Staples and Office Depot: Is Two Becoming a Crowd in Retail Sectors?

Staples and Office Depot: Is Two Becoming a Crowd in Retail Sectors?

The blockbuster news of Staples acquiring Office Depot might be the ultimate consolidation move in an industry that has gone through a whirlwind of mergers that could lead to just one chain standing. This deal follows on the heels of the Office Depot and Office Max merger of 2013, which took us down to two key competitors in the office supplies sector.

For those of us who have been around the industry long enough, the headline “Staples to Purchase Office Depot” must conjure up some memories. There was, in fact, a proposed merger between these two companies that was cancelled in 1997. At that point, the FTC stepped in to block the deal. What a difference 17 years (might) make!

Around that time, we wrote what seemed like a groundbreaking white paper called “3’s a Crowd.” The premise was that there was no longer room for three or more competitors in a particular retail category. What followed over the next decade or so was significant consolidation in just about every category—the home improvement sector now has two national chains (Home Depot and Lowe’s), the sporting goods sector has Dick’ Sporting Goods and Sports Authority, the pet food and accessories sector has PetsMart and Petco, and so on.

Now, we may be entering an era where “two might be a crowd…” In consumer electronics, the liquidation of Circuit City left us with Best Buy and RadioShack. In a matter of days, RadioShack might become another casualty—and there would be one sector specialist left. The same could happen with the approval of a Staples-Office Depot merger. In all likelihood, there would be one brand standing in the end.

Of course, the FTC could step in again, with the concern that a single chain would lead to higher prices for consumers. As in 1997, much depends on the definition of a sector. Office supplies are sold through a variety of channels, from clubs to discount stores to supercenters, along with a host of other outlets, from supermarkets to drug stores to dollar stores. The big difference between 1997 and today? E-commerce. The power of e-commerce and the emergence of pure play retailers like Amazon has exponentially expanded choices for the consumer and will keep prices in check. When Circuit City went out of business, Best Buy did not necessarily benefit and prices for the consumer did not go up as demand was quickly absorbed by other channels.

If the Staples-Office Depot deal goes through, we would expect to see a massive rationalization of the real estate portfolio, which has already been started with the merger of Office Depot and Office Max. Staples is in the process of shedding underperforming stores as well. Combined, Staples and Office Depot would be valued at nearly $29 billion, representing considerable power in physical store presence and online.

The merger might also continue to set the trend of “two’s a crowd” and rampant speculation on what could happen next.

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