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The Great Office Supplies Caper

Where's the Soft Underbelly in the Office Products & Equipment Industry?

by Ian M. Elliott | 9/11/17 7:58 AM

In our previous article, while exploring the weak points of the office products and equipment industry, we focused on the independent resellers and the competitive forces currently squeezing the life out of them. We introduced the concept of the stronger Office Equipment (OE) resellers acquiring resellers in the Office Product (OP) channels and making this a key component of their survival strategy.

But, we also pointed out that OE resellers buying into the OP channel would, ultimately, still fail to secure their futures unless they implemented strategies to increase market share. Two declining businesses will never automatically equal one successful business - it will do no more than provide temporary relief on the top line!

What sector of the competition will independent resellers have to look to take market share and what capabilities will be necessary for them to maximize their chances of success?

The Market Sectors:

    • The OEMs
    • The Big-Box Resellers
    • The Internet Retailers

We took a look at the financial strength of Staples and Office Depot from a balance sheet perspective in our recent article "Amazon & Office Products - Who's Equipped to Fight Back" and noted that, once the privatization of Staples is completed by Sycamore Partners, then it's likely that Office Depot will have the stronger of the two balance sheets.

We know Amazon is already having a significant impact on the performance of both these companies, and we know this competitive pressure is not likely to let up.

As EBITDA shrinks then borrowing capacity is reduced, limiting options to invest in business development strategies.

In this article, we're taking a look at the income statement and the combined impact of loss of market share, price compression, and market shrink on Staples, Office Depot, and Hewlett Packard.

Based on overall market shares, we believe around 80% of Staples and Depot's ink and toner sales are OEM brand cartridges and estimate their combined sales of OEM cartridges to be $7.3 billion.

A concerted effort by a group of office equipment and products resellers to convert a portion of this $7.3 billion to aftermarket alternatives would have a big impact, not just on the financial performance of Staples and Depot, but also on their [Staples and Depot's] OEM suppliers of ink and toner cartridges.

With this scenario in mind, we built a financial model to measure the impact of independent reseller channel consolidation when combined with sales and marketing efforts targeted at the Staples and Depot customer base and designed to help the independent resellers win market share.

Model Assumptions:

  • Staples sales of OEM ink and toner - $4.5 billion (of which 50% is HP brand)
  • Depot sales of OEM ink and toner - $2.75 billion (of which 50% is HP brand)
  • Hewlett Packard total sales ink and toner - $10 billion

Download assumptions underlying the model here.


 Staples Logo.png

Staples Conclusions:

5% market shrink, 10% customer churn, and 10% price compression (passed through from OEMs attempting to defend market share) eliminates almost 75% of EBIT in a $700M swing!


 DepotMax Logo.png

 

Office Depot Conclusions:

5% market shrink, 10% customer churn, and 10% price compression (passed through from OEMs attempting to defend market share) turns a profitable business unprofitable in a $530M EBIT swing!


HP Logo.png

Hewlett Packard Conclusions:

5% market shrink, 10% customer churn, and 10% price reduction passed through to resellers in an attempt to defend market share, eliminates almost 70% of EBIT in a $2.5B swing!


SUMMARY

 

What does this model tell us?

First, we already know market shrink is taking place. We all intuitively know we print less and, to back up what we intuitively know, we only have to look at the recent financial performance of Staples, Depot, and even Hewlett Packard and other OEMs to confirm the market is getting smaller.

Second, we know churn is taking place. Staples and Depot are losing business to Amazon as their retail sales crash and even their B2B comes under attack. Perhaps not 10% churn yet but probably 5% and climbing!

Third, while we've modeled 10% price compression on OEM cartridges, this is actually the least likely of the key events to take place. It's in the model to demonstrate the OEM's cannot reduce prices on their cartridges because of its devastating impact on their profitability!

Because of the profound negative implications, OEM cartridge price reductions will only ever be a last resort action to defend market share.

EXPERIMENT WITH THE CALCULATORS TO SEE THE IMPACT ON THE P&L THAT RESULTS FROM CHANGING THE PRICE COMPRESSION ASSUMPTIONS!

However, it is this limitation for using price to defend market share that translates to create great opportunity for resellers who perfect conversion selling [OEM to aftermarket] in new business situations, as well as selectively within their existing customer base to reduce churn (customer loss) and improve profitability.

Fourth, a massive consolidation of the independent reseller base is going to continue to take place. However;

  • There is no guarantee a group of "super-elite" Office Equipment resellers will emerge to sweep up struggling Office Products resellers, and then subsequently, up their ante to win business away from the big-box resellers.
  • There's also no guarantee a large group of the stronger OP resellers, (not yet ready to sell-up) will successfully acquire the best of their struggling OP competitors before they go out of business.
Regardless, it's not difficult to foresee an overall reduction of 65% or more in the number of independent office products & equipment resellers, with a best case outcome resulting in a 7% reduction in retail dollars sold through the channel!

The impact of the shrink, churn, and price compression issues faced by Staples and Depot are flowing upstream and have the potential to become major issues for the OEMs and their profitability. In light of this, it shouldn't be surprising that they [the OEMs] are likely to accelerate their direct selling strategies to mitigate potential loss of market share incurred by their big box resellers.

How can the independent resellers exploit the opportunity?

What's it going to take for the independents to take $1.7B in sales away from Depot and Staples, and to convert that into $850M in new sales for their businesses?

Staples and Depot may represent the soft underbelly of the Office Products Industry - two giant big-box resellers facing limited options!

In short, it's going to take a significant upgrade in capabilities, in fact it's going to take a whole series of digital business transformations. Every service that Staples and Depot routinely provide to their business customers, and more, will be necessary before there's a realistic chance of a widescale shift in market shares.

These include:

The business opportunity we've described is a big prize but, even with significant upgrades to their business approach, it's not going to be an easy prize for the independents to win. This is so despite;

  1. There being limited options for Staples and Depot to defend their business.
  2. Their limitations being a significant and exploitable opportunity.
  3. Amazon simultaneously attacking and weakening both Staples and Depot.

Amazon, in weakening Staples and Depot can, in fact, indirectly help the independent resellers achieve their objectives!

Just like we've previously explained how the independent resellers are being squeezed from all directions, now's the time to fight back, turn the tables, and put pressure on the increasingly soft underbelly that Staples and Depot have developed!

As an office products reseller, are you still operating in the analog world or are you transitioning to digital with the use of sophisticated digital marketing tactics? You can't survive unless you do, so please check out our SlideShare "executive" summary to help you determine where you are in the process!
 
Analog Vs. Digital SlideShare Click Here for Access
 

To improve the future for office supplies dealerships, their websites must become the foundation for digital transformation. Why not check out our free, no obligation, offer for a comprehensive evaluation of your site? Just click the button below.

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