Still Too Many Office Supply Players
Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Office Depot (NYSE: ODP) is buying OfficeMax (NYSE: OMX) in a billion dollar deal. As soon as the rumor leaked, their shares headed higher. Assuming the deal passes regulatory approval, not a guarantee, it may be Staples (NASDAQ: SPLS) that comes out the big winner, for now anyway.
Small and medium size businesses use the same supplies as large companies, but they don't have the same buying power. Obviously, buying a couple of boxes of pens a year isn't enough to entice large office supply distributors to get involved. As such, these businesses have to go to office supply stores to get the products they need.
This isn't a big deal, of course, it's just a fact of life. While at one point such office stores were operated by mom and pops, like so many other businesses, big box retailers came along and took over the market. These companies expanded aggressively at one point, only to find that they had over saturated the market. When Internet retailing hit its stride, the competitive pressure on these companies got even worse.
Why run out to a store if you can simply go online and click your way to a full supply closet? Moreover, Amazon.com is happy to deliver for free if you buy enough stuff. This, plus the increasing digitization of documents, forced the big box office stores to shift their offerings, increasing the number of services they provide. Only, there were already notable competitors in that space, including FedEx and UPS, which purchased Kinko's and Mail Boxes Etc., respectively. Add in the club stores, like Costco, and things look even worse.
A Weak Market
So, today, the big box office supply stores are in a bit of a bind. Although there are only three main players, the competition is far more diverse today than it was ten or twenty years ago. There are just too many options to support overlapping store bases. And since each chain is fairly large, that means none of the companies are executing all that well.
Office Depot and OfficeMax have seen particularly weak sales for awhile, which has been an obvious drag on their shares. Staples has been doing relatively well, with sales generally heading higher (2012 was a notable off year), but even this company's shares have struggled. Basically, this industry's hay days are behind it.
The news that Office Depot and OfficeMax, both notably smaller than Staples, were considering linking up sent the shares of all three big box office retailers higher. This isn't the normal chain of events.
When companies consider pairing up, the expected buyer normally sees its shares fall in value while the target normally sees an increase. While competitors' share prices often adjust, too, based on additional corporate action speculation, the move in Staples' shares was fairly large. The market, it seems, likes the idea of going from three players down to two.
When there are only two major players in a market it's said to be a duopoly. For example, there is an effective duopoly in the cell carrier space between AT&T and Verizon. That hasn't been a bad thing for the industry, as these two competitors have both aggressively worked to gain the upper hand. Right now in the office supply space, the three participants aren't doing a particularly good job of offsetting each other because OfficeMax and Office Depot are so much smaller than Staples.
Thus, Staples has notable advantages of which it is making good use. In fact, while its two main competitors are a factor, it probably faces more competition from non-traditional stores encroaching on its space. However, if OfficeMax and Office Depot do consummate their planned marriage, they would, together, be a more competitive competitive threat. Of course the government might believe that going from three players down to two is anti-competitive, which is a real risk to this deal.
The Real Winner?
With so many overlapping stores, however, OfficeMax and Office Depot will likely start closing stores in short order. This would be an important aspect of any deal, as it would produce notable cost savings and improve profitability. The process of integrating the businesses could take a couple of years because of the store closing issue.
This would be a big opening for Staples. As the stores of its main competitor closed, its own stores would then be more prominent and likely see increased sales. This is likely the reason behind the rise in Staples' shares on the OfficeMax/Office Depot merger rumor. Indeed, Staples could be the real near-term winner. Longer-term, it's harder to tell.
Too Far, Too Fast
With the run up in the share prices of all of this industry's players, investors should consider the actual change that this will have on the industry's prospects. Sadly, the answer is probably not much. All of the other players aren't going to go away and are more likely to get stronger as time goes on. In the long run, investors should probably look elsewhere.
Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, Costco Wholesale, FedEx, and United Parcel Service. The Motley Fool owns shares of Amazon.com, Costco Wholesale, and Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!