Office Depot (NYSE: ODP) is one of the largest office suppliers in the United States, with over $12.1 billion in office products sold in 2009. Combined with Staples (SPLS) and Officemax (OMX), these three companies supply approximately 10% of the world's office supplies.
Office Depot has made efforts to increase its profitability by offering copy and print services, which enjoy margins twice as high as its other offerings. The company has integrated copy and print services into retail and commercial businesses, going so far as to extensively renovate its retail stores with copy centers prominently featured in the front. In addition, Office Depot built a network of 12 regional centers for large commercial clients.
A second initiative to increase profitability involves direct sourcing, whereby retailers purchase goods directly from suppliers and cut out any middlemen. Direct sourcing allows companies such as Office Depot to offer its own line of private label goods, which typically see higher margins than branded goods. Office Depot and Staples are very competitive in this regard, with about one-fifth of all goods sold coming from respective private labels.
In 2009, Office Depot's total revenues were $12.1 billion, a 16% decline from its 2008 revenue. The company attributed this decline to the tough economic conditions in the United States for 2009. As a result, Office Depot posted a net loss of $599 million in 2009, compared to its net loss of $1.48 billion in 2008.
Office Depot breaks its business into three reportable segments: i) North American Retail, ii) North American Business Solutions, and iii) International.
Office Depot's retail stores in North America sell office supplies, computers and software, office furniture and other business-related products. Many of Office Depot's retail stores also have copy centers which design, print and ship various materials such as training manuals, newsletters and marketing materials. Retail stores mostly serve consumers and small businesses. For 2009, Office Depot's North American Retail segment had total sales of $5.1 billion and posted an operating profit of $105.5 million.
In addition to operating retail stores throughout North America, Office Depot also provides office supplies directly to medium and large sized businesses. Office Depot serves these businesses via field sales agents, catalogs, and Office Depot's website. In 2009, North American Business Solutions sales were $3.48 billion, with an operating income of $98 million.
Office Depot operates retail stores in foreign countries and sells directly to businesses on an international level. In the international retail segment, Office Depot operates a mix of company owned stores, joint ventures, franchised stores and other retailing arrangements. In the international business solutions segment, Office Depot sells office supplies to business through catalogs, websites and field sales agents. For the year ended 2009, Office Depot's International segment had total sales of $3.5 billion and an operating income of $120 million.
Office Depot currently directly sources approximately 5% of its merchandise, including both brand name and private-label goods. Direct sourcing is a method that wholesale retailers have been adopting more readily across the retail industry, whereby retailers purchase goods directly from manufacturers rather than through a transferring agent or "middleman".
Direct sourcing creates considerably higher margins for retailers such as Office Depot by eliminating "middleman" costs. It is estimated that for every 1% increase in sales that is directly sourced, Office Depot would see a 0.1% increase in operating margins.
Most North American retail outlets have copy centers that provide designing and printing services to consumers and businesses. The overall copy center market is estimated at about $20 billion annually, and the industry is broken up among several key constituents:
In this highly divided market, there is room for Office Depot to take away market share not only from its main competitors, Staples and OfficeMax, but the copy center leader, FedEx Kinko's. In addition to copy centers based in retail stores, Office Depot has 12 regional production facilities that provide the same services for large-scale orders.
Current estimates for the operating margin of Office Depot's design, print and ship services are approximately 17%, ranking it as one of Office Depot's most profitable offerings. Office Depot has leveraged this profit center by renovating retail stores to make copy centers more visible to customers near the front of the store.
Despite being second to Staples in total sales and profits, Office Depot had greater total sales and a higher operating margin in the international segment than leading competitor Staples. Part of this advantage comes from Office Depot's split of retail and business solution sales in the international division. Office Depot is pressing their advantage at operating business solution sales in the international segment by acquiring contract office suppliers across the globe in profitable markets such as Asia and South America.
Office Depot, combined with Staples (SPLS) and Officemax (OMX), are the market leaders in the office supply industry. However, together they account for about only 10% of the estimated $300 billion market. The rest of the market is divided widely between supermarkets, wholesale retailers, discount stores (including Wal-Mart) and smaller independent companies.
One clear advantage Office Depot holds over Staples is in the international market, where Office Depot is clearly ahead in terms of sales and operating margins. This lead in the international regions may also help buffer Office Depot's business in the case of an economic downturn in North America.