OfficeMax Inc. History

Address:

P.O. Box 22500
Cleveland, Ohio 44122-0500
U.S.A.

Telephone: (216) 921-6900
Fax: (216) 349-4220

Public Company
Incorporated: 1988
Employees: 17,133
Sales: $1.84 billion (1995)
Stock Exchanges: New York
SICs: 5712 Furniture Stores; 5734 Computer & Computer Software Stores; 5943 Stationery Stores; 5999 Miscellaneous Retail Stores Not Elsewhere Classified

Company History:

OfficeMax, Inc. is the second largest operator of high-volume, deep-discount office products superstores in the United States. In mid-1995, the company was operating more than 400 superstores in 41 states and Puerto Rico and was planning to open more than 150 additional stores within two years. The company was also experimenting with related business concepts, including a chain of furniture stores and a string of copy-service centers.

OfficeMax started in 1988 as a simple idea. In little more than five years the company bolted to the forefront of the American business supplies industry, posting more than $2 billion in annual sales by 1995 and generating sound profits by 1993. The company achieved that stunning success despite intense competition and an economic recession that began in the late 1980s and lingered throughout the early 1990s. The company's savvy marketing, distribution, management, and financial systems and strategies became models for other superstore retailers in the 1990s.

The OfficeMax idea was hatched by entrepreneurs Michael Feuer and Robert Hurwitz. Feuer, who became the driving force behind the chain's growth, had been nurturing the idea during more than 17 years of service with Fabri-Centers of America, a 600-store, Cleveland-based retailer. By his early 40s, Feuer had risen to the executive ranks. Still, he was frustrated by his inability to run the company as he believed it should be operated. "At age 42 ... I was bored, and like many executives, I also suffered from the Frank Sinatra syndrome--I wanted to do it my way," Feuer recalled in the September 1993 Corporate Cleveland. "I had always claimed that if we could just cut through all the nonsense--for example, the 20 to 25 percent of time most executives spend on CYB (covering your butt)--and do it my way, we could make millions," Feuer observed.

Feuer finally jumped ship and, despite other excellent corporate job offers, decided to start his own enterprise. He and Hurwitz decided that they didn't want to fund the start-up with bank debt or venture capital, because they didn't want to forfeit control of the operation. So they scrambled to raise capital from friends and family. They eventually found 50 investors, including several doctors and lawyers, who were willing to contribute a total of $3 million. The sum was paltry compared to other retail start-up businesses at the time, but the pair thought that they could parlay the cash into a winning enterprise.

Feuer and Hurwitz launched their enterprise on April Fool's Day in 1988. On that day, they laid out on a blank sheet of paper their concept for a new type of office products store. Their goal was to create a large business supplies discount store that was an exciting place to shop, proffered professional and friendly service, and offered prices between ten percent and 30 percent less that those found in more traditional office supply retailer shops. The main goal was to bypass all of the middlemen, such as wholesalers and distributors. Achieving that goal, they reasoned, would allow them to effectively replace mom-and-pop office supply stores, much as supermarkets had replaced small grocers years earlier.

OfficeMax was fighting an uphill battle from the start. In May, an office supplies industry trade paper published a list of 15 start-up companies that were trying to crack into the business; OfficeMax was 14th on the list by asset size. The start-up team knew that it had to keep expenditures at an absolute minimum to compete. So Feuer and Hurwitz rented office space in a 500-square-foot brick warehouse that had barely any heat or air-conditioning. The space was equipped with a few pieces of cheap office furniture, a coffee machine, and a copier (the copier and coffee machine couldn't be operated at the same time, however, because the fuse would blow). They decided not to invest in a fax machine until it became absolutely necessary.

OfficeMax started out with a skeletal staff of seven people, not including the founders. Their requirements for potential employees were simple: they had to be hard workers with open minds, big hearts, and plenty of enthusiasm. They also had to be willing to work for very little money. Feuer and Hurwitz attracted the workers by promising them part ownership in the company if they stuck with it and by offering them the chance to go farther, faster, and to have more fun than they had ever had in another job. From the beginning, Feuer made it clear that OfficeMax would be operated differently from the bureaucracies from which most of the team members had come. There would be no secrets, criticism and praise would be swift and frank, and everyone would cooperate as a team.

Thus, OfficeMax was up-and-running without a single store or any other operation that could bring in any money. The founders hoped that they would be able to get manufacturers to fund their inventory, but they soon found that few big companies were eager to do business with a meager upstart. To overcome such hurdles, the team got together every morning and created a game plan for the day on a blackboard. They flew by the seat of their pants and used every trick they could conjure to get what they needed. Importantly, the company was able to get an unsecured line of credit from a local Cleveland bank. The bank granted the line of credit under one condition: that the founders agree never to use it.

Feuer and Hurwitz were able to take their "line of credit" to big suppliers like Xerox and convince them to fund their inventory on credit, sometimes for a full year or more. Indeed, the OfficeMax team learned early that the only way to get the cooperation of potential suppliers was to act as though OfficeMax was much bigger than it really was. They dealt with suppliers as though OfficeMax was a soon-to-be major chain with 20, 50, or even 300 stores going up in the near future, suggesting that if those suppliers wanted to secure a place with OfficeMax tomorrow, they would have to cooperate today. To the founders' surprise, most companies played along. Those that didn't often regretted it, as OfficeMax quickly became the leading customer for many major office equipment and supplies manufacturers.

Incredibly, OfficeMax opened its first store just 90 days after the founders had created their business blueprint on April Fool's Day. Observers were surprised that the team had managed to find space, hire and train a store staff, and hone a store concept in just three months. But to them it was a simple matter of survival; they had to start generating cash flow so that they could pay their bills. The first OfficeMax was opened on July 5, 1988, at the Golden Gate Shopping Center in the Cleveland area. The only advertising for the grand opening was a newspaper ad two days prior to the store's opening. Nevertheless, the mart had sales of $6,400 on its first day.

After only six months in operation, the store was breaking even (before corporate overhead). That feat was accomplished partly as a result of the grueling hours put in by the team. Feuer, for instance, worked at the corporate office from seven a.m. to seven p.m. He would then race home, shower, put on casual clothes, and drive out to the store to observe the customers and employees. When a customer left the store without purchasing anything, Feuer was known to chase him down in the parking lot and ask him if OfficeMax had failed in any way. That type of thinking was later reflected in OfficeMax's intensive customer-satisfaction orientation. For example, the company began requiring that all customer complaints be resolved to the customer's satisfaction within 24 hours.

Enthused by the quick success of the first store, Feuer and Hurwitz hurried back to the original investment group and raised additional capital for expansion. They dumped the cash into an aggressive growth program that, amazingly, had OfficeMax operating 13 stores in Ohio and Michigan less than 12 months after opening the first outlet. Sales had climbed to an impressive rate of $13 million annually and, more importantly, the stores were operating at a profit. The success was so quick that it worried Feuer, who was convinced that the company's accounting system was messed up and that OfficeMax could easily be teetering on the edge of bankruptcy.

Shortly before OfficeMax had fired up its first store, a similar office superstore venture called Office World had started in Chicago. The business was funded heavily by retailer Montgomery Ward, but despite hefty financial backing, the effort had lost a big $10 million in the span of a few years. Thus, when Montgomery Ward approached OfficeMax about the possibility of a merger between OfficeMax and Office World, Feuer and Hurwitz were hesitant. They eventually warmed up to the idea, however, and the resulting agreement brought seven new stores to their chain as well as the resources of several deep-pocketed venture capital firms. OfficeMax, for its part, only had to give up two of the ten seats on its board.

By the summer of 1990, following the Office World merger, OfficeMax was operating a total of 30 stores. After once again going back to its investment group, the company was banking an impressive $33 million in cash. The cost-conscious founders finally decided that it was time to move into a better headquarters facility, one that featured separate men's and women's bathrooms, for example. The rest of the money was put to use funding an aggressive expansion plan that would, the company hoped, tag 20 more stores onto the chain within a year. Despite healthy gains and a bright future, however, a development in 1990 threatened to quash OfficeMax and its competitors.

Feuer and Hurwitz had perceived the threat years earlier. Finally, their fears were being realized when mass discount merchant Kmart announced plans to roll out an office supplies superstore dubbed Office Square. OfficeMax executives realized that the new venture, backed by Kmart's massive bank account and retailing savvy, could literally crush start-ups like OfficeMax. Feuer and Hurwitz, refusing to ignore the threat, began trying to initiate talks with Kmart. The talks initially centered around an outright purchase of OfficeMax by Kmart. But Feuer and Hurwitz were hesitant to give up control of their company. The two companies finally agreed to a plan whereby Kmart invested $40 million in OfficeMax in return for a 22 percent ownership share.

Fortunately for the founders, Kmart turned out to be OfficeMax's greatest ally, rather than its worst enemy. Feuer and Hurwitz were allowed to maintain total control of the company, and Kmart smartly became a silent financial partner. With its new bankroll, OfficeMax intensified its expansion efforts and quickly met the goals that it had set with Kmart executives. Both companies were so pleased with the arrangement that Kmart decided to up the ante in 1991. It purchased 92 percent of the outstanding shares from the original investors and became the owner of OfficeMax. The net result was the OfficeMax was sitting on a mountain of cash and had virtually no long-term debt. Furthermore, Feuer and Hurwitz were still firmly in control of the company.

The deal couldn't have been sweeter for OfficeMax, which was suddenly positioned to launch a bid to dominate the national business supplies superstore segment. That's exactly what the company did. During the next 18 months the company began opening new OfficeMax outlets at a feverish pitch. More importantly, the company purchased the 46-store Office Warehouse chain and the 105-outlet Bizmart chain, and eventually integrated those stores into the OfficeMax organization. As a result of store additions and acquisitions, OfficeMax was operating 328 stores, coast-to-coast, in 38 states by the end of 1993. Sales for that year climbed to $1.41 billion from just $245 million in 1991, while net income increased to $1.08 billion (OfficeMax's first positive annual net income).

Although cash was a major ingredient in the company's recipe for growth, its shrewd operating strategy was just as important for success. Indeed, throughout its expansion OfficeMax maintained its customer focus. It also adapted the format of its stores to capitalize on the huge growth in the small and home-based business markets, which became the dominant industry trend during the early 1990s. In addition, OfficeMax managed to implement cutting-edge information and distribution systems that allowed the top mega-discounters like Kmart and Walmart to thrive. By the mid-1990s, OfficeMax was efficiently operating nearly 400 stores and several distribution centers, and stocking more than 6,000 brand name office products, business machines, computers and related electronic devices, software, and other goods.

With Kmart's financial backing and the OfficeMax team's successful operating strategy, the company sustained its blistering growth rate in 1994. By the end of the year the company was operating 388 stores in 40 states and Puerto Rico. Importantly, the end of 1994 marked a huge change for the company. Late in that year, its well-heeled parent, Kmart, sold out. Kmart's investors had been pressuring Kmart to sell off its side interests and refocus its resources on the hyper-competitive general merchandise discount industry. Kmart's directors stooped to the pressure and decided to bail out of the OfficeMax venture. OfficeMax completed the largest initial public offering in the history of the retail chain industry when it sold 35.7 million shares at a price of $19, bringing in $678 million that allowed Kmart to reduce its ownership interest. A subsequent offering in July 1995 entirely eliminated Kmart's ownership share.

Thus, after growing by leaps and bounds with the help of Kmart, OfficeMax was suddenly on its own again as a publicly held enterprise. For the 1994 year, OfficeMax posted $1.81 billion in sales, $30.4 million of which was netted as income. As Hurwitz had removed himself from day-to-day operations at OfficeMax following the stock sale, Feuer stepped up expansion plans in 1995, hoping to boost OfficeMax's 11-percent share of the U.S. office supplies superstore market. By 1995, in fact, OfficeMax had become the second largest business superstore in the nation (behind Office Depot), and was gunning for the number one slot.

To that end, Feuer hoped to add about 200 new stores to the chain by January 1997. Meanwhile OfficeMax launched related ventures beginning in 1994, including FurnitureMax, a chain of discount office furniture stores, and CopyMax, a chain of copy-service centers. Both of the new store concepts were designed to be connected to existing OfficeMax stores and to serve as add-on profit centers. The company also initiated a computer service called OfficeMax Online, which was designed to enable customers to purchase OfficeMax products online from their home or office computers. OfficeMax expected to post sales of about $2.5 billion for the fiscal year ending January 31, 1996.

Principal Subsidiaries: Bizmart, Inc.

Principal Operating Units: FurnitureMax; CopyMax; OfficeMax Online.

OfficeMax Inc. History

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