When Neil Austrian retired as President of the NFL in 1999 he probably didn’t expect to be running a public company more than ten years later. However, after two stints as Office Depot’s interim CEO, the company turned to the 71-year-old long-time board member in May and persuaded him to take the job on a full-time basis. OPI caught up with Austrian to find out how he intends to steady the Depot ship in the current choppy economic waters.
Office Depot’s head office staff in Boca Raton reportedly gave Neil Austrian a standing ovation when news of his full-time appointment as CEO broke in May. The man who likes to spend as much time as he can in the staff canteen chatting to colleagues clearly has a more hands-on, approachable management style than his predecessor Steve Odland.
Filtering this style down through the management levels is one of Austrian’s goals as he looks to improve staff morale at a company which has been faced with declining sales, continued accusations of overcharging on government contracts and rumours of a merger with rival OfficeMax.
OPI: You said at the Goldman Sachs Retail Conference in September that seven years ago you felt “coerced” into taking on the interim CEO position. What was different this time around?
Neil Austrian: I think the difference this time around was that I probably had more knowledge of the company and its officers, having served as the lead Director for a number of years. I also have a home in the area now, so it was not as big of an issue as it was last time. I know and love the community. I think the other big difference though, is that we were operating in an economy that was the worst I’ve ever seen since I came into business almost 50 years ago. So it’s a far more challenging time, far more competitive time, and clearly we don’t have the financial reserves that we had in 2004.
OPI: The seven months in the interim role, would you say that this was a ‘lame-duck’ period
NA: No, the word “interim” never entered my mind when I took on the job. I took it on as though I were going to be here forever even if it was an interim position, and some of the changes we made, and the focus on a few key things, I would have done no matter what.
I think the biggest difference, and the only difference, between the interim and permanent was that I really couldn’t make organisational changes the way I wanted to do as interim because, in the event that somebody else became the CEO, I didn’t want to put in place an organisational structure of which they might have a differing point of view.
What happened at the end of the day, there was a search committee of the board. Every candidate we wanted to interview, we did. There was never any doubt that the Office Depot CEO position was a very attractive opportunity. The committee narrowed it down to a very senior executive at a Fortune 100 company and literally, just the weekend we were preparing to make a person an offer, the board came to me and said: “We think you’re doing a good job. We like what you’re doing. Would you consider staying for an extended period of time?”
So my wife Nancy and I talked it over that weekend, and we agreed we were having fun, and I agreed to do it.
OPI: Taking away the macro economic conditions, would you agree that there were inherent problems with the company and, if so, what were the main ones that you identified?
NA: Every company has problems. Certainly we’re no different from anyone else. I think – at least from my perspective – there were a number of things. First, I thought the culture was impaired in terms of what I wanted to see and, second, I felt that the company was trying to accomplish too many things without any real focus on what’s really important to driving the business.
I also felt, and it was confirmed, that the style of management that I have versus what Steve had is vastly different and that I’m far more willing to really give people a lot of rope and let them run their businesses and not be afraid to fail, not be afraid to make a mistake.
There was limited accountability, so what you had was a situation where, because most of the decision making was centralised at the very top, people weren’t empowered so, as a result, they didn’t feel accountable. It was a very inward looking organisation and I felt we were somewhat intellectually dishonest because we couldn’t admit mistakes that we had made in the past, and if you don’t admit you made a mistake, you really can’t go forward because you’re not going to correct it.
OPI: Would you say it’s fair if I said that you inherited a ‘sick’ company?
NA: Well, I think you have to define what sick is and put it in perspective.
You have a situation where not just us but the industry – and many industries – lost a substantial amount of their revenue in that three and a half to four year period of time. We went from almost $16 billion in revenue to $12 billion. So a $4 billion revenue loss at about a 30% margin is $1.2 billion approximately of gross margin dollars that we lost. Yet, at the same time, we remained profitable during all those years and had positive cash flow.
OPI: You made a loss last year – especially after the restatement of the earnings.
NA: I’m looking at the business today the way most securities analysts do. I’m focused on EBIT [Earnings Before Interest and Taxes], gross profit dollars and free cash flow. I’m not worried about write-offs and below the line items right now, and on that basis we were profitable. We had $86 million of EBIT and were profitable. This year we expect to have about $110 million of EBIT. The restatement was really a situation with the IRS. It didn’t affect EBIT, it affected cash.
OPI: In terms of your EBIT margin goal, you have said 3-4% by 2013. That’s still some way below the historical highs. Is this just a sign of the office supplies industry as it is today or more company specific?
NA: I think it’s two factors. It’s clearly a sign of the office products industry’s evolving competitive nature and the fact that you have competitors other than just Staples and OfficeMax. Secondly, I think it’s a sign that I can’t get to where I want to go in just two years. I think that we have a real chance at getting margins back. Whether I can get them back to historical highs I can’t say at this point because I’m really focused on the next two years.
OPI: Is that what you’ve set yourself, a two-year plan for a turnaround?
NA: It’s my mission. It doesn’t mean I’m only committed here for two years. I haven’t set a timeline for myself, but basically I believe that I’ve got to get a sense of urgency into the company. In fact, we’ve got a two-year runway to prove that this management team can turn this business around. We don’t have forever.
OPI: What do you think you’ve been able to achieve in the first few months?
NA: Well, I think we’ve made some progress and the way we’ve gone about it is we’ve had round table discussions on a continuing, cross-functional basis.
We’re trying to set up a culture that I call TNT – that means ‘Today Not Tomorrow’. Let’s get at it, and let’s make it work today because time is passing by and we have an economy that’s not being very helpful to us. I want a company that hates to lose, that won’t accept losing, and centres at goal winning. I want the associates to be engaged in the process of setting the goals and priorities. They can discuss them, we can disagree on them, but once we approve them, you buy into the plan and stop complaining.
Finally, I think the key was focus. We’ve narrowed down what’s really important and we have half a dozen key initiatives that everybody in the company understands and that’s what we’re going to work on for this year and next year.
OPI: I guess on a personal level – and no disrespect here – but perhaps at this stage in life you’re not looking at future CEO roles after Office Depot.
NA: Probably not, but you know, stranger things have happened in life. I didn’t think I’d be back here!
OPI: Do you have any sense that this is your swansong at CEO level and you want to go out with a bang?
NA: No. I don’t look at my life that way. I’ll be very honest, I’ve had a charmed life, I’ve had a wonderful job and I’ve had a career that most people envied, including myself. So I don’t look at swansongs, I look at a situation here that got presented where the board thought I could make a difference, the current associates think I can make a difference and I believe myself I can make a difference – and that’s not ego talking, it’s just I’ve had an awful lot of experience.
Given that, my mission really is to restore the company to the right kind of profitability and my hope and goal would be that the next CEO would come from within the company.
OPI: Let’s have a look at some of the changes that you’ve made. I think one of the most obvious ones is the change to the North American management structure with Kevin Peters coming in as President of North America. Why did you make that change?
NA: We’ve talked ever since I’ve been on the board about being customer centric and customer focused. And they way we were organised was in silos. We had the BSD organisation reporting up to Steve Schmidt. We had the retail organisation reporting to Kevin. We had the merchandising group reporting to Kevin, the marketing organisation reporting to Steve and, at the end of the day, I think we were spending more time debating about allocation of costs and where revenue was going to go as opposed to worrying about the customer. So it seemed to me that it made sense to focus our efforts on our North American customers.
It doesn’t mean that Kevin is doing everything. We’ve still got the BSD and direct sales group reporting to him, but in order to basically make him the customer point person in North America, we’ve moved the supply chain to report to Mike Newman, our CFO, and the merchandising and marketing organisations report to me. So we have elevated those roles so the company understands that merchandising and marketing are what’s going to drive our business.
I brought in Bob Moore as our full-time Head of Marketing. He spent a couple of years as EVP Marketing at Staples and has had a whole succession of both marketing and general manager jobs at Bosch and Lomb.
Our interim Head of Merchandising, Farla Efros, has been in the retail field for the last 20-plus years and has been working here as a consultant for PWC on our merchandising strategy. I’m optimistic she’s going to stay on a full-time basis.
From a strategy and new business development standpoint, I needed a senior executive who knew the industry and who’s well respected in this company, and that was Steve Schmidt. Steve has taken on that assignment in terms of where we’re going to be after these two years and, at the same time, the first major initiative that Steve is working on is our direct import business, because it’s a major factor in what we do from a merchandising standpoint worldwide
OPI: Just looking at Steve Schmidt’s role there, it did look at first glance that it was perhaps a sideways or even downwards move for him personally. Would you agree with that?
NA: Steve understands that he doesn’t have P&L responsibility today that he used to have but, at the same time, he recognises how important his new role is. He’s embraced it and I think he’s dug in 150% in terms of how he believes he can make an impact.
OPI: I know the changes are recent, but are there any tangible results yet?
NA: I think the only comment would be that the morale both in the field and here in Boca is extremely positive. In most of our town hall meetings and officer meetings, our folks have become accustomed to the fact that I want them to talk up and speak out, and I haven’t heard any comments that this was not the right move at this point in time.
OPI: Turning to look at the market. All indications suggest Staples is taking share from yourselves and ‘Max both in delivery and retail. Firstly, would you admit that is probably true and, assuming that you do, how can you reverse that trend?
NA: Let me step back. Staples is twice as big as we are. They’re bigger than both ‘Max and ourselves combined. And my hat is off to them because they’re an extremely well-managed company. They’ve had great consistency in their management where they have a very deep bench and they rarely have to go outside to promote.
OPI: Ten years ago they were smaller than you.
NA: I know. I understand that. I think one of the things that really hampered us was when the proposed merger [with Staples in 1996] fell through we were negatively impacted in a major way. Before the decision was made by the Federal Trade Commission [to block the merger], we lost just about our entire real estate department, we lost about 90% of the marketing department, half the merchandising department and a good part of finance.
The deal was overturned and this company had a rebuilding process that took years. During that period of time Staples went on a major spree in terms of adding to their retail business, both in the US and in Canada.
There’s no question that Staples today has higher margins and higher profitability.
On the retail side, I’m not 100% sure I would agree with you that they’re gaining share. You have to back out their Canadian business. In the delivery business they seem to have done a little bit better in the second quarter than either we did or ‘Max and I’m trying to understand exactly why because basically our gains in terms of new business that we got at profitable margin and our retention rate were at an all-time high. So I’m trying to understand where they’re getting their delivery business from. But my hat’s off to them.
If you say what are we going to do, we’re focused on a couple of key initiatives on the BSD side and the retail side to try and get us back to profitable growth in spite of the economy.
OPI: They did refer specifically to US comping slightly positively last quarter and Canada was not quite as strong as the US.
NA: I’ve got to go back and look at all that, but my focus is on how well we’re doing.
OPI: And how well are you doing?
NA: I think we’re doing pretty well. When I look at the EBIT line, our EBIT for the second quarter was $11 million compared to a loss of $23 million last year, so we beat last year by $34 million. We’ve told people that we expect to be up on a full-year basis in terms of EBIT and we’ve laid out a realistic, but we think aggres
ive, plan, as to where we can get at a run rate by 2013, where we think the key initiatives we have can add over $250-280 million of incremental EBIT profit.
OPI: You recently closed one of your US distribution centres. It looks like you’re cutting costs and trying to find more efficiencies. But how long can you go on reducing costs in an environment where top-line sales are still falling? It can’t go on forever, can it?
NA: Basically, our focus is not on cutting costs. This was a move where we closed one distribution centre just based on where the economy was and we could integrate it into another DC that could better handle that on a profitable basis. All of the initiatives we’re talking about to add the $250 to $280 million have very little to do with cost savings. They have more to do with process and how we go to market, both at the store level, the BSD level and how we deal with better rationalisation of our pricing promotions assortment, category management and brand building from a marketing standpoint.
OPI: At the Goldman Sachs conference Ron Sargent said he thought there should be consolidation in the retail sector in the office supplies channel. What is your reaction to that comment?
NA: Staples has been preaching consolidation for quite a while because obviously it benefits Staples. I believe that at some point in time, consolidation will probably happen. I just don’t think it’s going to happen in the short term.
OPI: Are you saying that if Depot and ‘Max were to combine in the near future, that wouldn’t generate any near-term shareholder value?
NA: No, I didn’t say that. I think that from our perspective I believe we can create shareholder value with more certainty in a shorter period of time by focusing on these key initiatives today. I haven’t spent any time thinking about the synergies with OfficeMax. I obviously read what all the analysts have written, but to get at those synergies – assuming there’s even a willing set of managements that want to combine – there are also some significant one-time costs that have to be addressed. And at this point in time I believe both of us are far more focused on achieving our own initiatives and preserving liquidity given the state of the economy. I haven’t found anybody at this point who is optimistic about the economy either in the US or in Europe for the next couple of years. And to think about a transaction like this at that point in time, I’m not sure the timing is terrific.
OPI: Would you admit that at the retail level there are just too many office supply superstores in the US at the moment?
NA: I don’t know the answer to that. I’d say that three or four years ago everybody thought there were a lot more superstores that you could add. I think what I would say at this point is that we’ve had some real early on success with our 5K stores and we think that there is a future for that.
We also believe that there is too much square footage of stores. I think the whole concept of the large warehouse has probably gone and what all of us are doing, including Staples, is downsizing the stores to 15,000 sq ft to 17,000 sq ft from the 24,000 sq ft average today. Staples is ahead of that game.
We’ve laid out our plans where we think we can reduce our space over the next 5-10 years and save $40-$50 million in our rent.
OPI: How much of a concern is your current stock price? Alliance Bernstein has significantly reduced its shareholding in the company. It doesn’t seem to have much confidence in Office Depot at the moment. What makes you think you can improve shareholder returns and increase the share price?
NA: Let me step back. I spoke with the Alliance Bernstein portfolio manager. He said he was disappointed they had to sell the stock, but they did it because of a portfolio allocation reason, not for lack of confidence in the company.
Second, if you look at our largest shareholder BC Partners, I meet with them on a monthly basis. They’re happy with the progress we’re making. They’re not worried about their investment, which is convertible at $5 a share. They still think they have a lot of value.
I just bought another 100,000 shares, raising my total ownership to just under one million shares. I may plan to buy some more if the stock stays where it is. I think there’s nothing but upside at this point, assuming that our economy doesn’t absolutely tank.
OPI: You mentioned BC Partners. They’ve got three members on the board. What role do they play in influencing key strategic decisions at the company?
NA: I think that they function as every other board member does. I think they’re extremely respectful of the fact that while they’re the largest shareholder, they don’t own a majority of the shares. They participate in all the discussions. They’re fully involved, fully invested in the conversation. They’ve never missed a board meeting. They’re available any time I need to talk to them.
From a standpoint of timing, I think they would admit that they would have hoped that the stock would be higher. I think when they made their investment they and a lot of other very smart people believed the economy was ready to turn upwards and it didn’t. They understand that they made a bet where this industry and this company is dependant primarily on white collar employment. That has dropped significantly so, at this point, I think their time horizon is far longer than they would have envisioned or wanted, but at the same time I think they believe that they’re going to make money at the end of the day.
OPI: You’ve made these changes in North America and I guess that was the priority. Have you had time to really take a good look at the international portfolio and perhaps make any decisions on that?
NA: I haven’t yet. Our international business has grown significantly. It’s very profitable. Obviously the European situation today is clearly impacting the business. We’ve made some portfolio moves in terms of exiting Japan and Israel and increasing our stake and business presence in Sweden. We’ve got a growing business in Asia. We’ve done some franchising moves in the Middle East and we’ll wait and see how that plays out. It’s a new opportunity for us. And I would say the next year’s probably going to be more of the same from an international standpoint.
OPI: What about the franchise model? You’ve recently started something in the Dominican Republic. Are you going to roll out this model in other markets?
NA: We’re still evaluating this concept because we only started it about a year and a half ago. I think we need more time to fully understand that. But in markets where we really don’t have any presence today, clearly the best route for us is to find an established partner who understands that country very well and, rather than buying a business there, if we can joint venture it or do a franchise agreement with somebody that understands the contract, B2B business or the retail business, it makes far more sense.
OPI: Obviously we’ve got these sovereign debt concerns again in Europe. I know you’ve made a few changes in Europe in the last few months. Are you going to have to have another look at that and see if there might be one or two markets where you’re going to look to pull back – some of the smaller markets in Central Europe or in Iberia for example?
NA: We have not made any decisions to pull back at this point in any of our European markets.
OPI: You’ve made a major investment in the Viking brand in the UK. I think it got off to a slightly slower start than you’d planned because of some computer issues. Any update?
NA: We’re solving the website functionality issues. We think we’re back to where we wanted to be when we launched. It will just take us a little time to get those customers back. But I think we’re very happy with the Viking relaunch. I think it looks a lot better and much fresher, and our customers seem to like it very much.
OPI: A strategic look at the market. Where’s the office supplies market, if that is still the right term, heading?
NA: I think as you look ahead – and I’m not a prognosticator – but I think we’re going to have an industry where companies that do well will be those which provide solutions to our customers as opposed to just products.
I look at ourselves today and we’re doing that in the copy and print business. We’re also doing it in the tech services business where we basically started a programme where if you buy your computer from us, why not have us fix it? We’ll guarantee 24-hour repair. And I think we’re going to look for more and more overall solutions to a customer’s business, and that’s easy to say, hard to find.
OPI: Everyone else is doing the same thing.
NA: They’re doing the same thing, absolutely.
OPI: What’s going to make Office Depot different to everybody else?
NA:If I knew that today I wouldn’t tell you because I’d be telling my competition what’s going on. But that’s one of the things that Steve Schmidt has high on his plate in terms of what he’s working on right now.
OPI: There are a lot of question marks about the relevance of the office supplies retailers, especially as you’ve got the Walmarts and the other big multiple retailers, and then there are consumer electronics retailers like Best Buy. What’s your take on that?
NA: From a consumer standpoint I might agree with you. From somebody running a small to medium-sized business, I’d disagree with you because if you’re starting a business, you have a business with ten or 20 employees, you are not going to find one-stop shopping at Best Buy or Walmart. You will find one-stop shopping at one of the office superstores.
If you went into Best Buy today to buy ink, which I do on a regular basis from a competitive standpoint, you’d better have a printer that’s less than two years old because if you have an older printer, you won’t find the ink because they don’t stock the number of SKUs that any of the three of us stock.
OPI: What about the online competitors? Obviously Amazon is the one everyone mentions.
NA: Of course, Amazon is highly competitive. Clearly one of the key things we focus on is making sure that our online business at OfficeDepot.com is as relevant and as customer-friendly as we can make it. We’re upgrading the site almost on a daily basis so that we are relevant. And there’s no question there are competitors.
At the same time when I look at the retail piece, the one thing that the online can’t do today is give you a cartridge of ink in the next 20 minutes. So as long as there’s still that convenience factor, and when you look at the industry, you’re looking at billions in retail sales just from the OSS market. While it may decline over time, it’s not going to go away.
OPI: How do you view the independent dealers from a competitive standpoint? I know you’ve said you want to have a stronger presence in the SMB customer segment which is their bread and butter. How do you view these guys?
NA: As good competitors. I think that when you look at the industry the three OSS chains account for a very small share of the office supply business and I think we have to get to a point where we really are the neighbourhood store, where we recognise our customers, where they feel good about coming in to see us and where we make the shopping experience a real positive one – which is what Kevin is working on. I think unless we do that, we’ll lose business to the independents.
One of the key initiatives that we talked about at the Goldman conference was our in-store customer experience, which everybody in the company is focused on.
OPI: I guess we could look back through big box reports and mission statements from the last ten years or so and probably find a reference to a greater focus on the small business customer. What’s different this time around and what makes you think you’re going to be successful?
NA: I think what makes me feel that we’ll be successful – and the proof will be in the pudding – is that we’ve limited our focus in terms of what we’re really working on. Rather than vague generalities and say we’re going after the small and medium-sized customer, we’ve got four or five specific initiatives with several tactics under each and everybody is committed to those. So we’ll just have to wait and see if we can execute and perform.
Office Depot CEO since May 2011 following seven-month period as interim CEO
Also held interim CEO role for six months in 2004/2005 prior to the appointment of Steve Odland
Appointed member of Viking’s board in 1988
Became an Office Depot director when the company acquired Viking in 1998
Spent most of the 1990’s as President and COO of the National Football League
Also held Managing Director/CEO roles at investment banking firm Director Dillon Read, Showtime/The Movie Channel and major advertising agency Doyle Dan Bernbach
Graduated in civil engineering from Swarthmore College and also has an MBA from Harvard
In 2009 Austrian was named the Drug-Free Kids Campaign Humanitarian of the Year by the Community Anti-Drug Coalition of America, where he has been a board member since 1999
Headquarters: Boca Raton (FL), USA
2010 sales: $11.6 billion
Employees: c. 40,000
N° of stores worldwide: 1,620 (approx. 1,130 in the US)
Operates in 56 countries