight for good franchisees with Books & More. One obvious source for further growth was two other buying group chains, Top Line and Paper World. Paper Plus already had an historic link with Paper World and we decided to replicate the rapport with Top Line owners and franchisees. Via a friendly acquisition forum the three brands merged forces, signed tight franchisee agreements and as an extended group effectively locked out Books & More from a number of markets. The Top Line and Paper World stores tended to be smaller than Paper Plus and in order to strengthen their identity and brand we launched them under the new name Take Note in 2001. Take Note works in smaller and mainstreet trading environments and has fulfilled a valuable niche for the Paper Plus group network. There has been some migration (in both directions) between Paper Plus and Take Note businesses as owners select the best brand for their respective markets, and this is expected to increase. There are currently 72 Take Note stores, complementing the 90 store Paper Plus group, so the economies of scale have been considerable. The recent addition of former competitors Books & More to the network (see below) offers further scope for development in all these areas.
The group has also gone into brand extension through Paper Plus Books. For the most part, New Zealand is under-supplied with good branded book store specialists. A small number of outstanding independents operate throughout the country, but the book industry recognises the gap. It might have been filled by Dymocks, but Whitcoulls opened a number of ‘new' Bennetts book store businesses in high profile regional centres, effectively stopping Dymocks entering those centres. Some years later, Dymocks remains stalled on five stores and Bennetts have closed their doors. A long legal battle also slowed Dymocks progress and restricted the brand's growth.
Paper Plus believes the gap still exists and launched the Paperplus Books brand at The Palms in Shirley in 2003. There are five Paperplus Book stores currently trading, with an identified potential in excess of twenty locations nationwide. The Paperplus Books store is over 55% books (as against 25% in a traditional Paper Plus store), and has a first-rate offer of greeting cards, magazines, stationery and quality gifts. This is the Paper Plus equivalent of a mega-store.
And what of the internet? The Paperplus Books website launched in 2003 and now boasts over 900,000 titles. For the website to work cost-effectively, Paper Plus formed an internet alliance with Real Groovy, who manage the site. Of course, within a franchise and/or co-operative retail environment, there is some suspicion that website sales are lost store sales. Over time, this franchisee view of the world is changing and the Paper Plus franchisees are increasingly utilising their own websites for special orders and customer enquiries. There is a growing appreciation that any business done on the web will come from Amazon or others who have grown their internet portals rather than from in-store customers - and who better to benefit than Paper Plus, which is owned by its members?
The true measure of success with a franchise is the desirability of the brand and operating system when gauged from within. This was demonstrated recently when, with one of our most difficult years behind us, an existing Paper Plus member secured their third store and two others started actively looking to add another store to their stable. Paper Plus has twelve multi-store owners, with the largest owning eight stores and some operating two brands. We have also seen two franchisees return to the group after selling off other successful businesses and reinvesting once again in Paper Plus.
Of course, no business is without its challenges, issues and stress. Paper Plus has had its share of insolvencies, distressed franchisee/franchisor issues and marketing shortcomings. The group accepts that the model is not perfect, but when issues do arise there is a very strong likelihood they will be resolved positively as long as the shareholder's attitude is right. Support Office personnel are committed to the wellbeing and wealth creation of the shareholders, but it is, as always, a two-way street.
The Paper Plus co-operative operates with a disciplined franchise structure. There is a level of subscription with fees, standards, brand protection, product offer and marketing. For their subscription, each shareholder gets a desirable brand, strongly marketed, and the knowledge that their peers and compatriots are also playing the team game. Paper Plus shareholders enjoy a very high level of independence and inter-dependence. Admittedly, when you have 90 independent owners there will be some variation in the offer, but from a customer perspective this is not highly obvious. In fact Paper Plus management believe 90% of shareholders are on board 90% of the time for 90% of the programme.
The group's relationship with suppliers of goods and services is first rate. These days, Paper Plus Group has a total turnover approaching $200 million and some 200 suppliers exhibit at our annual conference. For the Paper Plus and Paperplus Books business all goods (magazines excluded) are processed via a central billing payment protocol which guarantees payments to the supplier. This allows the group to behave much like a corporate in its dealings with suppliers and ensures an efficient reconciliation and payment agreement.
For store owners, the central billing system brings tight cash management disciplines, because Paper Plus is all but the only creditor and demands to be paid on time. As a consequence, although cash can be tight and bank managers have been close at hand, the Paper Plus store owner is operating the business with a squeaky-clean balance sheet, and cannot pad out payments to a wide and alternative supply base.
The acquisition of Books & More into the Paper Plus Group, coupled with the NZ Post franchise agreement, will be a building block of significance for the group's future. Books & More was originally a joint venture between NZ Post and Blue Star (then owners of Whitcoulls). With changes of ownership, the Books & More roll-out slowed over recent years and an opportunity presented itself to Paper Plus management that culminated in a new partnership with NZ Post being announced in August last year. NZ Post has always been seen by Paper Plus as a natural and logical partner; the group currently has 27 stores outside the Books & More brand where a full NZ Post shop exists, and from a management perspective the strategic benefits the NZ Post franchise brings to a Paper Plus or Take Note business are clear to see.
As a result, the Paper Plus Group is now approaching a store count of nearly 200 throughout New Zealand, and the potential for that number to grow remains good.
The success of the Paper Plus group over the last 12 years in becoming New Zealand's largest retail franchise can be credited to the very good work the board and management put in place during the crucial years from 1993 to 1996. Those years set in place a strong, workable basis for a company that would demonstrate the ability to compete successfully and grow in an ever-changing, ever-challenging marketplace.
Success is the product of all stakeholders' efforts. Shareholders, because it is in their interests to work as a team for a strong brand. Suppliers of products, because they operate through the distribution network for a profit. Suppliers of services, because no-one person is the fount of all knowledge and their professional expertise helps expand the mind and the model. The Board of Directors who, while highly participative and professional, set the strategies and put trust in management to deliver. The staff and executive of the administration who are dedicated to the members' survival and growth by completing the loop and ensuring wealth to the shareholders. And, finally, the customer, who recognises the value of their local Paper Plus, Take Note, Books & More or Paperplus Books outlet. Without all of these people co-operating together to make the whole thing work, New Zealand would, without any shadow of a doubt, have less brand choice for stationery, books, cards, magazines and quality gifts.
As published in Franchise New Zealand magazine Volume 15 Issue 1 2006
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