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Staples (SPLS)Stock (Consumer Products Industry, Office Supplies Industry, Retail Industry, Specialty Retail Industry)
 This article should cite more sources.  While Staples is the overall leader, it has embarked on several initiatives to extend its lead. For its physical retail locations, the company has significantly remodeled older stores while introducing smaller store formats in less-populated areas. To increase its margin, Staples has increased the mix of private label offerings (i.e., Staples brand products) and emphasized the purchase of products directly from manufacturers instead of distributors. The company has also moved beyond traditional office supply products to services such as Copy Centers, which generate operating margins twice as the overall company average (about 20% versus 8%). Not only do all Staples North American retail locations include Copy & Print services but the company has opened 6 stand-alone Copy & Print shops in metropolitan areas. In addition, Staples has adopted a computer repair department called EasyTech analogous to Best Buy's Geek Squad. The three largest retailers collectively hold about 10% of the estimated $300 billion global market for office products. The remainder of this market share is generally held by supermarkets, discount stores, wholesale clubs, drugstores and other various retailers . These retailers--along with Staples' main competitors--have recently been expanding their operations to get a piece of this large opportunity. The downside of this multi-faceted expansion is a potential oversupply of products and the consequent fall in prices and lower profit margins. This is one of the major concerns for the entire industry and especially Staples. In February 2008, Staples attempted to negotiate with management at Dutch office supply retailer Corporate Express NV (CXP) to acquire the international chain; when the two parties could not come to an agreement Staples then launched a tender offer to purchase Corporate Express NV (CXP). In June 2008 Corporate Express NV (CXP) finally accepted the offer, encouraging all of its shareholders to accept Staples' offer for their shares. Assuming enough of Corporate Express's shareholders accept the offer, the acquisition will be accepted by the end of June, greatly expanding Staples' international operations. As the U.S. economy has struggled in the first half of 2008[1], Staples first two quarters of domestic performance followed. Comparable store sales in North America decreased 6% and 7%[2] during the first two quarters of FY08, respectively, while international comparable store sales increased 4%, fueled by double-digit same store sales growth in the United Kingdom. Despite these troubles, Staples continued to grow, adding 70 new stores during the first half of 2008[2].
[edit] Company OverviewStaples invented the office supply superstore category when it opened its first store in Brighton, MA in 1986 with the goal of providing both individuals and businesses of all sizes with supplies, business machines, technology and services. A slew of copycats emerged shortly thereafter, but today there are only two other major players in the office superstore business besides Staples: OfficeMax (based in Illinois) and Office Depot (based in Florida). Staples is currently the leader with sales of $19.4 billion in 2007 compared to $15.5 billion for Office Depot and $9.1 billion for OfficeMax. [edit] Operating Segments  [edit] North American RetailStaples operates 1,773 retail stores in North America as of the end of Q1 FY08. Their primary customers are small businesses, home offices, and casual consumers. A typical Staples superstore offers office supplies, office technology products, furniture, a copy and print center, a UPS ship center, and a computer technician in every store (a new initiative from 2007). In major urban centers Staples operates smaller store formats called Staples Express. N.A. Retail generated $10 billion of sales in 2007, which accounted for 52% of total company revenue in 2007. NA Retail earned a segment operating margin of 9.5% in 2007.
[edit] North American DeliveryNorth American Delivery is Staples' business-to-business segment, through which Staples sells and ships office products and supplies to businesses, ranging from small businesses to corporations across a variety of industries. In 2007, North American Delivery's sales topped $6.6 billion, representing approximately 34% of total company revenue for the year. Approximately 75% of North American Delivery sales are e-commerce sales. Staples operates over 30 fulfillment centers for its North American Delivery business which are strategically located at optimal sharing points for different delivery centers. As a result, the delivery business operating margins benefit from a superior supply chain. NA Delivery was Staples' most profitable segment in 2007, with a segment operating margin of 10.7%. [edit] InternationalStaples' International Division operates retail stores, catalog, and Internet businesses under various names in 22 different countries in Europe, South America, and Asia. In 2007, the International segment generated $2.7 billion in sales, up 16% from 2006. However, the segment operating margin for International operations was only 3.6%, significantly lower than the rest of Staples' operations; yet this 3.6% figure was an increase of 144 basis points from 2006, a significant improvement. Staples' International Division will become greatly augmented if Staples' tender offer of Corporate Express NV (CXP) is completed in June 2008. Corporate Express NV (CXP) is a Netherlands-based office supplier operating throughout Europe and North America that sells office supplies directly to businesses through catalog and Internet operations. [edit] Trends and Forces[edit] Corporate Express NV Acquisition AttemptIn February 2008 rumors began to circulate of a potential acquisition of Corporate Express NV, Europe's largest office supplier. Staples attempted to open discussions with management at Corporate Express NV (CXP), but the retailer allegedly failed to work with Staples in negotiating an agreement. After this, Staples decided to appeal to the company's shareholders by launching a tender offer to purchase any and all shares of CXP at about a 90% premium to the company's share price. In May 2008 Staples' increased their offered price per share to about 9.15 euros, valuing the company at about $2.7 billion. Under the terms of the deal, which was approved by the Netherlands Authority for the Financial Markets (CXP is headquartered in the Netherlands), Staples must acquire at least 51% of the ordinary share capital (which includes preferred shares and convertible bonds) of CXP for the deal to be accepted. In June 2008, Corporate Express NV (CXP) basically accepted Staples' offer by publicly supporting the tender offer and encouraging its shareholders to sell their shares to Staples. The acquisition of Corporate Express will not only give Staples a firm standing in Europe, Australia and Canada but enhance the company's position to launch into the Pacific region. Staples has until the end of June to acquire the necessary number of shares in order to officially acquire the Dutch company. [edit] Supply ChainStaples' standard superstore is significantly smaller than those of Office Depot or OfficeMax and houses much less of its inventory on-site. Instead, Staples operates 4 distribution centers across the United States to supply its retail stores on a timely basis and keep a stock of backup inventory. Part of Staples' efficiency comes from this distribution network operating in conjunction with Staples' small store format. Hence, Staples saves significantly on leasing costs, and has greater leeway to place stores in the most effective locations near their target customers. The comparatively larger size of distribution centers allows Staples to make larger purchases with volume discounts, and their close relationships with vendors allows the time of delivery to match closer with demands so goods don't take up floorspace in distribution centers. This centralized handling and receiving system leads to significant savings on administrative and labor costs, and allows store associates to concentrate on store presentation and customer service. [edit] New Market OpportunitiesWith a significant presence in the Northeast, Staples has expanded to key areas in recent years, including Chicago in 2005, Florida in 2006, and Denver in 2007. They also opened new delivery fulfillment centers in Denver and Nova Scotia. There are also plans in the works to enter 10 additional major North American cities where Staples currently has no market presence, primarily in the Western and Southern regions of the US. [edit] New International MarketsEntering new foreign markets (especially those in countries like India, China, and South America) present opportunities as well as risks, such as unforeseen political turmoil, cultural retail differences, and lower per capita spending habits leading to less efficient sales. However, Staples has consistently ventured into new international markets, including China where sales have doubled since 2006 to over $200 million in sales from 32 stores in 2007. [edit] Direct Sourcing and Own Brand ProductsStaples offers a bevy of private label products and has begun directly sourcing many products (i.e. purchasing directly from manufacturers instead of through distributors). Private label products are usually priced lower for consumers than comparable national brands, yet offer higher profit margins to the retailer than brand name items. Staples is aiming to increase its private label offerings, which in 2007 comprised 22% of sales, up from 20% in 2006. Staples has also recently entered into deals with 2,400 supermarkets to offer "Staples-branded" aisles in their stores. The company may generate a dual benefit of increasing brand awareness as well as garner additional sales. It is estimated that every 1% increase in private label sales will add 0.05% to the company's overall operating margins. About 5% of the company's product mix is directly sourced. Direct sourcing has greater margin leverage than private label as every 1% increase is estimated to add 0.1% to the company's overall margins. Staples' long-term goals are for the product mix to be 30% private label and 10% directly-sourced. [edit] Copy CentersCopy Centers have been a crucial initiative to drive profitability in recent years because they generate operating margins near 20%, more than twice the overall company average. Staples' in-store copy centers accounted for 5.1% of North American Retail Revenue in 2006. The attractiveness of this opportunity has attracted the attention of other office supply superstores, Staples is also currently testing standalone copy and print centers to compete directly with market leader FedEx Kinko's, which currently holds about 10% of an estimated $20 billion market. FedEx has lately been having operational issues, potentially allowing Staples' to scoop market share. [edit] Rewards Strategy for Customers and EmployeesAlong with the previously mentioned superior supply chain management, Staples' management utilizes a bonus system that rewards store employees for reaching certain store-level targets and is reputed to have very high quality customer service. These advantages help Staples run most efficiently among contenders in the office supply business. Staples has also been quite successful partly due to their focus on small business/home office customers, who spend over $500 per year on office supplies. Through programs such as Staples rewards and rebates, as well as multi-unit packaging, Staples makes itself more attractive to small business and home office customers--the most profitable segment of customers. This strategy appears to be working, because the Business Delivery division, for which small business/home office is their primary market, is the fastest growing in terms of sales. [edit] General Economic ForcesDomestically, the demand for office products is correlated with many different measures--white collar employment, small business spending, and national GDP--which are all indicators of the overall health of the macro-economy. As long as the macro-economy continues to grow, there likely be more demand for office products. On the flipside, if the economy slows down significantly, the demand for office products could drop. All else being equal, Staples could be a participant in price war or lose share to competitors who market more aggressively. One hedge against a dependence on the domestic economy is growth in their international business, especially in developing countries where economies are growing and no established office supply retailer dominates. [edit] CompetitionStaples Inc. (NASDAQ:SPLS) is the world's largest office products company, generating $19.4 billion in sales in 2007. The company is ahead of its closest competitors in terms of revenue: Office Depot (ODP) comes in second at $15.5 billion and Officemax (OMX) third with $9.1 billion. 
 Staples2004 Data 2005 Data 2006 Data 2007 Data 2008 Data Most Recent Data Available [edit] Overall Operating Margins
Both Office Depot and OfficeMax hired new CEOs in 2005 in order to chip away at Staples' operating advantages. Both competitors have since shut down unprofitable stores, tactically opened new stores, and implemented other changes in an effort to improve operating margins. Staples is still by far the best operator, but increased head-to-head competition could lead to market over-saturation (i.e., through overly aggressive new store growth) and subsequent price wars. [edit] International Operating Margins
Staples has become significantly more profitable in its international operations in the past few years. Staples international operating margin has grown to 3.6% in 2007 from 0.6%, as a result of improved efficiencies in product mix and expansion throughout various countries, such as China. Note: OfficeMax does not have any international operations to speak of, which is why they do not appear on this graph. [edit] Same Store Sales Growth
[edit] Other CompetitorsIn a world market for office products estimated around $300 billion, Staples, Office Depot, and OfficeMax collectively hold $30 Billion (or 10%) of that opportunity. Most of this market is generally held by non-specialty retailers including wholesale clubs such as Costco Wholesale (COST), discount retailers such as Wal-Mart Stores (WMT), drug stores, supermarkets, copy centers, computer/electronics retailers, and smaller office supply chains, etc. These other companies have recently been allocating more floor space for office products during peak selling seasons, which could pose greater than expected competition. [edit] References
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