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The Amazon Effect: The CPO’s View of the Proposed Staples and Office Depot Merger (Part 2)

In part 1 of this series, we introduced the topic of the proposed merger of Staples with Office Depot. According to a recent Wall Street Journal article, Staples is telling Wall Street it expects the deal to close by the end of the year, but I can tell you with 100% confidence that there are dozens of hedge fund managers who are not so sure.

Staples claims that there are plenty of competitors – including Wal-Mart, Costco, Sam’s Club and BJ’s – in the low-end B2B market, where buyers buy like consumers. This is true, especially when you also factor in online competitors such as Amazon, Jet, Zoro and even just Google shopping and a p-card. But, in the higher-end enterprise B2B market, there are no real national competitors that have a physical retail footprint. Yes, you still have Amazon Business as a strong online competitor, but it’s really apples and oranges when you compare the actual market basket of products and value-added services.

Still, Staples will claim Amazon as an example competitor, and Amazon is happily going along with the story. Amazon is actually lobbying for the deal to happen, too.

Why? Shouldn’t it instead fight the deal and let Staples and Office Depot kill each other? Shouldn’t it relish in a dead loss cost to them from a big breakup fee?

Well, not really. If the Big 2 combine, do you really think that price savings will get passed on to the customers, as the Staples CEO implies in the WSJ article? Probably not. A “Big 1” means the race to the bottom slows, and Amazon won’t likely need to cut prices quite as much.

More importantly though, it also means many enterprise procurement groups will be scrambling to recompete the business – especially if there’s a price increase that will help fund the synergies promised to Wall Street. But since there would be no equivalent national competitor, many CPOs will take a hard look at unbundling and commoditizing their market baskets, especially using online competitors for high-volume office supply SKUs, which of course would be music to Amazon’s ears.

We’ll discuss the detailed tactics and implementation issues of staving off such a price increase in a future research brief. But for now, the fate of the proposed merger proposed lies with the courts and, we believe, on whether Staples Advantage, combined with Office Depot, would have a monopoly on the B2B enterprise market for office supplies in the US – especially for Fortune 500-type firms with national demand for in-store supplies.

This question in turn is predicated on how you define a market. Depending on how you craft your market basket and your sourcing objectives, the answer will vary greatly. We’ll dive into this topic in our next post, because it has ramifications for spending beyond office products.

Voices (6)

  1. Hi Peter, I applaud your company loyalty and your enthusiastic use of capital letters. First, you have no Retail footprint that many national buyers with similar national footprints (Banking, Retail, etc.) desire, but the other issue is that your buying power is much less then the Big 2 given your size relative to them. Personally, living in the Boston area, I like you guys and always route for the small guy, and I’d assume that you’d like the deal to happen to get you a lot more ‘at bats’ from procurement folks looking for an alternative to a “Big 1”. Thanks for writing in!

  2. Why does this article not mention that WB MASON IS A TRUE COMPETITOR NATIONWIDE?

  3. David Guernsey says:

    I would suggest there is a different point of view from which to analyze the impact to Enterprise customers and the likely benefit, or not, to workplace products resellers in general and Staples in particular. First, while offices supplies are a commodity, service broadly defined is not. Depending on what is considered as unreasonably raising prices, the dead net effect can’t be that the Enterprise customer will simply categorize offices supplies as a commodity and free their users to shop anywhere, anytime and at any price. While there are many permutations of service requirements, one simple example suffices to make the point…departmental, or more commonly, desktop delivery is the norm for Enterprise customers. Either the customer takes on that chore/cost from the shipping dock or the reseller provides that service. Delivery is more than last mile, it is the last few feet that most Enterprise customers seem to feel is in the their best interests. Further, service is key with ERP integration, billing requirements and branding preferences that Enterprise customers have concluded are critical even to the lowly provision of office supplies. So…a competitor of ONE is not so simple to cast aside.

    1. David, I couldn’t agree more! Keep reading the rest of the series. A spending category is not complex or not just by virtue of the substitutability of a SKU on a line item, but rather a larger market basket and supporting services (including logistics). These are great in short term, but raise switching costs and whittle down the list of plausible incumbents over the longer term.

  4. We’re not advocating the government do anything because the government is already doing something to investigate, per the Sherman Act Anti Trust laws, to ensure that competition is not “unreasonably harmed”. When you go from multiple national superstores in Office Supplies down to ONE, that seems like an understandable execution of current anti trust law. Re: price increase, yes, the firm is not stupid. It will likely only increase pricing just enough to minimize customers switching business – although if you’re the only game in town, then…? Re: financials, the FTC can’t just decide whether to enforce law based on whether firm is in a tough industry or having a hard time. That said, Staples generated $1B in positive cash flow from operations last year and I don’t the regulators will be swayed by “Why don’t we let them give it a try”!

  5. Why does the Government need to protect the current pricing large corporations are getting from Office Depot and Staples? If Depot and Staples merge there will likely be a reassessment of pricing after their current contract expire, but that does not guarantee an unreasonable price increase as Staples would not want to alienate this customer base and motivate them to find new ways to get their office supplies. This seems to me to be a legitimate course of business. Staples is not making much of a profit now and has a right to construct their business to make a better profit even if it means large corps will have to pay more. Will Staples have a monopoly? They have to execute correctly to get to that point. Why don’t we let them give it a try?

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