Can Office Depot Clip Staples?


By William C. Symonds The North American office-supply superstore wars are heating up. On June 30, Office Depot (ODP) announced that it's embarking on what CEO Bruce Nelson called "one of the most ambitious expansion plans in company history," including its first major invasion of the Northeast, a territory long-dominated by archrival Staples (SPLS). At the same time, Office Depot unveiled a new store design -- known as Millennium2 or M2 -- aimed at making its stores both more inviting and more profitable.

"This is one of our most important initiatives in the last seven to eight years," says Nelson, "and we're going to use it as a springboard" to accelerate growth.

The offensive is long overdue. Under CEO Ron Sargent, market leader Staples has been pulling away from its Florida-based competitor. Comparable-store sales (sales for stores open at least one year) surged 5% at Staples during 2004's first quarter, following a 4% increase for all of 2003. In sharp contrast, North American comp-store sales slumped 4% at Office Depot last year. Even worse, fiscal 2003 operating profits in its North American retail division plunged by over $100 million, or 25%, even as they rose by more than $100 million, or 27%, at Staples' North American retail division.

WALL STREET WINNER. True, signs are emerging that Nelson is beginning to turn things around. Comp-store sales rose 3% in this year's first quarter. But that was just the first time in four years that Office Depot had reported a positive gain in this key measure of retail vitality. Office Depot is nearly as big as Staples in the overall office-supply market (which includes delivery of office supplies, in addition to superstores), with fiscal 2003 sales of $12.4 billion, vs. $13.2 billion for Staples. But Staples is the clear winner on Wall Street, sporting a market value of around $14.4 billion -- well over twice Offic Depot's $5.6 billion.

So, Nelson is launching a two-prong offensive to catch up. He figures that on a net basis (counting stores that were closed), Office Depot has been standing still, adding only 12 stores since 2000. Today, Office Depot has about 900 superstores in North America, vs. 1,400 for Staples and a little over 900 for OfficeMax, which was acquired by Boise Cascade (BCC) last December. The CEO now plans to open an average of 100 new stores in each of the next three years, starting with 80 to 90 this year. Eventually, he figures this could vault Office Depot into second place in store count in North America.

But many of these new stores will be opening in enemy territory -- the Northeastern U.S., long dominated by Staples, which is based in the Boston suburb of Framingham. That means Office Depot will have to fight hard to win market share. Traditionally, the office-superstore giants have balkanized the U.S. market. Office Depot is strong in the Southeast, Southwest, and Northwest, while Staples is big in the Northeast and West. Office Max has been especially entrenched in the Midwest.

DOWNSIZED STORES. Until now, Office Depot has had only a scattered presence north of Baltimore and virtually none in Massachusetts. But in March, Nelson finally found a way to break into the densely crowded Northeast by striking a deal to buy 124 former Kids "R" Us stores from Toys 'R' Us (TOY). Ultimately, he hopes to convert up to half these stores -- some of them in the Northeast -- to Office Depots.

And over time, Nelson vows that "50% to 60%" of his new stores will be in the Northeast. Staples, however, already has nearly 400 stores in the region and has been aggressively expanding there. "Office products are a convenience purchase, so developing a complete network of stores is awfully important," warns Staples Executive Vice-President John Mahoney.

Nelson is counting on his new M2 format to lure customers. These stores will be far smaller than traditional Office Depots, averaging 17,500 square feet, vs. 27,000 under the old format. "And they'll be a lot more shoppable," promises Nelson, with better signage and a more intuitive system for arranging merchandise, so customers will have an easier time finding things.

FAMILIAR STRATEGIES. And while it has often been hard to tell the office superstores apart, "there will be no confusion" with M2, claims Nelson, thanks to a color scheme that moves away from red, white, and black in favor of pastel colors like lime green, purple, and yellow.

Maybe. But M2 sounds awfully similar to the "Dover" new-store format Staples first rolled out three years ago. Dover stores are about the same size as M2s and are also better-organized and easier to run than the old-fashioned warehouse-style superstores. Last fall, Staples -- long known for its trademark bright-red color -- even introduced an updated color palate, including greens and oranges. And thanks to its big head start, it already has 400 Dover stores, plus 450 more stores that have been remodeled to incorporate some of its key elements.

The upshot is that Office Depot faces an tough fight. In the office-superstore wars, imitation has become a familiar strategy. As soon as one of the giants makes a move -- like promising computer inkjet catridges will be in stock -- competitors rush to follow. In this environment, execution -- how well a store actually serves the core small-business market -- may be the most important differentiator. Unless Office Depot can win that battle, it may continue to lag behind Staples. Symonds is BusinessWeek's Boston bureau manager


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