When it comes to the office supplies sector, Staples Inc. and Office Depot Inc. find themselves in a situation that even the world’s biggest “Easy” button could not fix. Unless they merge, it is unlikely either will survive.
In 2013, when Office Depot acquired Office Max, combining the second- and third-biggest companies in the industry, the Federal Trade Commission unanimously deemed the deal acceptable for a few reasons. Among them: Pricing was no longer driven by office supplies stores, but by new brick-and-mortar competitors, such as Walmart Stores Inc. and online retailers such as Amazon.com Inc.
Should today’s deal be any different from the one of two years ago? The answer is no.
The potential merger of Staples and Office Depot has an even more compelling argument to go forward. Since 2013, according to the research firm Euromonitor International, both companies’ market shares are falling, and office supply competition has only become more intense.
Retail giants such as Amazon and Walmart have lowered prices on office supply products and made it easier and more convenient to buy online. Discount wholesalers, such as Costco Wholesale Corp. of Issaquah, Wash., and BJ’s Wholesale Club Inc. of Westborough, are entering the office supply market. All this has forced Staples and Office Depot to shutter more than 600 stores worldwide by the end of 2016.
More and more, vendors are cutting out the office supplies chain middleman in favor of selling directly to customers through websites and mobile apps. Perhaps just as compelling, Staples and Office Depot are serving an entire generation whose professional needs no longer require paper, ink, and toner, significantly cutting down on their once-popular printing business for resumes, stationery, and other materials.
The marriage of Staples and Office Depot makes seemingly blissful sense. For better or worse, the companies’ similarly antiquated business models and cost structures would allow them to reduce global expenses and optimize the number of retail stores. This could lead to approximately $1 billion in savings over three years, a savings that would translate to lower product prices and hopefully bring back much-needed customers.
In my view, the FTC will ultimately approve this deal (it’s already been approved in Australia and New Zealand) and is only blocking it now to force Staples and Office Depot to make additional concessions, similar to what happened with Albertson’s and Safeway grocery stores earlier this year. In that case, the combined firm had to ditch 168 stores to four competitors nationwide.
The FTC’s main concerns have focused on the corporate side of the office supply business. Together, Staples and Office Depot control 70 percent of the market for business customers.
So far, Staples has offered to give $600 million worth of their commercial contracts to their closest competitor for business clients, Essendant Inc. of Deerfield, Ill., but that was not enough to satisfy the FTC. Now, Staples needs to go back to the drawing board to determine what more they can concede.
Staples, which has seen sales and profits fall in recent years, just doesn’t have the resources for a long, drawn-out legal fight with the FTC. The truth is, Staples and Office Depot have become irrelevant to the market. Whether they stand alone and fail, or merge to see another day, the question remains: Will anyone even notice?Kristina Minnick is an associate professor of finance at Bentley University in Waltham.