Staples Earnings Don’t Bode Well for Office Equipment & Supplies Industry

Jeff Hayes
Aug 22, 2013

Staples’ most recent earnings announcement and efforts to reinvent itself suggest the office equipment and supplies business has entered a period of long-term decline. Vendors and resellers need to take notice and develop new strategies for growth.

Consider some of the financial highlights and comments from Staples’ conference call with analysts:

  • Total Q2 sales for Staples were down 2.2% to $5.3B.
  • North American Stores & Online segment sales decreased by 2.3%.
    • Sales of business machines, ink and toner, and computers and accessories were down – items Staples calls core office products.
    • Sales of mobile technology (tablets, phones), facilities and breakroom supplies, and technology (EasyTech) and copy & print services were up – but not enough to offset the decline in core office products.
    • Most of the declines were from the retail stores where Staples reported a 3% decline in same store sales, resulting from lower traffic and average order size, and from the closure of 54 stores during the previous twelve months.
    • Sales from Staples.com increased 3.5%.
  • North American Commercial business segment sales were up 1.3%.
    • However, the increase was primarily due to increased sales of facilities and breakroom supplies, furniture, and mobile technology.
    • Sales of core office supplies and print solutions were down.
  • International Operations’ sales decreased 8.3%.
    • The decrease was driven by broad-based weakness in their European delivery and Australian businesses, the closure of 49 European stores during the previous twelve months, and a 6% decline in comparable store sales in Europe.
  • Staples reduced guidance and expects full year 2013 sales to decrease in the low single-digits compared to 2012 sales of $23.9 billion.

I think it is worth noting that Staples Q2 2013 results are coming off of a weak Q2 2012 when company sales were down around 5% from 2011.

When reading through the Staples financials and listening to the management team’s response to various questions, I sense a company that is in transition as aspects of its core business model and markets are fundamentally changing.

Here are some of the sound bites from CEO Ron Sargent and his leadership team.

  • Demand for core office supplies (ink, toner, paper) fell short of our expectations.
  • Evolving our mix of business from paper-based products to more technology-based products and the margins aren’t nearly as good.
  • Given that core office supplies are going to continue to shrink we need to be more aggressive on cost take out.
  • We are on track to close 40 stores and downsize and relocate 45 stores during 2013.
  • More customers are relying on Staples for categories beyond office supplies.
  • There is a lot of great new stuff coming to replace core office supplies.
  • The game is how quickly can we reduce space in our stores for these unproductive or weak categories and replace it with mobile phones, facilities and breakroom supplies, and other test categories such as safety, early education, office gifting, etc.

I found the answer to one question very telling. A financial analyst from Oppenheimer asked, “When you talk to your customers, if employment is picking up, why aren’t they buying as much office product?”

Staples replied, “There is a technology impact there. Clearly it is affecting not only small but large businesses as well. They are better controlling their spend than they ever have. For example, board directors presentations that used to be sent out in hard copy in binders are now being done digitally on tablets. A change in technology is impacting in our core supplies business. Ink, toner, and paper are all slightly negative, in spite of what I would argue were slight market share gains (for Staples).”

It’s Not the Economy

So we have a period of rising employment in North America (albeit slowly) coupled with market share gains by Staples (by their estimates) and, yet, their core office supplies sales are down within the North American Retail & Online and Commercial business segments.

My conclusion is that mobility and managed print services (MPS) are driving down the office supplies business. Unless the US economy starts adding jobs at a much higher rate (a scenario which I believe has a low probability), I sense the office supplies business in the US and other developed economies has peaked and is now in a period of long term decline.

Reinvention … No Time To Lose

Staples is not standing still by any means. They have a deep, strong management team that recognizes the issues and has been taking actions to reinvent itself including:

  • Fewer retail stores, smaller retail stores – by the end of this year Staples expects to have reduced retail space by over 2 million square feet.
  • New “omnichannel” store design that blends mobile, online, and in-store shopping – Staples has opened 8 stores with the new design and stated that the majority are retaining 95% of previous sales despite having 30% to 50% less floor space.
  • Reducing retail store shelf space for office equipment, ink, toner and paper to make room for tablets, mobile phones, facilities and break room supplies, and other test categories.
  • Investing in the Staples.com web site and fulfillment operations to improve the user experience, dramatically increase in SKUs (goal is 300,000), and lower prices and costs.
  • Expanding its offering of technology services (EasyTech, AppCenter) and print services – the company cited double-digit growth in EasyTech services and that it is approaching $2 million per week in Marketplace sales from nothing a year ago.

Towards the end of the call CEO Ron Sargent said “I am not at all happy about our performance in the second quarter. The problem is it (the reinvention effort) is just not working fast enough.”

I think if Staples, which bills itself as the world’s largest office products company, is urgently trying to reinvent itself, all of its office products suppliers and competitors need to be doing the same.

If you are feeling any of these pressures, I encourage you to check out some of InfoTrends new studies and how we can provide insights to guide your planning and grow your business.

Business Process Automation for Vertical Markets

Mobile Office Solutions & Services

Office Opportunities by Vertical Market, Company Size and Metro Area

Jeff Hayes
President

 

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