Who Wins After OfficeMax and Office Depot Merge?
The announced deal to merge OfficeMax and Office Depot would, presumably, help the combined company cut costs by eliminating duplicative positions and doing away with underperforming locations while giving it increased purchasing power and marketing clout. In short, the combination of the number two and three office supply chains should, theoretically, give the new company a better shot competing with Staples, the top-ranked chain in the category.
Based on current stats, the combined OfficeMax/Office Depot would begin with 68,000 employees worldwide and operate roughly 2,575 stores. The two chains currently generate $18.5 billion combined. Staples, as a point of comparison, generates roughly $24 billion in annual sales from stores and websites operating in 26 countries in the Americas, Asia, Australia and Europe.
According to a research note by Sanford C. Bernstein retail analyst Colin McGranahan, reported by The Wall Street Journal, the combination of Office Max and Depot could realize between $400 million and $700 million in synergies while creating "a much larger, more profitable, and more capable competitor against emerging competition from Amazon as well as existing competition from Staples."
Not everyone believes an OfficeMax and Depot marriage would work. Analysts at Janney write, "We are scratching our head to think of another merger anywhere near this size in retail where it has worked out well and returns have been strong."
"It’s (Staples) a much better-managed company," Brian Yarbrough, an analyst for Edward Jones, told Bloomberg News. "There is such a gap here. That gap doesn’t close by merging No. 2 and No. 3 that are much weaker than Staples."
- Office Depot, OfficeMax to Merge to Compete With Staples – Bloomberg
- OfficeMax, Office Depot shares soar amid merger report – Reuters/Chicago Tribune
- About Us – Staples
- Staples Could Be Big Winner in the ‘Offices’ Merger – The Wall Street Journal (sub. required)
- Staples May Be Winner in Office Depot-OfficeMax Merger – Bloomberg News
- OfficeMax, Office Depot in Talks to Merge – The Wall Street Journal (sub. required)
- Office Depot and OfficeMax Better Order Up Cost-Cutting Supplies – The Wall Street Journal (sub. required)
Discussion Questions
Who wins in the retail office supplies market following the OfficeMax and Office Depot merger? Where do you see this category heading in the future?
If Janney is saying this kind of merger doesn’t usually work, it gives me pause. What comes to mind is the question of management. If neither Office Max nor Office Depot could effectively compete with Staples, why should their merged offering?
The new entity may save some money the first or second year, albeit merger costs have to be taken into account as well. In the long run, it’s how well the new entity is able to leverage the supposed strength achieved. And this depends on upper management. While saving money helps, the top line is dependent on marketing and merchandising savvy. If neither retailer was on top before, it’s hard to forecast that their joint effort will put them there.
I pretty much agree with Mr. Yarbrough. However, I wouldn’t just blame it on management. Office Depot has been through a series of management changes (that’s an understatement) over the past decade or so and that hasn’t solved the problem. I actually believe the problem is cultural—the rank and file home office employees (think merchants) just won’t change with the times. I have heard this from people coming through the revolving door of employment there. After all, it wasn’t all that long ago that Staples and OD were very competitive with each other.
OfficeMax made a decision to go vertical and buy one of its suppliers. A logical idea that did not pan out.
Whoever ends up in control of the combined entity probably should bring a broom—it’s not about cutting costs, it’s about spending money wisely.
The answer to both questions is the same: Staples and Amazon. This plays into Marc Andreessen’s latest prognostication that physical retail will succumb to e-tail (not that I really agree).
Kmart and Sears’ union comes to mind. The one who wins is Amazon with more locker locations.
What’s going to be most effective is not increased efficiency, but innovation. How can these companies find new ways to fill customer needs and eliminate “purchase friction?” Creative brainstorming with key customers should be a key part of the strategy going forward.
My sense is that Amazon just may win here, as you know it is nimble and aggressive enough to focus on improving the shopper experience while OD and OM are spending 18 months trying to get the merger in place and working with scissors to cut costs.
In the end, the shopping experience will win the day.
You can’t save your way to prosperity. The headlines always shout about the saving that will be achieved ($400MM – $700MM) but somehow much of that seems to dissipate in the aftermath of the deal. Joan is absolutely correct the combined company must drive sales.
Margins are unlikely to improve given the competition, ranging from Staples, Walmart, Costco, Sam’s in the B&M world and Amazon in the online world, so we are back to sales. These have to come from either the retail world or the contract side of the business where Staples already is a dominant force.
The issue here may not be that the combination of the companies is that much stronger but it may allow bits and bobs of each to survive as one entity where as two certainly one of them was going to go away.
Who wins? Certainly not suppliers, particularly those in the consumer electronics space who are already hard-pressed for distribution options (Best Buy and, uh…).
The combined mega-entity’s every decision regarding brand and product strategy will make waves rather than ripples. It’s going to be interesting to watch.
Depot-Max is queuing up to experience the paradox of scale. All combining will do for either company is eliminate duplication in the accounting departments while the combined entity sacrifices intimacy with customers.
The architects of the deal make bonuses, share prices spike, and some sign companies make a brief killing when the buildings get re-branded. Meanwhile the retail price of printer cartridges will probably go up.
Of course Wall Street investors pumped up the stock prices on the news. But this is less an expression of long-term approval than it is a demonstration of their eagerness to leverage some quick trading profit.
Even Staples has cause for concern in this situation. It’s the clear leader in a category that is condensing into two chain players plus online. Look at Best Buy and Circuit City for your cautionary tale of what happens to the last survivor in a killer category.
This is not a win. As was aptly pointed out, combining bad management and bad efficiencies (inefficiencies) only allows for them to become larger. There is a reason that they are number 2 and number 3, and shrinking….and it is not because of their size, but their models. Amazon is rapidly gaining on this entire industry as we see the continued move to online away from brick and mortar…having a brick and mortar office supply store offers no advantage to consumers, and the consumer will continue to vote with their wallets. It is only a matter of time before these businesses fail as well, post merger.
Staples could be the big winner…huh? Curious about this seemingly paradoxical assertion that appeared in several of the referenced articles. I read them; the claim is that Staples will gain because it will take over—or at least gain business from—the “duplicate” locations that would be closed in the merger. This of course begs the question of whether OfficeMax/Depot would really want to close them if that’s the result, and if not, would there really be any savings at all…hence the gap between what’s supposed to happen and what does.
But no matter, the winners here will be the brokers and bankers and other “experts” who always push these maneuvers through.
Looking at the loses in sales and market share of the three companies, OfficeMax, Office Depot, and Staples, the current investor should only consider a small portion of long-shot money for investment purposes. In fact, if the current trends are not improved to the plus side, all three might make the “Where did they go” list of forgotten retailers.
Sadly, there is more market watch with regards to the effects of internet sales companies, both large and small, against this type of established retailer. With increases for landed costs and long-term overstock storage needs for poor turning inventory, the retail brick giants continue to show vulnerability against the combined distribution might of FEDEX and UPS with a solid internet retailer.
So where are we now? The Office Depot and OfficeMax merger needs more than synergy and a layoff to stave off the market pressure from consumers and clicks. A new business plan with a 21st century vision might be a good starting place.
Consumers win because most of us don’t know the difference between the two. Now we won’t be taking their weekly ad to the wrong store.
Who wins? Nobody, really.
Walking through an OfficeMax last week for the first time in months was an amazing experience. It’s a perfect portrait of a dying business model as one sees new calendar appointment books for 2013, tons of pens and pencils/paper notebooks/staplers for paper/paper clips/photo print paper/presentation boards and equipment…basically, everything that’s going away in deference to electronic versions of the same. And it’s all that inventory on a footprint that is WAY too large and unnecessary.
If one uses Staples (or even includes Walmart/Kmart/Sears/Amazon) as the competitive frame-of-reference to determine who may ‘win’ and who may ‘lose’, then one is not thinking broadly enough. When a calendar comes free on my computer and syncs with all my devices, why would I need to proactively buy a new paper appointment calendar…or the pens to write in my appointments? I can certainly see some need for office furniture and maybe printers or hard drives (but only when they are on sale so their prices come close to what’s available online), but when seemingly 2/3 – 3/4 of the space is dedicated to products which are rapidly becoming obsolete, it’s pretty clear their real business issues have less to do with Staples or Walmart than they do with the entire business model and the nearly invisible REAL competition.