Office Depot Inc CEO Gerry Smith and his new senior management team delivered a high-calibre series of presentations at the company’s analyst day in New York last Wednesday. OPI takes a closer look…
After ringing the closing bell on the NASDAQ on Tuesday, Smith and his team spent most of the following morning going through Depot’s strategic plan – and the progress made so far – to transform the company into an omnichannel business services platform.
The analyst day’s tagline was ‘Depot. Different!’. This was not only to highlight the new, differentiating strategy, but also to – once again – try and change the perception that investors and (potential) customers have of Office Depot as being predominantly a consumer-focused retailer, whereas, in fact, 60% of sales are derived from B2B.
Apart from Smith, those who took to the stage were Jerri DeVard (customer and marketing), Janet Schijns (merchandising and services), Steve Calkins (BSD), Dan Stone (CompuCom), Kevin Moffitt (retail) and Joe Lower (finance). Only Calkins and Moffitt remain from the ‘old’ Depot as Smith has revamped his leadership team and aimed to instil a new, more dynamic corporate culture at Office Depot.
The enthusiasm and energy levels of the presenters was high, and as analyst Dan Binder put it in a note to clients: “[Office Depot] hosted a high-energy meeting in New York City where it outlined its vision as a company in transformation from a sleepy declining office products business, hindered by a lack of strategic focus, old processes, management deficiencies and underinvestment, to an energised, B2B services-focused, omnichannel reseller ready to leverage existing assets and relationships to penetrate the SMB market.”
Binder called Depot’s strategy “intriguing”, but added the caveat that execution of the plan now needs to follow. Indeed, that was a sentiment echoed on several occasions during the conference by Smith himself, who said that it was all very well presenting the plan in front of a group of analysts, but that the talk had to be backed up by results. That didn’t really happen in the first quarter, but it’s early days and there were still a few signs from the Q1 results that Depot is moving in the right direction. For example, online traffic in the quarter was up 9% and there was a 16% increase in business customers.
One could question the $1 billion paid for CompuCom, but Depot does have a clear, strategic roadmap on how it intends to develop a combined products/services offering for business customers, both SMBs and larger accounts, although the mid-market would appear to offer the most potential.
Only time will tell if Depot’s approach is successful, but it is certainly not a ‘more-of-the-same’ strategy, and the management team has been revitalised.
Here are our key takeaways from the day’s presentations:
Gerry Smith – CEO comments
Smith admitted that 12 months ago, Office Depot’s strategy was based on synergies arising from the acquisition of OfficeMax, and that this was not sustainable. There was no strategic focus and something had to be done.
The CEO talked a lot about Depot’s assets and their potential. These include: 28.6 million annual active customers; +18 million loyalty customers who spend on average twice the amount of those who are non-loyalty; 200,000 enterprise accounts; more than 50% of US school districts as clients; 5.9 million SMBs located within three miles of an Office Depot store; ability to provide next-day delivery to 98.5% of the US population.
With the move to business services, Depot says it is now playing in a $225 billion addressable market. Interestingly, more than 50% of that is still from office and technology products (including furniture) which are estimated to be worth $116 billion. “We are not abandoning products,” stressed Smith.
12 months ago, just 1.5% of the products that Office Depot sold were new products. “That is not acceptable,” said Smith.
Smith said that Depot is “maniacally focused on costs” and that the winners in the marketplace would be those with a low-cost operating model. Smith is using his experience from the tech industry – “where every penny counts” – to try and make Depot more efficient.
Jerri DeVard – Marketing
DeVard has dragged Office Depot’s marketing into the 21st century, ramping up investments in digital, cutting the budget in paper inserts by 77%, making better use of data and focusing on Depot’s core business and omnichannel customers.
There are already some tangible results from these changes: between Q1-Q3 2017, the return on marketing investment (ROMI) was $2.78; in Q4 2017, ROMI rose 12% to $3.11.
Depot has been doing some interesting work defining its key prospective customers and has pigeon-holed these into three groups: Digital Pragmatists, High-Touch Quality Seekers and Premium Pioneers. The last of these are the highest spenders, spending an average per year of $2,200 on supplies and $1,300 on services.
Providing business services will be the key to going after all three of these customer segments, and to simplify its services offering, Depot introduced the Workonomy brand during the conference. This new umbrella brand will cover all Office Depot’s in-store services that previously ran under the Tech-Zone, Copy & Print and BizBox names, as well as new services that it will roll out.
Workonomy comes just a few months after Depot introduced BizBox in its Austin, Texas, pilot market. The ditching of the BizBox name so soon afterwards was made after customer research showed the services branding to be confusing, and it underlines Depot’s ability to react swiftly as part of a new ‘test and learn’ mantra.
Janet Schijns – Merchandising & Services
Schijn’s strategy is based around eight points that, together, are intended to create an integrated products and services offering for business customers.
Core office supplies are still “very important” to Office Depot, but it is doubling down on investments in the furniture, technology and cleaning & breakroom categories. As a result, it has rationalised its office essentials assortment by 30% to cut down on unproductive SKUs (ie, products that customers didn’t want).
At the same time, Depot has changed its product sourcing strategy and says it wants more intimate relationships with fewer suppliers. It has severed relationships with around 150 medium and smaller vendors that it says didn’t bring sufficient value, and improved cost and payment terms with a further 200 vendors.
Private brands account for around 30% of Office Depot’s product sales and offer opportunities for higher margins and product innovation, for example with a range of new, patented private label sit-stand desks. Expansion of the TUL brand has led to its sales increasing by 50% year on year, while the WorkPro furniture brand and SeeJaneWork desk accessories brand have also seen good growth.
The new subscription service for ink and toner already has more than 250,000 subscribers. Another subscription-based service in the educational category is being developed: this will be a $25-$30 dollar-per-month subscription based on STEAM (science, technology, engineering, art and mathematics) products and activities.
Office Depot will shortly be testing a co-working concept in the Silicon Valley market. Other services include or will include: device managed services, cyber security, cell-phone repair, business and health insurance, voice services, business coaching, and tax services.
Depot is engaging with channel partners such as Microcorp and Telarus that will add indirect sales people. It is also looking to develop non-competitive retail partnerships, online marketplaces and wholesaling routes to market.
Steve Calkins – Business Solutions Division (BSD)
It was a bit of an eye-opener when Calkins said near the start of his presentation that this is the first time that Depot has put the customer first since he joined the company – he’s worked at Depot since 2003!
BSD has segmented its customers into five groups: two SMB groups, one with annual spend of $0-$10,000 and the other $10,000-$75,000; Emerging (essentially the mid-market) with annual spend of $75,000-$1 million; Strategic (+$1 million); and Public Sector.
An important go-to-market change is the inside sales support that is now being provided to the Emerging, Strategic and Public accounts – segments where field sales are the primary touch point. This is being done to have more regular contact with customers beyond the sales rep visit. The Austin (TX) call centre now has almost 500 staff.
Calkins provided a case study of a cooperative customer in the hospitality vertical with which Depot is able to serve approximately 10,000 ship-to-locations with next-day delivery. “Not many supply chains can do what we do,” he stated. This account is projected to grow by almost 25% this year to $47 million largely due to adjacent categories.
Adjacencies (mainly cleaning & breakroom, copy & print, furniture and technology) represent 36% of BSD’s total product sales, up 350 basis points from last year. Cleaning & breakroom is expected to be up in the double digits this year, backed by a national stocking model called ‘ready to ship’.
Calkins said that there are “hundreds” of cross-selling opportunities between BSD and CompuCom and that there were several large wins awarded in the first quarter.
He pointed to the 1% growth achieved by BSD in Q1, the first positive year-on-year quarter since the OfficeMax acquisition, although – like Smith on the Q1 earnings call – he didn’t provide an organic growth figure. Excluding dealer acquisitions, BSD isn’t yet in positive sales growth territory.
Dan Stone – CompuCom
Today, including CompuCom, services represent around 14% of Office Depot’s total sales. The goal is to increase that to 20% by 2020.
Stone provided some insight into what CompuCom actually does and the rationale for its acquisition by Office Depot – the customer-rich and services-rich combination that has been covered before.
Traditionally, CompuCom works with enterprise-level customers and has struggled in the SMB space. That’s where the potential with Office Depot comes in and Stone said SMB was “a huge opportunity”.
Some examples of SMB services include device managed services, a $15 per month offering that Stone said couldn’t have been done without the support of Office Depot, and IT as a service for SMBs that have more than 20 employees.
He provided several examples of new business wins in the SMB, mid-market and education segments that highlighted CompuCom and Office Depot teams working together.
Commenting on these cross-selling opportunities in a client note, analyst Dan Binder said: “Cross-selling is a term we have heard many times and often times it doesn’t live up to expectations because of a lack of salesperson expertise selling non-core products/services or collaboration issues between salespeople with different expertise.
“Account ownership, communication, and compensation structures have also been at the root of cross-selling failures. Based on our conversations with management, we don’t think it has necessarily solved all the potential problems, but it does sound like compensation structures have been addressed and often times the best way to drive behaviour is through someone’s wallet, so time will tell.”
Kevin Moffitt – Retail
Depot has said it’s not abandoning products, and similarly it has committed to the retail channel as well. It has almost 1,400 stores and this number is not expected to change significantly in the near future.
Moffitt grew up in a small business retail environment, his parents being successful local retail entrepreneurs. He wants to take this community approach and scale it nationally across Office Depot’s retail footprint. He is looking at improving traffic trends through localised demand generation, community outreach and special networking events.
He said that the integration strategy with the OfficeMax stores – when more than 500 stores closed and more than $1.5 billion was wiped off the top line – had worked for a time while there was still a lot of store overlap and sales transfer to another store of almost 30%. However, he said that to continue in that direction – with operating profit and comparable sales both declining in the past two years – would have been a “going-out-of-business strategy”.
Inherent problems include declining store traffic, less than two-thirds of visitors making a purchase and 45% of purchasers buying just one item. If any one of these metrics increased by 1%, that would add $50 million in annual sales.
There are moves to empower store managers and to encourage the sharing of best practices within the network. Remuneration of in-store staff has also been changed to incentivise them to sell more services – as a result, tech services attachment rates have grown from 19% to 31%. It will be important here to provide services that customers really want and need – there has been a tendency in the past at Depot and other retailers to force expensive and not always necessary plans on unsuspecting consumers.
$20 million in labour savings will be re-invested in the sales and services drive to improve conversion and average order size.
Results in the Austin market, where Office Depot is testing its ‘store of the future’ concept, were said to be “very positive”, but no specifics were given. Whatever the outcome, Depot doesn’t have the resources to replicate this initiative in many other places. Store improvements will happen, but will have to be made within the CapEx budget.
Downsizing stores will also be a challenge, but there will be ongoing lease opportunities in a renter’s market that will help to address this issue. The co-working initiative, if successful, may also provide an opportunity to better use excess floor space in stores.