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Staples to Benefit From Merger of Rivals? What Are You Smoking?

Bill Bulkeley

Office supplies retailer Staples Inc. (SPLS) is getting new attention because its two smaller rivals, Office Depot Inc. (ODP) and OfficeMax Inc. (OMX) agreed to merge in a $1 billion stock deal. They are expected to close many stores to cut costs, leaving some business for Staples, the giant of the industry.

But consolidation among big-box retail chains is seldom good news for any participants. Staples’s long-term problems are too big for a short term change in the industry to help much. Over the last three years, none of the office-supply chains’ stocks have done much for investors, as seen in a stock chart, although OfficeMax had an impressive rebound over the past 12 months.

SPLS Chart

For Staples’s fans, there’s obvious logic in thinking that a reduction in competition (even if it results in one stronger competitor) will boost sales and profits. Staples outlets should pick up business from closed rival stores.

A number of analysts said the merger and elimination of overlapping stores by the two smaller companies should be good for market leader Staples. Staples founder, Tom Stemberg told the Wall Street Journal "It's healthy for the industry. It takes out excess capacity.''

But similar logic about consolidation in the big-box electronics and book retail categories hasn’t played out. Best Buy (BBY) stock looked like a winner when archrival Circuit City announced liquidation plans Jan. 16, 2009. The stock jumped more than 50% over the next two years. But by 2011, Best Buy’s stock had started a long, slow slide, and it is currently 42% below its level when Circuit City closed, a depressing stock chart.

BBY Chart

Similarly, Barnes & Noble (BKS) looked to be in better shape after long-time rival Borders announced it would liquidate in July 2011. But today its stock is 26% below the level then, another depressing stock chart.

BKS Chart

Staples biggest problem doesn’t come from its long-time rivals. Instead, it faces the same scary problems as Best Buy and Barnes & Noble. All of them face secular declines in purchases of their core products. And all of them face off against Amazon (AMZN) and Wal-Mart Stores (WMT). For retailers, preserving margins against those two companies is a never-ending challenge.

SPLS Operating Margin TTM Chart

Staples has built a substantial online business. But Amazon is tough to beat. A price check shows that a box of 100 manila folders on recycled card stock made by Smead costs $13.88 at Amazon, compared to $15.99 at Staples.

Staples is a stronger company than either Office Depot or OfficeMax, but the office supply business is shrinking. Almost everything sold in a Staples store, from ink to filing cabinets to, yes, staples, is tied to consumption of paper.

And while the paperless office is rare, the less-paper office is ubiquitous. According to data from the American Forestry & paper Association , shipments of office papers fell 20% from 2006 to 2010, and continued falling in 2011, despite a rebound in office employment. U.S. Postal Service mail volume, dropped to 168 billion pieces in 2011 from a peak of 213 billion in 2006.

Staples may get a revenue bump if its consolidated rival closes stores as expected. But the competition from those two is the least of its long-term problems.

Bill Bulkeley, a contributing editor at YCharts, worked for the Wall Street Journal for more than 30 years, covering high tech since the birth of the PC. He also wrote about the Internet and the imaging industry. He has written for Technology Review, Knowledge@Wharton and CIO Magazine. He can be reached at editor@ycharts.com.

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