A leaked document from Office Depot confirms the company’s decision to close operations inSpain andPortugal. Industry insiders claim the move is no great surprise…
Since Office Depot released its 8K filing last week, which stated that the company would close 11 stores and one warehouse in its international division as part of a strategic review of operations, rumours abound on their locations.
Although the retailer declines to elaborate on details of the closures at present, OPI+ can confirm – through a leaked internal document that was sent to all Office Depot employees in Europe on 12 September – that the company plans to close its retail activities in Spain and its mail order operation in Portugal from the beginning of 2006.
The document – translated from French – says: "We do not believe that these activities will be profitable in the future. These closures will allow us to concentrate our efforts on our remaining distribution channels in Spain and Portugal."
The news is already buzzing around the Spanish industry, with Spanish trade union CCOO up in arms about 70 expected redundancies as a result.
The Depot document also states that, over the next 18 months, Depot will carry out a number of other streamlining and consolidation initiatives. These will involve the "possible closure of warehouses", the "possible outsourcing to partners of customer service activities that do not involve direct contact with customers"; the centralisation at European level of "a significant part of merchandising and graphic arts activities", which will require a review of the current mail order business; and the outsourcing to external partners of certain support activities in the finance department.
Depot entered the Spanish market with six stores in 2003, one of which was shut down a year ago. The decision to go in was not an unwise one. The Spanish market has been pegged as one of the fastest growing in western Europe, valued at €2.7 billion at manufacturers’ selling prices in 2004, according to MPA International, and estimated to grow by 5.3 per cent in 2005.
One industry source in Spain told OPI+ that he was not surprised by the move. "It was bound to happen, I gave them five years, but it was just a little over two." He believes this is because Depot’s locations were expensive and overstaffed. "To produce margins you need to cover costs, and this was obviously not happening," the source claimed.
He also blames the American format. "The format was not right and the image was wrong. The hypermarket outside town doesn’t work in Spain. And the pricing was wrong – products were way more expensive than those of local chains."
Kurt Querbach, managing director of Querbach Stationery Business Consultancy, agrees. "The urban structure in the Mediterranean is different to the US. People live in flats, they work in flats, and they use public transport. They don’t want to spend hours driving out of town to a hypermarket. Furthermore, paper and consumables are the biggest office products in Spain and they are heavy articles to carry without a car."
Querbach also says that Depot’s decision to open all the stores in Madrid was a mistake. "A lot of people in Madrid work in public administration or big companies, which don’t allow employees to make purchases in this type of store. If a retail chain wants to be successful, it needs to go to smaller towns where there is a larger number of medium-sized enterprises. As much as 75 per cent of purchasing power in Spain is outside Madrid."
Querbach also claims that there is just not enough room in Spanish OP retail for a foreign newcomer. Carlin, the market leader, has over 300 stores; its spin off, Folder, currently has around 15-20 stores; Picking Pack has 140 retail outlets; and Office 1 has just opened its 11th store in the Canary Islands, and is expected to announce another two stores by the end of the year.
Pedro Echeguren, chief of Office 1 Spain, claims the retail franchise is going well in the country, but concedes that the Spanish market is tougher to crack than other European countries. "It has a mature market, and the clients require a high level of service – often 24-hours a day – and good locations," he says. "It takes time and effort to get new clients in Spain and you need local knowledge." Querbach adds: "You can’t just jump in here – you need to adapt to local conditions."
As a delegate said in a breakout session at OPI‘s European conference this year in Barcelona: "The matador knows how to play the local game."