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As Office Depot merger falters, Staples’ next step won’t be easy

Staples’ next step is to continue to do what it has been doing: Revamp its online operation, close stores, and seek new products and services to generate revenues, analysts said.
Staples’ next step is to continue to do what it has been doing: Revamp its online operation, close stores, and seek new products and services to generate revenues, analysts said. JOY LEWIS/ABILENE REPORTER-NEWS VIA ASSOCIATED PRESS/FILE 2012

Staples Inc. needs a Plan B as federal regulators move to block its merger with rival Office Depot Inc., analysts said Tuesday. But whatever that plan turns out to be, it won’t be as simple as pressing the big, red “Easy” button that once dominated Staples’ advertising.

Staples’ next step — assuming its challenge to the Federal Trade Commission is unsuccessful — is to continue to do what it has been doing: Revamp its online operation, close stores, and seek new products and services to generate revenues, analysts said. And the Framingham company must do all that in the face of competition from Amazon.com Inc., other big-box chains such as Walmart, and a host of upstarts.

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“It’s a tough slog,” said Rajiv Lal, a professor of retailing at Harvard Business School. “There are some very special challenges.”

Staples, the number one office supplies retailer, has watched sales and profits slide in recent years. It also has trumpeted its $6.3 billion takeover of Office Depot, the second-largest office-supplies retailer, as a major component of its turnaround plan.

But on Monday the FTC took legal action to kill the deal, saying such a merger would “eliminate beneficial competition” that helps keep the cost of office supplies low. Staples has vowed to fight the commission in court, but such decisions are rarely overturned, Lal said.

After dropping nearly 14 percent Monday, Staples stock fell another 5 percent Tuesday, closing at $10.08 a share, its lowest in more than a decade. Staples declined to comment.

Diminishing demand in the digital age for Staples’ core products such as paper, ink, and toner has reduced foot traffic in stores, forcing the company to close stores, cut costs, and emphasize online and mobile sales.

Sales for the third quarter were $5.6 billion, down 6 percent from the third quarter of 2014. Since 2011, the company’s annual sales have declined 9 percent, to $22.5 billion from $24.7 billion. By the end of this year, Staples has said, it will have closed 240 stores, more closings than it previously predicted.

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The company employs 44,000 full-time and 34,000 part-time workers and remains the fourth-largest ecommerce player behind Amazon, Apple Inc., and Walmart. In a Nov. 18 call with analysts, Staples’ chief executive Ron Sargent said the acquisition of Office Depot was needed to accelerate Staples’ reinvention. He detailed efforts by Staples to expand into other markets, such as schools, restaurants, and doctor’s offices, and improve the shopping experience on its website and mobile app, including offering a buy-online, pick-up-at-store option.

“Our top priority is to get the [Office Depot] deal done,” Sargent said.

But with the merger in limbo if not dashed, Staples’ strategy must evolve further and faster, said Ani Collum, a partner and retail consultant at the Norwell firm Retail Concepts.

Collum said Staples offers a broad assortment of products, but perhaps too many, as consumers seek better curated sites that make selections easier. And, she said, Staples lacks the flair and fashion of newer companies that want to grab its market share.

The retailer Poppin, a 115-employee company based in Manhattan, is a good example, Collum said. It sells everything from tape dispensers to office furniture in modern styles, all of which can be ordered in a variety of colors and customized to a person, theme, or event.

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“The big traditional, boring office supply retailers are struggling because there are other options that are potentially more appropriate for this new age of companies that are starting up,” Collum said. “People are realizing that [Staples and Office Depot] aren’t the end-all, be-all.”

Wayfair Inc., the Boston home decor e-retailer, is also branching into the office supply market, she said. And W.B. Mason Co. Inc. of Brockton is another savvy and growing office supply company with a growing business delivery fleet, she said.

Collum said Staples has made improvements, offering designer office supplies, such as its line created by New York sportswear and accessories designer Cynthia Rowley. The collection includes floral-patterned staplers or gold-patterned pencil sharpeners.

Lal, the Harvard Business School professor, said Staples is in a similar position to electronics retailer Best Buy Co. Inc. a few years ago, which was also struggling with competition from Amazon and other nimble retailers.

Best Buy executives moved the company out of a deep hole, Lal said, by selling some of its products exclusively online and offering specialized services, like the Geek Squad, to help customers at home.

Staples, Lal said, could benefit from new arrangements that would make its stores showrooms for manufacturers, charging those companies to showcase their merchandise,

Any reinvention of Staples would begin with a fundamental question, Lal said: What should a modern day office supply store look like?

“It would not look anything like what [Staples founder Thomas Stemberg] started” in 1986, Lal said. “Or what current stores look like.”

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 CEO Ron Sargent said the merger would boost Staples’ reinvention.
CEO Ron Sargent said the merger would boost Staples’ reinvention. JANET KNOTT/GLOBE STAFF/FILE 2006

Megan Woolhouse can be reached at megan.woolhouse@globe.com. Follow her on Twitter @megwoolhouse.