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The big three — Staples, (SPLS) Office Depot (ODP) and OfficeMax (OMX) — make up 10% of the $323 billion-a-year market for office and school supplies. That means business booms around August and September.
Household spending on school supplies is expected to rise 1% to 2% this year, thanks to higher enrollment and tighter school budgets.
Big office supply stores target more than students, of course. The chains' real focus is on small and midsize businesses.
About 80% of Office Depot's retail clients are small businesses. As these firms have grown the last few years, so have retailers' sales.
A focus on business also helps protect the industry group from the vagaries of consumer demand, analysts say.
"We like the group," said Colin McGranahan, an equity analyst at Bernstein.
"You have less exposure to consumer spending, and we're more comfortable with the business demand outlook than the consumer spending outlook," he said.
The industry's wholesalers — firms that sell copiers and printers to large corporations — have benefited from an uptick in professional service jobs, particularly those in document-intensive industries like banking and insurance.
"What we look at is white-collar employee expansion," said Dan Murphy, a vice president at Ikon Office Solutions. (IKN) "That's probably the greatest indicator of growth."
About 45% of Ikon's 2005 revenue came from selling equipment to its midsize and Fortune 500 customers.
The rest came from providing these companies with consulting, leasing and services such as in-house document management. In other words, Ikon's staff runs some firms' mailrooms.
Global Imaging Systems, (GISX) Britain's Danka Business Systems, (DANKY) United Stationers (USTR) and Netherlands-based Buhr-mann, (BUH) under the brand name Corporate Express, all compete to sell office equipment and supplies to corporate customers.
For all the firms in IBD's Office Supplies Industry group, the goal is to win customers on price, selection and service — while keeping costs as low as possible.
For the retailers, private-label products have helped them take advantage of lower manufacturing costs overseas.
Customers can now buy reams of copy paper, stacks of pens, and boxes of envelopes that carry the stores' brand name but come out of factories in Mexico, Taiwan and Indonesia.
China is the biggest exporter for at least 12 categories of office products, from blank books to office equipment, says industry trade group Shopa — the School, Home and Office Products Association.
Everyone wants more private-label wares. Besides lowering costs, they let retailers focus marketing expenses on one brand.
Take OfficeMax, which has just completed the first stage of a turnaround aimed at stemming losses and boosting margins. (See related story)
It sees private-label products as a key way to meet its goals. In the past few months, it opened an office in China.
"When you look at just the amount of private-label (products), our competitors have us outnumbered by quite a lot," Sam Duncan, OfficeMax's chief executive, said in a recent conference call.
Big-box stores have struggled with higher prices for paper pulp and energy, raising costs for paper products, plastic electronics parts and transportation.
At the same time, lower manufacturing costs and better inventory management have helped chains offset commodity price increases.
"Given the consolidation that's occurred in the retail marketplace in the last 10 to 15 years, the community is hesitant to pass on price increases," said Steven Jacober, president of Shopa.
For retailers and wholesalers, competition is tough. Battling over prices can crush profit margins.
The wholesalers of office equipment have seen the prices of copiers and other office imaging gear fall steadily over the years.
That can pinch margins for distributors, who add a markup to these items.
So wholesalers say they try to avoid gunning for deals just by offering the cheapest price.
Ikon tries to sell its consulting services, which can help clients cut costs and improve productivity. That consulting work then drives hardware sales.
Ikon's overhead costs — as a percentage of sales — have fallen for seven straight quarters. That fattened operating profit margins to 5.2% last quarter, up from 3.2% in the March quarter of 2005, Citigroup says.
Office retailers, meanwhile, face a wide range of competition. In addition to competing with each other, they have to take on the major discount chains like Wal-Mart Stores (WMT) and Target, (TGT) electronics stores like Best Buy, (BBY) and drugstores like Walgreens (WAG) and CVS. (CVS)
The big office supply chains all advertise weekly sales promotions. The idea is to attract the "cherry-picker" customer who comes in for the discounted item — hoping he picks up other items.
But this customer doesn't always produce the most profits, so some stores are adjusting their strategy. OfficeMax says it's stopped focusing on selling a lot of low-cost, low-margin items to the cherry-picker customer.
Instead, it looks to sell higher-ticket items to small businesses.
What works best? Getting customers to purchase something big and then selling them supplies and accessories for it.
Office Depot trains its salespeople to ask customers buying a printer whether they need the appropriate cable, for instance.
"It's very easy for a customer to find multiple things they should buy together," said Chuck Rubin, president of North American retail for Office Depot.
The chain keeps a large database on its customers that allows sales staff to mail or e-mail offers for related items — say, photo paper — in the weeks after a customer buys something major like a printer.
Such follow-up sales have helped boost profit margins in Office Depot's North American retail division — its biggest in revenue — to 6.4% from 5.3% a year ago.
Plain-old belt tightening has helped too. Rubin estimates the chain has saved "up to seven figures" just by shortening the length of its cash register receipts.
When the economy slumped in the early 2000s and businesses cut back on workers, office suppliers suffered too.
But since 2003, professional and business services have grown 2% to 3% a month, says the Labor Department. Overall job gains have been sluggish the last four months, and many economists expect U.S. economic growth to slow in the second half of this year.
Still, as long as firms don't slash white-collar work forces, they should require more copy paper, printer toner and mail services.
Shopa expects the total market for school and office supplies to increase 3.6% to 3.8% this year — the third straight year of accelerating growth.
For office retailers, technology helps management track inventory and find the best spots to open stores.
Properly stocked shelves keep customers happy. So office supply chains have turned to inventory-management software. "Our industry has always been a smaller industry and more information poor" than other retailers, says Shopa's Jacober. "As we develop the library of data, it becomes more widely used and more effective."
Technology also helps the chains pick locations — a task that's not always easy. Shoppers may choose a store based on whether they need to make a left or right turn at a busy intersection.
OfficeMax, which closed 111 underperforming stores in the first quarter, says it plans to use software from MapInfo (MAPS) to determine ideal sites for new stores.
Most economists expect business spending to grow faster than consumer spending over the next year. That should put suppliers in a good position, analysts say. But it's not a slam-dunk.
If the economy slows, companies may hold back on buying big items, such as printers and copiers.
Those devices are "not generally viewed as 'mission critical,' " noted Citigroup analyst Matthew Troy in a recent report. So businesses may just rely on their old systems longer.