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A big merger unites office supplies chains that have fallen behind in online sales.
OfficeMax Inc. and Office Depot Inc. in late February announced plans to merge, uniting two office supplies retailers that have fallen far behind rival Staples Inc. in e-commerce as well as total sales. The deal is expected to close by the end of 2013.
The merger makes the new entity an $18 billion company, based on projected 2012 sales, the companies said in a joint statement. However, even combined, the new entity still trails significantly behind office supply retailer Staples Inc., which reported $25.02 billion in total sales for 2011, up nearly 2% from $24.54 billion in 2010.
Staples has built its lead in part on its much greater success online. 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 Internet Retailer Top 500 Guide. In the same period Office Depot's online sales have fallen by more than 40%, from $4.90 billion in 2007 to $2.90 billion in 2011, according to Top 500 Guide 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.
That slow online growth is especially damaging in office supplies, the product category that has moved the fastest to the web among the 15 major merchandise categories tracked by the Top 500 Guide. Office supplies retailers in the Top 500 Guide accounted for 45.18% of all office supplies sales in 2011, the highest percentage of any category.
Because office supplies are so often purchased online, the combined company—its new name was not immediately disclosed—is likely to displace Apple Inc. as No. 3 in the Top 500 Guide. Staples is No. 2 in the Top 500 Guide, behind leading e-retailer Amazon.com Inc.
Office Depot, No. 6 in the 2012 Internet Retailer Top 500 Guide, reported 2011 online sales of $4.10 billion, flat compared with 2010 web sales. OfficeMax, No. 12, had Internet Retailer-estimated web sales of $2.90 billion in 2011, a 1.4% increase from $2.86 billion in 2010. Combined, they represent $7.02 billion in 2011 web sales, compared to $10.6 billion in 2011 web sales for Staples.
Executives of the merging companies say they understand that they have to be strong competitors online. "In the past decade, with the growth of the Internet, our industry has changed dramatically," Neil Austrian, chairman and CEO of Office Depot, said at a news conference announcing the merger.
The companies can "build on our strong digital platforms and to expand our multichannel capabilities to better serve our customers and to compete more effectively," said Ravi Saligram, president and CEO of OfficeMax. Austrian and Saligram will remain in their current roles until a committee comprised of board members for the newly combined company identify a CEO.
But the new company will fall behind even further online as it waits for the deal to win regulatory approval and close, says Jim Okamura, managing partner at retail consultant Okamura Consulting. "They will likely need some major capital investment in Internet technology once the deal closes in what could take another 18 to 24 months," Okamura says. "I wouldn't expect short-term miracles because it can take multiple years to get a ship that large turned."