Business to Business - Office Depot Inc - Essay Example

Business to Business - Office Depot Inc Overview of the company Pat Sher, Jack Kopkin and Stephen Dougherty established a company called Office Depotin 1986 in Fort Lauderdale, Florida. The company went public in 1988 and was subsequently listed on the NASDAQ. It expanded its operations in North America with the acquisition of The Great Canadian Office Supplies Warehouse Chain in 1992. Company is selling its products mainly under the brand names like Office Depot, Viking Office Products and Viking Direct. Headquartered in Delray Beach, Florida, having its footprints in 23 countries, company's main operative area is US. Company has been making good use of almost all distribution channels like retail stores, direct mail, contract delivery, Internet and business-to-business e-commerce. Office Depot Inc. recorded revenues of $14,278.9 million during the fiscal year ended December 2005, an increase of 5.3% over 2004. Company could not translate this increase into profitability owing to some intense competition in the sector. As a result the company could generate an operating profit of $348 million during FY 2005, a decrease of 34.3% over 2004 while the net profit was $273.8 million in fiscal year 2005, a decrease of 18.4% over 2004. However the quarterly results for FY 2006 have been quite encouraging so far. The final figures for third quarter indicate an operating profit of $55 millions as compared to $42 million for the same period in 2005. Company is now on a massive expansion spree with newer acquisitions like Papirius with operations in Czech Republic, Lithuania, Hungary and Slovakia. Office Depot has also entered the biggest consumer market and one of the fastest growing economies i.e. China with the acquisition of AsiaEC, one of the largest dealers of office products and services in China. Research Methodology It is worthwhile here to mention that the company is not dealing with too many retail customers, therefore it is not possible to interview the retail customers as such. The best method to study and analyze a company operating in B2B environment is; i. To sift through the reports from some of the marketing agencies, company's quarterly/ annual reports, newspapers and journals ii. Speaking to some of the business customers and gathering their feedback. Therefore, I carried out this research mainly by studying and analyzing the latest Internal reports, annual reports/ quarterly reports of Office Depot, market research by Datamonitor, newspapers, Journals and other printed materials. In addition I also studied the reports of some of its competitors like Circuit City Group Inc., IKON Office Solutions, Inc., Staples, Inc., Wal-Mart Stores, Inc., and United Stationers Inc. SWOT analysis Office Depot is the second largest office products company in the US selling a wide range of office supplies, business machines, computers office furniture and related products through superstores in major regions like North America, Europe and Japan, besides using other channels like contract delivery sales force, and the internet. As compared to other divisions, the North American delivery division has recorded strong growth in fiscal year 2005. Strengths Strong Brand Image: Though a relatively newer company, but Office Depot has been able to establish a strong brand image. In the US, Office Depot has become synonymous with office products. Adopting the tagline "Taking Care of Business" into its logo has further given it a unique identity. The company has successfully finalized a multi-year alliance with NASCAR under which it became NASCAR's official office products partner. This has helped in boosting the brand visibility of Office Depot products. While entering newer markets, like the Asian subcontinent, a strong brand image helps in an easy and formidable entry. Balanced Product Mix: Product mix of Office Depot includes branded office products and own brands with general office supplies, computer supplies, business machines and related supplies, and office furniture under various labels, including Office Depot, Office Depot Value, Viking Office Products, Niceday, ForayM, AtivaM and Christopher Lowell. In order to optimize the retailing capacity to a B2B customer, the company also sells products of some other reputed brands. Such a balanced product and brand mix allows the company to serve multiple customer segments and markets. While on the one hand branded products enable the company to address the label-conscious customers, own brands are targeted at more cost-conscious customers. Customer Diversity: Customer base of Office Depot is equally diverse. It clientele includes a diverse range of businesses, ranging from big corporate houses to small office home office (SOHO) customers. The wide span of diversity can be gauged from the fact that in the FY 2005, no single customer accounted for more than 5% of the company's total sales. Geographically also, the company is spread across many continents, which helps in isolating the region specific problems of one region from spreading to other regions, thus reducing the business risks while systematic plans can be prepared for specific regions. Strong Presence in North America: With more than 1,121 stores already in place and 150 new stores planned for 2007, 200 new stores in 2008, Office Depot has been able to sustain its leadership on this region despite stiff challenges from the competitors. During the fiscal year 2005, the North American retail division alone accounts for about 47% of its total retail business. Weaknesses Weaker Financial Performance: Having started off with a promising business, Office Depot's has come out with some discouraging results in recent years. The period2001- 2005 saw an increase of about 4.4%, lower than the industry average of 21.9%. For this period, the while the industry average is 10.9% for operating margins, the company could record an operating margin of only 3.4%. Similarly, the company's net profit margin was also lower at 2.3%, as compared to the industry average of 7.1%. Company really needs to think over this declining trend and try to plan for a recoup sooner than later. Sluggish International Division: Company's international division recorded a weak performance in fiscal 2005. in fact company has been focusing too much on its North American division. The economy has opened up all around the globe an the biggest consumer markets exists in the rapidly economies like China and India, where the attention has been minimal so far. The sales of the international division fell by over 3% in 2005, after increasing 30% in 2004 and 67% in 2003. The operating margin of this division has also declined from 4% in 2004 to 1.9% in 2005. Continued weak performance of this division is certainly not a healthy sign for the company, which may result in further squeezing the revenues and profit growth. Low Returns: For the period ending December 2005, Office Depot felt the pinch of lower margins. Company's return on average assets (RoA) figure for the period was 4.6%, against an industry average of 9.2% for the trailing twelve months (TTM). The five year average RoA was 5.2%, as compared to an industry average of 7.8% for the same period. The image of the 'white van man': Office Depot, has a team of drivers and a fleet for delivering to business addresses. Majority of its drivers use light commercial goods vehicles, and many of them do not have formal qualification. Such an image of a Transit-sized delivery van filling the rear-view mirror is somehow not fitting into the modern corporate culture. Office depot has realized this fact and already teamed up with Skills for Logistics to dispel the 'white van man' image of the industry. Opportunities Store expansion and acquisitions: Office Depot has opened many more new stores in the last couple of years, which resulted in widening its customer base. The company has big plans in the offing for the coming year as well with a target of 150 stores in 2007. in recent years company acquired stakes in China, Japan, France etc. In February 2006, the company acquired a controlling interest in Best Office, a leading South Korean office supply company which operates more than 70 retail stores. In the domestic market as well the company is on an offensive with the acquisition of Allied Office Products, the largest privately held office products company in the US. If due diligence is maintained in operating all such stores, the company will be able to tackle the competition much more effectively in the future. This will help in diversification and revenue generation to boost the growth potential of Office Depot. Positive Outlook for US Market: US market size has been consistently on the rise over the years. While, in 2002 the market size was worth approx $294 billion, for 2003 it was worth $302 billion, for 2004 worth $312 billion and for 2005 worth $323 billion. The US office equipment industry was valued at approximately $11.4 billion in 2003 and is expected to rise to $13.8 billion by 2007. Products of the company have a strong presence in the office equipment segment. It markets office equipment of all leading vendors. Company stands a better chance for improving its market share with a positive outlook for the US office equipment industry. Increasing number of online community: Internet, e-commerce and m-commerce hold the best future prospect for a business entity. The online spending habits are on the rise on account of its ease of use, for both the seller as well as the buyer, and an improvement in security features for such transactions. Office Depot has a strong web presence and operates a number of websites including www.officedepot.com, www.viking.com and www.techdepot.com. An increase in online sales would certainly boost the company's direct to business customer revenues. Falling Oil Prices: The Company is heavily dependent on transportation network as it has a large distribution network with a large network of stores and delivery centers around the globe. For bringing products from overseas producers to its distribution systems it also incurs significant shipping costs. Year 2005 and 2006 saw a hefty hike in oil prices because of uncertainty in the gulf region. But now by the last quarter of year 2006, oil prices are heading down south, which will help Office Depot in saving huge sums of money on transportation charges. Threats Slowdown in PC sales: The US personal computers (PC) market, on an average, saw a growth rate of around 6% period during the last couple of years. This indicates towards the saturation of the US PC market. Such a trend may not affect its direct sales in terms of the computer stationary, but may also result in decelerating growth in the online community. Intense competitive environment: Office Depot has to continuously take on the biggies like Circuit City Group Inc., IKON Office Solutions Inc., RadioShack Corporation, Staples, Inc., Wal-Mart Stores, Inc., United Stationers Inc., Buhrmann NV, Corporate Express, Inc. etc. Office Depot operates in a competitive and fragmented industry consisting of retailers, dealers, and distributors. Office Depot and OfficeMax, account for less than 11% of industry sales. Therefore the company faces fierce competition from its competitors. From time to time retailers like Wal-Mart and TESCO have been coming out with attractive schemes with lower prices, for the customers. This calls for rapid fire arrangements on the part of Office Depot to retain the market space. Recommendations 1. Of all the changes in distribution during the last century, those taking place in retailing have been the most dramatic. Competition is tougher in the B2B segment, as in such a business proposition the customer is always in control because the customer buys whatever he wants. This gives a feeling of being more threatened and less empowered in terms of the company's dealings with its customer base. Therefore the company will have to continuously remain on an innovation course with, its vision as a guiding statement, which states, "We listen to our customers and understand their needs. We offer products, services and innovative thinking that enable our customers to achieve success." 2. Now e-business has been gaining widespread popularity therefore Office Depot needs to further strengthen its web portal, with better security features and by providing cost effective international shipping. 3. Office Depot needs to pay some more attention towards strengthening its International operations, with particular emphasis towards the growing economies like China, Malaysia, India etc. 4. It indeed very important to pay due attention towards building the brand image to gain customer loyalty and gain more customers. Office Depot has already taken up the initiative to enroll its drivers for the qualification in order to further strengthen its brand image. Such positive image building exercises must continue. References: 1. Datamonitor (2006), Company Profile: Office Depot Inc. NY, Jul 2006. 2. Personnel Today (2007), 'Driving change'; 1/2/2007, p16-16, 1p, 2c, UK 3. Krol, Carol (2006), 'Office Depot looks to become service station', B to B; 11/13/2006, Vol. 91 Issue 15, p3-37, 2p, 1c 4. Laposky, John (2006), 'Office Depot Rells Out Travel, Business Cases', TWICE 11/06/2006 5. Troy, Mike (2003), 'Office Depot Puts $900 million faith in European B2B market', DSN Retailing Today May 5, 2003 6. Office Depot (2007), Taking care of business, available online at http://www.officedepot.com/, (Jan 30, 2007). 7. Rutledge, Keisha (2000), Ventures in B2B networking put retailers in suppliers shoes'. Discount Store news, April 3, 2000. 8. Wind, Yoram (Jerry). (2006), Blurring the lines: is there a need to rethink industrial marketing, Journal of Business & Industrial Marketing 21/7 (2006) 474-481. Too much dependence on NA region (Threat Problem area To be looked into) US market large and growing (http://library.corporate-ir.net/library/94/947/94746/items/202402/6_16_06.pdf) Read More