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Office Supplies

There is a merger/antitrust court case in progress involving Office Depot and Staples. Unsurprisingly, Amazon has been dragged into this.

Office Depot and Staples want to merge because they are suffering from the convergence of two huge trends.

(1) De-paperization of the office. I'm not gonna say "paperless" because I know you are all allergic to that term, but if you've been into one of these stores lately, you've seen how the contents of the shelves have evolved over time and you get that they aren't moving paper, or any of the stuff that involves paper (from pens to filing cabinets) the way they used to. They've become increasingly dependent on Back to School sales.

(2) The rollback of retail space in the US. Whether you get your office supplies from Amazon, or Office Depot or Staples websites, a lot of people are not going into physical stores. Both chains have been shrinking their retail footprint for a while now.

http://www.sun-sentinel.com/business/consumer/fl-office-depot-second-quarter-earnings-2015-20150804-story.html

http://www.usatoday.com/story/money/business/2014/03/06/staples-closings/6114525/

A lot of stores which have lost some chunk of their business to online shopping have expanded into other lines of business to make up the losses. And somewhat random dry goods (if you have been in an office supply store, you know what I'm talking about) have been expanded into by damn near everyone, from bookstores to gift shops to hardware stores to drug stores and groceries. If you need to buy a plastic bin, some pump hand soap, a pen, a box of crayons and a three ring binder, you have a lot of choices. While you are wherever you wound up, you can probably pick up a bottle of aspirin, some chocolate, a flat of bottled water and an umbrella, none of which you even were thinking about when you headed out on your errand.

Right now, any place that has an Office Depot has a Staples and vice versa. And a lot of those markets could probably support _one_ big box office supply store (at least for another few years), but not two. In a roughly comparable situation, Barnes & Noble and Borders reached a resolution when Borders went under, but _that_ happened during the economic meltdown so the larger economic environment now is very different.

Because both chains are national, it is not necessarily easy for the chains to recede back to a strong regional base; efforts to carve up the country ("okay, you get the South, we get the West and we split the Atlantic states as follows") would trigger a lot of antitrust attention, just as the merger has, and require the maintenance of very large supply infrastructure over a continually shrinking customer base. A merger makes a lot of economic sense. Also, regional office suppliers are more annoying for national businesses to interact with.

A while ago, the NY Post put out a couple rumors on the topic of the merger. One argued that Amazon _wanted_ the merger to happen, because it would be easier to compete against a single chain than two. The other involved Amazon perhaps making some sort of deal with one of the merger participants and/or W.B. Mason. (FWIW, W.B. Mason is _not_ on the same level as Staples or Office Depot. W.B. Mason has a few dozen locations; the two national chains have hundreds). I find it almost impossible to take either rumor seriously, or, for that matter, the NY Post seriously at all, and everyone who repeated those rumors attributed them back to the Post, so I don't think the rumors even need to be addressed. Just because someone said it on the internet doesn't mean anyone needs to respond to it.

The FTC's case against the merger is fairly simple. Pre-internet commerce, it would have been open and shut: there are two chains competing in a national office supply market and if they merge, they can raise prices. Barriers to entry would be non-trivial, the number three chain is way smaller, the resulting behemoth could almost certainly raise prices, modify agreements with captive business customers in a way that benefited the chain over the customer, etc., and leave the customers with little recourse.

But of course, the chains had no desire to merge back then.

Post-internet commerce, the argument becomes a question of What Exactly Is the Market? Who are the competitors? For example, are Office Depot and Staples competing only with other bricks-and-mortar stores? Or are they also competing with online commerce.

Staples and Office Depot are arguing that they are competing with online commerce. If they merge, there are still alternate choices -- notably Amazon Business, but also the aforementioned smaller supplier W.B. Mason and still smaller, Costco, etc. -- for customers who are dissatisfied with whatever the resulting chain (Staple Despot?) has on offer.

Staples and Office Depot have not been getting a lot of help from Amazon for their project.

http://www.wsj.com/articles/staples-office-depot-get-little-help-from-amazon-as-they-challenge-the-ftc-1458757585

But then, the FTC isn't getting a lot of help from Amazon, either. Amazon is downplaying Amazon Business (harming the chains' case for a merger) -- and asserting that FTC applied pressure to them to say things that just weren't so.

"When U.S. District Judge Emmet G. Sullivan reopened the courtroom late in the afternoon, he said Mr. Wilson had testified in the closed proceedings that the FTC, in the run-up to the case, attempted to have him sign a legal declaration that said things that Mr. Wilson didn’t believe to be true."

There are some supremely humorous quotes in the WSJ article.

"We do have fulfillment centers." "There are robots in them, yes." "there is an opportunity to serve this customer segment".

Because I'm an opinionated soul, I personally think that the office supply chains could expand their list of competitors a lot further. However, it turns out that office supply chains have something they do that CVS and the Ace Hardware store near you don't necessarily offer: a business oriented procurement system which includes regular deliveries of standing orders. That's why somebody from Mcdonald's was up on the stand testifying for a while.

If Office Depot and Staples are ultimately permitted to merge, it will be interesting to watch what happens next. It will give us some insight into whether two national chains should attempt to compete until one dies (a la Borders) or merge (as in this case), as their business is eroded by changing technology, both in terms of what they sell and how they sell it.