Big Interview: Neil Austrian

When Neil Austrian retired in 1999 he probably didn't expect to be running a public company more than ten years later. OPI caught up with the Office Depot CEO to discover his plans. Read on for part one...

Man with a mission

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 71-year-old, 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 that 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 several 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 the worst economy I’ve seen since I came into business almost 50 years ago. So it’s a far more challenging time, a far more competitive time, and clearly we don’t have the financial reserves that we had in 2004.

OPI:  Taking away the macroeconomic 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 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. 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, or to make a mistake.

There was limited accountability, so there was a situation where, because most of the decision making was centralised at the very top, people weren’t empowered. 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. If you don’t admit you made a mistake, you really can’t go forward because you’re not going to correct it.

OPI:  What do you think you’ve been able to achieve in the first few months?

NA:  Well, I think we have made some progress. We’ve gone about this by holding round-table discussions on a continuing, cross-functional basis. 

We’re trying to set up a culture that I call TNT – ‘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 that 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, they 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. That’s what we’re going to work on for this year and next year.

OPI:  In terms of your EBIT margin goal, you have said 3-4% by 2013. That’s still some way below historical highs. Is this just a sign of the office supplies industry as it is today or more company specific?

NA:  It’s two factors. It’s clearly a sign of the OP industry’s evolving competitive nature and the fact that there are 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 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 the business around. We don’t have forever.

OPI:  Let’s have a look at some of the changes that you’ve made. I think one of the most obvious 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:  Ever since I’ve been on the board we’ve talked about being customer centric and customer focused. And the way we were organised was in silos. We had the Business Services Division (BSD) 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 the 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 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. 

From a strategy and new business development standpoint, I needed a senior executive who knew the industry and who is 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, it did seem 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 the 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 that 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. It’s bigger than both ‘Max and ourselves combined. And my hat is off to them because it’s 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 Staples went on a major spree in terms of adding to its 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 better in the second quarter than either we or ‘Max did and I’m trying to understand why. Our gains, in terms of new business that we got at a 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 ask what we are going to do, we’re focused on a couple of key initiatives on the BSD and retail sides to try to get us back to profitable growth in spite of the economy. 

OPI:  Staples did refer specifically to US comping slightly positively last quarter and Canada was not quite as strong.

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 aggressive, 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:  At September’s 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?

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. 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 management teams 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 that at this point in time, I’m not sure that the timing is terrific.

OPI:  Would you admit that at the retail level there are too many office supplies superstores in the US right now?

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. 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 (1,500 sq m) – 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 five to ten years and save $40 million– $50 million in our rent.

OPI:  You’ve made these changes in North America, which I assume 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 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 made some franchising moves in the Mi
dle 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 that understands that country very well. Rather than buying a business there, it makes far more sense to start a joint venture or make a franchise agreement with somebody that understands the contract, the B2B business or the retail business.

OPI:  We’ve got these sovereign debt concerns again in Europe, and you’ve made a few changes in Europe recently. Are you going 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 – such as in some of the smaller markets in Central Europe or in Iberia?

NA:  We have not made any decisions to pull back at this point in any 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 technology 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 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:  There are a lot of question marks about the relevance of office supplies retailers, especially with Walmart and other big multiple retailers. Then there are consumer electronics retailers such as Best Buy. What’s your take on that?

NA:  From a consumer standpoint I might agree with you. From the standpoint of somebody running a small- to medium-sized business, I’d disagree with you because if you’re starting 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. They don’t stock the number of SKUs that any of the three of us stock.

OPI:  I know you’ve said you want to have a stronger presence in the SMB customer segment, which is independent dealers’ bread and butter. How do you view these guys from a competitive standpoint?

NA:  As good competitors. In my opinion when you look at the industry the three OP superstore chains account for a very small share of the office supplies 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 really positive one – which is what Kevin is working on. I think unless we do that, we’ll lose business to the independents.  

OPI:  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 making vague generalities and saying 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.

 

Resémé

•  Graduated in civil engineering from Swarthmore College and has an MBA from Harvard

• Appointed member of Viking’s board in 1988

•  Spent most of the 1990s 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

•  Became an Office Depot Director when the company acquired Viking in 1998

•  Held the interim CEO role at Depot for six months in 2004/2005 prior to the appointment of Steve Odland

•  In 2009 named the Drug-Free Kids Campaign Humanitarian of the Year by the Community Anti-Drug Coalition of America, of which he has been a board member since 1999

•  Office Depot CEO since May 2011 following a seven-month period as interim CEO 

 

Office Depot

•  Founded 1986

•  Headquarters: Boca Raton, FL

•  2010 sales: $11.6 billion

•  Employees: c. 40,000

•  Number of stores worldwide: 1,620 (approx. 1,130 in the US)

•  Operates in 56 countries