Fearing the foodies
by Andy Braithwaite
Can the beleaguered office supplies superstore chains face up to the growing challenge of the mighty mass market retailers as they step up their efforts to sell more office supplies to both consumers and small businesses?
At a recent industry conference, a senior executive at a major office products retailer suggested that the biggest threat to OP resellers in the coming years would come from the mass market retail channel, or the 'foodies' as he called them - the Wal-Marts, Tescos and Carrefours of this world. You could also include warehouse clubs like Costco and Sam's Club given their size and wide product assortment.
The retail sector, as we all know, has been under severe pressure over the last 18 months. Household names such as CompUSA, Circuit City and Woolworths have all departed the scene, DSGi is facing serious questions about the future viability of its retail presence, and the 'Big 3' office supplies superstores - Staples, Office Depot and OfficeMax - have all seen drops in their retail sales, with Depot recently closing more than 100, or around 10 percent, of its US stores.
Of course, the global recession has been blamed for the fall-off in sales. But you could argue that it is merely acting as a catalyst to changes in the retail landscape that would have taken place anyway. Among the reasons for these changes are the growing dominance of the mass retail sector and the failure of some of these now-extinct chains to evolve and adapt as the competitive retail environment changed.
Ironically, some 20 years after the rise of the big box store format wiped many smaller office and stationery retailers off the map, these 'category killers' themselves are now anxiously watching every move of these larger predators who are hunting for market share as the shrinking economy encourages them to seek growth opportunities outside their traditional categories, including office supplies.
And these are certainly retailing behemoths that should not be taken lightly. The figures speak for themselves: Wal-Mart - by some distance the world's largest retailer - had sales of over $90 billion in the last quarter alone and boasts more than 4,000 stores in the US; the number two Carrefour has in excess of 15,000 stores worldwide and sales of over j100 billion ($135 billion); and the UK's Tesco commands more than 30 percent of the grocery market in its home country from its store portfolio of some 2,200. The combination of sheer store numbers, the volume of customers going through their doors (Wal-Mart says that its stores attract some 200 million US customers annually), highly advanced sourcing and distribution networks, massive purchasing power and continued investment in e-commerce platforms makes these players formidable competitors indeed.
The move to non-food
There are several reasons why the mass retail chains are a growing threat to the office supplies superstores.
Firstly, they are simply stocking more office supplies in their stores. It's probably fair to say that five years ago you probably wouldn't have seen a year-round large office supplies assortment - if one at all - in the big multiples. Now, according to one office supplies retail executive in the UK, "they are giving significant shelf space to that product offer after seeing a good opportunity in categories like office supplies compared to some of the margins they're delivering on common assortments around food". This is, of course, part of the multiples' overall non-food strategy. In the UK, for example, sales of non-food products in the grocery channel rose over 50 percent between 2003 and 2008 to reach £20.4 billion ($32 billion) annually according to Mintel, and Tesco has vowed to become as strong in non-food as in food. With office products, in terms of product assortment and category management, now obviously higher up on their agenda, competition is increasing.
Whether this competition will ultimately lead to the demise of the office supplies superstore, as we know it, is another matter. But the threat has not gone unnoticed. "Obviously we take the mass retailers and clubs extremely seriously," says Steve Mahurin, EVP Merchandising at Office Depot in the US. "Over the years they have been adding more and more office supplies to their assortment and we watch what these guys do and take note. We want to understand where they are going and adapt our strategies accordingly. They could become a formidable competitor in the future and we want to make sure we're doing everything we can to remain the supplier of choice for office products for businesses and home owners alike."
According to Ethan Sinick, Managing Director EMEA at retail research and consulting firm MVI, the competition between mass retailers and office supply specialists is growing as technology evolves. "The growth of technology products in the office specialists (computing, mobile telephony and software) is being mirrored by investments from mass retailers and consumer electronics specialists," he argues.
"We see retailers like Tesco and Best Buy expanding mobile phone store-within-a-store concepts which will be attractive for SOHO customers. We see Best Buy continuing to expand its Geek Squad concept which is competing with a similar offering from Staples. Most importantly, the growth of mass retailers in the e-commerce space, notably Wal-Mart, Tesco and Auchan, along with the specialists like Best Buy and DSGi, allows for greater competition in technology-related office supplies categories." And with EOS accounting for around half of all office supplies sales, that means added pressure on all OP resellers.
The strength of the mass retailers - providing the most popular fast moving products at competitive price points - could ultimately be a factor that plays into the hands of the office superstores. The mass retailers' current model does not allow for the depth of assortment that is carried by the superstores.
Take ink, for example, which is estimated to represent around 30 percent of total office supplies sales.
The mass retailers don't want to stock cartridges from a four-year-old printer because there just isn't the scale - they're stocking the commodity lines which general consumers and SOHO customers might put in their basket during the weekly shop. That's still taking market share from the OP retailers, but there is always going to be a role for the office superstores to provide that convenience in a physical sense for people to go to their stores.
One particular battleground where things are hotting up is the back-to-school/back-to-college season.
"The battle to win back-to-school dollars - estimated at over $50 billion in the US at retail level when combined with back-to-college spending - is a global one," suggests Sinick.
"Looking at the core office supplies business, mass retailers around the world continue to see back-to-school as a critical must-win season," he says.
It's also critical for the office superstores. "Back-to-school is a significant promotion period for us - it can shape one's year," said one executive.
In the UK, the stakes have been raised this year with the absence from the high street of Woolworths - a traditional back-to-school destination - following its bankruptcy at the end of 2008.
"The UK multiples definitely want a slice of that pie," one industry insider told OPI. "We're going to see some effective in-store offers going head to head with the independent dealer, office superstores and other retailers."
Traditionally, the office superstores have used their wider product assortment to tempt back-to-school shoppers through the door, differentiating themselves from the value proposition of the mass retailers.
Last year, however, there was a shift to a low price message, in particular from OfficeMax with its 'Power to the Penny' campaign and Staples, which focused on making savings in its Easy Button TV ad campaign as US consumers grappled with soaring fuel prices.
The fuel crisis is largely behind us, but with most economies in recession and unemployment on the rise, it looks like value will be once again at the top of consumers' priorities. This is not particularly good news for the superstores in terms of margin, but there seems little choice if they want to drive store traffic. What they will have to do is to ensure that they make the most out of their ability to be more flexible than the multiples in terms of timing, meaning they can usually get product on display sooner and carry it longer if they choose to do so.
While periods such as back-to-school are clearly focused on the consumer, the multiples are also having some resonance with the small business marketplace, a key area for the office superstores. This is partly because small business owners are currently more inclined to pick up commodity lines such as paper and ink when they're doing their weekly shopping trip, but also due to a deliberate effort by the multiples to target SMBs. This is most noticeable is the warehouse clubs at the moment.
While these operators have always been targeting SMBs, both Costco and Sam's Club have been stepping up their small business marketing efforts recently. Sam's, for example, says that it has contacted over 80,000 small businesses in recent weeks as part of its Small Business Savings Drive. The Wal-Mart-owned warehouse club has also just announced a partnership with the US Chamber of Commerce aimed specifically at the SMB segment and has simplified its membership requirements for small businesses. And both clubs have sent out a clear message that they are looking to compete directly with the superstores by opening dedicated business centres. At the moment, this new format totals just a handful of outlets and it is too early to tell if they will have a serious impact on the established superstore chains, but it will be interesting to see if and how it develops. Other concepts, such as Costco's Home and Fresh format failed to get off the ground.
A threat not to be discounted
The discounters are getting in on the act, too. US-based discount chain Dollar Tree - which has more than 3,600 stores - recently announced that it was moving its Dollar Tree Direct business online and has a dedicated school and office supplies area.
The site only offers a limited range and only bulk orders are available, but the concept, where orders are placed online and then picked up a few days later at the store, is an interesting one. It's something that Wal-Mart, for example, already does with its Site to Store offer, leveraging its extensive store and distribution networks to offer an extended range of products online. The step from this to be able to provide a full-blown delivery business is probably not a huge one if that's what Wal-Mart decided to do because a lot of the infrastructure is already in place.
"If they were very aggressive in the retail channel, started to get traffic and then leveraged this through the distribution network with a good catalogue offering associated with good service, then this would be a real threat," according to one retail analyst. However, he doesn't see that happening just yet. "They are nowhere near that yet. They could probably compete on the assortment side and price, but there are big question marks over their service ability.
At retail, people are willing to sacrifice price over service, but it's a different story in the delivery channel. Price is a factor that comes in at perhaps third or fourth in the list of most important reasons why customers select a particular operator. Business customers are looking for reliability, services, the ability to handle mistakes quickly and exchange products."
Not surprisingly, Steve Mahurin at Office Depot agrees. "For the small business customer, it's about more than just office supplies," he stresses. "We're going to take the price lever away as best as possible against all competitors. We have a whole host of services that small business owners require to run their businesses on a daily basis. This really differentiates ourselves from what the clubs are doing today. This doesn't mean that they won't change to offer more services with time, but we'll continue to expand our services as well."
One key driver in the whole issue of increased competition from the mass retail players is without doubt the current economic crisis. Not surprisingly, given the state of the global economy, the overriding theme in retail at the moment is 'value'. A recent report by Nielsen says that more middle and high income Americans are shopping at dollar stores than ever before; anecdotal evidence from the UK suggests that 'middle England' is now shopping at value chains such as Matalan and TK Maxx and is proud of it.
In the US, despite the recent fall in fuel prices, the number of shopping trips has gone down. Discretionary trips are being cut as consumers look to make more of their purchases from single destinations, playing into the hands of the mass market retailers, and specialist stores are taking a hit. If you just look at recent comparable store sales, Wal-Mart was able to show growth - albeit a modest one - in April, while the office supplies superstores' most recent comparable retail sales are down in the mid to high teens.
And it doesn't look as if consumers are about to drastically change their habits.
"I think we'll see another year of very much a value focus," predicts Tim O'Connor, VP at retail specialists RetailNet Group. "In the US last year across multiple categories we saw massive pantry destocking when consumers said 'let's just use what we have' in food and consumables. For the most part that's behind us, but it's going to be a slow recovery."
To compete or not to compete on value?
Can, or should, the office supplies superstores go head to head with the multiples on a purely value basis?
If we're looking at it in purely price terms, then it looks like a big gamble. Nowhere is this truer than in the technology segment, where Circuit City was a big name casualty last year in the US, and in Europe, UK-based consumer electronics retailer DSGi has been scaling back its retail activities, not only because of the recession, but also due to intense pricing pressure from the mass retail and online channels. Office Depot got its fingers burned recently by running aggressive promotions in technology products and had to pull back, even giving up around three points on comparable sales because it was just bleeding too much margin.
"For a while the office superstores got into selling flat screen TVs, but that was inappropriate and a distraction from a long-term standpoint," argues O'Connor. "They just can't compete and are not relevant in that space."
It's also a lesson on finding the right balance between promotions and profitable business. Office Depot was getting cherry-picked with customers coming in, buying heavily discounted products and then leaving the store - so this kind of policy doesn't always help to increase the whole basket. However, Office Depot's Steve Mahurin argues that promotional activity is just a sign of the times across retail at the moment. "Consumers are curtailing trips, so all of us are taking steps to attract them and there is far more promotional activity than we saw in the past. Unfortunately, due to the business environment we're in, that's what it takes to attract traffic into the stores."
A big question is whether the consumer's focus on value will wane once the recession is over or if it is a long-term trend.
A new report from UK company Verdict Research suggests that the recession is not merely fostering a temporary change in consumer mindsets, but providing the catalyst for a long-term transformation.
"By the end of this downturn, shopper psychology will be irreversibly changed from that of the heady days seen in the late 90s and early part of this decade," says Matthew Piner, retail analyst at Verdict Research and the report's co-author. "Spending will rise after the recession and consumer confidence will gain some traction again, but shoppers from the lower socio-economic groups in particular will have formed a more price conscious outlook and an intolerance of taking on debt to fund retail expenditure."
On this point, there are strong similarities between the situation in the UK and the US. Consumers were in a position where they were spending more than they made. The credit markets, once so free, have now they dried up and it could be argued that these liquidity resources have dried up for good. There is also uncertainty surrounding the exact impact of higher taxation levels to pay for government bailouts, though it seems certain that this will also have a curbing effect on consumers' ability to spend.
Verdict's report predicts that non-food retail growth in the UK will be just 2.1 percent and 2.5 percent in 2012 and 2013, a much more reserved level than the average 6.3 percent annual growth seen through the nineties. As a result, retailers will have to change their strategies by necessity, with a survival-of-the-fittest style cull taking place. Innovation, differentiation and exclusive products will need to become an integral part of retailers operations. "Retailers will have to learn to balance the new consumer desire for quality, timeless products, with the need to drive shorter replacement cycles for areas where consumers are instinctively cutting back," says Piner. "They will have to compete harder on the entry price items upon which consumers are more sensitive, whilst becoming more adept at adding value to higher priced products."
The superstores will argue that they have been already been adapting to the current challenges and the changing retail environment across a number of fronts.
OfficeMax, for example, formed a partnership with grocery retailer Safeway last year to create co-branded aisles in 1,600 Safeway stores (Staples has had a similar arrangement with Ahold in the north east of the US since 2005). While not covering the full range of products and services, this kind of store-in-store strategy is a quick way to develop sales without expensive real estate costs, and also means the mass retailer is not going develop its own competing assortment.
Store downsizing has already been going on for some time. "Some stores the office superstore chains opened around five years ago were in the 28-30,000 sq ft range - a big store now is say 22,000 sq ft and a lot of them are in the teens," points out RetailNet Group's Tim O'Connor.
Office Depot has been overhauling its product assortments recently. "We've been cleaning up assortments, reducing SKU count and inventory in many cases, improving our costs and making sure that at the end of the day we have the most compelling assortments at retail," states Depot's EVP of Merchandising Steve Mahurin. "We're seeing good initial success and each new assortment we roll out is doing better than the previous one."
In the last year, all of the Big 3 have introduced exclusive products or announced partnerships with specialist vendors in order to create a differentiating product offering. Office Depot has increased the breadth of product in its jan/san and crafting assortments, while Staples launched its own M brand of high-end stationery.
Customers are being enticed by new or revamped services. Recent examples include ink cartridge recycling, PC tune-ups and free résumé printing.
Whether these initiatives will work, time will tell, but the Big Boxes clearly recognise that they need to evolve their store concepts.
At the end of the day, if they are able to provide value in terms of breadth of assortment, attractive pricing and an array of add-on services that give people a compelling reason to visit their stores rather than visit a mass retail chain store, they will have succeeded. But it will still be a big challenge.
by Andy Braithwaite
Can the beleaguered office supplies superstore chains face up to the growing challenge of the mighty mass market retailers as they step up their efforts to sell more office supplies to both consumers and small businesses?
At a recent industry conference, a senior executive at a major office products retailer suggested that the biggest threat to OP resellers in the coming years would come from the mass market retail channel, or the 'foodies' as he called them - the Wal-Marts, Tescos and Carrefours of this world. You could also include warehouse clubs like Costco and Sam's Club given their size and wide product assortment.
The retail sector, as we all know, has been under severe pressure over the last 18 months. Household names such as CompUSA, Circuit City and Woolworths have all departed the scene, DSGi is facing serious questions about the future viability of its retail presence, and the 'Big 3' office supplies superstores - Staples, Office Depot and OfficeMax - have all seen drops in their retail sales, with Depot recently closing more than 100, or around 10 percent, of its US stores.
Of course, the global recession has been blamed for the fall-off in sales. But you could argue that it is merely acting as a catalyst to changes in the retail landscape that would have taken place anyway. Among the reasons for these changes are the growing dominance of the mass retail sector and the failure of some of these now-extinct chains to evolve and adapt as the competitive retail environment changed.
Ironically, some 20 years after the rise of the big box store format wiped many smaller office and stationery retailers off the map, these 'category killers' themselves are now anxiously watching every move of these larger predators who are hunting for market share as the shrinking economy encourages them to seek growth opportunities outside their traditional categories, including office supplies.
And these are certainly retailing behemoths that should not be taken lightly. The figures speak for themselves: Wal-Mart - by some distance the world's largest retailer - had sales of over $90 billion in the last quarter alone and boasts more than 4,000 stores in the US; the number two Carrefour has in excess of 15,000 stores worldwide and sales of over j100 billion ($135 billion); and the UK's Tesco commands more than 30 percent of the grocery market in its home country from its store portfolio of some 2,200. The combination of sheer store numbers, the volume of customers going through their doors (Wal-Mart says that its stores attract some 200 million US customers annually), highly advanced sourcing and distribution networks, massive purchasing power and continued investment in e-commerce platforms makes these players formidable competitors indeed.
The move to non-food
There are several reasons why the mass retail chains are a growing threat to the office supplies superstores.
Firstly, they are simply stocking more office supplies in their stores. It's probably fair to say that five years ago you probably wouldn't have seen a year-round large office supplies assortment - if one at all - in the big multiples. Now, according to one office supplies retail executive in the UK, "they are giving significant shelf space to that product offer after seeing a good opportunity in categories like office supplies compared to some of the margins they're delivering on common assortments around food". This is, of course, part of the multiples' overall non-food strategy. In the UK, for example, sales of non-food products in the grocery channel rose over 50 percent between 2003 and 2008 to reach £20.4 billion ($32 billion) annually according to Mintel, and Tesco has vowed to become as strong in non-food as in food. With office products, in terms of product assortment and category management, now obviously higher up on their agenda, competition is increasing.
Whether this competition will ultimately lead to the demise of the office supplies superstore, as we know it, is another matter. But the threat has not gone unnoticed. "Obviously we take the mass retailers and clubs extremely seriously," says Steve Mahurin, EVP Merchandising at Office Depot in the US. "Over the years they have been adding more and more office supplies to their assortment and we watch what these guys do and take note. We want to understand where they are going and adapt our strategies accordingly. They could become a formidable competitor in the future and we want to make sure we're doing everything we can to remain the supplier of choice for office products for businesses and home owners alike."
According to Ethan Sinick, Managing Director EMEA at retail research and consulting firm MVI, the competition between mass retailers and office supply specialists is growing as technology evolves. "The growth of technology products in the office specialists (computing, mobile telephony and software) is being mirrored by investments from mass retailers and consumer electronics specialists," he argues.
"We see retailers like Tesco and Best Buy expanding mobile phone store-within-a-store concepts which will be attractive for SOHO customers. We see Best Buy continuing to expand its Geek Squad concept which is competing with a similar offering from Staples. Most importantly, the growth of mass retailers in the e-commerce space, notably Wal-Mart, Tesco and Auchan, along with the specialists like Best Buy and DSGi, allows for greater competition in technology-related office supplies categories." And with EOS accounting for around half of all office supplies sales, that means added pressure on all OP resellers.
The strength of the mass retailers - providing the most popular fast moving products at competitive price points - could ultimately be a factor that plays into the hands of the office superstores. The mass retailers' current model does not allow for the depth of assortment that is carried by the superstores.
Take ink, for example, which is estimated to represent around 30 percent of total office supplies sales.
The mass retailers don't want to stock cartridges from a four-year-old printer because there just isn't the scale - they're stocking the commodity lines which general consumers and SOHO customers might put in their basket during the weekly shop. That's still taking market share from the OP retailers, but there is always going to be a role for the office superstores to provide that convenience in a physical sense for people to go to their stores.
One particular battleground where things are hotting up is the back-to-school/back-to-college season.
"The battle to win back-to-school dollars - estimated at over $50 billion in the US at retail level when combined with back-to-college spending - is a global one," suggests Sinick.
"Looking at the core office supplies business, mass retailers around the world continue to see back-to-school as a critical must-win season," he says.
It's also critical for the office superstores. "Back-to-school is a significant promotion period for us - it can shape one's year," said one executive.
In the UK, the stakes have been raised this year with the absence from the high street of Woolworths - a traditional back-to-school destination - following its bankruptcy at the end of 2008.
"The UK multiples definitely want a slice of that pie," one industry insider told OPI. "We're going to see some effective in-store offers going head to head with the independent dealer, office superstores and other retailers."
Traditionally, the office superstores have used their wider product assortment to tempt back-to-school shoppers through the door, differentiating themselves from the value proposition of the mass retailers.
Last year, however, there was a shift to a low price message, in particular from OfficeMax with its 'Power to the Penny' campaign and Staples, which focused on making savings in its Easy Button TV ad campaign as US consumers grappled with soaring fuel prices.
The fuel crisis is largely behind us, but with most economies in recession and unemployment on the rise, it looks like value will be once again at the top of consumers' priorities. This is not particularly good news for the superstores in terms of margin, but there seems little choice if they want to drive store traffic. What they will have to do is to ensure that they make the most out of their ability to be more flexible than the multiples in terms of timing, meaning they can usually get product on display sooner and carry it longer if they choose to do so.
While periods such as back-to-school are clearly focused on the consumer, the multiples are also having some resonance with the small business marketplace, a key area for the office superstores. This is partly because small business owners are currently more inclined to pick up commodity lines such as paper and ink when they're doing their weekly shopping trip, but also due to a deliberate effort by the multiples to target SMBs. This is most noticeable is the warehouse clubs at the moment.
While these operators have always been targeting SMBs, both Costco and Sam's Club have been stepping up their small business marketing efforts recently. Sam's, for example, says that it has contacted over 80,000 small businesses in recent weeks as part of its Small Business Savings Drive. The Wal-Mart-owned warehouse club has also just announced a partnership with the US Chamber of Commerce aimed specifically at the SMB segment and has simplified its membership requirements for small businesses. And both clubs have sent out a clear message that they are looking to compete directly with the superstores by opening dedicated business centres. At the moment, this new format totals just a handful of outlets and it is too early to tell if they will have a serious impact on the established superstore chains, but it will be interesting to see if and how it develops. Other concepts, such as Costco's Home and Fresh format failed to get off the ground.
A threat not to be discounted
The discounters are getting in on the act, too. US-based discount chain Dollar Tree - which has more than 3,600 stores - recently announced that it was moving its Dollar Tree Direct business online and has a dedicated school and office supplies area.
The site only offers a limited range and only bulk orders are available, but the concept, where orders are placed online and then picked up a few days later at the store, is an interesting one. It's something that Wal-Mart, for example, already does with its Site to Store offer, leveraging its extensive store and distribution networks to offer an extended range of products online. The step from this to be able to provide a full-blown delivery business is probably not a huge one if that's what Wal-Mart decided to do because a lot of the infrastructure is already in place.
"If they were very aggressive in the retail channel, started to get traffic and then leveraged this through the distribution network with a good catalogue offering associated with good service, then this would be a real threat," according to one retail analyst. However, he doesn't see that happening just yet. "They are nowhere near that yet. They could probably compete on the assortment side and price, but there are big question marks over their service ability.
At retail, people are willing to sacrifice price over service, but it's a different story in the delivery channel. Price is a factor that comes in at perhaps third or fourth in the list of most important reasons why customers select a particular operator. Business customers are looking for reliability, services, the ability to handle mistakes quickly and exchange products."
Not surprisingly, Steve Mahurin at Office Depot agrees. "For the small business customer, it's about more than just office supplies," he stresses. "We're going to take the price lever away as best as possible against all competitors. We have a whole host of services that small business owners require to run their businesses on a daily basis. This really differentiates ourselves from what the clubs are doing today. This doesn't mean that they won't change to offer more services with time, but we'll continue to expand our services as well."
One key driver in the whole issue of increased competition from the mass retail players is without doubt the current economic crisis. Not surprisingly, given the state of the global economy, the overriding theme in retail at the moment is 'value'. A recent report by Nielsen says that more middle and high income Americans are shopping at dollar stores than ever before; anecdotal evidence from the UK suggests that 'middle England' is now shopping at value chains such as Matalan and TK Maxx and is proud of it.
In the US, despite the recent fall in fuel prices, the number of shopping trips has gone down. Discretionary trips are being cut as consumers look to make more of their purchases from single destinations, playing into the hands of the mass market retailers, and specialist stores are taking a hit. If you just look at recent comparable store sales, Wal-Mart was able to show growth - albeit a modest one - in April, while the office supplies superstores' most recent comparable retail sales are down in the mid to high teens.
And it doesn't look as if consumers are about to drastically change their habits.
"I think we'll see another year of very much a value focus," predicts Tim O'Connor, VP at retail specialists RetailNet Group. "In the US last year across multiple categories we saw massive pantry destocking when consumers said 'let's just use what we have' in food and consumables. For the most part that's behind us, but it's going to be a slow recovery."
To compete or not to compete on value?
Can, or should, the office supplies superstores go head to head with the multiples on a purely value basis?
If we're looking at it in purely price terms, then it looks like a big gamble. Nowhere is this truer than in the technology segment, where Circuit City was a big name casualty last year in the US, and in Europe, UK-based consumer electronics retailer DSGi has been scaling back its retail activities, not only because of the recession, but also due to intense pricing pressure from the mass retail and online channels. Office Depot got its fingers burned recently by running aggressive promotions in technology products and had to pull back, even giving up around three points on comparable sales because it was just bleeding too much margin.
"For a while the office superstores got into selling flat screen TVs, but that was inappropriate and a distraction from a long-term standpoint," argues O'Connor. "They just can't compete and are not relevant in that space."
It's also a lesson on finding the right balance between promotions and profitable business. Office Depot was getting cherry-picked with customers coming in, buying heavily discounted products and then leaving the store - so this kind of policy doesn't always help to increase the whole basket. However, Office Depot's Steve Mahurin argues that promotional activity is just a sign of the times across retail at the moment. "Consumers are curtailing trips, so all of us are taking steps to attract them and there is far more promotional activity than we saw in the past. Unfortunately, due to the business environment we're in, that's what it takes to attract traffic into the stores."
A big question is whether the consumer's focus on value will wane once the recession is over or if it is a long-term trend.
A new report from UK company Verdict Research suggests that the recession is not merely fostering a temporary change in consumer mindsets, but providing the catalyst for a long-term transformation.
"By the end of this downturn, shopper psychology will be irreversibly changed from that of the heady days seen in the late 90s and early part of this decade," says Matthew Piner, retail analyst at Verdict Research and the report's co-author. "Spending will rise after the recession and consumer confidence will gain some traction again, but shoppers from the lower socio-economic groups in particular will have formed a more price conscious outlook and an intolerance of taking on debt to fund retail expenditure."
On this point, there are strong similarities between the situation in the UK and the US. Consumers were in a position where they were spending more than they made. The credit markets, once so free, have now they dried up and it could be argued that these liquidity resources have dried up for good. There is also uncertainty surrounding the exact impact of higher taxation levels to pay for government bailouts, though it seems certain that this will also have a curbing effect on consumers' ability to spend.
Verdict's report predicts that non-food retail growth in the UK will be just 2.1 percent and 2.5 percent in 2012 and 2013, a much more reserved level than the average 6.3 percent annual growth seen through the nineties. As a result, retailers will have to change their strategies by necessity, with a survival-of-the-fittest style cull taking place. Innovation, differentiation and exclusive products will need to become an integral part of retailers operations. "Retailers will have to learn to balance the new consumer desire for quality, timeless products, with the need to drive shorter replacement cycles for areas where consumers are instinctively cutting back," says Piner. "They will have to compete harder on the entry price items upon which consumers are more sensitive, whilst becoming more adept at adding value to higher priced products."
The superstores will argue that they have been already been adapting to the current challenges and the changing retail environment across a number of fronts.
OfficeMax, for example, formed a partnership with grocery retailer Safeway last year to create co-branded aisles in 1,600 Safeway stores (Staples has had a similar arrangement with Ahold in the north east of the US since 2005). While not covering the full range of products and services, this kind of store-in-store strategy is a quick way to develop sales without expensive real estate costs, and also means the mass retailer is not going develop its own competing assortment.
Store downsizing has already been going on for some time. "Some stores the office superstore chains opened around five years ago were in the 28-30,000 sq ft range - a big store now is say 22,000 sq ft and a lot of them are in the teens," points out RetailNet Group's Tim O'Connor.
Office Depot has been overhauling its product assortments recently. "We've been cleaning up assortments, reducing SKU count and inventory in many cases, improving our costs and making sure that at the end of the day we have the most compelling assortments at retail," states Depot's EVP of Merchandising Steve Mahurin. "We're seeing good initial success and each new assortment we roll out is doing better than the previous one."
In the last year, all of the Big 3 have introduced exclusive products or announced partnerships with specialist vendors in order to create a differentiating product offering. Office Depot has increased the breadth of product in its jan/san and crafting assortments, while Staples launched its own M brand of high-end stationery.
Customers are being enticed by new or revamped services. Recent examples include ink cartridge recycling, PC tune-ups and free résumé printing.
Whether these initiatives will work, time will tell, but the Big Boxes clearly recognise that they need to evolve their store concepts.
At the end of the day, if they are able to provide value in terms of breadth of assortment, attractive pricing and an array of add-on services that give people a compelling reason to visit their stores rather than visit a mass retail chain store, they will have succeeded. But it will still be a big challenge.
