Cover Story -- e.biz -- Strategies
Why Office Depot Loves the Net
Its brick-and-mortar network is a big plus
Warehouses, stores, and inventory are all the kiss of death when it comes to Internet economics, right? If so, someone forgot to tell David I. Fuente, chairman of Office Depot Inc. Since getting into e-commerce nearly four years ago, Fuente has used Office Depot's nationwide network of 750 superstores, 30 warehouses, and $1.3 billion in goods to build the largest office-supply retailer on the Internet, with $250 million in sales. And unlike high-flying Web-based companies that have yet to turn a profit, he gloats over the fact that Office Depot's Net business is in the black. "For us, this has been profitable from virtually the day we opened," says the 54-year-old Fuente.
As the Internet matures, it may be the old brick-and-mortar retailers like Office Depot that have the last laugh. But only if they develop a Web strategy not unlike Office Depot, which is leveraging its strengths in terra firma for success in cyberspace. The necessary ingredients: a solid brand name, extensive local distribution, and hefty purchasing power to match--or even undercut--discount-minded cyber-rivals. "If the traditional retailers would only wake up and use their stores and distribution power, it would be a phenomenal opportunity," says PaineWebber Inc. retailing analyst Aram Rubinson.
Office Depot is a case study in how to avoid being Amazoned. The Delray Beach (Fla.) company is tightly integrating the Net into the heart of its operations. Focusing primarily on business-to-business, it has set up customized Web pages for 37,000 corporate clients, including Procter & Gamble Co. and MCI WorldCom Inc. For each customer, Depot has designed a site with parameters that allow different employees various degrees of freedom to buy supplies: A stockroom clerk might only be able to order pencils, paper, and toner cartridges, while the assistant to the CEO might have carte blanche to order everything the company sells.
Customers also can use the Net to check up-to-the-minute inventory at the nearest store or warehouse to see what's available for delivery the next day. "Office Depot seems to really get it," says Chuck Martin, chairman of the Net Future Institute, a New Hampshire think tank that studies e-commerce. "Rather than just extending their business to the Net, they've used it to leverage their bricks and mortar."
There's a sweet financial incentive for doing it: Electronic sales cost less than those made in stores or from catalogs. Processing an order taken over the Net costs Depot less than $1 per $100 of goods sold, vs. twice that for phone orders. And since no customer-service representative has to key in the transaction, order-entry errors are virtually eliminated and returns are cut in half. The Web now accounts for some 20% of Depot's sales to corporations--and the company aims to raise that to 30% by yearend. That would help: Last month, the company told analysts that its second-half earnings would come in more than 20% below the Street's estimates, primarily because of rising inventories of outdated office-technology products and the costs of closing underperforming stores.
Office Depot isn't the only one that wins by moving to the Web--so, too, do its customers. The Depot's Web operations help corporate clients reduce their need for costly purchase orders since billing is handled electronically. While the average order for supplies is about $125 at Office Depot, many customers report costs of more than $100 to simply process a purchase order and pay an invoice. Using the Web, that can be slashed to $15 to $25. "We went to Office Depot primarily because of their Web systems, which translated to greater efficiency in ordering," says Urban Sommer, director of procurement at MCI WorldCom. The phone company has seen its $3.5 million annual bill for office supplies shaved by more than 10%.
To be sure, Office Depot isn't the only seller of office supplies on the Net. Staples Inc. in Framingham, Mass., has a site that many experts believe rivals Depot's--and even has certain advantages, such as a partnership with Register.com, a Web site that lets businesses sign up for Net domain names. The third player in the real-world office supply business, Office Max Inc. of Shaker Heights, Ohio, was first to the Web, beating Office Depot by a year. But thanks to Depot's sophisticated approach, it's leading the pack with Web sales that are 25% higher than Staples' $200 million. Office Max doesn't report its Web revenues, but concedes its sales are smaller than the other two. "Depot has done the best job, hands down," analyst Rubinson says.SMART FRIENDS. Together, the three have occupied the Web early and forcefully enough to neutralize any serious threat from Internet startups, such as At Your Office.com and Online Office Supplies.com. Consider this: Online Office Supplies started operating a year ago and has logged less than $1 million in sales. Anybody would "have a difficult time becoming the Amazon of office supplies," says Paula Jagemann, CEO of Online Office Supplies.com.
Office Depot can credit smart friends for its success. Its push into e-commerce began at the behest of one of the more tech-savvy institutions: the Massachusetts Institute of Technology. The school was looking to ditch an archaic system of requisitioning office supplies from campus stockrooms and outside vendors. "We wanted the school community to use the Internet in a way that would eliminate having to make a call, generate a purchase order, and pay an invoice. Yet they could still have the item the very next day or sooner," says Diane Devlin, who led the MIT team developing the operation.
Depot won the contract and opened the system in January, 1996. Soon, MIT had rid itself of five stockrooms and a warehouse, allowing redeployment of much of the $1.2 million it had tied up in inventory. And through the Office Depot initiative and other Internet-ordering systems, MIT has reduced employment in its procurement department by roughly half.
Since Office Depot started building similar sites for corporate clients in the autumn of 1996, it has found that the cost of operating on the Web is minuscule compared to the benefits. Because Depot built its Net business on an existing network of warehouses, 2,000 delivery trucks, and phone-order sales to many of the same customers, the upfront cost was less than $10 million. "Our incremental investment to become a Web-based company was almost zero," Fuente says. "We didn't need to buy any different products, we didn't need to build any new distribution centers or order-entry systems. All we needed was a Web site. It's very cheap."
Now, Office Depot is turning its attention to a public Web site for small businesses and consumers. Individuals can order any of the company's products. Small companies get a poor man's version of the big corporate sites. For example, each visitor can set up lists of authorized users with the ability to purchase specific types of supplies or goods up to a certain dollar value. A company can also authorize a lower-level worker to place orders that will only be submitted after a supervisor, who is notified by e-mail, approves them. The site is catching on: It attracted more than 800,000 visitors in July.
Even though Depot's Net operations are growing 50% per quarter, Fuente believes they will not displace the company's traditional business anytime soon. Even now, the Web accounts for only 3% of the company's total revenues. Besides, he knows how critical brick-and-mortar assets like warehouses are to Depot's Internet future.By David Rocks; Contributing: Peter GaluszkaReturn to top