xpedx + Unisource … Will Bigger Be Better?

International Paper (IP) and Unisource Worldwide (UWW) Holdings have announced a definitive agreement to merge their distribution businesses and form a newly created, publicly traded company that will be the largest paper distributor in North America.

This is a big deal. Two of the largest distributors of paper, board, and related supplies for the commercial printing and packaging industries are merging. It would be like Sysco and US Foods, UPS and Fedex, or Dunkin’ Donuts and Starbucks merging – OK, maybe not that big, but you get the idea.

The new xpedx/Unisource (unipedx? I hope not.) will have an unparalleled combination of product assortment, availability, logistics services, operational efficiencies, and, potentially, pricing power in the market. According to IP, the combined xpedx and Unisource business will have projected annual revenue in the range of $9 billion to $10 billion, and will have about 9,500 employees across more than 170 distribution centers in North America.

New Company … Cost Savings, Supplier Pressures

We expect the usual cost savings to materialize from this merger. Look for the new company to rationalize distribution centers, delivery, logistics software and systems, administration, sales, marketing, and other duplicated functions. We also expect the new company will have additional purchasing clout with their suppliers and negotiate for price discounts and better terms related to delivery, stocking, quantities, payment, returns, and anything else that can be cut.

John Faraci, chairman and chief executive officer of International Paper noted, “we anticipate the new company will generate synergies of about $200 million.” This amount represents about 2% of the new company’s $10 billion projected revenue – which may be a conservative estimate by Mr. Faraci or an indication of just how lean the companies (and their suppliers) are already running.

Plenty of Scale, But Can They Grow?

The bigger question facing the new company, and the merchant channel in general, is how it will drive growth. Unisource and xpedx have been pursuing different paths to expand beyond their core supplies business for the print, packaging, and jan/san industries. xpedx has been focusing on graphic communications technology and related professional services. Unisource has been primarily investing in logistics services and enterprise e-Marketing solutions.

For each company, these areas are relatively small, but provide new growth opportunities and another dimension of competitive differentiation. There is no single graphics industry supplier that offers this mix of products and services with a truly national footprint.

The bigger opportunity for xpedx/Unisource is to position the company as a distribution platform with a vastly wider range of commercial products and supplies. Amazon.com is the king of distribution platforms for consumer products with a seemingly endless number of products and suppliers. Staples has recently taken steps to leverage its Staples.com site for the office products market by increasing its SKUs to around 300,000 up from only 40,000. For B2B maintenance, repair, and operating (MRO) products Grainger.com is the leader with over 1 million products and 4,000 suppliers.

The recent developments in the distribution of wide format printing supplies and substrates by Lexjet and Brand Management Group (BMG) are an indication of where the broader graphics communications supplies distribution model may be heading. Some of the key elements are a robust web-based ordering platform, an extensive mix of products and suppliers, a tightly integrated inventory and delivery system, and strong marketing and inside sales.

My colleague Tim Greene commented on this development late last year in this post and is in the midst of a multi-client study called Disruptive Supply Chain Strategies to look at how companies in the graphics business as well as other industries are dealing with supply chain challenges. We expect to have much deeper insights on this subject in the next few months.

Our sense is that the combined xpedx/Unisource has a ways to go before it can aggressively pursue a platform play (IT systems, web site, sales, marketing), but that some of the core pieces (supplier chain, inventory management, national delivery) are in place for massive scale. We anticipate that eventually some entity will be the primary product and supplies distribution platform for the graphic communications industry including commercial print, signage, labels, packaging, textiles, décor, and anything else that requires a substrate and marking material.

Industry Impact

The graphic communications industry has known this merger was in the works since last April, but now that the companies have come to terms it is time to prepare for new distribution dynamics. While it will take time for these organizations to come together and the synergies to materialize, PSPs, suppliers, technology vendors, and other merchants and dealers should think through scenarios and their strategies. We anticipate further consolidation across the merchant and graphic arts dealer channel and new competitors to emerge that offer a more compelling platform for connecting suppliers and buyers.