Office Depot Incorporated Business Information, Profile, and History

Company Perspectives:

Office Depot's mission is to be the most successful office products company in the world. We will achieve success by an uncompromising commitment to: A) superior customer satisfaction--a company-wide attitude that recognizes that customer satisfaction is EVERYTHING; B) associate-oriented environment--an acknowledgement that our associates are our most valuable resource. We are committed to fostering a environment where recognition, innovation, communication and the entrepreneurial spirit are encouraged and rewarded; C) industry leading value/selection/services--offering only the highest-quality merchandise available at everyday low prices, providing customers with an outstanding balance of value, selection and services; D) ethical business conduct--conducting our business with uncompromising honesty and integrity; E) shareholder value&mdash′oviding our shareholders with superior return-on-investment.

History of Office Depot Incorporated

Thanks to its 1991 merger with competitor Office Club, Office Depot Incorporated is one of the largest discount retailer of office supplies and furniture in North America. In addition to office products, the company also sells computer hardware and electronics designed for small business applications. Office Depot operates over 300 stores, most of them located in the South, the lower Midwest, and the West.

Mid-1980s Origins

Along with rival companies Staples and Office Club, Office Depot was a pioneer in the field of office supplies discount retail. The three companies were founded within months of each other in 1986 in three different corners of the United States--Office Depot in Florida, Staples in Massachusetts, and Office Club in California. All of them saw opportunities in selling office supplies to small businesses at bulk discount rates that had previously been the privilege of larger companies. Since small businesses had never purchased supplies in quantities large enough to receive bulk discounts, they had been at the mercy of conventional retailers who, in the absence of price competition, could sell at manufacturer's suggested retail prices and take markups of as much as 100 percent. Buying directly from manufacturers instead of wholesalers and keeping overhead low, a discount retailer could offer goods from 20 to 75 percent off of full retail. Another trend that proved advantageous for these three companies was the advent of warehouse-style discount retailers in the 1980s; what Price Club had done for general merchandise and what Circuit City had done for consumer electronics, Office Depot, Office Club, and Staples sought to do for ballpoint pens and legal pads.

Office Depot was founded in Boca Raton, Florida, by entrepreneur F. Patrick Sher and two partners. The company opened its first retail store in Fort Lauderdale in October 1986, and it proved successful enough that two more Office Depot stores appeared in Florida by the end of the year. The company continued to grow rapidly; in 1987 it opened seven more stores in Florida and Georgia and sales topped $33 million. Sher did not have long to savor his success, however, for he died of leukemia scarcely a year after his first store had opened. He was succeeded as CEO by David Fuente, an experienced retail executive whom Office Depot lured away from Sherwin-Williams, where he had been president of the paint stores division.

Fuente's strategy was to have Office Depot continue to grow at a breakneck pace, to trap market share before copycats got into the act. He planned to enter ten new markets a year and add 50 stores a year. Although Office Depot opened only 16 stores in 1988, expanding into Kentucky, North Carolina, Tennessee, and Texas, Fuente met his goal in 1989 and 1990. Sales topped $132 million in 1988, and Office Depot went public in June with an initial offering of more than six million shares at $3.33 per share. Office supply discount retail as a whole was proving wildly successful; although they accounted for only a small fraction of office supply retail sales by the end of the decade, at least one analyst predicted in 1989 that discounters would form the fastest growing specialty-retail segment for several years to come.

Office Depot gained the distinction of being the first of the three original discount chains to turn a profit for a period of four consecutive quarters, which it did during the last two quarters of 1988 and the first two of 1989. The company achieved its success with stores that resembled nothing so much as warehouses. Their decor was functional and unassuming, in a style described by a reporter for Fortune as "plain pipe rack," with merchandise stacked floor-to-ceiling on steel shelves. As David Fuente explained it, "Customers pick only from the first six feet of 'shelf' space anyway. So we use the area above 'for storage'." By 1989, Office Depot stores were averaging $150,000 in sales per week. Of course, lack of concern for the aesthetics of interior design characterized the company's competitors, as well. Office Depot held an edge in that commercial rents were lower in the South than elsewhere in the United States, allowing the company to build exceptionally large stores and still keep overhead costs relatively low.

Rapid Growth in the Early 1990s

Office Depot continued to grow dramatically in 1989 and 1990, expanding beyond its regional base in the South into the Midwest. By the end of 1990 the company boasted 122 stores scattered across 19 states and sales of $625 million. Much of that expansion was financed by the sale of 3.6 million shares of stock for $41 million to Carrefour, a French chain-store concern with subsidiaries throughout Europe.

The office supply discount field became more crowded and competitive in the early 1990s as other companies, including OfficeMax and BizMart, joined the lucrative industry. With the struggle for market share becoming more vigorous, Office Depot and Office Club decided to merge in 1991. The move solidified Office Depot's position on the Pacific Coast in one swoop by eliminating a major competitor and giving it a substantial number of new stores in a regional market where the company previously had only a slim presence. For its part, Office Club had not fared quite as well as its fellow discounting pioneers; during the four quarters that constituted Office Depot's first profitable one-year period Office Club lost $2.7 million, compared to Office Depot's gain of $5.1 million and Staples's narrower loss of $1.9 million. The merger, therefore, proved advantageous to Office Club as well.

Office Club had been founded in northern California in 1986 by Mark Begelman&mdash′eviously an executive with British American Tobacco--in partnership with a friend who had been selling office products to Price Club. They reasoned that the same marketing principles that allowed Price Club to retail office supplies at deep discounts would work for stores specializing in that kind of merchandise. The first Office Club store opened in January 1987 in Concord, California. Office Club grew quickly, though not as frantically as Office Depot. By the end of 1987 Office Club had opened five stores. At the time of the merger, it operated 59 stores, most of them in California, and had posted annual sales of $300 million.

The merger was approved by Office Depot shareholders in April 1991. As a result of the agreement, which entailed a stock swap worth $137 million, Mark Begelman became president and chief operating officer of Office Depot, with David Fuente remaining chairman and CEO. Over the next 13 months, all Office Club stores were either closed or converted into Office Depot outlets, and the membership fee that Office Club had been charging its regular customers was dropped.

Even after the merger, Office Depot continued to expand. In June 1991 it sold another 1.8 million shares of stock to Carrefour for $40 million to finance expected growth, making Carrefour an 18 percent owner. In addition to the outlets acquired from Office Club, the company opened 57 new stores in 1991. At the end of the year, Office Depot had 229 stores and posted sales of $1.3 billion.

At about the same time, Office Depot saw its sales of office machines, including personal computers, begin to grow by leaps and bounds, and the company began to emphasize this side of its business more strongly. In December 1992, Begelman claimed in an interview that ten percent of all fax machines sold in the United States were sold by Office Depot. Store layouts were redesigned so that more machines could be put on display. The company began selling not only PC clones by Packard-Bell and Compaq, but also the real thing--in August 1991 IBM agreed to let Office Depot sell its PS/1 computers and around that time Apple gave permission for them to sell the Macintosh Performa line as well.

In 1992 Office Depot went international, acquiring HQ Office International, the parent company of the Great Canadian Office Supplies Warehouse chain, which operated seven stores in western Canada. HQ Office International had been founded in 1990 by Robert McNulty as a Canadian extension of his unsuccessful California-based HQ Office Supplies Warehouse chain, which was carved up and bought out by Staples and BizMart in 1990. Office Depot immediately replaced the HQ Office International name with its own and began expanding its presence in Canada, opening two stores in Manitoba. Office Depot's entry into the Canadian market set the company up for an eventual confrontation with Business Depot, a small chain based in eastern Canada, in which Staples held a minority stake.

In addition to expanding into new geographic areas, Office Depot began expanding its customer base. Originally catering to businesses with 20 or fewer employees, Office Depot decided to attract larger business by acquiring contract stationers and integrating them into its retail business. In May 1993 Office Depot acquired the office supply operations of contract stationer Wilson Stationery & Printing, a subsidiary of Steelcase Inc. The deal was valued at $16.5 million. In the next year the company bought three more contract stationers.

Having successfully moved into the established retail office supply market, Office Depot was confident they could challenge the existing system that served larger businesses. CEO David Fuente told Forbes in May 1994, "We're all selling the same stuff; we're all selling legal pads and pens and pencils, and we all buy from the same place. The real difference in performance is going to be: Are you pricing them better? Giving better service? Delivering better? The difference is not in the strategy but in the execution." Staples and OfficeMax clearly felt Office Depot was on the right track: they both followed suit by acquiring their own contract stationers. However, two years later Office Depot had yet to see big returns on its investment. Integrating the contract stationers into their core retail business had cost more than expected, but Office Depot remained confident that the more diverse customer base should make the investment worth it in the long run.

The company saw $2.6 billion in sales in 1993, with $63 million in profit. By 1994 Office Depot had grown to 362 stores, which still followed the company's original concept--warehouse-like buildings that stocked office supplies at 30 to 60 percent off manufacturer's list prices. The company's closest competitor, the Kmart subsidiary OfficeMax, was only half its size. Not satisfied, Office Depot planned to double the number of its stores in the next five years.

Challenges of the Mid- and Late 1990s

In late 1995 Office Depot's stock dipped following a slowdown in computer chip orders, which analysts feared would slow demand for personal computers. Smith Barney analyst James Stoeffel told Financial World that such fears were overstated. Because computer sales only accounted for approximately ten percent of Office Depot revenues and because the company only stocked the most popular brands, a slowdown might not mean disaster. "It's not immaterial, but it's obviously not the most critical part of their business," Stoeffel maintained. With its continued potential for growth, the company's stock soon bounced back from its low of $19 a share.

In 1997 Staples attempted to acquire Office Depot, its largest competitor, in a deal estimated at $4 billion. As these companies were number one and two, respectively, among discount chains, questions about antitrust violations were quickly raised. The Federal Trade Commission (FTC) found that the combined company would control prices in many metropolitan areas and that in cities where Office Depot and Staples competed head to head, prices might be expected to rise five to ten percent. The FTC sought a court order to stop Staples from buying Office Depot. In response, the two companies agreed to sell 63 stores to OfficeMax to open competition in certain areas, a proposal that had to be approved the FTC. They also argued that, with only five percent of the office supply market, their merger was not threatening. Unappeased, the FTC argued that office superstores are a market to themselves and that Office Depot and Staples controlled 75 percent of that market. As of early 1998, the two office supply giants remained hopeful of a merger.

Principal Subsidiaries: The Office Club, Inc.; H. Q. Office International, Inc.