Office Depot: Another Geek Squad, Technology Services?

Office Depot: Another Geek Squad, Technology Services?

Office Depot (NYSE: ODP), the struggling office supply retail chain, could make a push into technology services, managed print services and security solutions. That's the spin from Starboard Value, an investment firm that has been buying up depressed Office Depot shares. But how exactly would Office Depot hope to compete against Best Buy (owner of Geek Squad and mindSHIFT), Staples (Thrive Networks), and other retailers that now offer technology services to small and midsize customers?

First, some background on Office Depot. The company has 1,200 retail locations across North America. But the company has been struggling. Office Depot has a market capitalization of roughly $704 million. In 2005, the company had a market value of $10.5 billion, according to The Wall Street Journal.

Starboard Value, an investment firm, has quietly amassed a 13.3 percent stake in Office Depot and is now calling on the retailer to (A) cut expenses in certain areas while (B) investing in new market opportunities. A letter from Starboard Value to Office Depot CEO Neil Austrian states:

"In addition to the opportunities highlighted above, we have identified several other areas for substantial margin improvement.  First, we believe the Company can significantly increase the mix of higher-margin services, such as copy and print services, technology services, security solutions, and shipping services in its North American Retail Division.  As an example, services account for approximately 9% of Staples’ North American Retail revenue, substantially higher than at Office Depot.  Services generally carry gross margins of 60% compared to Office Depot’s average store gross margins of approximately 30%, as well as substantially higher operating margins.  For every one percent increase in the mix of services revenue, we believe Office Depot could improve operating income by $7 million to $10 million in its North American Retail business."
Read between the lines and it's clear Office Depot is facing many of the same challenges that other retailers must now combat: The shift from products to services, and the shift from in-store sales to online retailers.

Best Buy is facing similar challenges though in a different core market -- consumer electronics. Best Buy's founder is exploring ways to potentially acquire the company and take it private, while Best Buy is busy revamping its stores, building Genius Bar-type services, and extending into managed IT services.

Will Office Depot follow a similar path forward? Too soon to say. But we're watching.
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