High stakes for county as Office Depot pivots
CEO bets Boca firm can remake itself as a services provider.
BOCA RATON — At the Office Depot store a few miles from the Fortune 500 company’s headquarters, the fluorescent lighting is harsh, the parking lot is mostly empty and the aisles hold mundane products such as bottled water, poster board and pens.
Office Depot Chief Executive Gerry Smith wants investors to erase that image from their memories.
Aiming to spare his company — long troubled, twice a target of takeover attempts — from the fate of failed big-box merchants Toys R Us, Sports Authority and Circuit City, Smith has adopted a new mantra: “We are not a retailer.”
Instead, Smith wants Office Depot to be known as “a business services platform” — a company that sells tech support, rents co-working space and prints business cards.
“Innovate or die,” Smith, a
55-year-old veteran of Silicon Valley, said in an interview at his office in Boca Raton. “You’ve got to evolve the business model.”
The new strategy is reminiscent of Home Depot referring customers to construction contractors, or Best Buy offering tech support through its Geek Squad — or the business services sold by Office Depot rival Staples.
Office Depot’s ambitious turnaround plan has met deep skepticism from retail experts and investors. Smith’s strategy has high stakes for Palm Beach County: Office Depot is one of just two Fortune 500 companies headquartered here.
In the biggest move of its makeover, Office Depot in November paid $1 billion for CompuCom, a provider of tech support to large companies. Smith envisions customers developing deeper relationships with Office Depot by subscribing to CompuCom offerings such as cybersecurity services.
“Technology is the office supply of the future,” Smith said when he announced the deal.
Yet even as he downplays Office Depot’s strip-mall roots, Smith said he has no plans to eviscerate Office Depot’s network of stores, even if many are dated or simply too big.
“We have a lot of reach because of our 1,376 stores,” Smith said. “It’s an asset. Obviously, we want our stores to look better and be better and be more productive, and we’re putting a lot of time and effort into doing that. But we’re not going to downsize substantially our retail footprint.”
After dropping the “store of the future” concept championed by his predecessor, Smith is focusing on Office Depot’s “BizBox” concept.
The new format’s flagship is a 23,000-square-foot location in Austin, Texas. The concept includes a furniture showroom and a Dell “store within a store.”
While Smith plans to keep stores open, he’s cutting inventory. Moving out slowto-sell products will create more room in the stores for co-working space, Smith said.
“We have the two important things we need in shared office space — parking and bathrooms,” Smith said.
In trying to become a services company while also operating stores, Office Depot tackles the harsh reality faced by retailers in the Amazon era. The company’s retail network might be troubled and unappealing to investors, but it still brings in millions of customers and churns out billions of dollars a year in revenue.
For all the focus on its new services platform, Office Depot’s stores already prominently display backpacks and binders. “Back-to-school is one of our biggest and most important times,” Smith said.
In other words, Office Depot wants to be a little of everything — provider of high-margin tech support to entrepreneurs, seller of low-margin school supplies to bargain-hunting parents. The merchant also is experimenting with selling collectibles such as “Star Wars” memorabilia in its stores.
“One of the important things, culture-wise, is to try new things,” Smith said.
The mixed approach underscores that rescuing an old-fashioned retailer is no easy task. Mark Cohen, director of retail studies at Columbia University’s Graduate School of Business, said Office Depot is simply following the lead of Staples, its larger rival that has continued to struggle despite a services strategy.
Even as it’s saddled with a troubled retail network, Cohen said, Office Depot will face cutthroat competition in both tech support and renting out co-working space.
“It’s obviously their antidote for having failed at retail,” Cohen said. “It sounds like they’re drinking their own Kool-Aid. Their retail business is shrinking, but they can’t survive without the vestiges of it. And the business strategy they’re talking enthusiastically about doesn’t sound like it has any legs.”
Many traditional retailers are struggling to create new business models that will capture the attention of investors, said Erik Gordon, a business professor at the University of Michigan.
“It’s really hard to do,” Gordon said. “(Sears Holdings Chairman) Eddie Lampert would have you believe Sears is an e-commerce company. I wish Office Depot better luck than Sears.”
Kelli Hollinger, director of the Center for Retail Studies at Texas A&M University, agrees that reinventing a brick-and-mortar merchant is “a tall order.”
But it is possible, Hollinger said. She points to PetSmart as one retailer that has branched into services. It sells veterinary care and boards pets when owners go out of town.
“PetSmart has done this very successfully,” Hollinger said.
Smith, for his part, names Restoration Hardware and Williams-Sonoma as retailers that have shifted to service-oriented strategies.
Investors, meanwhile, remain dubious of the new approach. Shares of Office Depot (NYSE: ODP) topped $6 in August, then plummeted to $2 in April. In midJune, Office Depot stock had rebounded to $3.
For Palm Beach County, much is at stake. The retailer occupies 625,000 square feet at its headquarters space on North Military Trail, not to mention retail locations scattered throughout the county.
Office Depot, which employs 2,000 workers at its home office, has received millions in state and local incentives to maintain its headquarters in Palm Beach County.
In recent years, Office Depot has been plagued by shrinking sales. Revenue fell from $12.7 billion in 2014 to $10.2 billion in 2017.
But Palm Beach County has been on a winning streak in terms of keeping the trophy headquarters here. After Office Depot bought OfficeMax in 2013, Office Depot considered moving to OfficeMax’s home in Naperville, Ill.
Then, when Office Depot announced it would be sold to Staples, its larger rival said the combined companies’ headquarters would be in Framingham, Mass. However, federal antitrust regulators nixed Office Depot’s proposed sale to Staples. The blocked deal was a replay of the 1990s, when Staples said it would buy Office Depot, only to be stopped by regulators.
Smith took the helm of Office Depot in February 2017 from Roland Smith, and the new CEO said he faces no choice but to pursue a dramatic change in the company’s business model.
“To be really blunt, Toys R Us didn’t do real well when they didn’t pivot and come up with a new strategy,” Smith said. “We’re not going to be in that position.”