Office Depot Incorporated

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Office Depot Incorporated

2000 Old Germantown Road
Delray Beach, Florida 33445
U.S.A.
(407) 278-4000
Fax: (407) 265-4403

Public Company
Incorporated: 1986
Employees: 9,000
Sales: $1.70 billion
Exchanges: New York
SICs: 5112 Stationery & Office Supplies

Thanks to its 1991 merger with competitor Office Club, Office Depot Incorporated has become 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, with most of them located in the South, lower Midwest, and Pacific Coast.

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 of 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.

Under Fuente, Office Depot continued to grow at a breakneck pace, with its success matching the pace of its expansion. The company opened sixteen more stores in 1988, expanding into Kentucky, North Carolina, Tennessee, and Texas. Sales topped $132 million, and Office Depot went public in June with an initial offering of more than 6 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.

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 to Carrefours, 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 Office Max 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—previously 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 of 1991. As a result of the agreement, which entailed a stock swap worth $137 million, Mark Begelman became president and COO of Office Depot, with David Fuente remaining chairman and CEO. Over the next thirteen 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 of 1991 it sold another 1.8 million shares of stock to Carrefours to finance expected growth. Aside from 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 of 1992, Begelman claimed in an interview that 10 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 also Apple’s Macintosh Performa line.

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 holds a minority stake.

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, and gave Office Depot an entree into the side of the office supply retail business that serves larger companies, rather than the small and mid-sized businesses that had made up its customer base in the past.

Within its first five years, Office Depot grew from a tiny retail firm operating out of a storefront in Boca Raton to a major company with its own headquarters complex. It had also gobbled up one of its most serious competitors. After just seven years, Office Depot became the largest company in a lucrative and rapidly growing retail sector. How long the business can sustain such an amazing rate of growth is open to question, but with markets in the United States that remain largely untapped, a foothold in Canada, and the possibility of ventures in Europe through its link with Carrefours, it is likely that Office Depot’s success has yet to approach its highest point.