How Does the Office Depot/OfficeMax Merger Affect Consumers?

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Last week’s announcement that two retail giants will soon become one has shed light on the dramatic changes in the retail landscape over the past two decades.

On Wednesday, Office Depot announced that it would be acquiring its smaller office supply rival OfficeMax in an effort to increase revenue and efficiency, as well as to better compete with market leader Staples.

The three stores have held the market for office supply superstores for more than 20 years, with Staples leading the way as the largest revenue monster. With both OfficeMax and Office Depot experiencing declining sales for the past six years in a row, however, the recent merger seems like a move made out of necessity.

USA Today reports that Office Depot experienced a drop of 6% in same-store sales from the fourth quarter of 2011 to the fourth quarter of 2012, while OfficeMax saw a decrease of 4.1% for the same time period.

Once the merger takes place, the combined company is expected to be worth $18 billion, leaving it in better standing but still trailing Staples, which had total sales of $25 billion for 2012, according to Investing Daily.

While some of Office Depot and OfficeMax’s sales have been lost to Staples, a number of other factors have led to a decrease in demand for office supply superstores in general, requiring restructuring that even Staples is not immune to.

 

Merging to Stay Competitive

One-stop office supply mega-retailers filled a need for convenience when they first opened stores around the country and abroad, offering huge time savings for office managers. Both Office Depot and Staples opened their doors in 1986, while OfficeMax evolved from a company that was created in 1931. Businesses and individuals alike were drawn to the idea of getting all their supplies in one place.

As other powerhouse retailers like Walmart and Target began incorporating more and more office supplies into their inventories, offering the convenience of picking up office needs while also fetching clothes and groceries, office supply stores lost a chunk of their market.

Amazon then changed the game even more dramatically, offering the convenience of shopping without ever leaving the office, not to mention delivery and prices that big box retailers could never afford to beat.

The accessibility that the Internet provided opened the door for an endless number of office supply retailers to become part of the game, gaining exposure and the ability to make business-to-business sales much more efficient.

With fewer customers opting to step inside actual brick-and-mortar stores, consolidation became crucial to the survival of the superstore, with a move toward increasing internet sales at the forefront of efforts.

Shifting focus toward internet sales could mean the closure of up to 600 stores for OfficeMax and Office Depot, according to Investing Daily.

Even Staples is being forced to restructure its retail system: the company has plans to close 30 stores in the U.S. and 45 in Europe while scaling back the size of 30 additional stores by 2015, according to the Wall Street Journal.

Technology’s impact on the industry goes beyond internet sales, however. The rise in paperless operations has cut out the need for much of office supply stores’ inventory. Many documents can be accessed through the cloud, offering consumers the ultimate convenience of accessing crucial information on the go through mobile devices.

Paper, ink cartridges and even printers have much lower demand than they once did. Combined with a weak economy, this lessened demand has been a serious blow to office supply sales.

 

Pressure from Hedge Fund

While pressure to make a change has been mounting from multiple fronts for the past few years, the timing of the merger may have much to do with concerns expressed by an investing hedge fund.

Starboard Value LP took a 13.3% stake in Office Depot last September, and the Wall Street Journal reported that the activist investing firm’s CEO wasted no time in getting a letter to the retailer, urging them to make swift changes to increase profitability.

Among the changes CEO Jeffrey Smith called for were reducing advertising and administrative costs, as well as putting more focus of higher-margin services and products.

 

Implications of Combining Two Major Companies

The end goal for both OfficeMax and Office Depot is to increase profits by making possibly drastic cuts to their physical stores, leaving consumers and employees unsure about their futures with the chains.

Both stores cater to international markets. OfficeMax currently has more than 1,000 retail stores in the U.S. and Mexico, while Office Depot operates more than 1,100 retail outfits in the U.S. and Canada, with the highest concentration of stores being in California, Texas and Florida.

Stores most likely to end up on the chopping block will be ones in low-grossing areas, as well as stores in close proximity to one another. Bloomberg reports that about 50% of OfficeMax and Office Depot stores are currently in overlapping territories, meaning that half of all retail locations are at risk for closure.

The obvious pitfall is the resulting loss in jobs that will accompany these closures. Thousands of employees of each store are likely to be affected, thus lowering operating costs for the combined company at the cost of creating more unemployment.

Neither company has announced which stores may be on the chopping block, and decisions about leadership and location are yet to be made. USA Today reports that each company’s CEO will remain in their positions until a board of directors (comprised of directors from each company) chooses a replacement.

The final call on where company headquarters will reside will also likely affect hundreds, as a decision on where the new headquarters will be is being postponed until after a CEO has been chosen. Office Depot’s headquarters are currently in Boca Raton, Florida while OfficeMax has its main offices in Naperville, Illinois.

Consumers are likely to also feel the pinch in terms of having fewer locations to shop at, although the company will probably keep at least one store open in each current region. Having fewer superstores could also spell a loss in revenue for smaller strip mall-type retailers that depend on superstores like Office Depot and OfficeMax to draw customers, according to Marketplace.org.

Whether or not prices will change is still an unknown, though with both operations able to cut costs elsewhere, they may be able to maintain or even lower current prices. Carol Spieckerman, President of newmarketbuilders, a retail intelligence company, thinks the merger is a net positive for shoppers. “Ultimately, consumers should benefit from the merger and the benefits will not be confined to the combined company. In fact, multi-category retailers that carry office products such as Walmart, Amazon, Sam’s, and Costco could get quite aggressive with pricing,” states Spieckerman.

“By contrast, Staples has less wiggle room as a pure-play office products supplier. Nonetheless, Staples will have little choice but to react to any price cuts and market share grabs that competitors make in the wake of the deal. All in all, the consumer will benefit as multiple retailers scramble,” Spieckerman says.

 

Fear of Less Competition and the FTC

Cost to consumers is one side effect of the merger that the government may be keeping an eye on. The risk of increased prices is always present when industry leaders whittle down to two companies, and the FTC still has room to shut down the merger if it deems it necessary.

TIME likened last week’s merger to the failed attempt by Staples to merge with Office Depot in 1997 – a move the Federal Trade Commission shut down based on the belief that reducing the office supply superstore market from three companies down to two would result in higher prices for consumers.

In contrast to the retail climate of 1997, though, this most recent merger will not reduce competition in the entire office supply industry. Where Staples, OfficeMax and Office Depot were the main suppliers of office supplies 16 years ago, they now face stiff competition from multiple sources.

As TIME points out, the FTC made its 1997 decision based on the fact that superstores were then newest, most important innovation in the industry, a fact that is no longer true.

Smaller local stores already see the merger as an opportunity to gain traction and market share. Wendy Pike, President of Twist Office Products, an office supply company based in the Midwest, notes that midsized merchants often have better pricing and customer service than big box office supply stores. “Independent dealers also have the competitive pricing touted by the big boxes and many times even better prices, they just haven’t had the large advertising budgets to market it,” says Pike. “The independent dealer will continue to offer value prices as they do not have the high overhead to sustain.”

Other office supply chains are already going even further to attract customers who may be affected by the merger. Bill Swanson, Global CFO and Cartridge World North America CEO, says that Cartridge World, a supplier of printer ink cartridges, has a plan to take advantage of OfficeMax’s coming store closures. “Cartridge World is going to be providing a 10 percent discount on products and services to anyone with MaxPerks rewards (which may or may not dissolve in time),” says Swanson. “The 10 percent discount is not only double the discount given away as the award by OfficeMax, but the brand’s way of saying we are here and available for all your needs.”

Competition coming in these different forms, along with the fact that the two smaller of the three giants are merging rather than Staples engulfing another company, would suggest that this merger will go through with little backlash from the FTC. This, in fact, may be the most damning of evidence of the big box office supply store’s decline – that the FTC views the Office Depot/OfficeMax consolidation quite lightly.

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