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Office Depot, Inc. ranks as the second largest operator of office supplies superstores in the United States, trailing only category leader Staples, Inc. The company operates about 870 retail stores in 44 states and the District of Columbia, offering a full range of office supplies and office furniture, business machines and computers, and computer software. Most of the stores also include a copy and print center offering multiple services, such as printing, reproduction, mailing, and shipping. These stores principally serve consumers and small to medium-sized businesses. Besides retail, Office Depot's distribution channels include direct mail, contract delivery, Internet web site, and business-to-business e-commerce. Office Depot also owns Viking Office Products, Inc., a wholly owned subsidiary and one of the leading direct-mail marketers of office products in the world. International operations, involving a full array of distribution channels, extend to 23 countries, including Canada, where there are more than 30 retail stores; France, 42 stores; Japan, 19 stores; Spain, six stores; and Hungary, four stores. In addition, Office Depot has joint venture and licensing agreements for approximately 130 stores in Mexico, El Salvador, Guatemala, Costa Rica, Israel, Poland, and Thailand. Nearly one-quarter of the company's revenues are generated outside the United States.
Along with rival companies Staples and Office Club, Inc., Office Depot was a pioneer in the field of office supplies discount retail. The three companies were founded within months of each other in 1986 in three different corners of the United States--Office Depot in Florida, Staples in Massachusetts, and Office Club in California. All of them saw opportunities in selling office supplies to small businesses at bulk discount rates that had previously been the privilege of larger companies. Since small businesses had never purchased supplies in quantities large enough to receive bulk discounts, they had been at the mercy of conventional retailers who, in the absence of price competition, could sell at manufacturer's suggested retail prices and take markups of as much as 100 percent. Buying directly from manufacturers instead of wholesalers and keeping overhead low, a discount retailer could offer goods from 20 to 75 percent off of full retail. Another trend that proved advantageous for these three companies was the advent of warehouse-style discount retailers in the 1980s; what Price Club had done for general merchandise and what Circuit City had done for consumer electronics, Office Depot, Office Club, and Staples sought to do for ballpoint pens and legal pads.
Office Depot was founded in Boca Raton, Florida, by entrepreneur F. Patrick Sher and two partners, Jack Kopkin and Stephen Dougherty. The company opened its first retail store in Fort Lauderdale in October 1986, and it proved successful enough that two more Office Depot stores appeared in Florida by the end of the year. The company continued to grow rapidly; in 1987 it opened seven more stores in Florida and Georgia and sales topped $33 million. Sher did not have long to savor his success, however, for he died of leukemia scarcely a year after his first store had opened. He was succeeded as CEO by David Fuente, an experienced retail executive whom Office Depot lured away from Sherwin-Williams, where he had been president of the paint stores division.
Fuente's strategy was to have Office Depot continue to grow at a breakneck pace, to trap market share before copycats got into the act. He planned to enter ten new markets a year and add 50 stores a year. Although Office Depot opened only 16 stores in 1988, expanding into Kentucky, North Carolina, Tennessee, and Texas, Fuente met his goal in 1989 and 1990. Sales topped $132 million in 1988, and Office Depot went public in June with an initial offering of more than 6 million shares at $3.33 per share. Office supply discount retail as a whole was proving wildly successful; although they accounted for only a small fraction of office supply retail sales by the end of the decade, at least one analyst predicted in 1989 that discounters would form the fastest growing specialty-retail segment for several years to come.
Office Depot gained the distinction of being the first of the three original discount chains to turn a profit for a period of four consecutive quarters, which it did during the last two quarters of 1988 and the first two of 1989. The company achieved its success with stores that resembled nothing so much as warehouses. Their decor was functional and unassuming, in a style described by a reporter for Fortune as "plain pipe rack," with merchandise stacked floor-to-ceiling on steel shelves. As David Fuente explained it, "Customers pick only from the first six feet of 'shelf' space anyway. So we use the area above 'for storage.'" By 1989, Office Depot stores were averaging $150,000 in sales per week. Of course, lack of concern for the aesthetics of interior design characterized the company's competitors, as well. Office Depot held an edge in that commercial rents were lower in the South than elsewhere in the United States, allowing the company to build exceptionally large stores and still keep overhead costs relatively low.
Rapid Growth in the Early 1990s
Office Depot continued to grow dramatically in 1989 and 1990, expanding beyond its regional base in the South into the Midwest. By the end of 1990 the company boasted 122 stores scattered across 19 states and sales of $625 million. Much of that expansion was financed by the sale of 3.6 million shares of stock for $41 million to Carrefour, a French chain-store concern with subsidiaries throughout Europe.
The office supply discount field became more crowded and competitive in the early 1990s as other companies, including OfficeMax and BizMart, joined the lucrative industry. With the struggle for market share becoming more vigorous, Office Depot and Office Club decided to merge in 1991. The move solidified Office Depot's position on the Pacific Coast in one swoop by eliminating a major competitor and giving it a substantial number of new stores in a regional market where the company previously had only a slim presence. For its part, Office Club had not fared quite as well as its fellow discounting pioneers; during the four quarters that constituted Office Depot's first profitable one-year period Office Club lost $2.7 million, compared to Office Depot's gain of $5.1 million and Staples' narrower loss of $1.9 million. The merger, therefore, proved advantageous to Office Club as well.
Office Club had been founded in northern California in 1986 by Mark Begelman--previously an executive with British American Tobacco--in partnership with a friend who had been selling office products to Price Club. They reasoned that the same marketing principles that allowed Price Club to retail office supplies at deep discounts would work for stores specializing in that kind of merchandise. The first Office Club store opened in January 1987 in Concord, California. Office Club grew quickly, though not as frantically as Office Depot. By the end of 1987 Office Club had opened five stores. At the time of the merger, it operated 59 stores, most of them in California, and had posted annual sales of $300 million.
The merger was approved by Office Depot shareholders in April 1991. As a result of the agreement, which entailed a stock swap worth $137 million, Mark Begelman became president and chief operating officer of Office Depot, with David Fuente remaining chairman and CEO. Over the next 13 months, all Office Club stores were either closed or converted into Office Depot outlets, and the membership fee that Office Club had been charging its regular customers was dropped.
Even after the merger, Office Depot continued to expand. In June 1991 it sold another 1.8 million shares of stock to Carrefour for $40 million to finance expected growth, making Carrefour an 18 percent owner. In addition to the outlets acquired from Office Club, the company opened 57 new stores in 1991. At the end of the year, Office Depot had 229 stores and posted sales of $1.3 billion.
At about the same time, Office Depot saw its sales of office machines, including personal computers, begin to grow by leaps and bounds, and the company began to emphasize this side of its business more strongly. In December 1992, Begelman claimed in an interview that 10 percent of all fax machines sold in the United States were sold by Office Depot. Store layouts were redesigned so that more machines could be put on display. The company began selling not only PC clones by Packard-Bell and Compaq, but also the real thing--in August 1991 IBM agreed to let Office Depot sell its PS/1 computers and around that time Apple gave permission for them to sell the Macintosh Performa line as well.
In 1992 Office Depot went international, acquiring HQ Office International, the parent company of the Great Canadian Office Supplies Warehouse chain, which operated seven stores in western Canada. HQ Office International, Inc. had been founded in 1990 by Robert McNulty as a Canadian extension of his unsuccessful California-based HQ Office Supplies Warehouse chain, which was carved up and bought out by Staples and BizMart in 1990. Office Depot immediately replaced the HQ Office International name with its own and began expanding its presence in Canada, opening two stores in Manitoba. Office Depot's entry into the Canadian market set the company up for an eventual confrontation with Business Depot, a small chain based in eastern Canada, in which Staples held a minority stake.
In addition to expanding into new geographic areas, Office Depot began expanding its customer base. Originally catering to businesses with 20 or fewer employees, Office Depot decided to attract larger business by acquiring contract stationers and integrating them into its retail business. In May 1993 Office Depot acquired the office supply operations of contract stationer Wilson Stationery & Printing, a subsidiary of Steelcase Inc. The deal was valued at $16.5 million. In the next year the company bought three more contract stationers.
Having successfully moved into the established retail office supply market, Office Depot was confident they could challenge the existing system that served larger businesses. CEO David Fuente told Forbes in May 1994, "We're all selling the same stuff; we're all selling legal pads and pens and pencils, and we all buy from the same place. The real difference in performance is going to be: Are you pricing them better? Giving better service? Delivering better? The difference is not in the strategy but in the execution." Staples and OfficeMax clearly felt Office Depot was on the right track: they both followed suit by acquiring their own contract stationers. Two years later, however, Office Depot had yet to see big returns on its investment. Integrating the contract stationers into their core retail business had cost more than expected, but Office Depot remained confident that the more diverse customer base should make the investment worth it in the long run.
The company saw $2.6 billion in sales in 1993, with $63 million in profit. By 1994 Office Depot had grown to 362 stores, which still followed the company's original concept--warehouse-like buildings that stocked office supplies at 30 to 60 percent off manufacturer's list prices. The company's closest competitor, the Kmart Corporation subsidiary OfficeMax, was only half its size. Not satisfied, Office Depot planned to double the number of its stores in the next five years.
Mid- to Late 1990s: Failed Staples Takeover, International Expansion, Viking Acquisition
In September 1996 Office Depot agreed to be acquired by Staples, its largest competitor, in a deal estimated at $4 billion. As these companies were number one and two, respectively, among discount chains, questions about antitrust violations were quickly raised. The Federal Trade Commission (FTC) found that the combined company would control prices in many metropolitan areas and that in cities where Office Depot and Staples competed head to head, prices might be expected to rise 5 to 10 percent. The FTC sought a court order to stop Staples from buying Office Depot. In response, the two companies agreed to sell 63 stores to OfficeMax to open competition in certain areas, a proposal that had to be approved by the FTC. They also argued that, with only 5 percent of the office supply market, their merger was not threatening. Unappeased, the FTC argued that office superstores are a market to themselves and that Office Depot and Staples controlled 75 percent of that market. The FTC sued to stop the deal, and in late June 1997 a federal judge granted a preliminary injunction to block the transaction. At this point, Staples and Office Depot abandoned their merger plans, conceding defeat.
Aside from this failed merger, the mid- to late 1990s were noteworthy for Office Depot's steady expansion of its overseas operations. From 1995 to 1998 the company opened stores in Poland, Hungary, and Thailand under licensing agreements, and in Mexico, France, and Japan through joint ventures. In 1998 Office Depot bought out its joint venture partner in France and it did likewise in Japan the following year. Also important to this international push was the August 1998 acquisition of Viking Office Products, Inc. for about $2.7 billion in stock. Based in Torrance, California, Viking was the largest direct-mail marketer of office products in the world. Of Viking's $1.29 billion in 1997 revenues, 60 percent was generated outside the United States. It operated 11 delivery centers in Europe and Australia.
Also in 1998 Office Depot added to its growing channels of distribution with the launch of its first web site, www.officedepot .com, in January. The company's first European e-commerce site, www.viking-direct.co.uk, was launched in the United Kingdom one year later. Also in 1999 Office Depot entered into a partnership with United Parcel Service, Inc. (UPS) in order to begin offering UPS packaging and shipping services at its U.S. stores. That year, revenues surpassed the $10 billion mark for the first time, hitting $10.2 billion, while profits were a record $257.6 million. Office Depot ended the decade with 825 stores in the United States and Canada, and 32 overseas.
Early 2000s: Struggling to Regain Momentum
Despite the record results for 1999, all was not well at Office Depot. As the ill-fated Staples deal unfolded, Office Depot had placed its expansion plans on hold. Then when the deal died, the company scrambled to make up for lost time, opening new stores rather haphazardly--entering new markets, where competitors were already entrenched, with just a couple stores, and making some poor choices in regard to specific store locations. Office Depot was also hurt by heightened competition from warehouse discounters, particularly Costco Wholesale Corporation and Wal-Mart Stores, Inc.'s Sam's Club, who made aggressive moves into some of the most profitable office supplies categories, including computer paper, toner, and ink--forcing price cuts. Sales and profits were negatively affected, and Office Depot began missing some analysts' projections. After second-quarter 2000 earnings dropped 22 percent, the company's board reacted by easing Fuente out of the CEO slot and into the position of nonexecutive chairman. Bruce Nelson was promoted to CEO from his previous position as international president. Nelson had joined Office Depot as the president of Viking Office Products, and earlier in his career had garnered more than two decades of senior management experience at Boise Cascade Office Products.
Nelson spent the next several months making changes to top management and launching a thorough review of the firm's operations to identify underperforming outlets and weak markets. In January 2001 he announced that Office Depot would close 70 of its 888 North American stores, leaving the following markets altogether: Cleveland; Columbus, Ohio; Phoenix; and Boston. Expansion for 2001 was pared back to 50 new stores, with the new outlets being about 20,000 square feet each, about 5,000 square feet smaller than the average existing store. Nelson also aimed to refocus the stores on small and medium-sized businesses by eliminating a great deal of consumer-oriented merchandise, such as DVD players and children's computer software. In all, about 1,800 products were to be cut; these represented about 20 percent of the total number of products but generated only about 2 percent of sales. In connection with this restructuring, Office Depot recorded an after-tax charge of $260.6 million for the fourth quarter of 2000, leaving profits for that year to stand at a much reduced $49.3 million.
Continuing its ongoing overseas expansion, Office Depot in early 2001 acquired Sands & McDougall, an office products firm that was the largest contract stationer in Western Australia. The company also expanded its business services operations into Ireland, the Netherlands, and France that year. In December 2001 Nelson was named to the additional position of chairman, succeeding Fuente, who nevertheless remained on the company board. The Viking direct-mail business expanded into Switzerland, Spain, and Portugal during 2002, and Office Depot's business services division expanded into Italy. Through its Mexican joint-venture partner, Grupo Gigante, S.A. de C.V., the company expanded into Central America that same year, opening stores in Guatemala and Costa Rica.
In early 2003, however, Office Depot elected to exit from the Australian market in order to concentrate its international attention mainly on Europe. It sold its Australian operations to Officeworks, a subsidiary of Coles Myer Ltd. that was the leading office supplies retailer in Australia. It took little time for Office Depot to make a major move that nearly doubled its European operations. In June 2003 the company acquired the France-based Guilbert S.A. from Pinault-Printemps-Redoute S.A. for $945.2 million. Guilbert was one of the largest contract stationers in Europe, with operations in nine European countries and 2002 revenues of $1.6 billion. The acquisition of Guilbert, based in Senlis (outside Paris), not only accelerated Office Depot's penetration of the market for large business customers in Europe, it also gave the company the number one position among the continent's office supply firms. Office Depot subsequently, in April 2004, gained its first wholly owned operations in Eastern Europe by acquiring its licensee in Hungary, which had been operating three Office Depot stores in that nation. The company planned to use its Hungarian subsidiary as a base for expansion into the ten countries in the region that had recently joined the European Union.
After nearly four years of declines in quarterly same-stores sales (sales at stores that have been open for more than one year), Office Depot appeared to have turned the corner during the first half of 2004 when it posted two consecutive quarters of 3 percent increases in same-store sales. The company was also busy with a number of new initiatives. In February it rolled out its first-ever customer loyalty program, Office Depot Advantage, which rewarded customers who spend as little as $200 in a three-month period with a gift certificate good for future purchases. To help ramp up expansion efforts, the company agreed to buy 124 former Kids "R" Us stores from Toys "R" Us, Inc. for $197 million in cash. The deal was later reduced to 109 stores, and Office Depot planned to resell or sublet about half of the total, but 45 to 50 of the stores were to be converted to the Office Depot format. Many of the acquired stores were in the Northeast, and the company announced an aggressive expansion into that region, a stronghold for its two main rivals, Staples--now the number one U.S. operator of office supplies superstores--and OfficeMax. Overall, in an attempt to close the gap with Staples, which had 1,400 stores, the 900-unit-strong Office Depot aimed to open 80 new stores in 2004 and then 100 new stores in each of the following three years. The new stores were to feature a new store format called Millennium 2. Nelson told the Palm Beach (Fla.) Post: "We worked to create a store that was easier to shop, less expensive to open and more efficient to operate. This serves as our foundation to enter a new era." The format emphasized grouping product categories together in the way customers use them and also featured increased cross-merchandising. Also significant was that the stores began showcasing a new line of fashion-forward furniture created by Emmy Award-winning designer Christopher Lowell.
Principal Subsidiaries: Eastman Office Supplies, Inc.; Guilbert SAS (France); OD International, Inc.; The Office Club, Inc.; Office Depot of Texas, L.P.; Office Depot International (UK) Limited; Viking Office Products, Inc.; Office Depot International BV (Netherlands).
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