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Office Depot (ODP)Stock (Office Supplies Industry, Retail Industry, Specialty Retail Industry)
 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. Its two office supply competitors have also offered these services and in 2006, the three companies accounted for 11% of the $20 billion market combined. FedEx (FDX) subsidiary, Kinko's, leads all comers with a 14% share. 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. Despite initiatives to increase profitability, Office Depot's operating margin fell from 4.8% in 2006 to 3.1% in 2007, largely due to difficult economic conditions stifling consumer and business spending causing inventory build-ups and price markdowns. However, this decrease in profitability places ODP even further behind industry leader Staples, whose operating margin remained virtually flat at 8% while simultaneously growing sales.
[edit] Business Divisions and Services[edit] North American RetailOffice 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. N.A. Retail sales accounted for 44% of Office Depot's total revenue in 2007, with an operating margin of 5.2%. [edit] North American Business SolutionsIn 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 2007 N.A. Business Solutions sales accounted for 29% of Office Depot's total revenue, with a division operating margin of 4.9%. [edit] InternationalOffice 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. In 2006, business solution sales generated 85% of total sales while retail accounted for the other 15%. This division accounted for 27% of overall revenue and generated operating margins of 5.5% in 2007.
 [edit] Trends and Forces[edit] Direct SourcingOffice 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. [edit] Copy CentersMost 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. In addition, the company is moving to have have copy centers in all retail stores by the end of the renovation process in 2008. [edit] International AdvantageDespite 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 in 2007. Part of this advantage comes from Office Depot's split of retail and business solution sales in the international division. While Staples' international business was split 65/35 between retail stores and direct sales to businesses in 2006, Office Depot's international division was split 15/85 between retail stores and business solution sales, respectively. This distribution mix has proven more profitable in the international market as Office Depot's operating margin for international sales was 6.8% compared to Staples's margin of 2.1%. However, the gap between the operating margins of Office Depot and Staples narrowed through 2007 as Staples grew and tweaked its international operations. For fiscal 2007, Staples earned a 3.6% operating margin internationally, while Office Depot's international operating margin was slightly higher at 5.5%. 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. [edit] CompetitionOffice Depot has been in the number two position in the office supply industry between market leader Staples and third place OfficeMax for the past three years. Although these three companies are the market leaders in the office supply industry, 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. While Staples has remained the market leader in recent years, Office Depot began to close the gap between itself and Staples and to separate itself from OfficeMax in terms of operating margins in 2006. Office Depot more than doubled its operating margins from 2.4% to 4.9% while Staples saw limited operating margin growth from 7.7% to 8.1%. However, Office Depot lost this ground again in 2007 as Office Depot's operating margin fell to 3.1% while Staples' operating margin maintained at about 8.0%. In fact, OfficeMax surpassed Office Depot in terms of operating margin during 2007 with its new 4.0% figure. One clear advantage Office Depot holds over Staples is in the international market, where Office Depot is clearly head 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.
 Office Depot2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] References
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