Private equity firm Apollo Global Management will take Rackspace private in the all-cash deal.
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.”