Office Depot shifts store expansion to M2 format

DSN Retailing Today, July 19, 2004 by Mike Troy

DELRAY BEACH, FLA. -- Blend the overall layout of Bed, Bath and Beyond with Wal-Mart's newest sign package, Costco's palletize merchandise presentation and Target's liberal use of vibrant colors and the result is Office Depot's newest prototype known as M2.

The $12.4 billion office products company borrowed ideas from other retailers to create a format it hopes will differentiate it from competitors, be less costly to open, more efficient to operate and offer greater customer appeal. M2, short for Millennium2, will also serve as Office Depot's expansion vehicle for the remainder of the year as the company expects to open 80 to 100 stores, half of which will be in the Northeastern United States, where the strongest concentration of Staples' stores are located.

That's a tall order. While it will take time to gauge customers' reaction and the format's sales potential, Office Depot has succeeded in accomplishing its goals, including the key issue of differentiation.

"You can't walk out of here confused about which [office superstore] you have been to," Office Depot's evp of North American retail told DSN Retailing Today during a tour of the prototype.

M2 certainly looks different thanks to a clear and colorful sign package that communicates to customers where product categories are located from the moment they set foot inside the door. The store's layout also sets it apart from direct competitors due to the positioning of merchandise in horseshoe-shaped pods along the store's outer walls. This is where the resemblance to Bed, Bath and Beyond is most striking, since categories such as writing instruments or binding and filing products are grouped together in a pod the way the home goods chains group shower curtains and bath accessories together.

There are some aspects of the store design that are similar to its competitors and earlier Office Depot prototypes, such as the Millennium store design that opened in Atlanta last summer. For example, fixture heights in the center of the store are low, as they are at Staples and OfficeMax, so customers can see what they are looking for and so Office Depot employees can see customers if they need help with the technology products merchandised in the center of the store.

Adding to the differentiated look while at the same time achieving the goal of lower construction and operating costs are a number of other features. For example, Office Depot opted for a bare concrete floor, as Wal-Mart has in its newer stores, to reduce maintenance costs and improve the appearance. There is also greater use of warehouse-club-style pallet displays and other merchandising techniques motivated by supply chain efficiency. M2 contains approximately 22 pallet displays, with eight devoted to the highest-velocity paper products, whereas a typical store might have only two or three. There is also greater use of products shipped in shelf-ready merchandise trays that allow employees to simply open a box and place it on the shelf rather than touch each individual product to place it on a peg hook.

"We have reduced the number of peg hooks by 50%," said Joe Jeffries, director of store operations.

In addition, to improve in-stocks and simplify replenishment, the depth of store fixtures was increased to 42 inches to increase their holding power and storage for overstock was created on top of the fixture, where it is hidden behind a magnetically latching door with colorful graphics.

The cumulative effect of the efficiency measures is that Office Depot now has a format that costs less to operate and therefore can achieve profitability on lower sales volume. According to Jeffries, the 17,500-square-foot M2 format requires a 21-person staff, of which 30% are fulltime and 70% are part-time. A typical 26,000-square-foot Office Depot store has 23 employees and 40% are full-time and 60% are part-time. The result is a 4% to 6% reduction in payroll hours.

Thanks to reduced operating and construction costs associated with the smaller store, Office Depot chairman and ceo Bruce Nelson said the sales volume needed to break even has been reduced to $3.5 million to $4 million from $4.5 million to $5 million.

The improvement is significant because the future of Office Depot's 900-store North American retail operation is being pegged to M2 as the company embarks on its most aggressive expansion program in five years. Between 80 and 100 stores are slated to open during the remainder of the year, including approximately 50 to 60 former Kids "R" Us stores acquired earlier this year that will be converted to M2. Most of those locations are in the Northeast, where Office Depot is going up against Staples, which has a strong market presence there.

Staples ended last year with 1,134 U.S. stores, 40% of which were located in Virginia, Maryland, Pennsylvania, New York, New Jersey and seven other Northeastern states. Conversely, only 63 of Office Depot's stores are located in those same states.

Clearly, Office Depot faces a difficult challenge, especially since it will be competing against a well-established competitor that knows Office Depot is coming. And it is not the first time Office Depot has attempted to crack the Northeast. The last time was 1999, and Office Depot had just rebuilt its real estate department after its development program had been sidelined two years earlier by the failed merger attempt with Staples. Eager to prove it was capable of growing, Office Depot opened 130 stores that year, including several in Connecticut, New Jersey, Rhode Island, New York and Staples' home state of Massachusetts. Those stores performed poorly, and in less than two years they were among 70 stores Office Depot closed.