Effective Customer Centric Merchandising Strategy

Steve Olsen Vice President, Merchandising Sears Seminar Series Miller Center for Retailing Education and Research University of Florida April 17, 2009

Confidential

Agenda  U.S. Office Products Industry  Retail Challenges  Merchandising Strategy Definition  Category Management Framework  Merchandising Strategy Tactics 2

U.S. Office Products Industry

Market is large and growing

Billions

$400 $350 $300 $250 $200 $150 $100 $50 $0 $294B

Delivery $105B Retail $189B

2002 $302B $312B $323B

Delivery $108B Delivery $113B Delivery $117B

$331B $337B

Delivery $120B Delivery $122B Retail $194B

2003

Retail $199B

2004

Retail $206B

2005

Retail $211B

2006

Retail $215B

2007

Source: School and Office Products Network 3

CAGR ‘02-’07 2.8% 3.1% 2.6%

U.S. Office Products Industry

OSS comprise a small portion of the overall U.S. office supply industry

2007 Total U.S. Office Supplies Market -- $337B Contract Stationers Other

1% 9% 20%

Specialty Stores 2007 OSS Market Share ODP 3.4% Contract Specialists

21% 10%

O.S.S.

Independent Dealers

6%

Internet/Direct Sales Institutional/School Firms

3% 2% 1% 3% 4% 2% 18%

Mass Retailers Stationery/Gift Stores Food/Drug Stores Copy/Printing Services College/Bookstores SPLS 4.3% OMX 2.3%

Source: School and Office Products Network – State of the Industry Report 2008 / Office Depot Estimates Note: Figures may not add to 100% due to rounding 4

Office Depot – Business Overview • • • Office Depot is a leading global provider of office products and services 2008 sales of $14.5 billion – Supplies: 61% of sales – – Technology: 25% of sales Furniture and Other: 14% of Sales Multi-channel – stores, catalog, Internet and contract serve business customers of any size, from small home office to Fortune 500 accounts – – 58% of 2008 sales were not in North American Retail One of the world’s largest e-commerce retailers – $4.8 billion in sales in 2008 • •

(42% of 2008 Sales)

Over 1,200 stores in U.S. and Canada Largest concentration of stores in California, Florida and Texas

(29% of 2008 Sales)

• • • Catalog, contract and e-commerce Dedicated sales force works with medium sized to Fortune 100 customers Orders serviced through 20 distribution centers

(29% of 2008 Sales)

• • • Catalog, contract, e-commerce and retail Sells to customer directly and through affiliates in 45 countries outside of North America 35+ websites and over 400 stores 5

Challenging Times 6

Category Management Methodology

Category Strategy Category Role Growth Intent Category Management Framework Resource Allocation Category Tactics Strategic Levers

 Assortment  Brand Management  Pricing  Space Planning   Promotions Inventory 7 - 7 -

Merchandising Strategy Tactics

Product Price Merchandising Strategy Placement Promotion

Product

Product Price Merchandising Strategy Placement Promotion

 Line Review Process  Style / Function / Design  Pack Size  Packaging  Brand Awareness  Innovation / Exclusivity

Product Line Review     Comprehensive process Complete merchandising solution Market share and Industry trends Product quality, innovation, design and exclusivity   Ability to support and service Office Depot  Willingness to help Office Depot grow Negotiate the best cost/value relationship 10

Style, Functionality & Pack Size 11

Improved Style, Functionality & Pack Size 12

Packaging 13

Improved Packaging 14

Brand Awareness & Exclusivity 15

Price

Product Price Merchandising Strategy Placement Promotion

 Pricing Strategy  Business Objectives / Financial Goals  Competitive Strategy  Zone / Channel Strategy  Price Sensitivity  Retail Prices

Pricing Strategy      Strategic objectives Business objectives / financial goals Category management framework  Customer segment / profitability objectives  Channel / Store format Competitive positioning by category / store / region Price zones

Adjust Formulate Pricing Strategy Monitor Manage Execute

17

Strategic Pricing Process

Corporate Planning

 Corporate strategy   Brand strategy Customer strategy  Merchandising strategy  Financial plans

+ Department Strategies

    Category role  Growth objectives  Private brand strategy Competitive strategy Financial goals Marketing strategy  Zone strategy

+ Business Rules

      Cent ending Pack size Product family Competitive Good/Better/Best Brand relationship

+ Consumer Price Sensitivity

  POS data Product attributes   Insert media  In-store promotions  Clearance events Competitive data

Prices Aligned with Financial needs and Corporate Goals

18

Setting Retail Prices

Traffic Destination Destination Profit Traffic Convenience

19

Placement

Product Price Merchandising Strategy Placement Promotion

 Color / Fashion / Trend  Brand Position  Assortment Flow / Adjacencies  Signage / Messages  Shopping Experience

Color, Fashion & Trend 21

Improved Color, Fashion & Trend 22

Brand Position & Assortment Flow 23

Improved Brand Position & Assortment Flow 24

Signage & Messages 25

Improved Signage & Messages 26

Shopping Experience 27

Promotion

Product Price Merchandising Strategy Placement Promotion

 Promotional Plan  Print Advertising  Direct Mail / Email  Multi-Channel Promotions  Loyalty / Sponsorship

Promotional Plan

Direct Mail Q1 Q2 Catalog Email Web Blasts Online Marketing Broadcast In-Store Signage Worklife Reward Programs Theme Events

29

Q3 Q4

Print Advertising 30

Direct Mail & Email 31

Multi-Channel Promotions 32

Loyalty - Worklife Rewards 33

Sponsorship - NASCAR    Official office products partner of NASCAR  More Fortune 500 companies than any other sport  #1 sport in terms of brand loyalty #1 spectator sport Relevant to our target customer Source: NASCAR 34

Merchandising Strategy Tactics

Product Price Merchandising Strategy Placement Promotion

Summary  Retail has become a challenging environment and consumers are harder to predict, satisfy and reach  A merchandising strategy is critical because it determines how a company will compete in the marketplace and build customer loyalty  Category management principles are foundational to building a merchandising strategy and improving revenue and operating margins  The 4Ps, product, price, placement and promotion, are critical tactics for an effective customer-centric merchandising strategy 36