New destination for Office Depot Online: higher sales and increased market share

Keith Butler never expected to be pushing paper clips for a living—especially online.

Office Depot Online’s new chief executive originally aspired to be a college professor. But opportunities in academia were pretty sparse in the ‘70s, “unless you wanted to teach school in South Dakota,” says the 47-year-old Butler. That reality check, along with some exposure to the entrepreneurial world, caused Butler to switch gears and jump on a business fast track, eventually taking him to e-commerce.

Butler has been at Office Depot Online since its launch in January 1998, signing on as executive director of marketing and merchandising. In late May, when Beth VanStory resigned as vice president of Office Depot Online to head up an Internet car company, the torch was passed to Butler.

It hasn’t been business as usual, for Butler is rolling out a new game plan for fall. At the core of his strategy is a shift in business models, moving away from a purely for-profit mentality to focus on the larger picture—increased revenues and market share.

The new business model, which is Butler’s brainchild, is less controversial than it sounds. “I’m not suggesting that we throw profitability away,” stresses Butler. “We’re emphasizing other approaches to grow the business.” Besides, he points out, Office Depot Online has already proven its ability to produce profits, with black ink beginning to flow during this year’s first quarter.

San Francisco-based Office Depot Online operates as a separate business unit of Office Depot Inc., located in Delray Beach, Fla. Despite being part of a public company, it’s tough to gauge Office Depot Online’s actual performance for its parent bundles figures for its business-to-business Web site along with OfficeDepot.com.

Thumbs up from analysts

Internet sales totaled $70.2 million in the second quarter of 1999, compared to $12.2 million during the same period last year. Online sales for all of 1998 were $66.9 million. When prodded about OfficeDepot.com’s share of those revenues, the otherwise candid Butler refuses to be specific.

Analysts give the new business model a thumbs up. “We believe that multi-channel retailers need to be somewhat more focused on sales growth and less focused on near-term financial returns,” says Matthew Fassler, a research analyst at Goldman Sachs in New York. Yet that doesn’t mean investors are going to cut retailers tremendous slack, warns Fassler, predicting that Office Depot shareholders will be “fairly vigilant and not tremendously tolerant” of Web-related losses that cause the company to miss its projected revenue and earnings plan.

Because the office product category is relatively new to the Web, boosting OfficeDepot.com’s business begins by getting the word out. Under a rigid for-profit focus, marketing efforts were hindered, but the new model “changes the metrics by which we evaluate the business,” says Butler. Not only are more dollars being earmarked for marketing, but now Office Depot Online won’t have to justify every nickel it spends on advertising to senior management and Wall Street.

Offline ad debut

For its first year, marketing efforts for OfficeDepot.com were confined to the Internet. This past January, the online retailer ventured into the offline advertising world for the first time, selecting five cities (San Francisco, Denver, Dallas, Seattle and Miami) with a strong mix of small businesses and Internet users. Besides advertising in business journals, ads were placed on the sides of buses that followed specific routes believed to be viewed by the retailer’s target audience.

This fall a similar strategy will be adopted with dollars split fifty-fifty between online and offline efforts. Besides print and outdoor ads, OfficeDepot.com is also eyeing radio for its media mix.

Offline advertising may not sound earth-shattering, but it’s a new direction for online merchants. Marketing online is a less costly proposition—and less risky since merchants can track clicks-to-sales. But offline advertising is going to become necessary as online retailers seek ways to build their brands and differentiate themselves, say industry observers. “E-commerce doesn’t operate in a vacuum,” observes Martin Danaher, a partner at Leading Edges Brand Building, an Atlanta consulting firm. “If you’re going to do business with someone on the Internet, you have to go to them. The game gets back to making that connection,” says Danaher.

When it comes to online marketing efforts, Butler is not a big fan of banner ads, but prefers text links, targeted e-mail marketing programs with partners such as Computers.com, along with fixed ad placements and sponsorships.

Perfect for cyberspace

“We test, test, test,” says Butler, explaining that a small investment is made and clicks are tracked closely to sales. If the scores are high, then Office Depot Online digs deeper into its pockets. This summer the retailer strengthened partnerships with the Wall Street Journal’s online edition and PreviewTravel.com, where Butler was previously vice president of business development.

Office supplies may be in the adolescent stage online, but it’s a category poised for dramatic growth. According to Forrester Research, paper, pens and computer products generated Web sales of $1.3 billion in 1998, and are expected to grow fifty-fold to $65 billion in 2003. And everyone within the category, including Office Depot’s arch rivals, Staples and OfficeMax, is chasing after the market.

“Office products are not sexy products, they’re needs-based and consumable products,” says Butler. And that’s what makes them perfect for the Internet—and Office Depot’s audience of small and home-based businesses. Large corporations can fob off the paper chase onto internal purchasing departments, but smaller firms have to take time out from their core businesses. Who wants to drive across town to get a printer cartridge when it’s only a few mouse clicks away?

An idea that’s catching on, judging by the number of merchants hawking office products online.

Butler divides the competition into four areas: traditional bricks-and-mortar retailers that have embraced the Web, virtual retailers, manufacturers that sell direct and niche players such as consumer electronic stores. Of least threat are the virtual retailers. The first-to-market advantage has passed, says Butler, noting that office products “doesn’t have a leader like Amazon.com did in books.”

Although the virtual retailers may claim lower prices, Butler waves them aside. “We’re not in a price war,” he says, noting that the importance of price has been exaggerated. There’s a growing appreciation that time is money, which makes convenience a major drawing card for Web shoppers. Yet virtual retailers don’t pack the kind of fulfillment punch that Office Depot does with its 2,000 company-owned trucks, 2,500 drivers and more than 20 major warehouses around the country. “We own customer experience from to front to back,” says Butler.

Indeed, analysts give Office Depot kudos for strong integration and fulfillment. “They really bit the bullet on consolidation,” observes Ursula Moran, a retail analyst at Sanford C. Bernstein, a New York-based investment and research firm. After buying a group of contract stationery firms in the mid-’90s, Office Depot spent considerable energy and money to consolidate warehouses on a common platform. “Office Depot really did the hard work over the past years that is paying off for its online business,” observes Moran.

Though Butler may not be losing sleep over virtual retailers, traditional players are his larger concern—especially Staples, which launched its Web site last November. “Staples is biting at our heels,” says Butler, pointing out that Staples just put up a redesigned site this summer.

In the office supply market, Office Depot dominates with approximately $9 billion in annual sales, followed closely by Staples with $7.1 billion and Office Max with $4.3 billion. Yet online, the tables get turned a bit where one measure of success is how much traffic a Web site generates.

Media Metrix rates OfficeMax as the leader in terms of unique visitors. In May, OfficeMax.com attracted more than 1 million unique visitors while OfficeDepot.com had 784,000 and Staples.com had 693,000. But that’s not the number that counts, contends Butler, noting that visitors may browse, but don’t always buy. OfficeMax.com’s traffic might be higher because of its shotgun approach to marketing, speculates Butler.

Laser-beam focus

“We’re laser beam-like in our focus,” says Butler proudly, referring to OfficeDepot’s target audience. In contrast, Staples aims at a broader audience—though not as broad as OfficeMax. Butler observes: “I see Staples advertising in places that aren’t bad, but not necessarily where I would go.”

Guide to E-Commerce Technology

Whereas OfficeMax.com tries to lure customers with frequent flier miles and Staples.com holds out dividend checks as a carrot to customers, Office Depot Online doesn’t play the incentives game. “That’s more of a consumer approach,” says Butler. His team strives to win loyalty by providing one-stop shopping, resources and services for the small business.

With that in mind, this summer Office Depot Online redesigned Office Solutions, an area of its Web site that extends a helping hand to small businesses. Here, entrepreneurs can bone up on everything from writing a business plan to hiring employees and paying taxes. Model business documents, sample letters and contracts can also be downloaded. And though OfficeMax.com offers a smattering of Web links, OfficeDepot.com has a full-blown online directory of Web resources, ranging from Bartlett’s Quotations to stocks quotes. “Office Solutions is a key differentiator for us,” says Butler. “It establishes our site as a single voice for not just office products, but services and information.”

Value-added services are another area of focus for OfficeDepot.com. The retailer recently teamed up with TelePost, an Internet-based telecommunications company, to offer Web-based teleconferencing and presentations. Another affiliation with ELetter, an Internet mailing service, enables customers to outsource direct mailings from their desktop, faster and cheaper than traditional stuffing and stamping. More partnerships are in the pipeline, Butler promises.

Marketing meister

Although VanStory, Butler’s predecessor, was a strong general manager, “Keith is much stronger at marketing and sales—which fits in very well with the stage we’re at right now,” observes Paul Gaffney, senior vice president of systems development at Office Depot, whom Butler reports to.

“Keith has a unique ability to understand through experience what’s going on in the Internet world and then bridge that to the real world,” adds Gaffney. “He’s a voice of reason about some things that go on in the Internet world that aren’t worth applying for a large company.”

No surprise, then that Butler will be an integral part of Office Depot’s global expansion. The company already operates a Viking Web site in the United Kingdom, which was built after its merger with Viking Office Products Inc. in 1998. Yet Europe and Japan are being eyed for future expansion, and Butler will direct the worldwide business development and online marketing component of that effort. “The OfficeDepot.com site will serve as the lead site for features, enhancements and new technology development,” says Butler.

Although Butler may be drawing upon his marketing savvy right now, he has unusual breadth and Internet knowledge, observes Paul Nelson, senior vice president at PreviewTravel and a former colleague of Butler’s. “Most people come from one area and then migrate to the Internet,” says Nelson. Yet Butler “has touched every aspect of the business” from the engineering side to business development.

Butler also possesses insight into the needs of OfficeDepot.com customers. During his graduate school days, Butler got involved in two different start-ups—both builders of limited edition cars. Though he worked in purchasing, Butler got to touch all aspects of the business. In a start-up, employees have a greater span of control and involvement, he observes: “You feel more in control of your fate.”

After working for two other small companies, Butler decided it was time to garner experience in Corporate America and spent the next nine years at Pacific Bell.

In 1991, he joined Advanced Computer Communications Inc., a bridge and router manufacturer, then moved on to Redgate Communications, a new media marketing agency that was later acquired by America Online.

Balancing act

Mike Minigan, executive director of account services at AOL, who first worked with Butler during his Pacific Bell days and later recruited him to Redgate, praises Butler for being equally adroit in Corporate America and the small business arena. “He was able to build consensus quickly in an environment that is highly bureaucratic,” recalls Minigan. “Keith has the unique ability to state his personal position, but remain very much a team player.”

Butler’s affinity for entrepreneurs was one reason attracting him to Office Depot Online. “We’re a start-up organization within a Fortune 500 company,” Butler points out.

A big advangtage of start-ups is “seeing the results of your work—that means a lot to people,” Butler says. This benefit becomes exponential in the online world where results are almost immediate. “On the Internet you have the ability to learn quickly and apply those lessons to move forward,” he philosophizes. “The opportunity for failure is high, but the cost of failure is low—at least, if you don’t keep making the same mistakes.”

Butler hasn’t really strayed as far from academia as he thought—he’s just swapped classrooms.

December 1997-May 1999: Executive director of marketing and merchandising at Office Depot Online.

1996-1997: Vice president of business development and online sales at PreviewTravel.com

1992-1996: Vice president of business development at Redgate Communications, which was purchased by America Online in 1995.

1991-1992: Manager of marketing and public relations at Advanced Computer Communications Inc.

1982-1991: Held a variety of marketing and sales positions at Pacific Bell.