Staples Inc And Office Depot Inc May Be Merging, But Even A Combined Company Would Face Uncertainty

Update 2/4/15: Staples Inc. has agreed to acquire Office Depot Inc. for $6.3 billion, the companies announced Wednesday morning. The acquisition will give Staples pro forma annual sales of roughly $39 billion.

The deal "enables Staples to provide more value to customers, and more effectively compete in a rapidly evolving competitive environment," Ron Sargent, Staples' chairman and CEO, said in a statement. By merging companies, Staples should see at least $1 billion in savings as the it reduces global expenses and optimizes its retail footprint. "These savings will dramatically accelerate our strategic reinvention, which is focused on driving growth in our delivery businesses and in categories beyond office supplies,” he said.

Original story:

If Staples Inc. and Office Depot Inc. unite, the combined company would need to dramatically shift its strategy to stay afloat long-term, experts say. The world’s top two office supply retailers are in advanced talks this week to merge as the business of peddling paper reams and printers loses ground to email and Amazon.com, the Wall Street Journal first reported.

The big-box supply model “was prevalent 15 years ago, and it worked, but they’ve failed to move on with the times,” Mary Epner, a retail analyst in New York, said of Staples and Office Depot. “They’re caught up in the customer that was, not the customer who is now and will be five years from now.”

Bank analysts and investors have pushed for a merger in recent years to cut the companies’ costs and boost profit margins. A report from Credit Suisse last fall suggested a deal between the chains could lead to more than $1.4 billion in annual cost savings by 2017, an amount equal to the two companies’ combined profits that year, according to the bank’s estimates.

Both companies “have had to get pretty fancy with their earnings numbers in the last few quarters and rearrange a lot of different things. When I see things like that, it tells me the organic growth has ceased. It’s done,” said Josh Van Dress, chief investment officer at Able Capital Management. “So they have to go after other assets to [grow]. It’s a great purchase.”

Office Depot shares (NASDAQ:ODP) soared more than 20 percent in early Tuesday trading on reports of the merger, while Staples’ stock price (NASDAQ:SPLS) rose more than 11 percent.

Together, the chains have about 4,000 stores and annual sales of more than $35 billion. Framingham, Massachusetts-based Staples has a market value of around $12.14 billion, while Boca Raton, Florida-based Office Depot is valued at about $4.85 billion. Office Depot absorbed rival OfficeMax Inc. in 2013 for $1.2 billion, shrinking the field to just two major competitors.

The retailers rose to prominence in recent decades as cheaper, more robust alternatives to mom-and-pop stationery stores and local paper suppliers. Their expansive superstores stock a barrage of office tools, from pens, folders and paper clips to swivel chairs, copy machines and, more recently, laptops and cell phones.

Yet Staples and Office Depot have done little to keep up with changing consumer habits. Their websites lack the price variety and ease of shipping mastered by rival Amazon.com Inc., and their tech sections lack the quality customer experience exemplified by Apple Inc., Epner said. And all the low-ticket items, such as staplers, cork boards and disinfectant wipes, are easier to get and cheaper at any Walmart superstore or CVS Pharmacy.

Sales at office supply stores grew “at a very meager pace” in 2014, according to preliminary estimates, said Chuck Nwokocha, an analyst at Sageworks, a financial information company. “They saw their rate of revenue growth decrease, and their net profit margins were sliced in half.” He said analysts will be “keeping our eyes on this industry” as more statements for this year and last year roll in.

Epner said a combined Staples-Office Depot will have to do more to lure customers into its brick-and-mortar stores. In the larger locations, the company could scrap some of its less profitable inventory and make room for rentable workspaces, creating a home for roving freelancers or self-employed workers who would otherwise work from a coffee shop or the living room, she said. Both online and in stores, the retailer could offer solutions for customizable offices. Much in the way that Swedish furniture giant IKEA sets up scenes in its showrooms and catalogues, the company could provide ideas -- and promote products and devices -- for a variety of spaces, including home offices, college dorm rooms and small businesses.

“I set up a home office, and it was so frustrating to go from one website to another. I would’ve loved to be able to go to a Staples … and get everything I needed,” Epner said. “I understand that it costs more to do, but I think the payoff can be greater by doing something like this versus competing on the price of paper clips. They could have a competitive edge.”

But Bob Phibbs, CEO of The Retail Doctor consulting firm, said he doesn’t believe the office supply model works anymore given the ubiquity of cheap stationery and the ease of online shopping. “You can’t mask the underlying problem, which is no different than what we ran into with video stores and music stores,” he said. “We’re not buying those kinds of products in the same way anymore.”

Phibbs said news of a possible Staples-Office Depot deal reminds him of when Kmart merged with Sears, Roebuck & Co. in 2005 to form Sears Holdings. The $11 billion deal has largely been considered a failure as the company continues to struggle to lure in shoppers with coupons, layaway deals and loyalty rewards points. Sears in December announced an adjusted net loss of nearly $300 million for third quarter 2014 and said it would shutter more than 200 stores.

“It’s two retailers coming together and trying to hold on to each other,” Phibbs said. “But the demand is going away … because the demographics have changed so much.” On the possible linking of Staples and Office Depot, he said, “I just don’t see where the growth is going to be in this. I don’t see it.”

IBTimes reporter Jessica Menton contributed to this story.