Procurement’s Involvement in Divestitures: The Staples Case Pierre Mitchell - November 23, 2015 8:18 AM | Categories: Case Study, Industry News, M&A, Procurement Strategy & Planning | Tags: General News, L1 M&A activity has been on a bit of tear recently. AB-InBev and SABMiller are merging. Marriott and Starwood have announced they're engaged. Numerous tech players, including within the procurement sector, have also tied the knot, or are looking for suitors (e.g., Xchanging). Procurement's role in pre-M&A due diligence and post-M&A value realization is a fairly well-trodden topic, and it's certainly an important one for many firms. But so is procurement’s role in divestitures. Contracts have to be unwound without losing leverage. Transition plans will need to be made to cut operations over to the acquirer. If the entity is being spun out on its own, then new resources — people, systems, data — will need to be “stood up.” There are endless tactical details to work through. But procurement's role, and a supply chain group's role more broadly, should also figure into the strategy as well. Any procurement organization can have a strategy that supports an existing enterprise strategy, but only a truly strategic procurement group can actually help influence the business strategy. So, let’s consider a future case study in the making and consider the situation with office products retailer Staples. The Staples Case You’ve no doubt read our four-part series on Staples — see here, here, here and here — but in a nutshell, Staples needs to shed some assets in its enterprise business segment to help satisfy U.S. regulators, who are rightly worried that Staples’ acquisition of Office Depot would end up making it a monopoly in the U.S. for large buyers. So, if you were the CPO or CSCO and were asked by the CEO to help identify some options, what would you do? The first thing you'd do, like any good strategist, would of course be to segment the market to keep the growing, profitable and differentiated segment intact while sloughing off the rest. In this case, I think it's safe to say Staples wants to preserve its large enterprise customers. Staples is much better at managing a mega-buyer profitably than a bunch of smaller buyers, and it’s generally going to manage the buyers more than the buyers are managing the supplier. Trust me on this one. I’ve interviewed a lot of very knowledgeable folks who’ve worked on the other side of the table and have seen some very interesting pricing data on this. So, do you just carve off of the small and medium-sized business segment? Maybe. The low end of the market basically buys like B2C customers, because it has low buying power and is either going online or going to the local big box retailer, warehouse superstore or a Staples store. Unfortunately, the regulators will likely, and understandably, not see this as a very meaningful proposal. If I were the FTC and looking to cut a deal, I would ask to carve out something at the real enterprise market, like the upper mid-market, say, businesses with revenues from $100 million up to $2 billion. But Staples isn’t going to want that, so what to do? The Supply Market Solution When in doubt, look to your supply chain and supply markets for a solution. Let the power of supply markets help you. You just need to be creative in how you tap them. In this case, the problem is how can Staples carve off some business while keeping that business in its extended supply chain and allowing Staples to remain in control? As some recent newspaper articles have mentioned — see here and here — Staples could give some of its contracts to one of its strategic wholesaler suppliers like Essendant. But Essendant doesn’t want channel conflict with its mega-customer, and it would then have to find some other future customer to sell this channel off to, that won’t invoke the ire of Staples. That’s a tall order. I do have a proposal for the FTC to consider, but let’s hold off on that for now. So, you’re the CPO and you ask your mega-suppliers like Essendant to help you brainstorm on a solution that keeps the demand flowing to them, with perhaps some additional rebates flowing to Staples behind the scenes and buried in the books, and flowing from non-competitors to Staples. But how? Sales and Marketing Smart CPOs also coordinate heavily with sales and marketing functions to not just support for their procurement needs but also to best sell into procurement — a fairly standard best practice. You might highlight that even though diversity spending is an area of importance where, although Staples by definition can’t compete directly, it can not only source from diverse suppliers to at least give customers some Tier 2 diverse spending support, but can also partner with small-, minority-, women-, and veteran-owned business enterprise (SMWBE) firms, for whom Staples can then provide back-end order fulfillment. I won’t comment on whether this is using SMWBE ”pass-throughs” or whether it’s good business, but the bigger point is that if Staples could carve out this customer channel which has a higher cost-to-serve and give the back-end fulfillment over to its strategic supplier, Essendant — and maybe take a little extra rebate, too, for passing on the business — maybe that could placate the FTC. In fact, based on a recent Wall Street Journal article, this is what Staples has proposed. As the article stated, it’s a minimal percent of its current revenue — supposedly about $300 million to $500 million of business — and it’s an even smaller hit on earnings. So, it’d be a blip on the radar and business as usual. I think if the FTC looked at who the large customers of these SMWBE firms were, you’d likely find a disproportionately high number of Staples customers. So, I do applaud the bravado of Staples in putting forth such a small carve-out and hoping it’ll work. We’ll see how the FTC rules (or delays) in early December. Business Strategy and Scenario Planning OK, so let me know return to the proposal I mentioned before. Unfortunately, I’ve run out of time, so you’ll have to wait until tomorrow. But, since I started this article on procurement’s role in a strategic area like M&A, I seem to have wandered off the path into business strategy and scenario planning. But, it’s really not off the path at all in terms of philosophy or technique. For example, doing strategic sourcing is really just extended supply network redesign — and you can’t do omnichannel fulfillment if you can’t align suppliers to those channels or if you can’t manage inbound channels in the same way. Stay tuned for tomorrow’s post where I suggest a monster — hint: think Blue Oyster Cult — of an alternative to the current rumored proposal from Staples. Related ArticlesProcurement Saint: What Would Thomas Stemberg Think About the Staples-Office Depot Merger?What CPOs Should do Right Now About the Pending Staples-Office Depot MergerUnintended Consequences: The CPO’s View of the Proposed Staples and Office Depot Merger (Part 4)Define Your Market Basket: The CPO’s View of the Proposed Staples and Office Depot Merger (Part 3)The Amazon Effect: The CPO’s View of the Proposed Staples and Office Depot Merger (Part 2)The CPO’s View of the Proposed Staples and Office Depot Merger (Part 1 – Introduction) Voices (2) Pierre Mitchell: 23.11.2015 at 10:28 am Ira, Essendant is a supplier to Staples. And I completely agree that carving out some small segments of business to send to Essendant won’t change anything. That’s my point, and carving out some tiny amount of diversity business to pass on to Essendant for fulfillment rather than Staples handling it (both firms have large distribution networks) is not going to change the game here. Especially since the customers being shifted are likely Staples customers anyway who are only having their diversity spend carved off for fulfillment by a strategic supplier of Staples. Stay tuned for the next installment where I propose an idea that is a little better. It still doesn’t solve the monopoly problem for larger enterprise customers with national footprints, but it’s better than a paltry diversity spend carve-out. Stay tuned for this next post. Reply Ira Gorsky: 23.11.2015 at 10:11 am Pierre, Thanks for addressing the proposed divestiture. I don’t fully understand how this solves the competitive harm. The FTC’s concern would be that there would be a lessening of competition because Office Depot isn’t competing head to head with Staples for the large contract business. How does having Essendant in the mix solve this? If I understood the post correctly, Essendant would still be a customer of Staples, so how is this independent competition? 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