Price and Promotion Optimization Bring $40M in Benefits to Office Depot

Price optimization and more effective promotional strategies brought $40 million in benefits to Office Depot during the first nine months of fiscal 2011. The retailer is also reporting positive results from its new smaller-format stores, which executives say are achieving 90% of the sales volume of traditionally-sized stores while carrying only half the number of SKUs. The smaller stores are 18,000 square feet on average, compared to the 27,000-square-foot average traditional store; the retailer operates more than 1,600 stores worldwide.

"We are moving into the rollout phase of our plan to improve the customer in-store shopping experience," said Office Depot North America president Kevin Peters during a recent conference call. "Our plan is to roll out the new service model to over 300 stores by year-end and complete the remaining fleet in 2012. Our second initiative is to focus on improving the sales productivity of our stores. This includes remodeling about 30 to 40 traditional stores and reducing the average store size wherever possible. We have reduced the average store size with remodels and relocations by approximately 30% over the past three quarters."

Office Depot is balancing the SKU rationalization necessary with smaller stores with an endless aisle solution and more localized assortments. "All of the SKUs that were reduced are carried online," said Peters, noting that kiosks facilitate in-store online purchasing. "With regard to the product assortment going forward, I think it largely depends on the geographic area and the demographic that shops the stores. So if we're close to schools and universities, we may have an assortment that looks different than if we were close to a medical or legal vertical."

The retailer's price optimization strategies are also being tailored to different store types and locations. "What we've been doing over the last several months is really spending a lot of time being much more strategic and thoughtful about how we price the assortment inside of retail, not only with regard to the price-volume relationship but also with regard to where those stores are located, whether they're in suburban markets [or] urban markets," said Peters. Category management strategy also plays a role, "in terms of categories we want to lead and gain share in versus categories that we just want to maintain."

As part of its price optimization efforts, Office Depot has also focused on promotions' relationship to price, sales and margins. "If you're promoting items that add inelastic demand patterns, you're essentially giving margin dollars away," said Peters. "So we've been much more thoughtful about how and where we promote and specifically what SKUs."

Office Depot uses price optimization solutions from DemandTec.

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