Tuesday, January 20, 2015

The Enduring Mystery of Office Depot

There is an Office Depot store near my condo in River North. It is a very large store with a big parking lot. Since I am interested in business and like to ask theoretical questions I recently stopped by to research something that has been bothering me...
How does Office Depot stay in business?
When I was part of a start up business over twenty years ago the first store we went to when it was time to kit out our office was Office Depot. I can still remember practically bounding in and buying up chairs, office supplies, paper, printers, monitors, and everything else we needed.

Today, however, retail is a very difficult business. The high end retail items like Apple laptops aren't sold there; it is a mix of cheap and downscale laptops and inkjet printers. There are tablets, too, although many of them by makers you haven't heard of.

They used to have a giant wall of software. Today, however, software is mostly downloaded and not sold through retailers, and much of it is by subscription. Who goes to the store anymore to buy software? What do you do with the disc? Apple even stopped having a drive on their new Mac Book Air a few years ago and few people missed it. I went "old school" and bought a Mac Book Pro because I thought I might need one and I've used it about 3 times over the last 4 years.

What's left is mostly disposable. Want a phone system for your office? It is $100 for multiple handsets and a base set. Want a calculator? It is a few bucks. Now we are down to furniture and random office supplies. How can a giant store like that survive on margins from office supplies?

Ink for printers was a source of margins for a while and they still have a whole aisle; with modern internet delivery I'd bet that their margins have eroded significantly. If you want to take a chance on jamming your inkjet you can get refilled cartridges for almost nothing.

I'd say that Office "Depot" is an appropriate name for this retailer; it's where you go for low-end equipment and furniture for the parts of your office that aren't worth the Apple and the Herman Miller design touch.

Looking at their financials out on the web, Office Depot and Office Max recently merged and they are starting a plan to reduce their store overlap and gain synergies. Their margins are very low, as expected, and they are investing little in terms of capital into their franchise (which makes sense because they are collectively overbuilt).

Perhaps they have some sort of e-commerce distribution plan up their sleeve; the store is certainly giant and could house a lot of low margin office supplies for your downscale needs. I don't know if I'd put that in River North, however, where the rents are high; would probably be better off in a lower rent section of town.


Dan from Madison said...

The only thing they have is real estate - and I don't know how much they own or rent. If they own, they could do like Sears was thinking about (or did?) and spin off the RE holdings into a REIT to raise cash. Outside of that, dead business plan for sure.

Gerry from Valpo said...

My last career contract assignment was initially for six months working at OfficeMax HQ in Naperville about three years ago. They paid me my top rate too. They even extended my contract by a few months while one designer went on maternity leave. Man did I make a pile on that one.

What I learned there (briefly) was they have huge contracts supplying government, government vendor and Fortune 500 private corporate entities with everything from office furniture to filing cabinets to printers to pencils, paper, liquid paper and right on down to paper clips. They still published phone book sized paper catalogs sent to these customers who were allowed to order office supply items carte blanche due to discounts agreed upon in the negotiated contracts. They also had account specific online catalogs for each client account. This is where OfficeMax made their big nut, the retail not so much. Hard to believe this but most offices still ran on paper documents being filed in filing cabinets back then but I am sure that is being scaled back these days.

Max merged with Despot and I have no clue how they keep that big retail footprint going now.

Carl from Chicago said...

ha ha selling to the government will keep anyone afloat thanks that is great insight

Lewis said...

A very interesting article. The insights are really helpful and informative. Thanks for posting.

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