Channel crossing

There is still "huge" potential in the business supplies market. Officeworks CEO Mark ward tells OPI.

Big box sales and profit growth – not to mention retail expansion – isn’t something you see every day in today’s OP world. One notable exception is Australia’s leading multichannel player Officeworks. In its most recent financial year, sales increased almost 2% to A$1.51 billion (US$1.4 billion) and EBIT jumped more than 9% to A$93 million. When we found out that CEO Mark Ward was attending the World Retail Congress in Paris in early October, OPI Editor Andy Braithwaite hopped on a train and met up with Ward in the French capital to find out more about Officeworks’ recent success and its strategic direction.

OPI: When we last did the Big Interview with you [in March 2008], you’d only been at Officeworks a few months and the global financial crisis hadn’t kicked in. How would you summarise those six years in charge?

Mark Ward: We’ve spent the past six years or so resetting the foundations of what the business is about and what we wanted to deliver to the customer. So we’ve spent a lot of time and effort on updating the stores and getting the ranges right, introducing everyday low prices and focusing on our service areas. We’ve made investments in the systems, the processes and the people to put us in a strong position to continue growing – which we have done.

OPI: And since then you’ve developed this multichannel strategy? 

MW: Yes, we call it ‘every channel’. We put ourselves where we believe our customers expect us to be, whether that’s online, mobile, in the store, via phone, fax or social media. And across all that is the same offer; so the same range, the same price and the same service. That’s why we’re calling it every channel and we encourage the customers to use the channel that suits them so that they’re able to shop whenever, wherever and however they want to.

OPI: In the last full year you achieved just slightly above A$1.5 billion in sales.

MW: Yes, the first time we’ve hit A$1.5 billion, which was a really good result for us. We’ve also opened our 150th store and we had a really good profit result from a lot of good work from our team. So we’re very pleased.

OPI: Your EBIT margin was 6.2% of sales. Is that the key indicator your shareholders are looking at?

MW: No, return on capital is what the shareholders are looking at. That’s still not where we want it to be so we’ve got some work to do, but as I said we spent six years addressing and improving the foundations of the business to put us in a position to drive faster growth and increase our return to shareholders.

OPI: And what kind of EBIT figure are you looking at?

MW: We would ideally like to get above A$100 million as a first step. That’s a good psychological bridge to cross, and then we go from there. We’d like a bottom line of about 8% EBIT to sales. We think that’s pretty much best practice around the world.

OPI: When you look at the EBIT growth, how much of that is due to efficiencies and cost cutting?

MW: Our merchandising team has done a really good job of buying better and getting better terms. I think across our business we’ve done a lot on efficiency without the need to cut costs, so they’re different things entirely. We focus on improving processes and the way we do things and then take a proportion of that for the shareholders, and the rest you then reinvest in the business. So we have not had to implement any redundancies or major cost-cutting exercises; it’s actually just been about a mindset of ‘if you want the lowest prices then you have to have the lowest costs’, and that’s what we continue to do. 

OPI: We hear a lot about the challenges of retail in general. Are you happy with the general health of your retail network?

MW: Yes, we’ve spent a lot of time over the past few years reshaping the network and adding a lot of new stores. I think we’ve opened or relocated more than 40 stores in the past five years and we’ve also upgraded about the same number. 

OPI: I think about half the stores are now in your updated format.

MW: Yes, and in some shape or form every store’s been touched. During this financial year we will touch nearly every store with our biggest programme ever, expanding and realigning ranges across the entire network.

OPI: What new categories are you developing at retail level?

MW: Well, if you look at the total addressable market – which is about A$30 billion if you include things like advanced print and copy, commercial furniture and technology – it’s clear that there is plenty of runway ahead of us, and with all the foundations in place we’ve entered a new phase where we can focus on a wider opportunity set. 

I think we’ve become much stronger in printing and copying. We introduced the first self-serve printing units into Australia last year; that’s been quite significant for us and a very big growth engine. 

Canteen and cleaning products have been huge. We’ve put a lot of effort into that in the past 36 months and that’s getting exceptional growth for us, as it is for a lot of OP players around the world. 

The cables area is something relatively new to us; we saw an opportunity to expand that in Australia because there weren’t too many destinations for it. Every piece of tech that you and I have got has a cable and an adaptor, so that’s been a big expansion for us. 

At the same time we’ve worked to innovate in mature categories like writing instruments by freshening them up with things like loose pens – that way we can provide choices that are exciting for our customers. We’re also embarking on a journey to build a very strong commercial furniture base, which we’ve never really been in.

OPI: You’ve said before that you don’t believe in the death of retail and that the retail network is key to your future.

MW: Absolutely. We are an every channel business, but we understand that what’s unique about a web-based business is a great range of products, you’ve got to be in stock, you’ve got to have very efficient delivery, you’ve got to have great information and visuals on your website and there have to be minimal clicks to order. But we also understand, in a store sense, that if you want to keep that business thriving then you have to add uniqueness to it. 

So that’s where we do things that a lot of stores don’t do: things like the loose pens I mentioned; we do information classes for customers every weekend; community groups use our stores to raise funds; we’ve got free meeting rooms for any customer to use in our stores. So we work really hard on making sure that we’re giving customers a reason to visit. Stores will die if we don’t give customers a reason to visit them and those that are dying reflect the mindset of their owners.

OPI: What is the mix of customers – business versus consumers – at your stores, and is that at where you want it to be?

MW: It’s about 60/40 – 60% personal shoppers in a broad sense and 40% business customers. And we’re OK with that. We’ll try to drive both of them higher, but it’s pretty natural that the business customer is also using the online business. So we’re reasonably OK with that split.

OPI: Tell me something about this smaller city store format that you’ve been piloting.

MW: We’ve got three new distinct models under trial in Sydney and Melbourne. The two smaller ones are between 400 sq m [4,000 sq ft] and 600 sq m and the other one in Sydney is 900 sq m, so it’s a bigger store. We think we have got a concept that makes sense, but it’s still got some evolution to come and maybe we can do it far smaller than those as well. 

So we took the opportunity to take the leases on the properties that were available; they’re in great locations and we’re just seeing how they go and tweaking and changing things. And as I said, we’re working on what size can we actually do and I think we can go a bit smaller.

OPI: And looking two or three years down the road, how many of these smaller format stores do you hope to have?

MW: If we get the model right, we could probably have 20 or 30 because the whole idea of these things is that they’re small and they’re convenient, but they’re close so you don’t have to go far. And the 900 sq m one may still have a role to play in the city, operating as a hub store, if you like, with additional product ranges but still not too far away. That’s something we’re testing.

OPI: What’s the average size of your typical store?

MW: I think it’s probably about 1,400 sq m.

OPI: We hear a lot about store downsizing. Is that something that you are actively doing or thinking of?

MW: No, not at all. We’re actually working on putting more product range in and trying to make them even more intense and more inviting. I’m not saying we’re going to go and build bigger stores, but we’re certainly not looking to downsize. We actually see that our network has the opportunity to expand its offer rather than build a smaller network, so we won’t be going on any downsizing campaign.

OPI: Let’s look at online. Obviously, that’s been an area of investment over the past few years.

MW: Yes, it’s our biggest trading store – about 12% to 13% of our total sales – and we get more than 20 million visitors each year. We’ve had an online presence since 2004, but we’ve invested quite heavily over the past five years and our plan is to do all of that investment again, plus some, over the next five years. 

You’ve got to keep this up to date and for us that means a new product information system this financial year, a new trading platform, updating the back-end engines and a number of things that we’ve got to do to make the shopping experience easier and better for the customer. 

That’s this year and then next year we’ll be doing it all again because you’ve got to keep evolving this, whether that’s from your tablet, PC or mobile. So this is an ongoing investment for us that we’re committed to, the same as we are investing in the store network.

OPI: How big a player is Amazon in the Australian market and how much of a benchmark is it in terms of what you are trying to achieve online?

MW: I think Amazon is still the clear leader in online. It’s very, very good at putting the product in front of you, product personalisation and recommending products to you, in addition to the delivery service. So yes, I think Amazon is still the clear benchmark for all businesses to aspire to and one thing we know about Amazon is that it keeps reinvesting in continual improvement. It’s not sitting back and waiting for everyone else to catch up. You can’t just get there and say, “We’re done”. You’ve got to keep investing.

OPI: We’ve seen the big US OP retailers putting kiosks in their stores. Are you doing something like that?

MW: Yes, we’ve got that in our stores already, so you can come into our store and see our entire range online, which is wider than what we carry in-store, and you can order it there.

OPI: What’s the difference between the online SKU numbers and in-store SKUs?

MW: On average, we stock about 8,000 products in-store and about 20,000 online, so a 12,000 SKU gap. You can order products at the kiosk to be delivered to the store you’re standing in, your home, your business or wherever. It’s completely up to you.

OPI: When you read that Staples.com in the US is going to carry 300,000 SKUs by the end of this year, what does that make you think?

MW: Managing inventory for that number of SKUs could be a significant challenge. I don’t know whether it will be successful for them or not, but they’re having a go which is good on them. I don’t know what else to say about that.

OPI: Where might you go with SKU expansion online?

MW: Well, it’s an opportunity for us, but you’ve got to be able to do it properly and I don’t think we’re in a position yet where the range is exactly where we want it in our supply chain.

OPI: How are your online orders serviced in terms of distribution locations?

MW: We have four fulfilment centres around the country so the customers’ orders go directly there. Order before 11am you can have it same day, order after 11am it’s next-day delivery.

OPI: How big is that same-day delivery offer and how much of a unique selling point is that for you?

MW: Well, it’s exactly that: a unique selling point. I won’t tell you the number of clients that take it up because that’s commercially sensitive, but it is a proposition that some customers value and it is a unique selling point for us compared to other people in the marketplace. And we’ve had this since before my time; it’s been in the business for seven or eight years and nobody else in Australia has taken it on yet on a national scale.

OPI: What are you seeing in terms of orders coming from smartphones and tablets?

MW: As I said before, we’re investing in updating our platforms right now and that includes a better mobile platform that will bring us up to where we should be and also improve the seamlessness of the experience for the customer. So mobile apps and connectivity is a big growth area for us. We’ve got a lot of people viewing us via mobile, but as yet the order numbers are still reasonably low-ish. 

OPI: Do you offer price matching on certain products?

MW: On any of our platforms if you find something at a lower price we’ll beat that by 5%. There’s a bit of price matching going on, but we’re happy to have that position and beat the price for the customer.

OPI: But you’ve got a knock-on effect on your margin when you have to do that.

MW: Yes, but that’s the price you pay when you take the price position we do. We established that five years ago, do it across our entire range and it’s got really good customer trust. They know that we’re an everyday low price business; there are no high/lows, there are no gimmicks and if they find a better price then we’ll beat it by 5%. 

Sometimes you win, sometimes you lose, but we’d rather be really honest with the customer and say, “Well yes, we’ve mucked it up because someone else has got a better price than us, but you get the benefit because we value you as a customer”.

OPI: You’ve also been investing in the B2B business. How’s that doing?

MW: That’s going really well. We’ve been ramping up our business team for the past 24 months and we’re up to about 60 account managers on the road, which is a really significant increase for us. 

OPI: Aimed at SMB customers or corporate accounts?

MW: SMB primarily. Our core target in that area is the small customer, medium-sized business and schools, and that’s where our account managers are focused going forward. We’ve got a lot of upside there that we still want to work our way through and a huge amount of growth potential. So we’re going to keep expanding that team at a rapid rate.

OPI: What about the large corporates and the government sector?

MW: We’ve got a number of corporate customers, but it’s not an area that we are actively pursuing for major growth. The same with government. We are on a Queensland government tender and we do have a number of government departments that deal with us, but it’s not an area that we’re particularly trying to break into – the margins in that area are low and the service expectations are pretty high. In addition, you’ve got range requirements that add another level of complexity. 

So we’re working with those partners in government where it makes sense for them and where we can do what they want well. That’s a good partnership, as opposed to getting a contract at any cost, adding complexity and cost, and then poor execution of that contract to the customer. 

OPI: If we just step back and take a bird’s eye view of the Australian business supplies market, how would you summarise it at the moment?

MW: It’s challenging but there are always opportunities. From a challenging point of view we know the market is in real decline in dollars and usage and that has been going on for some time now. The opportunity is for anyone in the industry to come up with new and innovative ways to drive and increase usage of products, rather than just sit around and claim that it’s dying. What can we all do as an industry to drive a higher usage of the products we sell? That’s where it comes to product innovation, personalisation, style, fashion and all of those things. So it’s a very interesting market and it’s a good market, but you’ve got to work hard.

OPI: When you look at the impact of digitisation on paper-based products, are you able to quantify the declines?

MW: Not particularly. We notice a couple of things, but I don’t think in Australia we’ve seen some of the reduction that’s gone on in other parts of the world. That’s not to say we’re not going to see it, but we haven’t seen it at this point in time.

OPI: A quick look at some of your competitors in the market. What impact did Staples’ acquisition of Corporate Express have on Officeworks?

MW: I’m not going to comment on competitors, Andy! We are focused on our direction, not what our competitors are doing. 

OPI: Fair enough. Do you expect any impact on the market from the merger between Office Depot and OfficeMax?

MW: Well, I guess in Australian terms, I would possibly see an opportunity for OfficeMax to get better buying power in the Australian and New Zealand markets. In a more global sense, I think we’re going to see a pretty radical shake-up of those merged businesses in terms of the way that they go to market and their store network, and all sorts of things. So I think, handled well, it can only be good for the industry in future, that’s my view.

OPI: Do you see the need for further consolidation in the office supplies space in Australia?

MW: I don’t necessarily see the need for it, but I believe it’s going to come because, if the market continues to be challenging and/or in decline, we’ll see fallout. So I don’t think that’s consolidation, that’s exiting. If those conditions continue globally then I expect that’s what we’ll see around the world, but I don’t know that we need that to happen – it will just be a by-product.

OPI: What about the possibility of Officeworks being an acquirer in the market?

MW: We look at opportunities all year around. We have yet to find anything that we’re happy to buy, but we keep looking and every time we evaluate an opportunity we learn something – that’s the important thing.

OPI: How much does it help being Australian-owned versus some of the US or French-owned global companies?

MW: I don’t think it makes any difference at all, unless you’re an unliked brand – that’s different as your ownership starts to come into it a bit. But I think customers are so global these days that they just don’t worry about it. Maybe another way to think about it is that lots of people shop in their local areas to support local businesses where they live, but for the other stuff in their lives I don’t think it matters whether you’re Australian-owned or not.

OPI: It appears you play an active role in the local community. 

MW: That’s a big thing for us. All our stores get a budget every year to spend in the local community. How they spend it is up to them – within certain guidelines about who they support – and that gets them great awareness. 

The way we talk about it is that our staff live there, they work there and they raise their families in that local community, so it’s important for us to be able to be part of the growth and development of those communities. So we’re a strong partner in the local community and that is important to our overall philosophy.

OPI: Just to wrap things up, how do you see the future developing for Officeworks?

MW: We see huge opportunity in the Australian market. Huge. We’re not wanting for ideas; we’re actually more frustrated because we’ve got so many things we want to do and we have to choose what we can do because we want to do them well. We’ve got no concerns at all about growth for this business in Australia going forward. None at all.