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Category killers.

Category Killers

New Office Supply Retailers Take Aim At Mom, Pop And Sam

Computer-paper fighter planes.

Rubber-band missiles.

It's war in the office supply business, and Little Rock is a major battlefield.

With the grand opening of Arkansas' first Office Warehouse in late May, hot on the heels of Office Depot's opening in January, the artillery fire just gets louder.

The chains are part of what has been called the Toys R Us of the office supply market, examples of a new kind of retailing.

Just call them category killers.

They offer the best of specialty retailing at warehouse prices.

This new breed of stores can't be good news for mom and pop, the Main Street retailers who already have been battered by warehouse clubs.

Now the clubs, such as Arkansas-based Sam's Wholesale Club, have reason to worry, too.

Give and ye shall receive.

"They [category killers] are doing to Sam what he did to the mom and pops," says one Little Rock retail analyst.

Yes, even Sam Walton, chairman of Wal-Mart, sees category killers as a competitive force to be reckoned with. He says discount stores will have to reduce margins by 4 percent to compete with this new brand of specialty store.

The new kid on the retailing block has managed to simultaneously make traditional office suppliers nervous and Sam willing to cut his margin.

Alice In Wonderful-land

You want phones? They've got phones.

You want adding machines? They've got adding machines.

You want binders? Do they ever have binders.

Office Depot and Office Warehouse keep thousands of items worth millions of dollars in inventory. The items, piled to the ceiling in warehouse fashion, look like an avalanche waiting to happen.

In addition to the you-won't-believe-it-until-you-see-it inventory, the chains offer everyday low prices advertised at 10 percent to 80 percent off list prices.

The chains target small- and medium-sized businesses that previously bought at retail and were too small to merit much of a contract discount.

Both chains guarantee the lowest price in town. Office Depot will even beat that by 10 percent.

The Little Rock stores aren't skimping on service, either. Both offer delivery service, phone-in order service, charge accounts and in-house copy and print shops.

Great selection, low price and service, too. It's some package. Can it be beat?

Historically, businesses could buy office supplies at a warehouse and get good prices but little service and a limited selection.

The alternative was to buy from a specialty retailer with good service and good selection but high prices.

Office Depot, Office Warehouse and other category killers such as Drug Emporium, Home Depot and Toys R Us think they offer the best of both worlds.

This is why Sam's and more traditional central Arkansas businesses have cause for concern.

Robbing Mom and Pop

"There will always be a place for the mon-and-pop store, but it is unreasonable to think it won't affect business," says Jim Dailey, president and CEO of Dailey's Office Furniture & Supplies.

Dailey is a past president of the National Office Products Association, one of the world's largest trade associations with almost 10,000 members.

Through NOPA, Dailey has made friends across the country who operate retail stores. He has witnessed significant impacts on his friends' businesses when the specialty warehouses came to town.

Dailey knows of some mom and pops that have been forced to close. Hardest hit, he says, are those closest to the category killers.

Dailey says he has not seen a change in his sales yet due to the Little Rock superstores, but he points out that his store is downtown. Office Depot is located on West Markham Street, and Office Warehouse is at the intersection of South University Avenue and Asher Avenue.

Still, there have been changes.

"We're pricing some products on our floor differently, buying more basic items in quantity and recognizing we'll have to lower margins," Dailey says.

Traditional office suppliers operated on 35 percent gross margin. NOPA reports that was down to 34.3 percent in 1990 and expects it to drop below 34 percent this year.

The superstores operate on about a 24 percent margin.

Superstores, of course, depend on higher volume sales at the lower margin. It is estimated that it takes $5 million to $7 million in sales to support one of the large stores. Office Depot stores averaged $7.4 million in 1990.

The two Little Rock superstores thus need a combined minimum of $10 million in business -- money out of someone else's cash register.

NOPA estimates the central Arkansas office market is worth $124 million. Pulaski County accounts for $109 million of that.

Dailey believes the crunch will come in office supplies rather than furniture and equipment.

"That's where the volume is," he says. "It's your day-in-and-day-out business."

A post-it notepad here, a legal pad there, some company stationery.

If you think keeping these supplies on hand is a trivial cost of doing business, think again.

Each office employee averages using $500 per year in office supplies and furniture. That doesn't sound too bad until you multiply it by 10, 20 or 100.

Dailey thinks he's somewhat insulated from the loss of that business since 75 percent of his store's sales is furniture.

Industry Adjustments

NOPA is playing down the impact the superstores are having on its small retail members. But Office Depot and Office Warehouse are also association members, a fact that obviously prevents NOPA employees from calling it as they see it.

The trade group is, however, offering seminars on how to compete in a changing market.

"The message we stress is there's not a single magic formula that will meet everybody's needs," says Simon DeGroot, a NOPA spokesman. "Some folks respond to price and price only. Others are looking for service."

But aren't the new superstores offering both?

"We're stressing basic marketing skills, knowing your niche really well," says DeGroot.

That generic response can't be much consolation to a store owner watching his sales and margins erode.

Dailey predicts a shakeout in the industry is imminent. There are 11 superstore chains now, compared with 23 a year ago. Mergers affect the little guys as well.

"The industry is consolidating," DeGroot says. "Everybody's getting bigger."

Even so, it will be awhile before Sam's is forced to go head to head with the superstores in all its markets.

Sam's has 180 locations across the country. The chain opened two stores last week.

Office Depot has about 190 stores since its recent acquisition of The Office Club. Office Warehouse is up to 32 stores.

Other office superstore chains include Biz-Mar and Staples, the industry pioneer in 1986 that hired a number of Wal-Mart managers in its infancy. The superstores are mostly regional in nature.

Knocking on Sam's Door

A Sam's representative would only say that the wholesale club is not afraid of competition and, in fact, thinks competition is healthy.

Consumers may agree. Shareholders probably don't.

Sam's numbers are not broken out from Wal-Mart's. No one in the company will discuss finances, making it impossible to tell how the clubs are doing as category killers grow.

However, it has been suggested by analysts that Sam's profits come from membership fees, not paper-thin margins. Sam's may meet or beat the superstores' prices, but that's not the only measuring stick.

If you think Sam's has nothing to fear, consider this:

* Sam's membership fee is $25; Superstores have no membership fee.

* Sam's stocks about 3,500 items (and that includes food, appliances, etc.); Superstores stock more than 6,000 items in one category.

* Sam's is cash-and-carry; Superstores offer delivery and charge accounts.

"Now I see why my secretary was so excited," says one Little Rock businessman after visiting Office Depot. "I've told her to start shopping here, and I own stock in Wal-Mart."

The businessman adds that he can find some items cheaper through mail-order catalogs, long the nemesis of office suppliers, but then it becomes a question of convenience.

Office Depot must be doing something right. The company had $903 million in sales in 1990, compared with $34 million in 1987. Figures for Office Warehouse are not available because the company only went public May 14, the same day it opened its Little Rock store.

Both companies talk of a second store, probably in North Little Rock.

Many consumers will split their business between traditional specialty shops, warehouse clubs and the specialty superstores. But defining and holding onto a market segment won't be a cakewalk for any of them.

Expressing his enthusiasm for the new Little Rock superstores, one businessman recently remarked that he'd almost rather shop at Office Depot than .... well, you know.

But he did say almost.

PHOTO : A NEW KIND OF STORE: New to Little Rock, the specialty superstore Office Depot is out to grab its share of a $100 million-plus market from wholesalers and traditional retailers. One analyst suggests the category killer is doing to Sam's what that chain did to the mom-and-pop stores.

PHOTO : THE NEW BREED: With the grand opening of Arkansa' first Office Warehouse in late May, hot on the heels of Office Depot's opening in January, the war in the office supply business has come to Little Rock.

PHOTO : SUPERSTORES: Stores such as Office Warehouse and Office Depot operate on about a 24 percent fross margin, compared with 35 percent for traditional office suppliers. The superstores depend on higher volume sales at the lower margin. It is estimated that it takes $5 million to $7 million in sales to support one of the large stores.
COPYRIGHT 1991 Journal Publishing, Inc.
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Copyright 1991 Gale, Cengage Learning. All rights reserved.

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Title Annotation:includes related article on Sam's Wholesale Club's marketing efforts; new office supply retailers offer huge selections at warehouse club prices
Author:Ford, Kelly
Publication:Arkansas Business
Date:Jun 3, 1991
Previous Article:Changing positions.
Next Article:Worthen's ace in the hole.

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