OfficeMax Is Suffering From a Herd Mentality

Business trends come and go as fast as women's fashion changes. From Japanese-inspired total quality management initiatives in the 1980s to the Six Sigma movement and now "kaizen," they're all manifestations of corporations embracing the latest fad.

Go big or go home
Other ideas that illustrate a herd instinct among executives include the big-box superstore concept pioneered by the likes of Wal-Mart and Home Depot. But now after the Great Recession, everyone is running in the opposite direction, reducing a company's bricks-and-mortar footprint to its essentials. Even Wal-Mart is downsizing again.

When customers proved the only thing they wanted to buy from Best Buy was mobile phones, the electronics superstore went from spacious 45,000-square-foot stores offering everything from electronic gadgets to appliances to opening up cozy mobile phone-only stores that average 1,200 square feet in size. Radio Shack was even more radical in opting for little more than a kiosk stationed inside a Target store. Sometimes, though, too small is just too small, and the two recently severed their relationship after the concept flopped.

Perhaps the best example of the store-in-store ideal is Bed Bath & Beyond, which often houses its makeup and personal-care division Harmon Face Values in its big-box stores in addition to their own standalone models.

Everybody in the pool!
So it comes as no surprise that office-supply retailer OfficeMax (NYSE: OMX  ) is hopping on the less-is-more bandwagon and reducing the size of its store square footage. Although rival Staples (NASDAQ: SPLS  ) began the process several years ago, OfficeMax is following with gusto. It closed around 40 stores last year without barely opening any new ones and now is embarking on a plan to go from a cavernous 30,000-square-foot store to a more intimate 5,000- to 15,000-square-foot one.

Not to be outdone, Office Depot (NYSE: ODP  ) has committed $60 million a year to shoehorning approximately 500 stores into a new smaller format over the next five years and closing as many as 20 stores per year as leases expire.

For retailers like office-supply shops that stock tens of thousands of SKUs -- the large selection is why Staples is actually the second largest online presence behind Amazon.com -- going with the smaller footprint makes sense. It eliminates a lot of extra inventory that's expensive to carry, it reduces the number of employees needed to staff the stores, and it just might squeeze more profit out of the same concept at lower cost. Of course, Wall Street still thinks merging Office Depot and OfficeMax would be the best outcome for the two, because the current state of the economy can't support all three retailers.

Sending its very best
But OfficeMax isn't just trying one thing. It's heaving all sorts of ideas at the wall to see what will stick. One of its key initiatives is to become the Hallmark cards of office supplies.

You know how you go into a store and there's a whole aisle devoted to greeting cards? That's what OfficeMax envisions for its office supplies, with pens, paper, and paper clips being a dedicated design concept within a retail partner's store. 

Once upon a time, office supplies were only bought at office-supply stores, but now customers can get what they need at their local Wal-Mart and Target, not to mention at Amazon.com. While many supermarkets already have a small selection of office necessities, OfficeMax's plan is to supply them with both private-label goods (meaning higher margins for Office Max) and brand-name supplies. Because it has extensive reach and experience, it believes it can do the marketing better than the partner can by itself, but the question is whether retailers want to give up valuable real estate to office supplies.

Who's your daddy?
Other ideas OfficeMax is launching include in-store pickup for items ordered online, an increasingly popular choice among retailers, and it's partnering with domain host GoDaddy.com to hawk website setup packages and support services to small businesses (though after GoDaddy's excruciating Super Bowl ad, perhaps they'll rethink the pairing of smart and sexy).

There are a lot of good ideas OfficeMax is willing to try, even if it's following a well-worn trail blazed by others, as it shows the upheaval retailers everywhere are facing, and not just from the Internet. But if I had to choose an office-supplies retailer to invest in, I'd be going with Staples.

As the largest, most financially sound of the three, it has the wherewithal to continue succeeding in this sideways economy, even if there was a pairing between its two rivals. Its recent decision to offer 3-D printing services to customers shows Staples is willing to lead the herd, not merely follow it. The only problem is I don't see a catalyst that will make stocks of office-supply retailers stampede higher anytime soon, so I'd just as soon avoid them altogether until we get some firm direction on the economy.

The retail space is in the midst of the biggest paradigm shift since mail order took off at the turn of last century. Only the most forward-looking and capable companies will survive, and they'll handsomely reward investors who understand the landscape. You can read about the 3 Companies Ready to Rule Retail in our special report. Uncovering these top picks is free today; just click here to read more.


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