Staples – The Fight for Survival
Can anything save Staples? Paper usage is shrinking, pens, highlighters and note-pads are disappearing. Does putting two dying businesses together create life?
Digital Loser: Staples (The Fight for Survival)
Business summary
Staples engages in the retail of office supplies and equipment such as printing paper, pens, highlighters, notepads, printers, copiers etc. The company operates through its network of ~1,679 stores, its online platform staples.com and through its “delivery” / contract business to business channel. The company has ~$22.5BN in sales and employs ~79K people across its operations in North America, Europe and Latin America.
Digitalization destroying the office supply and retail market
Digitalization negatively impacts Staples’s business in two ways. First, the company’s core office supply products are slowly fading away. At the heart of the decline is the continued reduction in paper usage as offices go digital. People are increasingly viewing and editing documents digitally on their i-pads and computers. Digital storage is also quickly replacing paper file cabinets. Most of communication is also now done electronically with paper letters only being used when a signature is required. As offices increasingly go paperless, sales of other products such as highlighters, pens, staplers and notepads also decline. Secondly, digitalization has also greatly increased competition with competitors such as Amazon.com able to sell more goods with less costs. The major cost for brick and mortar retailers such as Staples are people and stores and online players have less of these. This enables Amazon to sell similar goods at lower prices while making the same margin
Evidence: consistently declining numbers
Sales have declined for 9 of the last 10 quarters (from Q1 2013) on a year on year basis. EPS has declined in all of the last 10 quarters on a year on year basis
The company’s response to this threat is two pronged: 1.) Leverage its differentiated existing relationships with business customers to compete in the business to business segment. 2.) Do its best in the direct to consumer / brick and mortar retail segment where it faces significant competition with few competitive advantages
Focusing on its business to business channel: The company is expanding online experience for business customers. It refreshed staples.com, introduced ipad and i-phone apps and is developing e-commerce expertise in Seattle, San Matteo and Cambridge. The company is also making acquisitions to strengthen its capabilities in the business to business segment. It bought PNI Digital media; a software company that allows customers to print business cards, wedding invitations and premium photographs. It also bought MAKR; software that allows customers to develop their own brands
Acquiring Office Depot: The company has reached a definitive agreement to acquire Office Depot for $6.8BN. Office Depot shareholders have already approved the deal and the transaction is scheduled to close in Fiscal Year 2015 pending regulatory approval. Regulatory approval is expected as the highly competitive nature of the industry coupled with declining sales in both Staples and Office Depot, make it unlikely that the merger will create an anti-competitive situation. The merger makes a lot of sense as this is the quickest way for the businesses to cut costs significantly. The merger is expected to yield $1 BN of cost saves in 3 years. The key areas for cost cutting are: headcount and G&A expense reduction, procurement, advertising and marketing and retail network optimization
Aggressively shrinking its retail footprint: The company plans to shut down 255 stores in North America in 2014 and 2015 and to reduce its store sizes from 24,000 sqf to 12,000 sqf. Store count has already shrank from 1,917 stores in 2011 to 1,679 stores in 2014 driving the elimination of more than 5 million of square feet
Expanding retail product offering beyond office supplies: Offering breakroom products such as coffee and snacks. Launching the “Copy and Print” business to offer publishing and design services to customers. Partnering with the US Postal Service (USPS) to offer shipping services through its retail outlets; 500 stores already provide USPS shipping
Promoting “Omni Channels” to gain a “digital advantage” through its store footprint: Omni channels include “Buy-Online, Pick-up in store” and “Ship to Store”
Great summary – I think you captured the key challenges well.
The MAKR acquisition you mentioned is a very solid addition in my opinion – with it you can customize your own products (e.g. business cards / posters)…and it fits into Staples’ overall mobile rewards platform by letting customers scroll through and edit items on their smartphones / tablets remotely. I think those features are potentially very appealing to small businesses who might desire some additional design capabilities (e.g. for marketing purposes)…these customization capabilities may help orient Staples’ value prop from being more of a commodity seller to a bit more of value-add seller with B2B capabilities as you alluded to, though I’m not sure if they can move fast enough to address their same store sales declines.
I’ve used the in-store pickup feature at Staples (the “Omni Channel” approach you mention), and it certainly is an added convenience factor…my guess is they can continue to rationalize their square footage / staffing if they get sufficient adoption of digital ordering. Surely only time will tell if they can survive…but if Staples does it will likely be as the only remaining office retailer, serving the customers who do value some sort of in-store / “consultative-like” experience.
Savage,
I think you’re right… Office supply stores are going the way of the dodo. We see it with Office Depot purchasing Office Max and Staples purchasing Office Depot. Consolidation usually marks the storm after the calm, but before the devastation. You laid out 4 possible solutions to the Staples problem. The idea that has a chance of winning is the “aggressively shrink footprint” one. Even that alone, despite cutting costs in the near term, will do little to stave off extinction. That strategy must be coupled with an increased focus on digital logistics and branding. I’d offer one additional suggestion as an add-on:
To be successful, Staples must now be known as Staples.com. It must be a web/app-first model that offers the immediacy and cost savings of Amazon. Actually, it should invest in the logistical know-how to be able to make same day shipping the norm. Imagine… no more rushing to Staples for poster board or Post-It notes. Office Depot’s Viking brand already does it in most W. European countries so it is not unheard of. When that day comes, Staples can aggressively shrink its footprint and lower overhead costs.
Great post! Unfortunately I don’t think anything can save Staples – especially with the advent of spend management services like Coupa (http://www.coupa.com/). Instead of just providing office supplies (and moderate services) to businesses and consumers (like Staples currently does), Coupa goes further and helps its customers think through inventory management and procurement in the context of the company’s larger cost structure -translating to both supplies and savings. I doubt Staples will have the ability to compete directly with these more advanced, cost-saving services. I’m also skeptical of the potential customization strategy, especially since at-home printers and personal design tools become more advanced, making it more likely that small businesses will soon be able to design and print their own stationary and supplies instead of going through Staples. I see only grey(er) skies ahead…