Spotlight on new Depot investigation

 

News that Office Depot is the subject of a new Department of Justice (DOJ) investigation in theUSis making the headlines in the national press.

 

In Depot’s regulatory annual 10K filing with the SEC on Tuesday, the company revealed: "During the first quarter of 2011, we were notified that the United States Department of Justice has commenced an investigation into certain pricing practices related to an expired agreement that was in place between January 2, 2006 and January 1, 2011, pursuant to which state, local and non-profit agencies could purchase office supplies."

 

The "expired agreement" refers to Office Depot’s US Communities cooperative contract, while the "pricing practices" are the pricing options that Depot introduced in 2008 and which have been the basis for the "overcharging" allegations surrounding the contract since David Sherwin’s first whistleblower claims in April of that year.

 

In a statement to opi.net (but which appears to be Office Depot’s standard response to all press outlets regarding the new DOJ investigation), the company said: "The DOJ appears to be examining the same issues investigated previously by the Florida Attorney General. Office Depot reached an amicable resolution with the Florida Attorney General with no admission of wrong-doing."

 

That Florida investigation led to Depot agreeing to a settlement of $4.5 million plus costs in June last year over allegations that public agencies (PPAs) were put onto a higher pricing schedule without their knowledge. The Florida agreement followed an earlier settlement of $320,000 with Missouri.

 

Assuming that Florida represented between 20-25% of Office Depot’s US Communities business at the time of the contract pricing changes, the company could be facing settlement charges of over $20 million if the DOJ investigation follows the same pattern as that of the Florida Attorney General.

 

What could be much more harmful is the potential damage to the company’s reputation during this crucial period – described by one industry insider as "a rapidly closing window of opportunity" – as Depot, its power channel rivals and the independents led by is.group compete for the public agency business that has come up for grabs since Depot’s US Communities contract expired at the end of December.

 

Independent dealer trade association NOPA has been spurred on to quickly issue a press release regarding the new DOJ investigation.

 

"The Justice Department’s investigation, along with continuing investigations by several state attorneys general and three federal agencies, sends a clear message that allegations of overcharging of public entities will be taken seriously in the interests of taxpayers and citizens," said NOPA President Chris Bates in the release.

 

This release – posted to leading newswires – has already been picked up by major news agencies, and a new Associated Press story on the DOJ investigation is now doing the rounds on such publications as Forbes and the Boston Globe.

 

This will give further ammunition to Depot’s competitors in the battle to win over PPAs, or at least help them to give public agencies cold feet about continuing with or switching to Office Depot.

 

There will no doubt be hopes of benefiting from a certain ‘fear factor’ about committing to a Depot contract while the company is under investigation. PPA purchasing officials are unlikely to want to run the risk of being thrust into the spotlight and facing awkward questions at a later date should the DOJ investigation have a negative outcome for Depot.

 

Nevertheless, it would appear that Depot has been relatively successful so far in keeping its state and local government customers.

 

Speaking at Tuesday’s quarterly conference call, Business Solutions Division (BSD) President Steve Schmidt said that, while there was a general weakness in contract business, Depot had managed to secure around 85% of revenue from its former US Communities contract.

 

Schmidt also stated that the majority of customers had been signed for the "longer term" and that three or four customers had actually switched back to Office Depot from the new US Communities contract because of service level issues.

 

However, the 85% retention claim has raised a few eyebrows, with some questioning the figure.

 

"Somebody’s numbers don’t add up," one independent dealer told opi.net, adding: "I find it hard to believe that 85% has stayed the course."

 

We hope to bring you some comment and reaction on this 85% claim from new US Communities contract holder is.group within the next few days.

 

In a note to clients, analyst Aram Rubinson said that he still expected Depot to lose around 50% of its former US Communities business by the end of this year, although he was adjusting his outlook to reflect the "slower pace" of the loss of this business.

 

What is clear, though, is that Depot is offering very aggressive pricing on its revamped TCPN contract – now its main go-to-market PPA cooperative offering – and is enjoying success, notably with larger-spending agencies which are the traditional power channel target.

 

An update on other aspects of Office Depot’s quarterly and full year results will follow shortly on opi.net.