Office Depot Inc CFO Joe Lower told investors at a conference this week that the company’s retail operations could represent less than 20% of the company’s sales within the next three years.
Now, before I get an angry email from Boca Raton, Lower did NOT say that Office Depot would carry out a mass closure of stores. His comment was more about how Depot plans to expand its business outside of its traditional retail base, in areas such as B2B, IT services, tech-based solutions and by leveraging its supply chain network.
Lower was asked whether Office Depot would consider separating the retail piece of its business, and he confirmed that this “is not our strategy today”.
There was a caveat, though.
“Nothing is off limits and there are no sacred cows,” he told investors at the Baird 2019 Global Consumer, Technology & Services Conference in New York this week. “We are committed to creating shareholder value, so if there is a way we can accelerate the value of this business, we’re going to pursue it.”
Office Depot has consistently reaffirmed a commitment to its retail network as a key component of an omnichannel strategy, although since CEO Gerry Smith said last year that closing stores was a “going-out-of-business strategy”, there has been a more pragmatic approach to store closures. Around 60 outlets are set to shut this year, with a further 90 by 2021 – but that will still leave Office Depot with approximately 1,200 locations in the US.
Lower said the notion that retail could represent 20% of the sales mix in three years’ time was a “very realistic” view, given current trends and how Depot plans to grow and invest in the B2B portion of its business, both in distribution and CompuCom.
But it does sound like a bit of a tall order; a quick ‘back-of-the-napkin’ calculation suggests that something around $8 billion would need to be added to the top line in other areas of the business for that 20% retail mix to be realised – assuming an average 6% decline in the retail top-line for three years and no massive store closures or sell-off.
Despite Lower’s confidence in CompuCom’s ability to “easily” achieve growth in the mid-single digits during that time, today it only represents about $1 billion of Office Depot’s total revenue of $11 billion and it would take something pretty transformational to move the needle anywhere near the required amount.
At the Business Services Division (BSD), the top line continues to edge up on the back of Depot’s ‘federation’ dealer acquisition strategy, but these deals have largely been confined to small-to-mid-sized resellers in markets or product categories where BSD is underserved.
A wild card could be Office Depot’s fledgling relationship with e-commerce powerhouse Alibaba, especially on third-party distribution services in the US. That collaboration is still in a pilot phase, and there is obviously potential for Depot if it becomes Alibaba’s preferred distribution partner. For the time being, though, it is still too early to say, and I’m not sure if, realistically, that could even ramp up to a multibillion-dollar business in such a short space of time.
Therefore, do we take Lower’s comment with a pinch of salt, or could there be a strategic acquisition on the horizon, or some other transformational move?
