Retailer focus

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Stepping stones
Six months after the first store opened its doors to the public, is new OP superstore chain Ofis on the right track to become a viable competitor in the Australian marketplace? OPI finds out if the likes of Officeworks should be worried just yet
For 15 years, Officeworks has had the enviable position of being the only office products superstore chain in Australia. What a tantalising prospect then, that earlier this year, Harvey Norman, one of the country’s best known retailers, signalled the end of this luxury with the opening of Ofis, a rival OP chain intent on making a substantial dent in Officeworks’ retail supremacy.

 

In a recent interview with online news service, Current.com.au, Harvey Norman’s chairman Gerry Harvey talked about his long and eventful career in retailing and set out his vision for Ofis. Harvey declared he wanted the new chain to take 20-25 percent of the market for office products in Australia, but acknowledged that it would take "between 10 and 20 years to do".

 

Mere rhetoric or a feasible goal, given Harvey’s entrepreneurial – and very successful – retailing history in Australia as well as in a number of offshore locations? Considering that even the biggest player in the OP market, Officeworks, barely commands 15 percent of overall market share in Australia with its 116 stores, it would seem that such comments are more spin that reality.

 

And while Paul English, Ofis’ General Manager in charge of running the new venture, says that everything is "going quite swimmingly", that customer feedback has been very positive and early financial expectations have been met, he also points to the long road ahead and warns of "running before we can crawl", discouraging overly enthusiastic expectations. He told OPI: "The original plan for this calendar year was to get to eight stores.

 

We’re going to fall short of that number, because we haven’t found some of the suitable plots that we had lined up. The fifth store will open this month [October]. We were goalling for eight to ten stores next year, but are now hoping to pull out another five to seven instead."

 

English admits that it’s been a tough retail market and that trading conditions have been challenging over the last few months, especially in August when the Australian public was more interested in watching the Beijing Olympics than shopping for office supplies.

 

Ofis’ most pressing challenges have less to do with the state of the economy, however, and more with an issue that is acutely relevant in the Australian retail market – real estate. The company’s success in the market – and its ability to compete with Officeworks, independents with a retail presence or any of the many mainstream retailers – is largely dependent on the number of stores on the ground and real estate availability is an ever growing problem.
Location, location, location
Finding the right locations for those stores is just as important. Andrew Penfold of Penfold Research says: "The superstore format undoubtedly appeals to Australian consumers, particularly students, households and small/micro businesses. I do believe Australia could support up to 100 more superstores, although this would be very detrimental for independent dealers and other retailers, such as Australia Post, newsagents, Dick Smith/Tandy, not to mention Harvey Norman’s own [electrical] stores.

 

"The qualification note however is that the additional 100 stores would need to be in the right geographic locations. The major barrier for any superstore operator – and the reason Officeworks has had it all to itself for so long – is the difficulty in obtaining good premises in the right locations. There are very few large suitable spaces for OP superstores in the central business district (CBD) of Sydney, for example. The most suitable option for a superstore operator would be to have two or three different-sized store formats depending on the location and the surrounding competition."

 

Indeed, Ofis’ strategy is one of individual assessment. Says English: "Regional parts of Australia where the towns are quite large can sustain a shop front where you don’t necessarily have to be in the middle of town. Then, when you look at metropolitan locations, there are – depending on the city – shopping precincts where people naturally convey. These are not in CBDs, but in bulky goods complexes.

 

"We’re finding that in CBD areas you get very good passing traffic during the week and it’s a bit quieter at the weekend. In the shopping precincts, meanwhile, business is primarily over the weekend and probably Fridays and Mondays. The Ofis model seems to work quite effectively in both types of environment, so we really take the location dependent on a host of factors. Essentially, we focus on two sizes of stores. A regional location would have a footprint of 1,200m2, a metropolitan one of about 1,500m2."

 

English dismisses the suggestion of industry peers that one way of getting round the real estate challenges is to combine Harvey Norman with Ofis stores (or indeed convert underperforming Harvey Norman computer/technology stores into Ofis locations). He told OPI: "When we did the original business plan, that was a consideration but it was quickly dismissed.

 

To manage the inventory properly, particularly with stationery products [that are not sold at Harvey Norman], we wanted to make sure that the ordering was done centrally. Harvey Norman is a franchise model and that means franchisees can do what they need to do for their local markets. Merging the two stores into one location isn’t going to enhance what we are trying to do."

 

That’s not to say that stores cannot be very close together, he adds. "If you look at our store in Albury, that’s literally across the road from a Harvey Norman store. In Cambridge Park, Tasmania, it’s across the car park. The two can happily co-exist."

 

The same applies to the competition. Ofis recently purchased a site in Newcastle (New South Wales) where a store will be opened next year – with Officeworks as its direct neighbour. English is not concerned about the close proximity and is confident that Ofis’ offering will be good enough to entice customers in and, if need be, make them switch from their existing supplier.
Customer feedback
The proof of the pudding is in the eating, of course, and while English says that customer feedback so far has been very positive, OPI also heard from those who don’t believe Ofis’ offer is compelling enough to make customers switch. Says one independent observer:

 

"I have found the Ofis store I visited bland in its exterior appearance compared to Officeworks’ big blue box stores which are so distinct. Ofis’ range also appeared to be narrower in general office products. Most importantly, the experience did not leave me with a compelling reason to return."

 

Another customer is more complimentary: "I have been to Ofis’ Auburn store in Sydney. It is by my estimate 60-70 percent the size of an Officeworks equivalent. The store is well presented, with clean, clear signage and category layout. The space allocation is heavily biased towards technology products and relatively under-represented in traditional stationery and furniture. It has a sizeable print/copy centre. The salesperson I spoke with was extremely computer/technology literate. The store was very quiet when I was there. It seems for now that Ofis is somewhat of a hybrid between Officeworks and one of the Harvey Norman computer stores."

 

As this customer points out, Ofis’ stores are essentially divided into four zones – print shop, stationery, IT and office furniture. English admits that the product mix is a work in progress, with stationery products on the list of SKUs to improve on. He says:
"Revenue-wise, about 30-40 percent comes from our stationery business, the balance is a mix of technology, office furniture and our print shop. The main difference between an Ofis and a Harvey Norman store is the stationery and print shop offering. At the moment the mix is not quite what we want it to be, but the stationery business is getting larger every month."

 

Given the small store count and the still developing stationery offering, the effect that Ofis will have on Officeworks specifically and the market as a whole looks negligible in the short to medium term. That’s not to say the competition can ignore the threat that Ofis might pose in the longer term, with broadline as well as specialist retailers likely to be the hardest hit.

 

Andrew Boath, CEO of leading Australian independent dealer group Office National, adds: "Gerry Harvey has proven to be a highly skilled retailer, so any corporate business or independent dealer with a retail presence has cause for concern.
As far as dominant player Officeworks is concerned, it has underperformed the market over the last year or two in terms of sales growth. One of the reasons for this has no doubt been the extended period of distraction that culminated in Coles Myer being put up for sale and eventually being bought by Wesfarmers at the end of last year. A cut-back in consumer spending and a slowing economy have also led to relatively flat sales in Officeworks’ most recent quarter. As Penfold says: "Officeworks needs to get its house in order as quickly as possible while at the same time protecting its most valuable asset – its portfolio of properties/leases – and trying to block Ofis. No doubt there will be fierce competition for new sites over the next few years."
Price wars
For now, the two companies appear to be locking horns over their pricing strategies. Officeworks has recently changed its pricing policy to be ‘Lowest All Year Round’ compared to Ofis’ catchphrase of ‘Best Prices Every Day’. Any suggestion that Officeworks made this move in direct response to Ofis’ appearance on the OP scene has been largely dismissed by industry peers, particularly as this strategy is entirely in line with the policies of hardware chain Bunnings which, together with Officeworks, is now part of Wesfarmers’ Home Improvement and Office Supplies Division.

 

Aside from creating margin pressures for the two retail chains themselves, their pricing and discounting policies will also have an impact on the country’s independent dealers, especially those with a retail presence.

 

This impact will be all the more pronounced if Ofis follows up on its intention to also establish a B2B presence, an essential move if it wishes to match Officeworks’ offering and become a full-on competitor in the market. Officeworks already has a commercial operation with Officeworks Business Direct, the former Viking business the company bought five years ago.

 

A fully functional e-commerce presence is equally important, with some quarters expressing surprise that online ordering capabilities weren’t on offer from day one.

 

English is pragmatic about such criticism. "In a perfect world, we would have launched Ofis stores and the website together. But we knew from the start that we had to look where to pull our resources initially and we decided to go for stores first.
E-commerce is a complex business and you have to do it correctly, so we’ve taken the cautious approach." With regards to a launch date, he is non-committal. "We were planning on launching before the end of this calendar year, but we held back on that because we wanted to make sure that we launch with the right tool set. The initial launch will probably be B2B first and then we do a consumer offering. "We were originally going to do it the other way round, but have since decided that we’re first going to focus on our business customers. We’re getting daily enquiries from customers asking when our e-commerce platform will be up and running."

 

With a future B2B offering firmly in mind, English warns against comparing Ofis to Officeworks and regarding the two as the main battle going forward. He says: "Everybody pitches us against Officeworks and it probably is our main competitor, but we’re looking at everybody – Office National, OfficeMax, Lyreco, Corporate Express… We’ve got to attack all angles of the marketplace." The last one of these potential rivals – Corporate Express Australia – and the biggest OP operator in the market after Officeworks, raises an entirely different prospect following the coming together with Staples.

 

Will Staples at some stage in the future be interested in creating a retail operation in Australia? Corporate Express is a well known and respected brand in the country while, to the general public, Staples is not. Add to that the real estate challenges in the country and a greenfield operation seems very unlikely indeed at any time. But what, if in a few years’ time, Ofis has built up a sizeable portfolio of stores and Gerry Harvey receives an attractive offer from Ron Sargent to sell the chain before heading into retirement? Speculation indeed. For now, Ofis is taking a step at a time in its pursuit of a sizeable chunk of the Australian OP market.