Store and warehouse operating and selling expenses consist of personnel costs; maintenance and other facility costs; advertising expenses; delivery and transportation costs; credit card and bank charges and certain other operating and selling costs. The increase in our operating and selling expenses in 2000 are primarily the result of higher personnel and warehouse costs compared to 1999. We have experienced higher delivery-and personnel-related costs in our warehouse operations as third-party carriers have increased their rates, and our integration efforts have taken longer to complete than originally planned. We also had a significant increase during 2000 in personnel expenses in our domestic stores, largely related to wage pressures stemming from a tight labor market. Increased costs associated with our aggressive store expansion were also the main driver of our increased operating and selling costs in 1999 compared to 1998. Also contributing to the increase in 1999 over 1998 was the re-launch of our “Taking Care of Business” advertising campaign.

North American Retail Division

Sales in our North American Retail Division increased 10% in 2000 and 15% in 1999. These increases were primarily achieved through our store expansion program. For 2000, comparable sales in the 818 stores that had been open for more than one year were flat. In 1999 comparable sales increased by 2% over 1998.

Sales of business machine supplies, with increases of 14% in 2000 and 17% in 1999, contributed considerably to the sales increases in our North American Retail Division. Sales of computer products (e.g., computers, printers, peripherals, software, and related supplies) in our stores, which contributed most significantly to our sales increase in 1999 with an increase of 23% over 1998, only increased by 3% in 2000. During 1999, we offered low priced units and more aggressive promotional programs on computer products, including an instant rebate program with the sign up for Internet service, which drove the increase in sales over 1998. For a portion of 2000, we did not offer an Internet service provider instant rebate program. Also in 2000, we saw a decline in the overall market demand for these computer products in comparison to 1999.

Lower margins realized on paper and machine supplies contributed most notably to the decrease in gross profit in 2000 compared to 1999. As discussed in the Overall section above, increased costs of these core products and decreased prices in response to competitive pressures negatively impacted gross profit. Also in 2000, sales increases in the North American Retail Division were not sufficient to leverage the additional fixed expenses incurred with the addition of new stores. Gross Profit includes fixed costs such as occupancy and rental costs for equipment in our print and copy centers. Increased occupancy costs also had significant impact on our gross profit percentage in 1999 in comparison with 1998. Furthermore, the increase in technology sales during 1999, which yield lower gross profit percentages than other product groups, also contributed to the decrease in our gross profit percentage compared to the prior year.

In our North American Retail Division, the largest components of operating and selling expenses are personnel, facility, advertising and credit card expenses. In our North American Retail Division, we added 63 stores in 2000 and 123 stores in 1999. Because newer stores typically generate lower average sales than more mature stores, operating and selling expenses as a percentage of sales have increased. Additionally, we believe that opening new stores in existing markets has cannibalized, to some extent, the sales of other Office Depot stores in those markets (i.e., had the effect of reducing sales at existing stores), also causing our expenses to increase relative to sales.

The increase in expenses during 2000 and 1999 was driven largely by personnel-related costs, primarily because of competitive wage pressure and the need to attract more highly skilled associates in certain positions. Over 50% of our stores’ operating expenses are personnel related and have a relatively large fixed component. In 2000, we saw an increase in delivery orders as a percentage of total store sales. These orders are delivered by the warehousing operations in our BSG, which allocates a portion of their cost to cover the delivery expense. As explained in the BSG section below, warehouse expenses increased in 2000, which also negatively impacted operating and selling expenses. In 1999, increased advertising expenses, primarily from the re-launch of our “Taking Care of Business” campaign, also contributed significantly to the increase in operating and selling expenses over 1998.