From...

January 15, 1999
Web posted at: 4:14 p.m. EST (2114 GMT)

by Bernhard Warner

(IDG) -- The office supply superstore chains - Office Depot, OfficeMax and Staples - have changed the way businesses buy paper clips, copiers and fax machines, squeezing out many mom-and-pop operators in the process. As the industry moves to the Web, a second revolution looms.

Already, the three big chains have set up online trading posts, and regional cataloguers, like Penny Wise, are doing the same. A number of Internet newcomers, including Works.com and AtYourOffice.com, have taken aim at the market. Together, the office-supply combatants are spending tens of millions of dollars to move online. Expect a huge fight for market share.

The players are maneuvering for position. Later this month, for instance, Delray Beach, Fla.-based Office Depot will begin the biggest ad campaign yet for Officedepot.com. The goal: Triple online sales this year, and move into the black this quarter.

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Staples, of Westborough, Mass., announced plans last month to invest $10 million this year to expand its e-commerce effort. The company will use the cash to spruce up Staples.com and streamline inventory management for its catalog and superstore arms.

Office Depot and Staples are playing catch-up: OfficeMax, of Shaker Heights, Ohio, was the first of the three chains to sell goods over the Web. OfficeMax has been at it since March 1995.

The flurry of investment reflects the fact that online sales of office supplies could be a huge business. Forrester Research expects the market to grow fiftyfold, to $65 billion, by 2003.

For office-supply buyers, ordering online cuts costs. For that reason, the superstores expect the Web to eat into their catalog business, which is fine with them. "It's one-tenth the cost to take an order online vs. the fax or telephone," reports Beth VanStory, VP of Office Depot's online division. VanStory says the layout of Officedepot.com mimics that of a catalog, not a store. "I'm not going to say [the Web site] will be cannibalizing our stores, but we will take customers from our catalog business," she says.

To help keep costs under control, OfficeMax, Staples and Office Depot tack on fees for invoices under $50; profit margins for bulky, small-ticket orders are nonexistent. That policy leaves an opening for nimbler players.

"A [client] doesn't care if it's doing business with a $6 billion company with stores in every city," says Gary Luiza, president of Bowie, Md.-based Penny Wise Office Supplies. Once a regional chain with stores in the Northeast and mid-Atlantic states, Penny Wise closed all but two stores a decade ago as office superstores spread. Penny Wise shifted its focus to electronic and catalog sales. For privately held Penny Wise, which does less business in a year than each of the three big superstore chains does in a month, e-commerce could be a whole new game.

Like Amazon.com, Penny Wise carries no inventory, relying on wholesalers like S.P. Richards, an Atlanta-based distributor. Luiza thinks that gives it a cost advantage. "On the Internet we can stick with them and eventually beat them," he contends. The company, he says, will spend between $2 million and $5 million this year to promote and streamline its six-month-old Web site, Penny-wise.com.

Tom Graham, founder and president of AtYourOffice.com, a Washington, D.C.-based start-up that calls itself "the world's largest online office products store," has been trying to build traffic with affiliate deals. The site, which opened in July, has signed deals with both Netscape's Netcenter and Microsoft's MSN.com to sell in their small-business areas.

Works.com, an Austin, Texas-based start-up with venture capital funding from Hummer Winblad, has yet another approach. Bo Holland, the founder and president of Works.com, says his company isn't building the online equivalent of a retail store. Instead, the company plans to offer an online purchasing management system, linking to two office-supply wholesalers.

Penny Wise, AtYourOffice.com and Works.com offer selection that is comparable to the big chains. Their success hinges on keeping accounts and controlling costs.

"The one unmistakable truth of the segment is that no single company has established a clear leadership position," VanStory concedes. "This is still a category-build battle as opposed to a market-share battle. I'm not concerned with stealing share from Staples and Max. They don't have any share to steal at the moment. And neither do we."

Bernhard Warner is Deputy New York Bureau Chief at The Industry Standard.