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OfficeMax provides office goods and services to small and medium-size businesses, home office customers, and individual consumers. The company has almost 1,000 superstores and delivery centers in the United States, on the Internet at OfficeMax.com, via direct mail catalogs, and through a nationwide commercial sales force.
OfficeMax, Inc. is the third-largest office supply chain in the United States. The company operates nearly 1,000 high-volume, deep-discount "superstores" in 49 states, Puerto Rico, and the US Virgin Islands. In addition to office products, OfficeMax stores also feature CopyMax modules (offering print-for-pay services) and FurnitureMax facilities, which offer office furniture. The company also maintains an e-commerce business (officemax.com), which carries over 20,000 items. Through joint ventures, OfficeMax operates stores in Mexico and Brazil.
OfficeMax started in 1988 as a simple idea. In little more than five years the company bolted to the forefront of the American business supplies industry, posting more than $2 billion in annual sales by 1995 and generating sound profits by 1993. The company achieved that stunning success despite intense competition and an economic recession that began in the late 1980s and lingered throughout the early 1990s. The company's savvy marketing, distribution, management, and financial systems and strategies became models for other superstore retailers in the 1990s.
1988: Humble Beginnings
The OfficeMax concept was hatched by entrepreneurs Michael Feuer and Robert Hurwitz. Feuer, who became the driving force behind the chain's growth, had been nurturing the idea during more than 17 years of service with Fabri-Centers of America, a 600-store retailer in Cleveland. By his early 40s, Feuer had risen to the executive ranks. Still, he was frustrated by his inability to run the company as he believed it should be operated. "At age 42 I was bored and, like many executives, I also suffered from the Frank Sinatra syndrome—I wanted to do it my way," Feuer recalled in September 1993. "I had always claimed that if we could just cut through all the nonsense—for example, the 20 to 25 percent of time most executives spend on CYB (covering your butt)—and do it my way, we could make millions," Feuer observed.
Feuer finally jumped ship and, despite other excellent corporate job offers, decided to start his own enterprise. He and Hurwitz decided that they didn't want to fund the start-up with bank debt or venture capital because they didn't want to forfeit control of the operation. So they scrambled to raise capital from friends and family. They eventually found 50 investors, including several doctors and lawyers, who were willing to contribute a total of $3 million. The sum was paltry compared to other retail start-up businesses at the time, but the pair thought that they could parlay the cash into a winning enterprise.
Feuer and Hurwitz launched their enterprise on April Fool's Day in 1988. On that day, they laid out on a sheet of paper their concept for a new type of office products store. Their goal was to create a large business supplies discount store that was an exciting place to shop, and offered professional and friendly service, as well as prices between 10 and 30 percent less than those found in more traditional office supply retailer shops. The main goal was to bypass all of the middlemen, such as wholesalers and distributors. Achieving that goal, they reasoned, would allow them to effectively replace mom-and-pop office supply stores, much as supermarkets had replaced small grocers years earlier.
OfficeMax was fighting an uphill battle from the start. In May, an office supplies industry trade paper published a list of 15 start-up companies that were trying to crack into the business; OfficeMax was 14th on the list by asset size. The start-up team knew that it had to keep expenditures at an absolute minimum to compete. So Feuer and Hurwitz rented office space in a 500-square-foot brick warehouse that had barely any heat or air-conditioning. The space was equipped with a few pieces of cheap office furniture, a coffee machine, and a copier (the copier and coffee machine couldn't be operated at the same time, however, because the fuse would blow). They decided not to invest in a fax machine until it became absolutely necessary.
OfficeMax started out with a skeletal staff of seven people, not including the founders. Their requirements for potential employees were simple: they had to be hard workers with open minds, big hearts, and plenty of enthusiasm. They also had to be willing to work for very little money. Feuer and Hurwitz attracted the workers by promising them part ownership in the company if they stuck with it, and by offering them the chance to go farther, faster, and to have more fun than they had ever had in any other job. From the beginning, Feuer made it clear that OfficeMax would be operated differently from the bureaucracies from which most of the team members had come. There would be no secrets, criticism and praise would be swift and frank, and everyone would cooperate as a team.
Thus, OfficeMax was up-and-running without a single store or any other operation that could bring in any money. The founders hoped that they would be able to get manufacturers to fund their inventory, but they soon found that few big companies were eager to do business with a meager upstart. To overcome such hurdles, the team got together every morning and created a game plan for the day on a blackboard. They flew by the seat of their pants and used every trick they could conjure to get what they needed. Importantly, the company was able to get an unsecured line of credit from a local Cleveland bank. The bank granted the line of credit under one condition: that the founders agree never to use it.
Feuer and Hurwitz were able to take their "line of credit" to big suppliers like Xerox and convince them to fund their inventory on credit, sometimes for a full year or more. Indeed, the OfficeMax team learned early that the only way to get the cooperation of potential suppliers was to act as though OfficeMax was much bigger than it really was. They dealt with suppliers as though OfficeMax was a soon-to-be major chain with 20, 50, or even 300 stores going up in the near future, suggesting that if those suppliers wanted to secure a place with OfficeMax tomorrow, they would have to cooperate today. To the founders' surprise, most companies played along. Those that didn't often regretted it, as OfficeMax quickly became the leading customer for many major office equipment and supplies manufacturers.
1988–90: Going from One Store to Thirty in Two Years
Incredibly, OfficeMax opened its first store just 90 days after the founders had created their business blueprint on April Fool's Day. Observers were surprised that the team had managed to find space, hire and train a store staff, and hone a store concept in just three months. But to them it was a simple matter of survival; they had to start generating cash flow so that they could pay their bills. The first OfficeMax was opened on July 5, 1988, at the Golden Gate Shopping Center in the Cleveland area. The only advertising for the grand opening was a newspaper ad two days prior to the store's opening. Nevertheless, the store had sales of $6,400 on its first day.
After only six months in operation, the store was breaking even (before corporate overhead). That feat was accomplished partly as a result of the grueling hours put in by the team. Feuer, for instance, worked at the corporate office from 7:00 a.m. to 7:00 p.m. He would then race home, shower, put on casual clothes, and drive out to the store to observe the customers and employees. When a customer left the store without purchasing anything, Feuer was known to chase him down in the parking lot and ask him if OfficeMax had failed in any way. That type of thinking was later reflected in OfficeMax's intensive customer-satisfaction orientation. For example, the company began requiring that all customer complaints be resolved to the customer's satisfaction within 24 hours.
Enthused by the quick success of the first store, Feuer and Hurwitz hurried back to the original investment group and raised additional capital for expansion. They dumped the cash into an aggressive growth program that, amazingly, had OfficeMax operating 13 stores in Ohio and Michigan less than 12 months after opening the first outlet. Sales had climbed to an impressive rate of $13 million annually and, more important, the stores were operating at a profit. The success was so quick that it worried Feuer, who was convinced that the company's accounting system was messed up and that OfficeMax could easily be teetering on the edge of bankruptcy.
Shortly before OfficeMax had fired up its first store, a similar office superstore venture called Office World had started in Chicago. The business was funded heavily by retailer Montgomery Ward, but despite hefty financial backing, the effort had lost $10 million in the span of a few years. Thus, when Montgomery Ward approached OfficeMax about the possibility of a merger between OfficeMax and Office World, Feuer and Hurwitz were hesitant. They eventually warmed up to the idea, however, and the resulting agreement brought seven new stores to their chain, as well as the resources of several deep-pocketed venture capital firms. OfficeMax, for its part, only had to give up two of the ten seats on its board.
By the summer of 1990, following the Office World merger, OfficeMax was operating a total of 30 stores. After once again going back to its investment group, the company was banking an impressive $33 million in cash. The cost-conscious founders finally decided that it was time to move into a better headquarters facility, one that featured separate men's and women's bathrooms, for example. The rest of the money was put to use funding an aggressive expansion plan that would, the company hoped, add 20 more stores to the chain within a year. Despite healthy gains and a bright future, however, a development in 1990 threatened to quash OfficeMax and its competitors.
Feuer and Hurwitz had perceived the threat years earlier. Finally, their fears were realized when mass discount merchant Kmart announced plans to roll out an office supplies superstore dubbed Office Square. OfficeMax executives realized that the new venture, backed by Kmart's massive bank account and retailing savvy, could literally crush start-ups like OfficeMax. Feuer and Hurwitz, refusing to ignore the threat, began trying to initiate talks with Kmart. The talks initially centered on an outright purchase of OfficeMax by Kmart. But Feuer and Hurwitz were hesitant to give up control of their company. The two companies finally agreed to a plan whereby Kmart invested $40 million in OfficeMax in return for a 22 percent ownership share.
Early 1990s: Life with Kmart
Fortunately for the founders, Kmart turned out to be OfficeMax's greatest ally, rather than its worst enemy. Feuer and Hurwitz were allowed to maintain total control of the company, and Kmart smartly became a silent financial partner. With its new bankroll, OfficeMax intensified its expansion efforts and quickly met the goals that it had set with Kmart executives. Both companies were so pleased with the arrangement that Kmart decided to up the ante in 1991. It purchased 92 percent of the outstanding shares from the original investors and became the owner of OfficeMax. The net result was that OfficeMax was sitting on a mountain of cash and had virtually no long-term debt. Furthermore, Feuer and Hurwitz were still firmly in control of the company.
The deal couldn't have been sweeter for OfficeMax, which was suddenly positioned to launch a bid to dominate the national business supplies superstore segment. That's exactly what the company did. During the next 18 months the company began opening new OfficeMax outlets at a feverish pitch. More importantly, the company purchased the 46-store Office Warehouse chain and the 105-outlet Bizmart chain, and eventually integrated those stores into the OfficeMax organization. As a result of store additions and acquisitions, OfficeMax was operating 328 stores in 38 states, coast-to-coast, by the end of 1993. Sales for that year climbed to $1.41 billion, from just $245 million in 1991, while net income increased to $1.08 billion (OfficeMax's first positive annual net income).
Although cash was a major ingredient in the company's recipe for growth, its shrewd operating strategy was just as important for success. Indeed, throughout its expansion, OfficeMax maintained its customer focus. It also adapted the format of its stores to capitalize on the huge growth in the small and home-based business markets, which became the dominant industry trend during the early 1990s. In addition, OfficeMax managed to implement cutting-edge information and distribution systems that allowed the top mega-discounters like Kmart and Walmart to thrive. By the mid-1990s, OfficeMax was efficiently operating nearly 400 stores and several distribution centers, and stocking more than 6,000 brand name office products, business machines, computers and related electronic devices, software, and other goods.
With Kmart's financial backing and the OfficeMax team's successful operating strategy, the company sustained its blistering growth rate in 1994. By the end of the year, the company was operating 388 stores in 40 states and Puerto Rico. Importantly, the end of 1994 marked a huge change for the company. Late in that year, its well-heeled parent, Kmart, sold out. Kmart's investors had been pressuring Kmart to sell off its side interests and refocus its resources on the hyper-competitive general merchandise discount industry. Kmart's directors stooped to the pressure and decided to bail out of the OfficeMax venture. OfficeMax completed the largest initial public offering in the history of the retail chain industry when it sold 35.7 million shares at a price of $19 per share, bringing in the $678 million that allowed Kmart to reduce its ownership interest. A subsequent offering in July 1995 entirely eliminated Kmart's ownership share.
Mid-1990s: Going Public Without Kmart
Thus, after growing by leaps and bounds with the help of Kmart, OfficeMax was suddenly on its own again as a publicly held enterprise. For 1994, OfficeMax posted $1.81 billion in sales, $30.4 million of which was netted as income. As Hurwitz had removed himself from day-to-day operations at OfficeMax following the stock sale, Feuer stepped up expansion plans in 1995, hoping to boost OfficeMax's 11 percent share of the U.S. office supplies superstore market. By 1995, OfficeMax became the second largest business superstore in the nation (behind Office Depot), and was gunning for the number one slot.
Meanwhile OfficeMax launched related ventures beginning in 1994, including FurnitureMax, a chain of discount office furniture stores, and CopyMax, a chain of copy-service centers. Both of the new store concepts were designed to be connected to existing OfficeMax stores and to serve as add-on profit centers. In 1995, the company debuted its TriMax stores, which consisted of an OfficeMax superstore flanked by a FurnitureMax and a CopyMax. The company also initiated a computer service called OfficeMax Online, (which later became OfficeMax.com), that was designed to enable customers to purchase OfficeMax products online from their home or office computers.
A period of tremendous expansion for OfficeMax began in 1996. In its annual shareholder's meeting, the company announced a major expansion into Southern California—an area where its rivals, Office Depot and Staples, were already well established. Additionally, the company made its first international foray by opening a superstore in Mexico City with its venture partner Grupo Oprimax. This store was followed by more store openings in Mexico, and the company's success in that country was phenomenal. CEO Feuer told Discount Merchandiser in 1998, "We went in with very modest expectations, but they have been more fully realized than anticipated, The volume in Mexican stores is equal or better than in the US." The company also began testing a smaller format store called Office PDQ, aimed at urban markets, and formed a joint venture with Jusco Co., Ltd., to open OfficeMax stores in Japan.
During 1997, Staples and Office Depot attempted a merger that was ultimately blocked by the FTC. While its two main competitors were focused on merger plans and court battles, OfficeMax took the opportunity to expand even further, opening a total of 150 stores in 1997 alone. This growth earned them—for a time—the long-coveted number one position in the market. Despite the large number of openings, the company still suffered a gap in sales numbers. Even though it had the greatest number of stores, the company's sales volume fell below $4 billion in 1997—as compared with Office Depot's $6.7 billion and Staples' $5.2 billion. Feuer attributed the gap to the company's relative youth in the market. He planned to make up the numbers in part by focusing on the copy center portion of the business, which had a very high profit margin. In 1998, the company turned its focus to increasing the productivity of its store base, primarily by reducing its inventory of computers—an area that had been disastrous in terms of profitability.
By 2000, the company had eliminated computers completely, instead forming a partnership with Gateway. Under their agreement, Gateway would install Gateway stores inside OfficeMax superstores. The Gateway operations would be staffed by Gateway employees. Gateway also invested $50 million in OfficeMax. However, the deal was scrapped in 2001, with Hewlett Packard replacing the flagging Gateway as OfficeMax's computer supplier.
The year 2000 was challenging for OfficeMax. The company's profits continued to fail to keep pace with its expansion, and the company underwent a major restructuring—which Feurer called "deliberate suffering." It installed a new integrated computer system and revamped its distribution system, a move that it hoped would ultimately save the company several million dollars a year. It also changed its purchasing policies to be more in line with what its customers actually bought, rather than what vendors provided incentives for it to sell. These measures helped, but in 2001, the company was faced with the decision to close stores. In January of that year, the company announced plans to close 50 stores—resulting in the loss of 1,200 jobs—and take a one-time after-tax charge of $69 million. Despite these troubles, Feuer remained optimistic, telling Futures World News in May 2001 that he expected the company's growth rate to accelerate in the third quarter of 2001-02.
Principal Operating Units:FurnitureMax; CopyMax; OfficeMax.com.
Principal Competitors:Buhrmann; Office Depot; Staples.
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