Office Depot has had declining sales for 13 consecutive quarters and rival Office Max has fared little better with sales declines for 13 out of the last 14 quarters. A merge between the two would be the joining together of two companies that have collectively failed over the last three years, while industry behemoth Staples has not only survived but thrived.

Office Depot, the second-largest U.S. office-supply chain, has plunged 90 percent to $1.16 billion in the last five years, more than any American retailer that still has a market value greater than $500 million, according to data compiled by Bloomberg. OfficeMax is now valued at $664 million after plummeting 78 percent, the third-steepest drop. Both trade at 10 cents or less per dollar of sales -- one-tenth of the industry average and ranking in the bottom five of 126 retailers.
 
The case for a merger as a salvation for Office Depot and Office Max is based on the premise that the office supply super store is still relevant. In fact the changing market environment says something quite different. First Office Depot and Office Max face competition not only from industry leader Staples, but from Wal-Mart, Costco, Sam’s Club, Best Buy, Freys, Amazon.com, not to mention Walgreens, CVS and a host of others adding office supplies to their market basket of products.
 
Office Depot and Office Max have increased their store product selection heavily towards consumer electronics such as printers, computers, phones, camera, flat screen TVs and other such low margin but high dollar products. The problem is the office supply super stores’ selection is smaller than Best Buy, HHGregg and Frey’s and higher priced than Wal-Mart, Costco and Sam’s. On-line options such as Amazon.com and Ebay offer greater selection and lower price than the office supply super store in consumer electronics.
 
Pens, paper and school supplies can now be found at your local grocery store, drug store, Wal-Mart, Costco, Sam’s Club and almost anywhere online. In fact Wal-Mart has been aggressively attacking the office supply superstores during back to school season, with full page adds detailing Wal-Mart savings directly against Office Depot and to a lesser extent Staples and Office Max.
 
Market and product fractionalization and fragmentation works against the bricks and mortar concept that Office Depot and Office Max have clung to with a death like grip. It may be that the market has only room for one major retail office supply company, not three and not two but just one. Merging Office Depot and Office Max may just be delaying the inevitable by reducing the sector to two, but it will not be a panacea that will save the two combined companies.
 
Office Depot and Office Max also have a contract sales divisions that are losing market share to a resurgent independent dealer community with new buying power that allows them to compete on a level playing field, as well as Staples which has contract sales gains yearly at the expense of the withering on the vine contract sales of Office Depot and Office Max.
 
Office Depot is a company beset by legal issues on multiple fronts, and these alone would give Office Max pause, even in a perfect world. Office Depot has made major settlements into overcharging allegations since 2010 with the District Attorney of San Francisco, and the Attorney Generals of Florida, Missouri and Colorado. The problem with Office Depot is just as they settle some investigations like the heads of the mythical Hydra new investigations takes their place.

As a case in point, in 2011 Office Depot settled with the District Attorney of San Francisco and the Attorney General of Colorado, only to have the Department of Justice (DOJ) and the New York Attorney General open new investigations of the beleaguered company. Office Depot has already disclosed that they are being investigated by two separate DOJ investigations; investigations by the Departments of Defence, Education and the General Services Administration; and by the Attorney Generals of New York, California, Ohio and Texas. Then there is the shareholders class action lawsuit alleging securities fraud by the CEO and CFO over the misstatement of the company’s 2010 financial statements, and a known complaint filed with the Securities and Exchange Commission (SEC) over such.
 
Finally, there is no assurance that the FTC would allow the merger. Just as the Staples merger (take over) with Office Depot was blocked so could any merger between Office Depot and Office Max be blocked. The competitive landscape is much different meaning the FTC could see it as a chance for a combined Office Depot and Office Max to act as a balance to the market domination of Staples. But that just brings us back to the fact that there really is only a place for one office supply retail chain, and Staples seems by all accounts to be the one that natural selection will choose to survive.

 

Source: Report by David Sherwin
Reference: http://www.bloomberg.com/news/2011-06-22/office-depot-officemax-deal-eyed-as-13-billion-lost-real-m-a.html?cmpid=yhoo