Focus

Inside ODP’S THREE-YEAR PLAN

In early November, The ODP Corporation held a long-awaited virtual investor conference to provide details of its new business unit structure and its strategy for the next three years. OPI’s Andy Braithwaite tuned in...

Several months ago, it still appeared as if The ODP Corporation (ODP) would be broken in two. Its Office Depot consumer-facing businesses (the retail network and officedepot.com) were set to be sold off or, failing that, spun off into a separate, publicly listed company.

Meanwhile, ODP would continue as a B2B-focused group with reselling (ODP Business Solutions – BSD) and supply chain operations (Veyer), plus its new marketplace model, Varis.

It all changed in June when ODP announced it had rejected buyout offers for Office Depot and scrapped plans to split the group up. Commenting at the time on the decision to keep all its businesses under common ownership, ODP cited, among other things, the benefits of maintaining purchasing and supply chain synergies.

Since then, it has been finalising what it calls its ‘four-business-unit (4BU) structure’, promising it would update the investment community on its strategy before the end of the year. This happened on 2 November, when the company held an investor day to coincide with the publication of its third quarter results.

Senior ODP executives took part in a two-and-a-half-hour virtual conference that included individual presentations by BU leaders and a Q&A session as the company presented its plans for the 2023-2025 period. The rationale for the 4BU model is clearly an attempt to increase ODP’s share price by ‘unlocking’ value from its assets.

This is most apparent at Veyer, which was previously focused 100% on serving ODP’s retail and B2B businesses. In contrast to this is Varis, essentially a start-up operation, but one which aims to tap into existing customer relationships, especially at BSD.

FOLLOW THE MONEY

Hanging onto the store network is without a doubt linked to the cash-generation capabilities of Office Depot. Indeed, CEO Gerry Smith described retail as the “cash engine” of the group. It is a key component of shareholder-friendly initiatives including a new $1 billion share buyback programme which was also announced on 2 November.

The ODP story over the next three years will not be one of surging top-line growth. From forecast FY2022 sales of $8.45-$8.6 billion, the target by the end of 2025 is $8.5-$8.7 billion, a year-on-year increase of about 1%.

Instead, the narrative is about creating shareholder value following an “algorithm” based on a low-cost business model, EBITDA and cash flow conversion, and disciplined

The ODP story over the next three years will not be one of surging top-line growth

More information on the Office Depot, BSD and Veyer BUs can be found on opi.net

and defined capital allocation. It also means ODP is not planning any major M&A activity over these few years.

Ruling out any strategic moves, Smith did suggest, however, that BSD would pursue its Federation programme of acquiring successful independent dealers in geographies where it is underserved.

In terms of what the company’s plan will mean for other stakeholders in the US business supplies community, below are a few observations:

• A greater proportion of private label products will probably put more pressure on brand manufacturers. • Traditional OP suppliers, in line with secular trends, will be further squeezed as ODP looks to grow in adjacent categories. • Calling out that no significant M&A activity will be carried out over the next three years implies – unless something changes – there is little likelihood of a combination with

Staples’ retail or B2B divisions. This raises questions about Sycamore’s exit strategy for its Staples assets. • The US dealer channel could risk losing some of its successful independents to BSD as part of its renewed Federation emphasis.

MESSAGE RECEIVED

With the investor day basically aiming to ‘sell’ the new ODP model to the investment community, there were a lot of soundbites throughout the session. However, it appears

Gerry Smith

the messages were well received: as of 21 November, ODP’s share price had risen by around 15% since the conference (although, in part at least, this is due to the share buyback programme).

While Varis and Veyer are new, there was no ‘wow’ announcement regarding BSD or Office Depot: keep focusing on the low-cost model, expand margins, generate cash flow, grow in adjacencies – almost like a ‘holding pattern’ strategy.

Looking at 2023 and beyond, one of ODP’s goals is to explore BU-level capital structures – could that result in the constituent parts eventually being broken up? It seems a distinct possibility.

THE ODP CORPORATION – AT A GLANCE

At a corporate level, ODP is headed by Gerry Smith, who has been CEO since 2017. Key execs working alongside him – and who also took part in the investor day – include CFO Anthony Scaglione and Chief Human Resources Officer Zoë Maloney.

Corporate oversees four business units that each have their own P&L. These are:

ODP Business Solutions: A B2B business products reseller, including Grand & Toy in Canada and the acquired Federation dealers in the US. Current annual sales are around $4 billion; it has been led since earlier this year by David Centrella.

Office Depot: The 1,000-strong store network in the US and officedepot.com. Annual revenue is approximately $4.5 billion and its President is Kevin Moffitt.

Varis: ODP’s new digital B2B marketplace and procurement solution, headed by former Amazon Business leader Prentis Wilson. Still in a start-up stage, revenue this year is expected to be about $8 million.

Veyer: ODP’s sourcing and distribution operations, where the goal is to become a fully-fledged third-party logistics provider. Current annual sales (to external customers) are about $25 million. Veyer’s President is John Gannfors, formerly Office Depot’ Chief Merchant and Supply Chain Officer.

ODP has assembled a team of seasoned Amazon veterans at Varis, led by Prentis Wilson (pictured above). The investor conference was seen as the occasion when there would be something of a ‘reveal’ of Varis’ go-to-market strategy and its financial targets.

As expected, Varis is a B2B digital procurement platform being pitched to both buyers and suppliers (resellers) in what Forrester has estimated is an $8 trillion addressable market in the US alone.

The question is then: is it just another Amazon Business? While there are similarities in terms of some of the reporting and compliance functionalities it offers, there are some key differences:

• Varis is a platform, not a seller in its own right; it does not hold inventory nor ship products directly. • It will work with selected suppliers, and not run “a race to the bottom with dubious internet sellers”. In a marketing document,

Varis wrote: “You won’t be competing solely on price in a marketplace saturated with vendors offering the same products.” • It is promising that its resellers will “own the customer relationship and pricing”, two subjects which have often rankled with third-party sellers on Amazon.

TWO-PRONGED APPROACH

During the investor conference, Wilson did not mention Amazon by name, but referred to a competing “subscription-based model that [costs] hundreds of thousands of dollars a year”, as opposed to Varis’ gross merchandise value (GMV) fee structure he views as “a superior business model”.

In fact, Varis appears to have two business models, one subscription and the other based on GMV revenue share. The former is a private B2B marketplace for enterprise-level customers – essentially the purchase-to-pay solution Varis inherited from its acquisition of BuyerQuest in 2021.

However, where Wilson sees the real potential for Varis to grow is in the second, GMV model, which is aimed at smaller-sized customers. These are the kinds of businesses being targeted through Varis’ integration with Microsoft’s Dynamics 365 Business Central customer base, for instance.

“The GMV-based model really helps us reduce the hurdle rate for these [types of] customers, enabling them to adopt our platform quicker,” Wilson stated.

A key partner going forward is sister unit BSD and significant cross-selling opportunities have been identified in that regard. Wilson pointed to the “thousands and thousands” of BSD customers that could benefit from the Varis platform, while he also gave an example of how Varis had helped BSD increase its own sales.

If you follow this logic, then Varis could well be available to ODP’s Federation dealers, whose customer sweet spot is with the mid-market and SMBs. Varis might be seen as a point of differentiation for them, as businesses look to make efficiency gains in their procurement processes.

How Varis vets and selects its suppliers was not specified, but its website gives the criteria which must be met, including: providing a product or service that fills a gap in its current offerings; demonstrating a commitment to working with US customers in the segments and verticals it supports; and meeting criteria for product availability, delivery, returns and customer expectations.

While Varis’ revenue is modest today, Wilson said it has already onboarded enough new clients to meet its 2023 target. There has been 100% client retention since the purchase of BuyerQuest, he confirmed, with a 64% increase in spend under management.

The goal is to generate $120 million in sales by 2025 and to be cash flow positive by this time. To help Varis achieve its growth ambitions, it is seeking third-party funding. On this note, it was announced that investment bank Perella Weinberg has been hired to identify “strategic investors”. Wilson said this would externally validate the Varis value proposition and provide a valuation reference point for ODP shareholders.

To help Varis achieve its growth ambitions, it is seeking third-party funding