Office Superstores Targeting Diversification in Small Businesses

Weakness in technology hit office superstore chains hard in Q3, company executives said on earnings calls Tuesday, and it’s too early to tell whether recently launched Windows 8 can provide the jolt needed to turn around flagging PC sales.

PC demand weakness and lower gross margins in the tech sector led OfficeMax to revamp its product mix, slashing its number of PC SKUs by half in favor of tablets, company executives said. Office Max’s Q3 U.S. sales comp sales dropped 2.6 percent “due primarily to lower technology product category sales, especially PCs,” said CEO Ravi Saligram. Industry-wide softness in the U.S. tech market, including “sharp declines in the PC category, significantly impacted total company sales,” Saligram said. Tech comps were down “high single digits” in Q3, Saligram said.

Chief Merchandising Officer Ronald Lalla said Windows 8 is still in its “early days” following an Oct. 26 release but the company has made an effort to educate its target customer on the benefits of the new operating system. Over the last nine days, expectations have been met for Windows 8 products, Lalla said, but “it’s too early to say if this will continue.” Overall, he said, “we still see softness in the technology sector.”

To address challenges in the PC sector, Office Max has “reset” its strategy for technology, Saligram said. The company is narrowing its focus “even more sharply” on the small business customer, he said. Office Max will continue to support the PC segment because “that’s an important part of being an office superstore,” Saligram said, “and we feel we are still not getting our fair share even within this channel.” But the retailer is “being very judicious” about how it balances assortment and choice while managing risk and profitability. “That’s why we made a strong decision to cut our assortment in PCs by half and we're moving up some of the tablets,” he said. The company doesn’t want to “go after the bottom fishers,” he said, and is focused on the small business customers rather than the individual consumer.

On attachment sales in the Windows 8 market, Lalla said, “accessories are still a big part of Windows 8,” but he said the company’s “aggressive push” is on the service side where the company is doing a lot of “proactive” work. To improve profitability, Office Max is “refining assortments” to meet customer needs for the “consumption versus creation of information,” he said. The chain is increasing sales training so sales staff can provide solutions based on attachment sales to small business customers, Saligram said.

At Office Depot, Q3 same-store sales were down 4 percent, with “continued weakness” in technology and peripherals, said Kevin Peters, president, North American operations. Office Depot, too, is “fine-tuning” the technology assortment and peripherals offerings to be “better aligned” with product trends, Peters said.

Office Depot is optimistic it can profitably grow the technology category, Peters said, but progress has been “slower than we would like.” It’s cutting back on “declining categories” including cameras and software and expanding or adding categories including headphones and smartphone accessories. Based on testing it has done, the company is gearing up for “scaling up” across the chain, Peters said.

The release of Microsoft 8 “may lead” to a lift in hardware sales during Q4, which would offer a much-needed boost to PCs and related product sales at Office Depot that “were down significantly” in Q3 from last year, Peters said. He referred to possible pent-up demand for laptops and desktops as customers waited for Windows 8, calling it a “hardware play.” The chain has trained and certified 6,000 employees on Windows 8, which is selling at Office Depot via 29 desktops, laptops and tablets.

As part of a cost-control strategy, Office Depot will spend $60 million to downsize or relocate 500 stores to small and mid-format operations at the end of their lease terms over the next five years, said CEO Neil Austrian. It also expects to close 10-20 stores per year after their leases expire over the same period, he said. For 2013, Office Depot will downsize or relocate roughly 100 large-format stores and hopes to realize cost savings of approximately $20 million a year.

Office Max is also downsizing, said CEO Saligram, saying the company has closed 5.4 million square feet of store space and nearly 2 million since 2005, while only opening two stores in the U.S. in the last 13 quarters. Office Max plans to close 20 more stores in Q4, bringing 2012’s total to 45, the most store closures in one year since 2006, he said. The company’s plan is to shrink U.S. retail square footage by 15 percent from the end of this year to the end of 2015, resulting in a total consolidation of about 8 million square feet from 2005-2015, he said. Also part of its retail strategy is to look for new categories to replace declining categories with more profitable ones, including services, Saligram said. In 2013, Office Max will launch “value-added” services targeted to small business customers and plans to open its first small-format store prototype.

Office Depot’s North American retail revenue was down 5 percent to $1.2 billion for the quarter, and Office Max sales were $1.7 million for the quarter, down 1.7 percent from Q3 2011, the companies said.