A Case Against
An Office Depot & Office Max
June 22nd 2011 (OMX and ODP)
Office Depot and Office Max stocks have been responding positively to rampant speculation that the two companies are primed to merge. The merger mania reached a fever pitch after Oppenheimer reported that Office Depot CEO Neil Austrian was favourably inclined to such. Office Depot has had declining sales for 13 consecutive quarters and rival Office Max has faired little better with sales declines for 13 out of the last 14 quarters. A merge between the two would be the joining together of two companies that have collectively failed miserably over the last three years, while industry behemoth Staples has not only survived but thrived.
The case for a merger as a salvation for Office Depot and Office Max is based on the false premise that the office supply super store is still relevant. In fact the changing market environment says something quite different. First Office Depot and Office Max face competition not only from industry leader Staples, but from Wal-Mart, Costco, Sam’s Club, Best Buy, Freys, Amazon.com, not to mention Walgreens, CVS and a host of others adding office supplies to their market basket of products.
Office Depot and Office Max have increased their store product selection heavily towards consumer electronics such as printers, computers, phones, cameras, flat screen TVs and other such low margin but high dollar products. The problem is the office supply super store’s selection is smaller than Best Buy, HHGregg and Frey’s and higher priced than Wal-Mart, Costco and Sam’s. On-line options such as Amazon.com and Ebay offer greater selection and lower price than the office supply super store in consumer electronics.
Pens, paper and school supplies can now be found at your local grocery store, drug store, Wal-Mart, Costco, Sam’s Club and almost anywhere online. In fact Wal-Mart has been aggressively attacking the office supply superstores during back to school season, with full page adds detailing Wal-Mart savings directly against Office Depot and to a lesser extent Staples and Office Max.
Market and product fractionalization and fragmentation works against the bricks and mortar concept that Office Depot and Office Max have clung to with a death like grip. It may be that the market has only room for one major retail office supply company, not three and not two, but just one. Merging Office Depot and Office Max may just delaying the inevitable by reducing the sector to two, but it will not be a panacea that will save the two combined companies.
Office Depot and Office Max also have contract sales divisions that are losing market share to a resurgent independent dealer community with new buying power that allows them to compete on a level playing field, as well as Staples which has contract sales gains yearly at the expense of the withering on the vine contract sales of Office Depot and Office Max.
Office Depot is a company beset by legal issues on multiple fronts, and these alone would give Office Max pause, even in a perfect world. The problem with Office Depot is just as they settle some investigations like the heads of the mythical Hydra new investigations sprout to take their place.
Finally, there is no assurance that the FTC would allow the merger. Just as the Staples merger (take over) with Office Depot was blocked so could any merger between Office Depot and Office Max be blocked. The competitive landscape is much different meaning the FTC could see it as a chance for a combined Office Depot and Office Max to act as a balance to the market domination of Staples. But that just brings us back to the fact that there really is only a place for one office supply retail chain, and Staples seems by all accounts to be the one that natural selection will choose to survive.
Total ODP reimbursements only total less then $12 million.
Your posts are akin to watching the movie 'Groundhog Day'. Every other day you mention something about Wal-Mart taking over the world of office supplies. I agree that Wal-Mart is a competitor for the office supply retailers. In fact, they are competitors for just about every 'big-box' retailer in America.
I try to avoid going into a Wal-Mart at all costs. However, at times I do go into their stores. Most of the stores that I have walked in have several thousand square feet dedicated to electronics. They also have thousands of square feet dedicated to clothing, landscaping, toys, food, hardware, books, and home improvement. They usually have 4-6 aisles set aside for birthday cards. I just saw a full page ad today announcing that Wal-Mart was going to start selling appliances. In fact, they are going to call part of their stores ' Appliance Mart'. For office supplies they have one or two aisles. Put it another way, they have as much space dedicated to lipstick and mascara as they do office supplies. Sure they flex out for back to school, but your constant posts make it sound like they have set aside a major amount of space for office supplies. That just isn't the case.
Also, you make it sound like the major office suppliers would be the only one hurt if Wal-Mart started dedicating thousands of square feet to office products. I would argue that the small local dealers would be hurt just as bad - if not worse. There are a ton of great independent dealers across America. A number of them compete head-to-head with the big box suppliers in the major markets. However, a large percent of the local dealers make their living focusing on rural markets that the big box retailers do not focus heavily on due to cost to serve. Most of these rural markets have a Wal-Mart in them. These small town dealers, that are likely making decent margins, would have their work cut out for them if Wal-Mart became aggressive in office supplies.
Would Office Depot, Office Max, and Staples be hurt if Wal-Mart became aggressive in this category - yes. But I think we would sadly see more than a handful of local dealers fall by the wayside. Wal-Mart has been putting mom-and-pop operations out of business for decades. So feel free to continue your Wal-Mart is going to crush Office Depot crusade. Just keep in mind that there will be a lot more businesses hurt than just Depot.
Office Depot still commands over 12 billion in sales. That kind of sales may not win over everyone but its still huge compared to a lot others. If there is a merger then its simply a case of one giving in and the other surviving.
I would like the merger frenzy to heat up a bit so both houses can clean up and the stock to rise.
I agree except they are not over 12 B now. They are slightly less than that. Their sales have fallen like the others.
That said, I would think that a company with "around" 12 billion in annual sales is still a force to be reckoned with.
Mistakes have been made. Mistakes re being rectified. If they can cut the fat and have a few good quarters, the stock price will show it.
Sounds repetitive to me. This person posts the same old crap over and over.
The posts states that Office Max and Office Depot are going to have all this competition from all of these other places. Well, it seems to me that if if THEY are, then Staples will as well.
I still say that people are not going to walk around superstores looking for a ream of paper or a specialty item that only these three stores might carry. I know I won't.
I go to Office Depot for anything and everything pertaining to office supplies. We have a great store and a great group of workers here.