September 4, 2014
Should Staples acquire Office Depot?
When Office Depot and Office Max merged last year, the idea was the combined company would be in a better position to compete with Staples, the number one chain in the office supplies category, as well as other rivals from Amazon.com to Walmart. According to Gary Balter, an analyst with Credit Suisse, the Depot/Max merger didn’t go far enough. In fact, to fend off its many competitors, Office Depot needs to be acquired by Staples.
According to a note written by Mr. Balter and reported by Bloomberg News, a Staples acquisition of Office Depot Inc. would reduce the companies’ costs by $1.44 billion and more than double the combined operating profits by 2017.
In the meantime, the office supply chains are looking for ways to increase traffic and sales.
Staples’ same-store sales, which exclude Staples.com, fell five percent in the second quarter. Traffic was down four percent in the quarter while the average order declined one percent. Sales at Staples.com were up eight percent during the period.
"We’re taking action to improve customer traffic, reduce expenses and close underperforming stores," said Ron Sargent, chairman and CEO of Staples, in a statement.
Staples closed 80 North American stores in the second quarter and plans to shutter another 140 units by year’s end.
Same-store sales at Office Depot’s North American locations, which accounts for 40 percent of its overall business, fell three percent in the second quarter. Office Depot is looking to close 165 stores in the U.S. this year and 400 by the end of 2016.
- Staples Gains as Analyst Says It Should Buy Office Depot – Bloomberg News
- Staples, Inc. Announces Second Quarter 2014 Performance – Staples, Inc.
- Office Depot, Inc. Announces Second Quarter 2014 Results – Office Depot, Inc.
- Office Depot expects sales to stay weak in tough market – Reuters
- Office Depot and OfficeMax Complete Merger – Office Depot, Inc.
- Who Wins After OfficeMax and Office Depot Merge? – RetailWire
- Staples and Office Depot take to airwaves in time of change – RetailWire
BrainTrust
Recent Discussions
Discussion Questions
Would a Staples acquisition of Office Depot make the combined companies more successful? Is the idea of an office supplies specialty retailer no longer valid in the current environment?
Poll
The chickens have come home to roost, as they used to say. There never was a demand for three big box stationary stores, and clearly not for two.
Isn’t this likely to run afoul of antitrust laws? And no, it’s still a valid concept in the current environment. But this business is perfectly positioned to become more online than retail stores. My guess is that over the years, their mix of products has changed—less paper, more specialty.
America has too many stores, including office supply stores. Acquiring a competitor and adding more stores looks like a short-sighted move in 2014, when so much business is being conducted online. A move like this makes sense only if the acquired party sheds a lot of marginal stores.
Not necessarily. Such a merger does not change the competitive structure and encroachment from other formats selling office products. Twenty-five years ago, the office products superstores wreaked havoc to the mom and pops/regional chains (remember Ginns in DC?) as well as the traditional commercial (B2B) segment of that industry.
The format and category is now getting trumped by online mega-aggregators such as Amazon, the dollar stores format, mass merchants and deep discounters. M&A alone isn’t enough.
I’d be surprised the government would allow Staples to purchase Office Depot. They’ve run most of the smaller local or regional office supply companies out of business, so I can’t imagine it happening.
What if Best Buy purchased Office Depot? Hmmm.
A merger of Staples and Office Depot would provide economies of scale in a mature business, although it would be under the same regulatory microscope as any pending merger of dollar stores. The bigger issue for Staples—whether or not it acquires its top competitor —is the rapid change in big box specialty stores, driven by more online competition like Amazon.
But the office supply store has unique challenges as a result of technology. Consumers simply aren’t using PCs and laptops as much, and likewise the market for printers, paper and ink is shrinking. Staples (and Office Depot) ought to be accelerating its small-format and cloud service businesses, because the decline of the big box format is tough to reverse.
Why are same-store sales decreasing? Where are the sales going? Are they all going to one place? What do the customers want? Without that information a decision about the value of a merger can not be made. If both parties are currently closing stores, why would an investment in more real estate help Staples? The real question is whether an office supply retailer can create value and a preferred customer experience for their consumers?
Not necessarily.
For one thing, there is some question about whether even the current emasculated version of the FTC would sit by while one retailer took over that much share of a category.
But, on a more practical level, this appears to be a category undergoing a fundamental shift in demand dynamics. More and more of the business is moving online, corporate customers are far more important than walk-in traffic, the home office movement has revolutionized the category in ways nobody is responding to, and—in a world where “Back to School” promotions are moving back to a point before schools break for the summer—the competition in the brick-and-mortar world is nigh on ubiquitous.
So bigger isn’t necessarily better, or at least better than more effective and innovative.
This is a category that needs to be completely rethought and then recreated.
That said, I say the answer to the second question is no, if validity equates in any way to the industry status quo.
What is totally missed in this analysis is the consumer (and small business) shift to omni-channel. With Amazon moving to one-day delivery in major markets, how many customers need to go to an “office” store?
Declining store traffic is an expected outcome as customers move purchases online. Staples realizes this and has plans to close 10 percent of U.S. stores that are too large and inefficient to operate. New Staples store formats are 50 percent of the former store size because breadth of selection now occurs online.
The last thing Staples needs is to acquire more stores from Office Depot!
The key to future Staples success is competitive online growth with strategies like BOPIS (Buy Online Pickup In Store) that integrate the web and stores.
Highly doubt combining two struggling companies makes for a more competitive single company. And I am sure there would be some antitrust issues given the top two market share leaders would be joining.
Office supplies for the most part are a commodity business and Amazon has entered the space with Amazon Supply. This is a tough business as in general it is shrinking:
“E-mail and the digitization of information is shrinking demand for core products like pens and paper. In fact, retail sales of office supplies in 2012 were 1.7% lower in absolute dollars than in 2003, and nearly 25% lower when accounting for inflation.”
And Amazon’s entry is going to make it that much tougher.
Today in his newsletter, marketing guru Seth Godin posted a sign from one of these stores that pointed to the “Stationary” section. Godin said he has trouble buying stationery from a store that can’t even spell it right. “Stationary,” of course, means “not moving” while “stationery” means letterhead, etc. And has anyone actually used letterhead in the last five years?
I agree with Bob Phibbs that these stores are very redundant. They’re like shopping in a Mexican town where every vendor has exactly the same things. Zero imagination or distinction and yet they purport to provide resources that will release ours.
There IS room for one creative and visionary retailer, offering unique and varied items that help people reach out to the world with their story.
While a Staples/Office Depot merger might provide a positive short-term lift in economies of scale and profitability, the longer-term issue for this sector is identifying a customer-centric strategy that effectively competes against Amazon and pivots away from the increasing commoditization of the core offerings—not an easy task.
This will require swift adoption and execution of omni-channel/BOPIS tactics that fully meet customer needs and deliver a customer experience that outflanks the pure online alternatives.
A merger like this might cut costs, but there are greater needs for both companies. The greatest need is to find more inventory that will sell and turn a profit at levels needed to grow the company. Mergers like this will only increase the availability of slow-turn, low-margin product and create a bigger management team with still no idea of what to do to increase same-store sales.
In most situations I am familiar with, Staples locations and Office Depot locations are often quite close together. A buyout would surely result in closing one of the locations and lessening competition. I can’t see a combined operation being more successful as much time would be spent closing stores and paying lease cost on underperforming properties for years.
With Walmart and Amazon both getting into the office supply business, I would advise staples to ignore Office Depot and shore up their business relationships with current customers. I see nothing to be gained by taking on the weight of Office Depot, it would surely be a millstone around their neck.
I think the office supply specialty retailer is still valid, but any and all had better sharpen their pencils because they currently present minimal value to the marketplace.
I will say that I liked the approach Office Depot was taking. Focus on the whole office, high on services, etc. Obviously office supplies are a much needed commodity. However, as implied by the word commodity, that can often mean a subscription service is the best way to go.
On the other hand, there are still those office items that are needed but on a not so regular basis. It begs the question though, do we need a big box for that? Perhaps if you want to make an office showcase out of it.
Getting back to the question, “Would a Staples acquisition of Office Depot make the combined companies more successful?” I would say, only if they truly combine the strategies. Focus on the whole office, offer services, be an office showcase and provide subscription services for commodity goods.
And that’s my 2 cents!
Yeah, yeah, that’s the solution: take two declining businesses and combine them, that always works…just ask Eddie Lambert.
Does anyone here—outside of the analysts and bankers who peddle these ideas—really think a merger would reverse, or even slow down declining sales? Or that replacing 2 CEOs (making $X) with 1 (likely making $3X) will result in any kind of meaningful savings? I don’t.
Ever notice that these analysts from Credit Suisse always come up with a scenario that one company should buy another? They are not far fetched ideas, but often borderline. I think they just want to stir things up to push stock prices up. What does the office supply store sell that you can’t get at Walmart? Not much. This could be like Blockbuster and Hollywood Video merging. Misery loves company.
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The chickens have come home to roost, as they used to say. There never was a demand for three big box stationary stores, and clearly not for two.
Isn’t this likely to run afoul of antitrust laws? And no, it’s still a valid concept in the current environment. But this business is perfectly positioned to become more online than retail stores. My guess is that over the years, their mix of products has changed—less paper, more specialty.
America has too many stores, including office supply stores. Acquiring a competitor and adding more stores looks like a short-sighted move in 2014, when so much business is being conducted online. A move like this makes sense only if the acquired party sheds a lot of marginal stores.
Not necessarily. Such a merger does not change the competitive structure and encroachment from other formats selling office products. Twenty-five years ago, the office products superstores wreaked havoc to the mom and pops/regional chains (remember Ginns in DC?) as well as the traditional commercial (B2B) segment of that industry.
The format and category is now getting trumped by online mega-aggregators such as Amazon, the dollar stores format, mass merchants and deep discounters. M&A alone isn’t enough.
I’d be surprised the government would allow Staples to purchase Office Depot. They’ve run most of the smaller local or regional office supply companies out of business, so I can’t imagine it happening.
What if Best Buy purchased Office Depot? Hmmm.
A merger of Staples and Office Depot would provide economies of scale in a mature business, although it would be under the same regulatory microscope as any pending merger of dollar stores. The bigger issue for Staples—whether or not it acquires its top competitor —is the rapid change in big box specialty stores, driven by more online competition like Amazon.
But the office supply store has unique challenges as a result of technology. Consumers simply aren’t using PCs and laptops as much, and likewise the market for printers, paper and ink is shrinking. Staples (and Office Depot) ought to be accelerating its small-format and cloud service businesses, because the decline of the big box format is tough to reverse.
Why are same-store sales decreasing? Where are the sales going? Are they all going to one place? What do the customers want? Without that information a decision about the value of a merger can not be made. If both parties are currently closing stores, why would an investment in more real estate help Staples? The real question is whether an office supply retailer can create value and a preferred customer experience for their consumers?
Not necessarily.
For one thing, there is some question about whether even the current emasculated version of the FTC would sit by while one retailer took over that much share of a category.
But, on a more practical level, this appears to be a category undergoing a fundamental shift in demand dynamics. More and more of the business is moving online, corporate customers are far more important than walk-in traffic, the home office movement has revolutionized the category in ways nobody is responding to, and—in a world where “Back to School” promotions are moving back to a point before schools break for the summer—the competition in the brick-and-mortar world is nigh on ubiquitous.
So bigger isn’t necessarily better, or at least better than more effective and innovative.
This is a category that needs to be completely rethought and then recreated.
That said, I say the answer to the second question is no, if validity equates in any way to the industry status quo.
What is totally missed in this analysis is the consumer (and small business) shift to omni-channel. With Amazon moving to one-day delivery in major markets, how many customers need to go to an “office” store?
Declining store traffic is an expected outcome as customers move purchases online. Staples realizes this and has plans to close 10 percent of U.S. stores that are too large and inefficient to operate. New Staples store formats are 50 percent of the former store size because breadth of selection now occurs online.
The last thing Staples needs is to acquire more stores from Office Depot!
The key to future Staples success is competitive online growth with strategies like BOPIS (Buy Online Pickup In Store) that integrate the web and stores.
Highly doubt combining two struggling companies makes for a more competitive single company. And I am sure there would be some antitrust issues given the top two market share leaders would be joining.
Office supplies for the most part are a commodity business and Amazon has entered the space with Amazon Supply. This is a tough business as in general it is shrinking:
“E-mail and the digitization of information is shrinking demand for core products like pens and paper. In fact, retail sales of office supplies in 2012 were 1.7% lower in absolute dollars than in 2003, and nearly 25% lower when accounting for inflation.”
And Amazon’s entry is going to make it that much tougher.
Today in his newsletter, marketing guru Seth Godin posted a sign from one of these stores that pointed to the “Stationary” section. Godin said he has trouble buying stationery from a store that can’t even spell it right. “Stationary,” of course, means “not moving” while “stationery” means letterhead, etc. And has anyone actually used letterhead in the last five years?
I agree with Bob Phibbs that these stores are very redundant. They’re like shopping in a Mexican town where every vendor has exactly the same things. Zero imagination or distinction and yet they purport to provide resources that will release ours.
There IS room for one creative and visionary retailer, offering unique and varied items that help people reach out to the world with their story.
While a Staples/Office Depot merger might provide a positive short-term lift in economies of scale and profitability, the longer-term issue for this sector is identifying a customer-centric strategy that effectively competes against Amazon and pivots away from the increasing commoditization of the core offerings—not an easy task.
This will require swift adoption and execution of omni-channel/BOPIS tactics that fully meet customer needs and deliver a customer experience that outflanks the pure online alternatives.
A merger like this might cut costs, but there are greater needs for both companies. The greatest need is to find more inventory that will sell and turn a profit at levels needed to grow the company. Mergers like this will only increase the availability of slow-turn, low-margin product and create a bigger management team with still no idea of what to do to increase same-store sales.
In most situations I am familiar with, Staples locations and Office Depot locations are often quite close together. A buyout would surely result in closing one of the locations and lessening competition. I can’t see a combined operation being more successful as much time would be spent closing stores and paying lease cost on underperforming properties for years.
With Walmart and Amazon both getting into the office supply business, I would advise staples to ignore Office Depot and shore up their business relationships with current customers. I see nothing to be gained by taking on the weight of Office Depot, it would surely be a millstone around their neck.
I think the office supply specialty retailer is still valid, but any and all had better sharpen their pencils because they currently present minimal value to the marketplace.
I will say that I liked the approach Office Depot was taking. Focus on the whole office, high on services, etc. Obviously office supplies are a much needed commodity. However, as implied by the word commodity, that can often mean a subscription service is the best way to go.
On the other hand, there are still those office items that are needed but on a not so regular basis. It begs the question though, do we need a big box for that? Perhaps if you want to make an office showcase out of it.
Getting back to the question, “Would a Staples acquisition of Office Depot make the combined companies more successful?” I would say, only if they truly combine the strategies. Focus on the whole office, offer services, be an office showcase and provide subscription services for commodity goods.
And that’s my 2 cents!
Yeah, yeah, that’s the solution: take two declining businesses and combine them, that always works…just ask Eddie Lambert.
Does anyone here—outside of the analysts and bankers who peddle these ideas—really think a merger would reverse, or even slow down declining sales? Or that replacing 2 CEOs (making $X) with 1 (likely making $3X) will result in any kind of meaningful savings? I don’t.
Ever notice that these analysts from Credit Suisse always come up with a scenario that one company should buy another? They are not far fetched ideas, but often borderline. I think they just want to stir things up to push stock prices up. What does the office supply store sell that you can’t get at Walmart? Not much. This could be like Blockbuster and Hollywood Video merging. Misery loves company.