Looking at the current trials and tribulations of the three OP big box operators in the US, there’s a recurring sense of déjà vu. And now that even Staples, the darling of the OP world (and often Wall Street), has fallen from grace – at the time of going to press, its share price traded at a lowly but slightly recovered $11.94 compared to its year-high of $16.93 and low of $10.57 – all three are sitting in a pit that at times can appear truly bottomless.
The reason is retail to a large extent, with a good smattering of difficulties in their multichannel international offerings thrown in for good measure.
Retail malaise
Let’s stick with retail for now. It’s pretty clear-cut why the OP big boxes are facing such an uphill struggle, says Jefferies Group Managing Director Dan Binder: “A lot of business is moving online for starters; secondly you have the secular headwinds in paper and ink which are a big problem that’s not going away; thirdly, technology has been soft. Some of the technology issues may be temporary and pick up when the economy does, but even that can only go so far because the whole move towards tablets is cannibalising laptop sales. Generally speaking, if you’re selling the iPad, you’re in good shape but unfortunately the OP boxes in the US and many others haven’t got that.”
Add the severe reduction in the white collar workforce (though that arguably affects the delivery business more), the increasingly low priority status of office supplies and the fact that the OP superstores have lost the price leadership of their first couple of decades ‘in power’, and the future looks bleak.
Admittedly, a good number of the problems that the big boxes are having now – and have had for several years – are out of their control. Some are more ‘homemade’, however, and are now coming back to haunt them in an often rather overwhelming way. Two obvious challenges that have become real millstones around their necks are store size and length of leases. When times were good, it wasn’t a problem. Now they aren’t and whether it’s closing down a store and/or getting out of a lease, relocating or just downsizing, all of it becomes a very expensive exercise.
There’s been no choice, however, and reducing the number of stores as well as store footprint has become the common theme among all players. In fact, the trend towards smaller and larger stores started in the US well over a decade ago when some of the mega-retailers, notably The Home Depot and Costco, began to look into more urban areas and also smaller towns and, as a result, reduced store footprint. That said, typical The Home Depot stores still average over 100,000 sq ft (10,000 sq m), over five times the size of Staples’ prototype 18,000 sq ft.
Big and small
Today, it’s become more than an add-on trend, however, and more of a steady reduction of all floor space. While Office Depot started its major retail overhaul over a year ago, Staples has been more cautious in its restructuring plans. This is now likely to change, with store size reduction a main priority, according to CEO Ron Sargent.
In the UK, for example, Staples’ biggest retail market in Europe, up to 60 stores are at risk of being disposed of, downsized or relocated according to a list published in Property Week in June. Staples Europe refused to comment on this “speculation” of a considerable restructure back in April and also more recently in August.
It makes perfect sense and is inevitable, especially in some overstored, badly located markets. And if, like Staples has been alluding to, it manages to retain a minimum of 90% of sales volume when downsizing a store, smaller stores are definitely the way to go.
If, on top of that, closing stores results in reverse cannibalisation (ie customers migrating to neighbouring stores), it’s a no brainer from an operating profit point of view. But it doesn’t happen overnight and while shareholders are losing faith and patience, the vultures – in the shape of private equity firms – are circling.
Most recently, for example, activist investment firm Starboard Value has taken a 13% stake in Office Depot, regarding the firm as “deeply undervalued” and suggesting ways in which the company could “substantially” improve margins.
In that context, it’s positive to note that OPI has spoken to a number of people who believe that the in-store shopping experience at Depot has improved considerably over the past few months from a price, selection, and, particularly, customer service point of view.
As a general rule, the more experiential retailers make their stores, actually giving shoppers a reason to go there, the more it will stand them in good stead, says Retail Insights Director for Kantar Retail EMEA Bryan Roberts. “Showrooming is almost inevitable, but it’s about how you minimise the impact of it,” he says. “In its specialist market, Dixons Retail in the UK, for example, both domestically but also in markets like Scandinavia, has done a great job of actually putting some time and money into its staff to provide a better service.”
And better than expected full-year results and renewed shareholder confidence have been the reward.
The OP big boxes, of course, haven’t been alone in their sales as well as profitability woes. France’s Carrefour, Germany’s Metro Group with its various subsidiaries and the UK’s Tesco have all been struggling, as the move online and a new attitude to shopping continues. Proximity retailing has become a big strategic initiative, particularly in saturated markets such as the US and Western Europe.
Tim O’Connor, Managing Partner at Retail Performance Solutions, says: “There’s a macro-trend in retail for smaller, more productive boxes. Carrefour thought they could just bully the market into pursuing the hypermarket business, but the market said ‘no’.”
For the big mass merchandisers it’s theoretically easier to ride out the storm because – unlike a Staples, Depot or OfficeMax – they sell a lot of products that people need on a daily basis, most importantly groceries. But, as the Carrefour example shows, that doesn’t necessarily guarantee sales (much less profitability) or customer loyalty.
All that said, the big box phenomenon is far from dead and particularly in regions such as Eastern Europe, Latin America and parts of Asia, there are still good growth opportunities.
In Australia, the US OP players’ equivalent Officeworks is also enjoying some fairly good times. Yes, the country’s only OP superstore operator – like its global competitors – has been making significant investments in its e-commerce platforms, but not so at the expense of store sales, says Managing Director Mark Ward. “E-commerce sales are growing quite rapidly for us – we have a run rate of $150 million annually and it’s now effectively our largest ‘store’, but we have very successfully grown sales across all channels over the last four years by understanding what is unique about each channel and driving that proposition in an integrated way,” he says.
Indeed, he adds, Officeworks’ largest physical store segment (there are three, the biggest about 15,000 sq ft in size) remains its most profitable outlet and also represents the bulk of its store network.
And there’s no real trend to downsize in Australia, although, admits Andrew Penfold, Owner of Penfold Research, whatever happens in the rest of the world will eventually come to Australia too. “As a nation, we are not as badly affected due to our healthier economy, lower rate of online purchase rates and lower degree of competition between players. However, global OP trends have a habit of spreading everywhere; they just take longer to get to some places than others. Basically, in a declining sector like OP you need to take share from your competitors just to stand still. So to really grow you have to diversify into new (non-declining) areas.”
And that’s not as easy as all that. Even though there has been growth in jan/san, for example, for the big boxes, it’s been mostly a channel shift rather than category growth.
For the likes of Walmart, it’s the core must-have products that are most attractive. Says OP Resource Partner Doug Ramsdale: “Walmart is interested in building bigger stores because it wants to add more food to its stores, particularly fresh food as that brings in the shoppers. But while more than 50% of Walmart’s sales is food, the addition of it has actually helped the non-food side grow.
“If you look at Target, meanwhile, only 5% of its business is food and Target wants to grow that to 15%. To do that, it has to build larger stores because it doesn’t want the rest of it to go away.”
Specialists under pressure
Is it a fair point, then, that the specialist resellers are having a tougher time than the more generic operators? In retail terms, electronics retailing is a segment where there have been – and still are – definite losers and winners. As mentioned, Dixons in the UK has been given the thumbs up while Metro Group’s Media-Saturn hasn’t been faring well.
In the US, when Circuit City (the retail side) went out of business in 2009, Best Buy became the undisputed leader in the electronics sector. But it didn’t maximise the opportunities and is now suffering badly at the hands of online sellers. Best Buy has become a great example of the showrooming phenomenon: research in store, buy online. Its tactic now: go small.
In the next three years, Best Buy is expected to more than double the number of its mobile stores to approximately 800 while at the same time closing and shrinking its big-box locations to reverse declining same-store sales.
But is it all a bit too little too late? O’Connor says: “Best Buy in many ways is in the same situation as the office guys in the sense that both have a narrow range. Best Buy had tremendous deflation in ranges around the entertainment side, because of flat screens, for example. People buy them and then they don’t need another one for a while. Combine that with the move to the internet, especially the smaller, high margin stuff, and it’s a disaster. So instead of stopping at Staples or Best Buy to buy a, say, backup hard drive for $120, people just go to Amazon.
“Looking back, Best Buy knew all the right things to do, the world just moved faster than the company could. The move from laptops to tablets, the way unit sales came down on flat screens, the whole shift to digital products, the move to the internet. Some of it, it saw coming, but most of it happened so much faster than Best Buy would have predicted. So instead of having a great strategy and being ahead of the curve, it had a great strategy but played catch-up and that causes a lot of stress and pressure.”
Going back to OP big boxes, it’s not just retail that’s been causing all the headaches and this is even more true in their international businesses than it is at home. For both Depot and Staples, Europe has been a particular bugbear. Looking again down under, Staples has had to contend with some serious headcount reductions already (15% in the last 12 months). The formerly mighty CEA is still a force, but the global financial crisis – unlike in retail where Officeworks certainly has got away lightly – has made a severe dent in its supremacy.
Management issues
There have also been some questions with regards to management. Dirk Collin at Depot EMEA, for example, wasn’t replaced but instead his job was kind of added on to that of President International Steve Schmidt. At a time when the going is pretty tough, is that not a dilution of interests? Staples isn’t faring any better when it comes to confidence in its international team.
Says Eamon Kelly, Research Associate/Partner at Cleveland Research: “Our work continues to imply that [Staples] is having a hard time getting the right team in place internationally. The consistent management-level turnover within its international segment is serving as an additional hurdle in turning around its international operations.”
Neil Austrian, Ravi Saligram and Ron Sargent can draw on their considerable expertise in running complex, multichannel businesses so it’s not all doom and gloom. For the time being, however, they have some serious fixing to do!
Click and collect: multichannel at its best
Online shopping has long been a major curse for bricks-and-mortar retailers, and showrooming has become frustrating as much as it has become irreversible.
But here’s another trend that’s proving retailers are not standing by idly, watching their online competitors take the sales that used to be theirs. Multichannel is the word and click & collect (C&C) the trend. One of the first to conceive and execute the idea was UK-based mail-order operator Argos just over a decade ago. C&C now represents 70% of its £1.3 billion ($2.1 billion) in online sales (that’s 30% of the company’s total revenues).
Today, many retailers – notably the large grocery players such as Tesco and Walmart – are doing it and it’s increasingly catching on among more specialist sectors, like fashion, pharmaceuticals and hardware. Since November of last year, even Apple, the coolest label on the planet, has launched an app (iOS) that allows customers to collect items from its stores within 12 minutes of ordering them.
The concept is simple and generally requires both an online and a bricks-and-mortar presence. C&C and its various derivatives (reserve & collect, order & collect etc) all refer to the ability of customers to reserve or purchase a product online and collect it in person in a physical store. With the active use of at least two touchpoints in the purchasing process, C&C epitomises multichannel retail.
To really make a difference as an added service, C&C relies on the fact that customers are already happy with their chosen retailer (or reseller even), so it’s not a fix-it solution for an already broken retail model. Customers are unlikely to switch to a certain company simply because of the C&C option. They want to buy from a particular reseller, but want to do so online, rather than making a trip especially, walking around a store to find products and then potentially finding that it’s out of stock. C&C doesn’t resolve all these issues, but it most certainly adds another layer of convenience and eliminates the often inconvenient and limiting home delivery.
The OP world is also beginning to see the opportunities and there are several schemes in motion now, in various stages of progress. France-based Top Office, for example, has started to offer ‘drive through’ pick-up options, while others, including Office Depot in France, prefer the in-store pick-up, presumably hoping for add-on sales at the time of collection. Staples first trialled the concept in Belgium and now offers it in the UK too. Curiously though, it’s also partnering with Amazon – the enemy as it were – with the e-tailer’s locker system in the UK.
There are challenges. Firstly, customers would typically only want to use the service if it’s free while for the retailer it’s a cost factor in terms of storage and staffing levels (although, presumably, if executed properly, it’s a cheaper method of fulfilment than home delivery).
There are other issues for retailers to address: Do they pick products from store shelves or from a warehouse? If the former, do they have good enough stock accuracy to ensure a product reserved online has not flown off the shelf by the time the customer collects? Should customers pay online or in store at collection? How long do customers have to pick up their orders? What products are suitable for store collection (food being more difficult to sell on that basis). How much does the push towards online cannibalise other parts of the business; who gets credited with the sale?
Lots of questions, but it’s a compelling proposition that seems to work. Yet few retailers – definitely in OP – have wholeheartedly embraced the opportunity which is particularly surprising given that some already have formidable online shops. Or maybe they just haven’t marketed it very well?
