The Need for Transformation at Staples, Office Depot and OfficeMax

Jeff Hayes
Sep 17, 2012

Staples, Office Depot and OfficeMax have been in the news lately for declining revenue and profits. The office superstores (OSS) face an immense challenge to transform as there is less demand for some of their biggest sources of profit (ink and toner cartridges) and less use of one of their biggest assets (retail stores). How they pivot at this point will likely determine their direction for years to come.

New Technology and Shopping Paradigms

I believe the decline of print in the consumer and office markets is permanent. Three years after the end of the Great Recession (yes, it has been that long) U.S. sales of office printing equipment and supplies remain down. InfoTrends research indicates 2011 unit sales of single and multi-function printers were lower than 2009 sales. Recent earnings reports from HP, Lexmark, Epson, and the office superstores suggest 2012 isn’t shaping up any better.

In looking at this figure, I’m reminded of one of my favorite quotes from Jack Welch, the former CEO of General Electric, “Face reality as it is, not as it was or as you wish it to be.”

Clearly, consumers and businesses are shifting away from the PC/networked print paradigm to a WiFi/smart device paradigm where people can access information anywhere. I don’t need paper (as often) to view, collaborate, or store information. People aren’t upgrading their printers (as often); they are upgrading their smartphone, tablets and cloud storage plans. Unfortunately, the office superstores don’t sell many of those devices or the related services. Even if they did, they would be severely challenged by other retailers (Apple, phone companies) and online providers (

The other paradigm shift for the office superstores is that people aren’t shopping at big box retailers as much as before, especially for technology products and consumables. BestBuy (along with Toys “R” Us, Sports Authority, and just about every other big retailer) is facing a severe challenge to its business model as consumers use the retail store to experience the product and their smartphone to find the lowest price. While “showrooming” may not be as prevalent at the office superstores as at BestBuy, pricing has become much more transparent in the smartphone era.

A quick scan of prices at my local Staples and Walmart (1 mile apart) for ink cartridges and paper finds Staples offering the HP 45 ink cartridge for $39.99, Walmart for $39.97; a ream of Staples multi-purpose paper is $3.99, a ream of Georgia-Pacific paper at Walmart is $2.97. Staples has a much better office products assortment, but it’s hard to beat Walmart’s overall assortment,  convenience and prices — especially when gas is $4.00 a gallon and I really don’t have time to make an extra stop. The result is office superstores find themselves with lots of locations, lots of square footage, and not as many shoppers.

Investment Banks to the Rescue?

Private equity and other investment firms are circling above sensing an opportunity to re-organize the sector through a combination of significant cost reductions and a new alignment of the business model. Last week The Boston Globe reported that Bain Capital and Thomas H. Lee are considering a deal with market leader Staples. Today The Wall Street Journal reported investment fund Starboard Value LP has increased its position in Office Depot to become the largest shareholder. According to the WSJ, Starboard CEO Jeffrey Smith stated he believes Office Depot is “deeply undervalued” but that management could take certain actions such as cutting expenses to improve performance. Fasten your seatbelts, turbulence ahead.

Weekly Closing Share Price – Jan. 1, 2007 – Sep. 14, 2012

To put things in perspective, the combined market capitalization of Staples, Office Depot, and OfficeMax was approximately $9.8 billion on September 14, 2012 down 68.5% from $31.2 billion on January 3, 2007. That’s a lot of ink and toner.

An Integrated Delivery System of Services and Products

What has held up reasonably well for the OSS companies is their services-related businesses including Contract Delivery and Print Services. It’s tough to match the office products supply chain logistics and delivery infrastructure of the Big 3. They also offer convenient digital printing and light bindery services for most personal, office and basic marketing collateral applications that can be produced on-site or via their website with delivery and in-store pick up options.

My sense is that Staples, Office Depot and OfficeMax can become highly valuable once again by combining the best of online (choice, self-service, efficiency), in-person retail (experience, customer service, immediacy), and centralized production/fulfillment (scale, delivery, turnaround) for consumer, office and marketing products AND services. I believe the growth leader will be the company that best re-orients as an integrated, services-driven business with a compelling offering for marketing supply chain and office technology management (e.g. Staples EasyTech) for businesses and creativity tools and technology services for consumers.

Sure, the office superstores will still sell tons of paper and lots of ink cartridges, but growth and differentiation won’t come from these products. The growth will come from providing a better customer experience that combines enabling services with competitively priced products to meet evolving business and consumer needs.

Jeff Hayes
President, InfoTrends


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