Shift in small business spending may curb Staples-Office Depot growth

By Nathan Layne and Nandita Bose

(Reuters) - It's the changing spending patterns of small business owners like Thomas Kean that helped prompt Staples Inc (SPLS.O) to buy Office Depot (ODP.O). It also may limit their post-merger growth prospects.

Staples announced on Wednesday that it would buy Office Depot for $6.3 billion, combining the top two U.S. retailers of office supplies. The companies said the deal would enable them to better serve customers and make them more competitive on costs..

Kean, the owner of a property broker that employs 10 people in the Chicago suburb of Park Ridge, said he stopped shopping regularly at the nearby Office Depot years ago and only buys from Staples when they advertise a really good deal.

"For normal stuff like paper, pens, folders and ink, I go to Costco and Sam's," Kean said, referring to membership-only bulk seller Costco Wholesale Corp (COST.O) and its rival Sam's Club, a unit Wal-Mart Stores Inc (WMT.N).

"I think most small business guys do the same thing."

Office Depot declined to comment for this story. Staples did not immediately respond to a request for comment.

While analysts say the merged firm should be able to keep, or even strengthen, business serving larger firms directly, some warned that stemming the decline in its retail business - which is underpinned by demand from small business owners -- would prove a more difficult task.

Kean was one of 15 small business owners and managers interviewed by Reuters in the town of Park Ridge, all within a short drive of a Staples, Office Depot and Office Max, and the outlets of key competitors Costco, Walmart and Sam's Club.

Their answers offer a window into how demand for office supplies is shifting to a wider base of retailers perceived in some cases to be offering better quality or prices.

While four of those interviewed named Staples or Office Depot as their main destination for office supplies, another four cited Costco and one said she exclusively shopped at Wal-Mart. Five said they use local distributors, partly to support small businesses like their own.

Yvonne Roeske, the owner of a furnishings and accessories store, said that while she still purchases some basic items at Office Max, she had switched to Uline for shipping supplies because it is more convenient for her to buy in bulk.

Basia Sobus, who runs a toy store, said she used to shop at Office Max but now buys printer paper from Costco, which she found to be of higher quality, and purchases ink through eBay online because she said it saves her time.

The U.S. market for office supplies sold in stores has been in a steady decline since 2007 and totaled $11.7 billion last year, according to Euromonitor. Staples' market share fell to 38.2 percent in 2014 from 40.6 in 2013, while Office Depot dropped to 31 percent from 33 percent, the research firm says.

Staples' commercial business, which sells supplies and services to larger corporate clients, should become stronger with the addition of Office Depot, said Randy Nicolau, chief executive of Poppin, an office products firm that supplies to Staples and runs a competing website.

But Nicolau said Staples was struggling with consumers and small business owners. He sees Amazon.com as a "disruptor" in this market segment as sales of products like staples, pins and paper rapidly shifts to online retailers.

Staples has itself been investing actively in its ecommerce operations, and with more than $10 billion in sales it ranked as the third-largest online player in 2013 after Amazon and Apple, according to Internet Retailer.

While none of the business owners interviewed said they were using Amazon.com for office supplies, some said they were open to the idea and would generally shop for the best price.

"If there is another competitor with better pricing," then I would be open to that, said Mohamed Ouifak, owner of a cafe with four staff members. Ouifak said he currently shops at Office Depot because "that's where you find office supplies."

(Reporting by Nathan Layne and Nandita Bose; Editing by Alan Crosby)