Big Office Supply Retailers Try to Build a Smaller Box

By Claudia H. Deutsch
New York Times
August 12, 2004

In the arena of big-box office supply retailers, the race for the small-business customer is on, and heating up.

The signs are easy to spot. Over the last few years Staples, Office Depot and OfficeMax, the three gorillas of office supply retailers, have all spurned warehouse-style stores in favor of smaller outlets with wider aisles and better sight lines. All three have catalogs and Internet sites; have expanded their lines of electronic products and furniture; and now offer copy centers and shipping services.

It’s not that they have abandoned consumers - indeed, all three still offer back-to-school sales, and both Staples and Office Depot are opening stores within supermarkets. But it is the business buyer’s siren song that they hear the loudest. And small wonder: Staples found in 2001 that business customers accounted for just 70 percent of sales, but 90 percent of profits.

And now the three big-box retailers are desperately trying - with varying degrees of success - to differentiate themselves in that business buyer’s mind. The examples include:

- Staples now sells a stapler that allows users to fasten a big stack of papers with one finger, and will soon offer a combination lock that uses words, not numbers. “We want our brand to stand for ease and innovation,” said Ronald L. Sargent, the chief executive of Staples.

- Office Depot is rolling out a store format that features signs that explain how products differ, that groups supplies by function - papers next to pens and printers, rather than in stand-alone displays - and that relies heavily on pastel colors. “Sixty percent of our customers are women, and these stores are designed to appeal to them,” said Bruce Nelson, Office Depot’s chief executive - noting that many of those women are shopping in their roles as entrepreneurs or employees.

- OfficeMax will soon add more sales representatives to call on businesses and negotiate contracts for office supplies. “Very little of our business is the casual customer, and our strength is relationship management,’’ said George J. Harad, chairman of Boise Cascade, which bought OfficeMax last year.

Each has a different approach to house brands, too. Staples, which recently invited inventors to submit ideas for new products, is putting its name on items that cannot be purchased elsewhere. OfficeMax, which is a major outlet for Boise Cascade’s uncoated cut paper, will continue to sell that under the MaxBrite name. Office Depot is focused on being the exclusive distributor for known designer brands, like its line of Christopher Lowell office furniture.

Still, analysts say that the similarities outweigh the differences. “There are some differences on the margin, but basically they are interchangeable,’’ said Michael Baker, an analyst at Deutsche Bank. That would not matter so much if the three big-box retailers stayed in their geographic areas - Staples in the Northeast, OfficeMax in the Midwest and Texas, Office Depot in the Southeast and California. But over the next few years Staples plans to open 100 stores a year in North America and 20 stores a year in Europe, many of them in areas that already have a rival’s store. “I don’t think Wal-Mart worries if Target or Kmart are already in an area,’’ Mr. Sargent said.

Office Depot seems equally confident in the face of competition. It recently bought Kids “R’’ Us, which has many stores in Staples’ territory, and is converting most of them to office supply stores. All told, Office Depot, which has gained only 12 stores since 2000, plans to open 80 new stores in the next five months, and 100 a year after that. “Staples is good at what they do, but we think customers want a choice,’’ Mr. Nelson said.

For now OfficeMax, which is in the process of shedding Boise Cascade’s name and paper-making assets, is relatively dormant. But, in a few months, it will be a stand-alone company comprising OfficeMax’s retail network and Boise Cascade’s direct-sales distribution business, which had catered to large companies but is itching to bring smaller ones into the fold. OfficeMax is starting its newly independent life without much debt, and has expansion in its game plan.

Death knells for any of the three might be premature. Although the Justice Department blocked a planned merger of Staples and Office Depot in 1997 on anticompetitive grounds, analysts project that together, the three big-box retailers have no more than 20 percent of what may well be a $250 billion market for office supplies in North America alone. Thus, price wars are unlikely.

“All of us offer competitive prices because our products can be bought in so many places,’’ Mr. Nelson said. “Customers are loyal because of convenience and service, not price.’’

Still, the history of other big-box retailing categories does not bode well for peaceful coexistence among three players. Target and Wal-Mart squeezed out Kmart; Best Buy and Circuit City made mincemeat of the Wiz; Lowe’s and Home Depot steamrolled Channel and Pergament.

“When three retailers want their fair share of the same market, it just doesn’t work,’’ said Aram H. Rubinson, an analyst at Banc of America Securities, who is not recommending any of the office supply retail stocks.

Others worry that Wal-Mart, which already carries office supplies, might take aim at the market as its next growth opportunity. “Wal-Mart is a threat to any retailer, and it seems almost inevitable it will make a big push into this area,’’ said Timothy M. Ghriskey, chief investment officer of Solaris Asset Management, which is avoiding the stocks of all three office supply retailers.

Karen A. Burk, a spokeswoman for Wal-Mart, does not rule out such expansion. “Should the demand in this category grow, our selections in this category will grow,’’ she said.
Most analysts say that Staples, the biggest and most profitable of the three, is safe, no matter what happens. Staples has cut out some 800 extraneous items and replaced many consumer-size packages with quantities that appeal to businesses.

“Business customers shouldn’t have to weed through pens shaped like asparagi or Britney Spears backpacks, and they should find packages of 100 envelopes instead of 50,’’ Mr. Sargent said.

Staples has abandoned its “Yeah, we’ve got that” advertising slogan in favor of “Staples: That was easy,’’ and has played down advertising in Sunday circulars in favor of direct mail to businesses. It has a full-time staff looking for unique products to offer under the Staples brand, and it is testing the idea of a service to troubleshoot computer problems for small businesses.

“Staples’ management is pitching a near perfect game, and it will be difficult for opponents to score hits against them,’’ said Kimberly K. Bernard, associate director of Babson Capital Management, which owns Staples shares.

Few analysts are equally sanguine about Office Depot. Gary Balter, an analyst with UBS, notes that only Staples same-store sales keep going up. “Office Depot is trying to do what Staples has already done, and a No. 2 player has to come up with something different,’’ he said.

Office Depot has a troubled legacy to overcome. It tried to expand in the Northeast in the 1990’s, but, analysts say, Staples already had the best locations, and Office Depot soon pulled out. Others note that its current “feminization” of stores comes only because its last modernization failed to woo customers. But Office Depot, whose advertising tagline is “What you need, and what you need to know,’’ is strong in technology-oriented products, and may parlay that into more high-margin services. One possibility: Helping small businesses install and maintain computer networks. “We are testing ways to get a higher share of the business customer’s wallet,’’ Mr. Nelson said.

For now, OfficeMax’s hopes seem pinned on setting up the same kinds of relationships with small businesses that Boise Cascade had with large ones. It will soon introduce a system, already used by its Canadian subsidiary, Grand & Toy, to let business customers issue cards to all of their employees, which will get them the pre-negotiated price at any store. It may also soon give employees portable credit-card scanners that will enable them to process payments for business customers who do not want to stand at the cash register.

Analysts give most of the strategies fairly high marks. Still, they say that the nagging question remains: is there room for all three?

“They all have healthy balance sheets,’’ said Mr. Baker of Deutsche Bank. But, Staples is the only one on his buy list. Why? “Maybe they can all survive,’’ he said. “But I’m not sure all three can thrive.’’