In late February, Office Max and Office Depot agreed to merge, pending normal government and shareholder approvals — and while this merger had been anticipated by the financial community for many years, the reasons why this took place are all too common.
The office supply world has changed dramatically over the past 16 years. In 1997, Office Depot attempted to merge with Staples, but the courts halted this due to the potential monopoly. Since then, the rise of stronger independent dealers working in the B2B marketplace, the rise of e-commerce sales (both independent dealers and others), and department stores expanding office supply goods in the B2C marketplace have forced marketplace changes.
Is this just a temporary rearrangement of the deck chairs? There are a number of reasons that make up the failure of these two companies to make it on their own. The first reason boils down to debt.
The bottom line is that these two firms combined have nearly 2,100 stores across the United States. This in itself has created massive amounts of debt — both on the balance sheet and off the sheet too. Office Max has more than $1 billion in off balance sheet debt and $1.7 billion of debt listed on the balance sheet. In addition, there has been another $2 billion in write-downs during of the past five years.
The second lesson is having a stagnant business model heavily based on brick-and-mortar stores. This new company, as yet un-named, will have 2,100 stores nationwide. Competitor Staples will have about 2,000 stores. However, all of the self-serve stores have been in a retail retraction for a few years and have been closing or reducing the size of stores in an effort to cut costs.
What you can expect to see
In order to create a healthy balance sheet, my crystal ball tells me that, due to duplication of resources, over the next few years, you can expect closures of distribution centers, a continuation of store closings, financial write-downs, layoffs and reductions in debt. Will this be enough to please shareholders? Stay tuned.
Since Depot bought Max, will Office Depot bring all of its outsourcing back from overseas or send more out? Will the handling of customer service issues improve or decline? Some clients have been told not to order on Friday, because they won’t deliver on Monday. Will they outsource all delivery personnel?
Will these changes affect their B2B clients? It is very likely — and not in a positive way.
By far, the biggest question is whether all of these changes will impact the remaining store, B2B and e-commerce sales.
What to do right now?
Businesses should control their business destiny and not wait for their dust to settle.
Look at your company’s strategic initiatives. Many common strategic initiatives include cost cutting, vendor reduction, “buy local” and sustainability.
Take this change in the marketplace as a reminder to examine this line item in the budget — even if you aren’t using Depot/Max. As we’ve seen, there isn’t a line item in a company budget that is above scrutiny.
I’ve worked with many clients nationwide and have been able to show them a double-digit price decrease compared to self-serve stores — all the while providing a higher level of service. While the pricing makes one competitive, it’s the service level that maintains loyalty.
Caution: Businesses that look strictly on price may likely be short-changing themselves by not looking at overall value. Consider working with a local partner who can make your office run smoothly. This will lower both hard and soft dollar costs while helping achieve strategic initiatives.
Independent office supply companies carry thousands of products. They have formed their own buying consortiums to lower the cost below self-serve stores and provide nationwide delivery. These include furniture, janitorial/sanitation, coffee/breakroom and computer supplies.
If you could purchase nearly everything for the office, with a reduced number of vendors and have a favorable impact to your balance sheet — wouldn’t you make a change? ●
Bill Botkin is a sales consultant for Today’s Business Products. Contact him at (800) 536-5163 or [email protected]