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The office supplies retailers’ merger tops out in second place.
If all goes according to plan, Office Depot Inc. and OfficeMax Inc. will unite as one office supplies retailer under a new name by year’s end. But the best the companies can hope for in terms of web sales is to hold down the No. 2 slot behind Staples, the No. 1 online office supplies retailer, an analysis of Top 500 data reveals.
The merger announced yesterday between Office Depot, No. 6 in the 2012 Internet Retailer Top 500, and OfficeMax, No. 12, would yield a company with $7.0 billion in 2011 web sales, based on data in Internet Retailer’s 2012 Top 500 Guide. That total still lags behind Staples’ $10.6 billion in web sales for 2011.
While web sales for Office Depot and OfficeMax over the last few years flat-lined Staples expanded its e-commerce program globally through acquisition and investing in new initiatives such as its Center for E-Commerce Excellence near Boston.
If the new Offices Max and Depot plan to close the gap with Staples, e-commerce could be the deal-breaker. That’s because in the most recent five-year period with reported web sales, from 2007 to 2011, Staples has grown web sales by 89.3%, from $5.60 billion to $10.6 billion, according to data in the 2012 Top 500 Guide.
In that same period Office Depot’s online sales have fallen by 40.1%, from $4.90 billion in 2007 to $2.90 billion in 2011, according to Top 500 data. OfficeMax web sales are down 8.2% over that five-year span, from Internet Retailer-estimated web sales of $3.16 billion in 2007 to $2.90 billion in 2011.
Staples’ e-commerce sales represented 42.4% of total sales in 2011, while for OfficeMax that rate is 40.8% and for Office Depot it’s 35.7%, Top 500 data shows.
Office Depot and OfficeMax are second and third, respectively, in total office supplies sales behind Staples Inc. Staples, No. 2 in the Top 500, hasn’t broken out 2012 earnings yet, but reported $25.02 billion in total sales for 2011, up by about 1.95% from $24.54 billion in 2010. Office Depot’s 2012 total revenue was $10.70 billion, down by 7.0% from $11.50 billion in the prior year. OfficeMax reported total 2012 sales of $6.92 billion, a decrease of 2.8% from $7.12 billion in 2011. Neither Office Depot nor OfficeMax broke out 2012 web sales.
Merging Office Depot and OfficeMax is expected to bring economies of scale the two companies estimate to be in the $400 million to $500 million range as they consolidate stores and product manufacturers, and trim administrative overhead. Apart from touting improved multichannel options for their customers, however, the CEOs from both companies said little about how they will approach e-commerce.
“If anything e-commerce should benefit from those kinds of scale efficiencies,” says Jim Okamura, managing partner at retail consultant Okamura Consulting LLC. “But can they contend with Staples without a major online strategy? No.”
Neither Office Depot nor OfficeMax responded to a request for comment for this article.
Staples has expanded e-commerce services in recent years and in December opened its e-commerce-focused Velocity Lab in Cambridge, MA. The facility will help the office supplies chain develop e-retail and mobile commerce programs. Earlier in 2012 Staples announced a restructuring plan that included closing stores and undisclosed investment in the web.
Both Office Depot and OfficeMax also have closed stores in recent years.
While Office Depot made an effort to incorporate web and store channels with the rollout late last year of a one-hour buy online and pick up in store initiative, it was still playing catch-up. At the time Staples was offering two-hour pick up while OfficeMax promised same-day pick up provided the product was in stock a the selected store.
Office Depot also has weathered a deluge of key executive departures since mid-2011 when Monica Luechtefeld, the company’s long-time executive vice president of e-commerce and direct marketing, and the architect of the blueprint that helped make Office Depot into a multi-billion dollar online retailer, retired.
Before there can be a unified company and resulting e-commerce strategy, the proposed merger of Office Depot and OfficeMax depends on shareholder and Federal Trade Commission approval. The FTC nixed Staples’ attempt to buy Office Depot in 1997 on grounds it would be anti-competitive.
Ironically, Neil Austrian and Ravi Saligram, respective CEOs of Office Depot and OfficeMax said yesterday they expect FTC approval precisely because of the advent of the Internet, along with big-box stores like Target and Costco, which they offered as examples of a broader landscape of office supplies retailers from which consumers can choose.
Time will tell if the combined companies can dislodge Staples from the top slot. But time isn’t on their side, with estimates of closing the deal pinned to late 2013 and both companies trailing Staples in total and web sales.
“They are behind the eight ball already, waiting on the deal to close,” Okamura says. “Standing still for a year puts them so much farther behind. They will likely need some major capital investment in Internet technology once the deal closes in what could take another 18 to 24 months. I wouldn’t expect short-term miracles because it can take multiple years to get a ship that large turned.”