OfficeMax is shaving its product assortment and vendor roster as part of a strategic initiative designed to improve long-term profitability.
The action, which begins this weekend and will extend through year’s end, will affect nearly every category in the store, including such consumer electronics segments as telephones and fax machines. Exempt from the scale back are PCs, laptops and monitors, whose assortments have already been rationalized, a company spokesman said.
The inventory cuts could total as much as $400 million, and the merchant anticipates taking a markdown charge of $50 million in the third quarter of fiscal 1999 to liquidate the goods.
According to CEO Max Feuer, the effort is part of a new centralized supply-chain management program designed to reduce inventory in stores and cut promotional funding costs. One leg of the program calls for the early completion of four new regional distribution centers, for a total of five, that will provide just-in-time merchandise delivery to stores. Currently, manufacturers largely ship products to individual OfficeMax stores directly.
The vendor rationalization, he said, would allow the company to begin buying merchandise on a net cost basis without regard to monies that are usually built into the cost of goods to fund advertising and marketing programs and to cover transportation costs. “The net savings is anticipated to be significant and far above the benefits built into the cost of goods under the current methodology,” which is typical of the office products superstore industry, he said.
In addition, OfficeMax will step up its e-commerce efforts in order to “seamlessly” integrate its web site, catalog and physical stores. Ultimately, Feuer said, customers would be able to order thousands of non-store inventoried products online, and pick up and return the merchandise at any OfficeMax location.
But the plan – based on a business assessment study by outside consultants and the retailer’s strategic planning group – carries a price. Earnings for the third and fourth quarters of fiscal 1999 will fall short of analysts’ expectations by $.38 to $.42 per share, the company said, due to added changeover costs and lower gross margins on clearance items. Shares of OfficeMax fell 18% following the announcement on Thursday.
OfficeMax also plans to reduce the number of new store openings from this year’s 115 – which will bring it up to about 950 units — to between 50 and 75 in fiscal 2000, saving the company upwards of $5 million. It also expects to open new stores in South America and Asia through additional joint ventures offshore.