Office Depot resurges amid merchandising makeover

DSN Retailing Today, June 7, 2004 by Mike Troy

As same-store sales growth goes, a 3% gain may not seem like much, but when this key measure of retail productivity reverses course after 17 consecutive quarters of decline, it is cause for celebration.

That was the situation at Office Depot two months ago when the company's 900 North American retail stores broke out of their slump by delivering a same-store sales increase that chairman and ceo Bruce Nelson promised last year. Now, thanks to improved merchandising, a restructured senior management team, a revived store expansion plan and major technology initiative. Office Depot is poised to consistently deliver future same-store sales growth.

"We are encouraged by our [same]-store sales results and anticipate continued acceleration in our performance in each quarter of the year," Nelson said. "Our No. 1 focus remains growth in North American retail, and we have specific initiatives in place to address each of the main drivers of store profitability."

Merchandising and marketing are two main areas where Office Depot has been especially busy. In February, the company introduced its first frequent buyer program called Office Depot Advantage. It contends the program is the most generous in the industry, since customers can receive rewards up to 10% back on qualifying purchases.

Office Depot also enhanced its technology assortment by adding-popular note-book computers from Gateway and Sony. The addition of those items followed the hiring last fall of John Lostroscio as vp of technology merchandising. Lostroscio previously served as vp of merchandising and product management for Gateway and prior to that as vp/gmm at CompUSA.

Another significant first quarter merchandising initiative was the launch of the Christopher Lowell line of office furniture. This attractive merchandise is available in four distinct groups and recharged Office Depot's nondescript furniture assortment. The logical extension of the Christopher Lowell furniture collection came last month with the introduction of Lowell's Spectator Collection line of desk accessories. The products are available in colors such as portobello, dried rosemary, blue pointe and Lowell lavender, which are coordinated with the four furniture collections offered under the Town, Country, City and Shore lines.

"It is exceeding all of our expectations," Nelson said of the Lowell brand.

While the merchandising and marketing changes helped jumpstart Office Depot's first quarter, longer-term gains are expected to come from the rollout of an improved store design and technology investments to improve product offerings.

Last June, a format called Millennium was introduced that emphasized grouping product categories together in the way customers use them as well as increased cross-merchandising. Fixture heights were lowered in the center of the store and signing was simplified to help customers find products. Departments such as the copy center and shipping were expanded, while other areas were branded as Ink Depot and Tech Depot.

After opening and remodeling roughly a dozen stores to the Millennium concept, Office Depot tweaked the design to come up with the next generation of the concept it plans to expand.

"We have set the stage for what we believe is some exciting North American retail growth underpinned by a new store format we call Millennium Two," Nelson said.

The first Millennium Two store is scheduled to open next month, with all subsequent openings and store remodels being of the revised design. A total of 80 to 100 new Office Depot stores are scheduled to open during the second half of the year, more than half of which are located in the Northeast, which is where the former Kids "R" Us stores that Office Depot acquired earlier this year are located. In addition, another 50 to 60 stores will be remodeled to the Millennium Two design, and in the next three to four years, the entire chain will be remodeled.

"We are positioned to grow. For the first time in a number of years we will begin adding significant numbers of stores in North America," Nelson said. "We are going to enter the Northeast. It is the heart of our competitor's territory and we anticipate a fight. But we are ready for the fight. We are ready with our organization and an exciting store format and we are ready to enter a part of the country we just have not had a good presence in."

Coupled with the company's renewed expansion and a more compelling store design is a major technology initiative called Magellan that is scheduled to come on line in less than two years. The price tag for the project is roughly $125 million.

"It is going to give us tools and analytics to help better align our merchandise capabilities with our overall merchandise strategy," Nelson said. "When you shop a store you want an assortment that is geared toward your demographics. We basically had a one-size-fits-all merchandise strategy. Consumers and businesses today want individualized assortments and Magellan gives us the capability to do that."

OFFICE DEPOT