Back to business at office superstore chains

Discount Store News, July 21, 1997 by Mike Troy

NATIONWIDE DSN REPORT -- It's full steam ahead for Staples and Office Depot now that they are free to devote all their resources to running a business rather than fighting the Federal Trade Commission. A federal judge may have put the kibosh on the retailers' 10 month merger effort by granting the FTC's request for a deal-busting temporary injunction, but it doesn't appear the aborted merger will have any lasting negative effect on either chain.

Staples certainly didn't let the grueling merger process hinder its growth. The chain hit $4 billion in sales last year and opened 115 stores. It maintained that momentum during the first quarter ended May 3 by increasing sales 26% and opening 42 new stores to end the quarter with 599 units.

Office Depot opened only one store during the first quarter ended March 29 and ended the quarter with 562 units. Sales only grew 9% and same store sales increased 2%. Disappointing results to be sure, but considering Office Depot curtailed advertising during the merger process, certainly not unexpected results. In fact, Office Depot is believed to have benefited in ways only now becoming apparent.

"The combined integration task forces spent months analyzing our business and developing best practices recommendations that Office Depot is already implementing," said David Fuente, chairman and ceo of Office Depot. "This process helped us to refocus on the basics of our business and as a result we've significantly enhanced Office Depot's systems, service capabilities and inventory management."

The chain also invested in strengthening its information systems during the merger process because it was to serve as the base platform for the merged companies.

"We now have in place a highly sophisticated information system that covers both our retail and delivery business and will easily accommodate future growth," Fuente said.

Office Depot still faces the challenge of filling what analysts estimate are 19 management positions including the possible new position of president and chief operating officer. In the meantime, the chain expects to open a total of 40 stores during the remainder of this year and another 80 in 1998. While most observers felt Office Depot would get the short end of the stick if the merger fell through, the company has won many supporters on Wall Street.

One of those is Amy Ryan at Prudential Securities. Her buy recommendation is based on Office Depot's ability to fill the holes in its management team, rebuild its real estate department to the point where it can open 80 stores annually and reimplement programs to build upon the sluggish sales growth of the recent past.

"We also expect to see Office Depot advertise aggressively," Ryan said. "The company essentially eliminated television advertising during the merger-related process, as there was no need to promote the Office Depot name if the merger went through."

Christopher Vroom at Alex. Brown said, "We consider Office Depot to be among the most effective retailers in America. Although the company has stumbled recently due to management mistakes in the important business service division, the core retail network still produces the best per store sales productivity in the business."

Considering the fragmented nature of the office supplies marketplace valued at $168 billion, Vroom said he expects Office Depot, Staples and OfficeMax to all see market share gains beyond the year 2000. OfficeMax has already opened 96 stores last year and is shooting for nearly 150 units this year. OfficeMax currently has about 600 stores and ended the last fiscal year with sales of $3.2 billion.

Whether there are two chains or three, office product superstores continue to be one of discount retailing's most dynamic segments.