Office Depot has taken its first steps into the Chinese OP market by agreeing to acquire a controlling interest in online e-procurement company AsiaEC, one of the largest OP dealers in the country.
Depot’s expansion plans aim to reverse the fortunes of the company’s sluggish international sales.
According to Bennett Little, president and CEO of Business Stationers and a Chinese OP specialist the deal was a no brainer.
"From a dollars and cents point of view, it was imperative that they do a deal as soon as possible, before the US dollar drops even further."
The company’s international division posted an increase in Q1 sales of 2 percent in local currencies, but a decrease of 6 percent in US dollars, compared to the same period in 2005.
Division operating profit was $53 million or 5.9 percent of sales as compared to $58 million or 6 percent of sales in the prior year’s first quarter.
Depot’s latest acquisition follows a string of international investments made by the company as it ramps up overseas operations. Earlier this year, the retailer bought Best Office, one of South Korea’s top three OP supply companies.
The company also increased its stake in Office Depot Israel from 22 percent to 51 percent. It also bought a controlling interest in Papirius, a large Eastern European B2B supplier of office products and services based in Prague in the Czech Republic.
Depot’s arrival in China comes two years after Staples became operational in the region. In 2004 the retail giant embarked on a joint venture with the Chinese internet and catalogue delivery business OA365.com.
AsiaEc, whose Chinese name, "Yashang zai xian" means Asian merchants online, was formed in 1999 by current CFO Mark Qiu and three partners who invested $300,000 of their own money in the start-up venture.
It was China’s first B2B e-commerce service provider and is an online and offline vendor of operating resources, including OP.
Headquartered in Beijing and with offices in Shanghai, Guangzhou, and Shenzhen, the firm now employs a staff of 500 that supports its contract sales, direct mail, and internet businesses.
Charles Brown, president of Office Depot International, said: "This acquisition gives Office Depot a significant presence in the fast growing Chinese market, and allows us to further leverage our operations in Japan and South Korea to enhance our competitive position within this increasingly important region."
Under the terms of the transaction, AsiaEc will operate under Office Depot International. Tim Liu, one of the founders and CEO of AsiaEC, will report directly to
Teddy Chung, recently appointed Depot’s SVP and managing director for Asia, who will spearhead the new division.
Liu said: "Both AsiaEC and Office Depot are committed to a customer-centric framework that delivers the products and services businesses need to be successful in the marketplace. Combining Office Depot’s multi-channel sales expertise with AsiaEC’s proven, scalable business infrastructure will give customers throughout China an even wider array of solutions."
Depot and Staples are implementing so-called pay-as-you-go strategies in starting up their Chinese operations. The retailers can keep their capital investment fairly low as they don’t have the massive overhead costs associated with organic start-ups. Therefore the element of risk with the new ventures is also kept to a minimum.
Bill Sims, retailing hardlines analyst at Citigroup Investment Research told OPI: "I think that Office Depot made a very smart move in partnering with an established OP delivery company in Asia rather than try to go about it itself. That would have been a mistake. It would have been pumping money into the business hand over fist."
The strategy has proved hugely successful for Staples which is predicting that the Chinese market could be a meaningful driver of its growth within the next five to ten years.
Depot’s Chinese arrival has come as no great surprise to industry observers. The Chinese market offers tremendous growth potential and now two of the biggest OP retailers have set up camp, it can only be a matter of time before other companies follow suit.
There is no reason to suppose that Depot will be any less successful than its rival in getting to grips with the Chinese dragon.