Date: September 26, 2012
To: The Board of Directors and Neil R. Austrian, Chairman and CEO
From: Christopher Cho
Subject: Guideline to increase revenues

Within the last six years, a steady decline in revenue and rising levels of competition have put our company in an area of concern. As our competitors within the specialty retail industry fight to retain their market shares, other existing companies within other industries have begun carrying office supply products, effectively lowering our market share. This, in turn has left Office Depot struggling to offer competitive pricing, selection, and services to our customers. A recent trend shows that the rapid growth of the Internet has caused consumers to make a shift toward online purchases over in-store purchases. In this memo, I will explain how we will use this trend to our advantage. I will also explain how a reduction of brick-and-mortar retailers, concentration of our e-commerce operations, and the expansion of our private-label product line will drive down costs and increase our sales revenues and operating profits.
Current Industry Status
The specialty retail industry is dominated by three major players: Staples (39.2% market share), Office Depot (22.9% market share), and OfficeMax (13.5% market share). However, the dominance of these three companies has been waning within the recent years. The start of the recession triggered competitors from other retail industries including warehouse clubs, grocery stores, discount stores, and shopping supercenters to carry office supplies at lower prices. In response, office supply stores have been forced to reduce their prices, taking a loss, in hopes of attracting customers for big buy purchases. These newly emerging external companies have been successful in offering customers a one-stop location for all of their daily necessities ranging from food and clothing to office supplies. IBISWorld, an online provider of U.S. industry information, reports that, “competition from retailers in external industries is projected to continue through 2017 as consumers look for ways to save money.”
In addition to the external entrants’ penetration into our industry, economic factors have had a large part in shaping the growth of our industry. Economic shifts, including changes to the housing market have suppressed the spending behaviors of our customers, who consist predominantly of small and home office businesses. These economic changes have put a downward pressure on our total sales and profits. The gradual decrease in revenue from 1998 to 2012 can be seen in the following chart:

Exhibit 1. This chart shows the steadily declining revenue growth of the office supply industry.
Exhibit 1. This chart shows the steadily declining revenue growth of the office supply industry.

Company Performance in 2011
As the second largest retailer of office supplies in America, Office Depot’s activities are divided into three separate operations: * North America Retail Division: This division includes the 1,311 stores in the United States and Canada. The overall sales in our division decreased at a rate of two percent in 2011. The decline in sales is attributed to the closing of 12 stores in Canada during 2011 and 120 stores during 2009 due to lackluster sales. Despite the reduction in sales, our North America Retail Division did see an increase in net operating profit, which is mainly due to the reduction in overhead costs from the aforementioned store closures. * North American Business Solutions Division: This division represents the company’s direct catalog, phone and online businesses. Sales in this division decreased by one percent in 2011. In total, the number of customer sales and the average order value per transaction were lower in 2011 due to less frequent promotional activities throughout the year. However, our division experienced a 4.4% increase in net operating profit, which is a significant increase from 2010 in which the operating profit in percentage of sales was 2.9%. This figure shows the future potential for the e-commerce segment. * International Division: This division is responsible for the retail and sales in 53 countries in North America, Asia, Europe, and Latin America. The International Division also experienced a one percent decrease in sales in 2011. Division operating profit amounted to $93 million in 2011, which represents a steady decline from $120 million in 2009 and $111 million in 2010.
Competitor’s Performance
As I mentioned earlier our company faces two major competitors within the industry: * Staples: As the world’s largest retailer of office supplies, Staples operates in 47 states in the United States and in 27 countries around the world. Staples’ U.S. revenue is expected to increase 2.1% in 2012 to $8.1 billion. Their success can be attributed to initiatives to scale down the size of their retail locations in an effort to reduce costs. In addition, Staples’ move to increase their selection of private-label products, which average 10% to 15% cheaper than national brands have provided high returns for the company. * OfficeMax: The world’s third largest office supply retailer includes 978 stores in the United States and Mexico and 47 international stores. The retailer’s US division is expected to increase 0.6% to $2.8 billion in 2012. A main problem for OfficeMax is the bland brand image it has carried throughout the years. OfficeMax is aiming to improve its brand image by remodeling its stores to give it a more modern appeal in contrast to their conventional warehouse look that they’ve used throughout the years.
The Internet Trend
As the prevalence of the Internet continues to rise, consumers have shifted to making more purchases online. In response, several major companies have focused their attention to e-commerce as a way to attract more customers. E-commerce stores offer lower prices to the customers in addition to the added convenience of at-home shopping. Major online retailers including Amazon.com have used special purchase incentives and one-time deals successfully to adopt a loyal customer base.

Exhibit 2. This graph shows the rise of transactions conducted in the e-commerce sphere.
Exhibit 2. This graph shows the rise of transactions conducted in the e-commerce sphere.

Proposed Plan of Action
In order to make up for the losses that we have experienced over the past several years, we need to take advantage of the recent trend in the e-commerce segment. I’ve laid out a guideline of the actions that should be taken: * Reduction of 15% of the total brick-and-mortar retailers in North America: Overhead costs have played a major role in hindering us from meeting the profits and revenues needed to progress and increase our market share. Office Depot’s 2011 annual report indicates that retail branches located in the Central and Northeastern regions of the United States in particular have experienced declining profitability. We will focus our plans for reduction in these regions. The stores that remain should be ones that are located near K-12 schools and business dense populations, where we see the highest margins. * Revamping of online marketplace: Since Office Depot does not have a strong presence in the e-commerce arena at the moment; we will have to provide consumers with incentives to shop with us. Currently, all of our incentive programs only work within the retail outlets. I propose that we offer our customers points for every purchase made online. As points are accumulated, our customers will have the option for either discounts on their future purchases or they will be given the opportunity to use these points to enter in online sweepstakes. The more points they have, the better their chances will be in winning the giveaway. In addition, we will email out deals to our customers on either a weekly or monthly basis similar to the deals given out by Groupon. * Expansion of private-label products: Private-label products are generally cheap to produce and provide high margins. Expanding our current line of Office Depot products online will generate larger quantity orders and provide higher margins. Other highly competitive industries have achieved success with the sale of private-label goods. According to Steven A. Burd, CEO of Safeway, “Food retailers make a 25% gross margin on branded product sales compared to a 35% margin on private label sales. That’s a significant source of additional profitability for a competitive business.” For those who might feel that customers would have an unfavorable reaction to the private-label expansion, The Nielson Company has conducted surveys showing the consumers’ increasing satisfaction with the quality that the private-label has to offer. One of these surveys can be seen in Exhibit 3:

Consumer Survey on Perception of Private Brands
Consumer Survey on Perception of Private Brands

Exhibit 3. This Nielson survey shows the changing customer preference for private-label products.
Exhibit 3. This Nielson survey shows the changing customer preference for private-label products.

Risks to Strategy
I’m confident that the plan that I have outlined for you will result in a change for the better. However, we must not forget that there will always be some risks that we must take into consideration: * Existing customers may feel too accustomed with the conventional retail approach and may take time to warm up to the online approach. * Major e-commerce outlets including Amazon and Poppin already have the experience and know-how in the industry and will hold a competitive advantage at the start. * Online marketplace may not gain traction in the e-commerce segment. * Office Depot may face backlash from employees from the closure of retail outlets.
Although there are some risks associated with my proposed plan, I believe that the potential benefits outweigh the risks involved. As the Internet is quickly becoming a central focus of our society, our revamped online marketplace will incentivize new and existing customers to make more online purchases that facilitate an easier, faster, and less costly way to shop. In addition, with the reduction in costs from the store closures, we will be able to transfer these savings directly to our customers. In conclusion, I believe that by following the steps that I have listed above will enable our company to increase our revenues and market share in the long run.

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