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Research & Insights
The CPO’s View of the Proposed Staples and Office Depot Merger (Part 1 – Introduction)

I saw a recently published white paper from an antitrust watchdog group arguing against the proposed merger of Staples and Office Depot. These types of arguments are published all the time, but this one is extremely relevant to procurement groups that nearly all have sourced office supplies multiple times and likely use one of these “Big 2” firms if they have large US operations.

For a large enterprise’s buying requirements, especially those with large numbers of facilities like retail, banking and hospitality, Staples and Office Depot are really the only game in town (no offense to my local home boys at WB Mason). Having them merge is like having SAP and Oracle merge. If that happened, you would argue that although the technology market is big and competitive, buyers would be competitively hampered. This is the crux of the argument facing the Federal Trade Commission and federal courts in its decision.

Anyway, as I was reading the report, I saw that it cites a research paper I wrote a few years ago when I was at The Hackett Group that analyzed the correlations between supplier rationalization and benefits such as price reductions from increased buying leverage as well as increased efficiencies from reduced transaction costs. Interestingly though, CPOs are not going to necessarily just roll over if the combined entity comes back with post-merger synergies that include a price increase, and the proposed merger could very well work against those benefits.

But, what options do they have?

We don’t have a dog in this fight, nor do we like to take sides on any such fight. We’ll let the courts and free markets settle this, but we can still comment on it, especially since there are some important learnings that practitioners might be able to take from it. But, before we get more into it, I’d recommend that you read the white paper. Although it’s obviously biased toward nixing the deal, it makes a very strong argument why the deal is anti-competitive in the large enterprise B2B segment where both of the Big 2 battle it out. And CPOs should indeed be wary of the implications and be prepared for countermeasures. I talked to a few CPO contacts of mine to solicit their input and got some interesting feedback, which I’ll share in future posts.

But, perhaps even more importantly, there are a lot of ramifications and learnings for a CPO that go beyond the deal, which I’ll also explain in more detail in the next parts of this series.

Voices (9)

  1. Ira Gorsky says:

    As a general rule, without customer complaints the regulatory agencies are less likely to bring an enforcement case.

  2. Ira, it’s funny. I know that most aren’t thrilled with the prospect because they know what tends to happen when suppliers get too powerful, but yet I don’t see them being overly worried about it because they think they’ll just unbundle, use GPOs, etc., but I’m not so sure those remedies will always be as easy as they may hope – but hopefully I’m wrong. As you know, the FTC has an open investigation, and folks who are concerned can contact them. https://www.ftc.gov/about-ftc/bureaus-offices/bureau-competition/contact-information

  3. Ira Gorsky says:

    So far it has been very quiet with respect to companies complaining about the transaction. Is that because the Fortune 100 is not concerned or they are complaining behind the scenes directly to the FTC?

  4. Michael, I’ll take you up on that offer! In one of the subsequent pieces I’m running, I make the point about how what appears to be a true commodity can be anything but, and you make a great point about commercial complexity and incentives (hidden rebates through the chain, sign-on bonuses like you mention, low ball item pricing in the basket, account profitability metrics that drive behaviors later in the relationship, etc.). And understanding the upstream supply chain is absolutely key. I don’t have a good sense on the dynamics between multi-product wholesalers and segment oriented ones (e.g., paper products), nor the extent that smaller retailers and corporate buyers alike can engage them ‘optimally’ – whether directly or through GPOs.

    Another question I will pose though too in a separate post is: 1) what could the FTC realistically propose without mucking up the works of the private sector? and 2) what would you do as CEO of Staples if the deal fell through? It seems like you have a few things: a brand, a bunch of Retail stores, and a sophisticated supply chain and technology platform. So, can these be unbundled? Could Staples / OD become like McD / BK or Starbuck/ DD and move to franchise model to divest the stores to a franchise business and brand licensing business, but the supply chain company then goes multi-category beyond office supplies and can re-intermediate the small retail shops who can be ‘powered by Staples’ or still buy from them cheaper than it can be now. Could also have store within a store, kiosks / vending machines, etc. The supply chain firm would however need to be able to deal with this additional non-trivial complexity, but it divests itself from the self-owned assets and can now do many interesting things.
    Ok, that’s about 5 questions. Let me do as a separate post.

    1. Jill Bossi says:

      Pierre: Great discussion and I think the “franchisee” model you proposed is a great idea! Just like McD/BK or others, corporate can decided where to have “corporately owned” stores that make sense for their business customers and where to fully “franchise” because while office supplies are needed, they are small purchases from small to mid size organizations within that geography. Hopefully, they will move in that direction. It also will allow those who are either already “in” the OP business or who want to be in it a way to enter the market.

  5. As a triple decade vetern of the OP industry at a high level for the large companies and the industry very well. Our firm does consulting to both large end users and dealers, so we see all aspects of the industry pricing structures. Saw the anti watchdog paper and it was excellent. There are a number of areas not being discussed however. First the independent dealers. There are over 1,000 of them in the United States ranging from tiny to 100 million plus. These are supported mainly by two wholesalers. What will be there fate in the marketplace. Much of the go to market pricing structure that the million dollar plus accounts get contain a signing bonus. This large cash outlay makes very difficult for this dealer segment to compete. If these dealerships start to vanish off the competitive landscape then the wholesalers may not have enough business for them both to sustain This will have an effect on national account competition more than Amazon. The government can solve some of these issues by putting certain restrictions on the new Staples/OD enterprise.. Pierre be interesting to have a live conversation, to give a better understanding of this space. There is lot more than meets the eye

  6. Honestly, I don’t think it’ll be very hard for Amazon to implement customer-specific pricing. As we discussed in earlier write-ups, Amazon only has one-size-fits-all “business specific pricing”, but a persistent price file is not rocket science for Amazon who uses extremely sophisticated web agents and revenue/profit optimization tools. And customers punching out to any vendor, including Staples, have to deal with the dynamic content issue as well and it’ll vary based on how you contract and what validations you put in place.
    I do agree though that Amazon will have relatively minor impact. I discuss this in more detail in an upcoming edition of this series. That said, Amazon can be useful in many ways if this deal does go down, but I hope it doesn’t go down if people are banking on Amazon to bring the competition. It’s apples and oranges. Try re-bidding the category and sending an RFP to Amazon – good luck with that!

  7. Andy says:

    Interesting article. But what of Amazon?

    1. Roger says:

      Amazon’s “marketplace” business model does not work well for enterprise customers looking for long term contract pricing. Ever bought something and gone back a few weeks or months later? The price, supplier and shipping terms could be completely different. This was explained well in the AAI white paper.

      Even if Amazon modified their business model to accommodate large B2B contracts – they’d still be a distant competitor to a combined Staples/Depot. (Amazon sold $70B of every product under sun in 2014 – A combined Staples/Depot sold nearly $40B of just office supplies.) How much of a dent in the sector could Amazon realistically make in the near term?

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