More than a store: Delray Beach-based Office Depot is known for its retail outlets, but most of its revenues are now produced online or over the phone. That's good news for CEO Bruce Nelson, who has been struggling against declines in same-store sales - Profile

South Florida CEO, March, 2004 by Rochelle Broder-Singer

The world's No. 2 online retailer (Amazon.com is No. 1) doesn't sell books (well, not many of them) or clothing, or specialize in electronics. It's not a "new economy" business founded subsequent to the emergence of the World Wide Web, or one that couldn't exist without the Internet. And it's not based in Silicon Valley, Seattle or any other West Coast tech-savvy location.

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No, the world's No. 2 online retailer sells the minutiae of everyday office life, from Post-It notes and pencils, to desks and computers. And it does so from a base in Delray Beach. Although few people think of it as anything other than a store, office-supplies retailer Office Depot commands that No. 2 spot with $2.6 billion in online sales.

"The majority of our brand awareness comes from the fact that we are a bricks and mortar retailer," says CEO Bruce Nelson. "The interesting part about that is that retail today is less than half our business. It's 45 percent of our business worldwide, and I would guess that in five years it could be as little as 25 percent of our business, because while retail will grow, our other businesses will grow faster." Indeed, Office Depot's e-commerce sales grew 25 percent in 2003, while total sales grew only 9 percent. Same store sales were actually down 2 percent.

Office Depot got into the online business early on, working with the Massachusetts Institute of Technology (MIT) back in 1995. "We invested in the technology and the people early, and nobody caught us," says Nelson. The company didn't just develop officedepot.com--it has more than 30 Web sites. There is also Viking.com, part of its small-business-dedicated Viking Office Products brand, and forsure.com, a high-touch technology seller. And those public sites are only a tiny part of Office Depot's e-commerce. The largest part is bsd.net, which creates, for Office Depot's corporate customers, customized Web sites that employees can use to place their office supply orders. The site will have all of a customer's purchasing rules built in, so that, for example, orders under $30 will be automatically filled, while larger orders will be routed through an approval process.

E-commerce is not the only non-retail channel that Office Depot uses. There are also sales reps who visit or call clients and take orders directly. Don't expect any of those channels to disappear any time soon, either, says Nelson. "The most valuable customer we have--meaning they buy more frequently, and we get a larger share of their total purchases--buys from us in more than one channel."

That's one reason Nelson is still looking to expand the company's retail presence in North America, where he plans to open 70 to 80 new stores this year, up from more than 30 in 2003. Outside the US and Canada, though, it's a different story. "Our primary focus [internationally] is not retail," he says. Largely because of high real estate, payroll and social program costs, only Japan, France, Spain and Mexico have retail stores. Another 17 or so countries are strictly delivery businesses.

The international arena is another key expansion target for Nelson. It already makes up more than 25 percent of company sales, thanks to the 2003 $892 million acquisition of France's Guilbert SA, which nearly doubled Office Depot's international revenue. Nelson is next eyeing Brazil, Chile and Argentina for growth; in Mexico he's already set up a joint venture with Agante stores.

Nelson feels he has to expand in order to keep up with fierce competition among purveyors of office supplies. OfficeMax recently merged with office products producer Boise, and Staples typically runs neck-in-neck with Office Depot for the top office supplier spot. Add to that competition in non-retail channels (from Amazon.com, for instance), and from entrepreneurs and specialty suppliers.

Consequently, Office Depot has, in many ways, been struggling. Its fourth quarter 2003 was the 15th straight quarter of declining same-store sales, even as Office Max and Staples posted same-store growth. And while 2003 revenues grew 9 percent, to $12.4 billion, net income was down 11 percent, to $276.3 million. Analysts point to problems that range from store presentations to poor sales of office furniture and technology (down 11 percent in 2003), which together represent 25 percent of Office Depot's business.

To address the furniture business, Office Depot recently announced a partnership--four years in the making--with TV home decorating personality Christopher Lowell. Office Depot's new Christopher Lowell Collection of desks, chairs, credenzas and other furniture is aimed at home offices, with four themed lines that are coordinated with accessories, from chairs down to artificial plants. While it remains to be seen how consumers will respond, analysts approve. "This represents the boldest exclusive launch or fashion statement for an office superstore chain, and to us resembles the Michael Graves line at Target, a successful launch for that retailer," wrote Goldman Sachs' Matthew J. Fassler in a February 11 report.