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Strike Two For Staples And Office Depot

Let me get this straight: It was OK for Office Depot and Office Max to merge, but Staples couldn’t join the party. Hmmmm.

What I find so perplexing about this recent decision by the FTC is that anyone could believe this merger would have had a negative impact on consumers. And this is not the first time this marriage has been contested. The first attempt was blocked in 1997.

From what I’ve read, the primary concern was the business customer, who buys through the delivery channel from these office-supply merchants. However, all one needs to do is take a step back and look at the bigger picture to see what the future will hold.  

Office Depot and Staples are two chains struggling to find their way in a market that has seen dramatic changes in the past ten years. The relentless attack by Amazon (and Amazon for Business) online, warehouse clubs like Costco, big-box retailers Walmart and Target, and a whole host of non pure-play competitors have all but necessitated that this merger should happen. This wasn’t an offensive action; it was a defensive action. Sales volume at these two chains has slipped for four years; more so for Office Depot when you exclude the positive impact to OD’s sales by the Max merger in 2013.

The simple truth is that there really are no barriers to entry into these businesses. Office supplies, while a core business for these two retailers, is part of a much broader portfolio of products at stores like Target or Walmart, which is why consumers who need to purchase school supplies for K-12 gravitate to a discount department store, where they can buy crayons and paper as well as a new pair of shoes.  

Having served as technology merchandising VP for Office Depot from 2003-2010, I experienced first-hand the challenges facing the office supply retailers.  What I found most interesting during my tenure was that all three shared many of the same beliefs and more importantly, behaviors; largely doing what they’ve always done with little regard to the changes in the competitive landscape or consumer behavior.  By the way, this is something that’s all too common among many retailers in many industries.

A prime example of this is the continued promotions on K-12 school supplies, like crayons, pencils and paper. The debate raged on whether to promote these items for 1 cent, 5 cents or a quarter. I remember adding up all of the basic core supplies a customer would likely purchase, and the whole basket came to less than a dollar!

No way to run a business?

On the surface, this kind of promotion sounds like a killer offer, one that consumers would knock down the doors to get. Of course, the discount department stores can, and do, run similar offers, as well as promote clothing and whatever else little Johnny or Mary need for the new school year, making them a logical choice for a busy parent. And, by the way, Target and Walmart really own this customer throughout the year, not just in August.  

I’m certain that if anyone from these chains read this, they will absolutely attempt to defend their actions, and they may even produce all sorts of statistics to support them. Of course, Depot and Max have merged and Staples wanted to join the party, so I submit that maybe, just maybe, there’s a little merit to my words.

I don’t claim to have all of the answers, but I do have a few questions. For example, why not abandon K-12 and go after higher-education students during back to school? The products they would likely purchase include more expensive technology and furniture for their dorms. And these students are only a year or so away from graduating; likely to begin a career in some company; or maybe start their own small business — all the more reason to gain their loyalty.

Of course, it’s not just about products and price. It’s about a relationship. I’d focus on developing a program that really relates to this segment of the market.

Why not continue to drive technology sales? After all, what sits on our desks? Who’s picked up a pencil to write a memo to a business colleague? Yes, it’s a tough business with slim, zero, or maybe negative margins. But the fact remains that business is driven by technology. Heck our lives are driven by technology! So I’d suggest that rather than take a defensive position in technology, someone develop an offensive position in the category that works.

When I joined Office Depot in late 2003, the primary objective was to reverse a trend of 15 consecutive quarters of negative comp sales performance. In 2004, we posted positive comp sales of 3 percent, against a minus 4 percent the previous year, or a 7 percent positive shift year over year. The technology products category increased 13 percent, following an 11 percent decline in 2003, or a 24 percent improvement year over year.  We merchandised the right brands, the right products, and offered them at competitive prices.

Now I fully recognize that the world has changed a whole bunch over the past 12 years, but the concept of what we did remains valid.  Technology sales have high average selling prices, especially compared to pencils, and can also drive new customer acquisition. They also drive a strong basket of accessories and consumables. Managing the technology category can at times be like trying to wrestle a hydra. But I still believe it’s an essential category that demands sound merchandising practices, creative strategies, and engaging vendor relations.

It’s a shame this merger was blocked. I only hope that both merchants put it behind them and focus on driving their individual businesses. As I’ve said before, sometimes the answer is a big, bold one, requiring a ton of courage. I wonder which one will show us they have what it takes to grow their business, rather than simply manage spreadsheets to show profits.

John Lostroscio is an industry veteran with more than 35 years of experience in merchandising, product management, marketing services, and sales leadership with a diverse group of retailers and manufacturers. Today he is the principal of his own consultancy, Lostroscio & None, LLC, focusing on merchandising and product solutions. He can be reached at [email protected].