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Office Depot Debuts New Store Format

6/30/2004 12:40:00 PM Eastern

Delray Beach, Fla. – Office Depot today unveiled a new concept in retailing called Millennium2 (M2), that is designed to be less expensive to open, more efficient to operate and easier to shop, and is part of a plan to open 80 to 100 stores this year, many in the Northeast.

Office Depot chairman/CEO Bruce Nelson explained the concept by saying. “By building on the things we have learned from [the] Millennium pilot project and combining them with extensive market research and a healthy dose of home-spun ingenuity, we are able to offer our customers the most enjoyable and satisfying shopping experience in the industry.”

He added, “M2 is intuitive, logical and designed specifically for the way people make purchase decisions.”

For example, Nelson noted that products are grouped in highly visible, strategically located “pods,” with core supplies at the outer perimeter of the store (signed for optimal visibility and easy purchase) and furniture and technology at the center (to better support consultative sales and the area in which the majority of staff will be located during peak buying hours).

According to Nelson, M2 plays a central role in the implementation of Office Depot’s seven corporate strategies, most notably addressing the company’s number one objective, which is realigning the North American real estate portfolio.

“In 2004, Office Depot is embarking upon one of the most ambitious expansion plans in company history,” Nelson said, while reiterating Office Depot’s intent to open between 80 and 100 new stores this year.

“We will leverage the M2 format along with our recent purchase of Kids ‘R’ Us locations to enhance Office Depot’s presence in existing core markets and provide immediate access to large areas of the country in which we do not currently have a strong retail concentration, such as Massachusetts, New York, New Jersey and Pennsylvania,” Nelson added.

“As we roll out these new stores, customers in the Northeast -- for the first time -- will have a choice, an alternative to the only place they’ve been able to purchase office supplies,” Nelson continued. “And what they will find is an Office Depot store that represents a true ‘destination experience’ – one that is warm, colorful and exciting and reflects the latest thinking in everything from product layout and adjacencies to graphics, replenishment and service.”

Overseeing the M2 launch on a daily basis is Rick Lepley, who was recently named executive VP of North American Retail for Office Depot, and who was responsible for putting together the original M2 project team.

According to Lepley, the extensive research conducted for M2 indicated that customers want two specific things when shopping at an office supply superstore: “For basic supplies, they want convenience, including help in getting oriented, the ability to find everything on a shopping list and fast checkout. For technology and furniture, they want information and advice, including assistance and support from knowledgeable staff and the ability to touch and try out various product options. M2 executes beautifully on both of these fronts.”

Lepley said that initial feedback from consumer trials and focus groups has exceeded expectations: “With M2 we have seen higher overall customer satisfaction scores, easier product selection, faster checkouts and improved service levels – all areas that we believe will lead to increased traffic, a larger market basket and broader attachment rates across multiple categories.”

To ready the M2 concept for introduction, Nelson and Lepley teamed with Chuck Rubin, executive VP and chief merchandising officer. Together, the marketing and merchandising organizations, store operations unit and IT group, set forth to revamp existing processes and ways of doing business.

According to Rubin, these advancements include:

* Graphics and Color Palette: New color scheme is vibrant and cheerful, and incorporates a contemporary color palette featuring bright orange, lime green, aqua and purple. New way-finding system (versus lifestyle graphics) improves the shopping experience by making it easier to navigate the store and find products.

* Store Layout: “Pod” structure assures easy navigation. Modularity of format adapts to different store sizes/shapes, yet provides a consistent customer experience. Low center fixtures offer clear sight lines. Open format allows employees to find and assist customers more efficiently, while at the same time allowing customers to easily seek out employees for assistance.

* Sales floor reduced by 10 percent without significantly sacrificing SKU count: A combined check-out and copy areas with cross-trained front-end labor creates a unified service offering. A redesigned copy area utilizes 50 percent less space while maintaining full functionality.

* Fixtures: High steel at outer walls and increased shelf depth maximizes holding power at point of sale. Holding power reduces perceived out-of-stocks and number of employee product “touches.” Planogramming tech assortment into designated top-stock locations reduces replenishment time/labor.

* Bulks and Pegs: High-velocity items are bulk-stacked to reduce labor and reinforce value statement. The number of pallets on sales floor increased five fold and the number of pegs reduced by 50 percent to improve labor allocation away from the products and towards the customer.

* Packaging: A move to “display ready” trays minimizes stocking and zone recovery labor and a selective use of gravity-fed or spring-loaded shelving keeps products organized.

* Information Technology: Interlock scanners provide extra security and all PCs are fully imaged to increase functionality and reduce number needed on sales floor. Wireless (RF) technology on PCs increases flexibility

Lepley noted that M2 is more than just an evolution in marketing and merchandising: “To make it a practical solution that Office Depot could roll out as our new store format or utilize as part of our remodel program, M2 had to demonstrate efficiencies of operation.”

“To justify the launch, we needed to address the financial aspects that govern retail, including costs associated with opening, maintaining and staffing a store,” he said.To that end, Lepley concluded by indicating that the company made significant progress in several areas.

For instance remodel costs are expected to be $250,000 to $300,000 as opposed to the $350,000 to $400,000 typically associated with Office Depot remodels. New store build-out costs are expected to be less expensive, Lepley noted. On average, M2 remodels will have a lower incremental sales hurdle and M2 offers a broader roll-out opportunity for the portfolio of Office Depot stores.

Information technology setup costs are expected to be reduced by 40 percent with virtually no reduction in functionality. Annual IT maintenance costs are expected to be reduced by 45 percent.

And the reallocation of labor to value-added selling activities can positively impact conversion, average order value and overall customer satisfaction, he noted.

Office Depot, which opened in 1986, has annual sales of more than $12 billion and operates in 23 countries and employs nearly 50,000 people worldwide. In North America Office Depot has 900 retail stores in addition to a national business-to-business delivery network supported by 22 delivery centers, more than 60 local sales offices and 13 regional call centers.

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