OfficeMax and Office Depot Merger

The Wall Street Journal reports that OfficeMax and Office Depot are in advanced discussions regarding a potential merger.   The article, by Anupreeta Das, Ryan Dezember, and Ann Zimmerman cites many of the benefits of the deal.  For instance, the authors note that experts estimate roughly $500 million in synergies may emerge from the deal.  The article also cites Staples founder Tom Stemberg, who says, ""This should have happened a long time ago.  It's healthy for the industry. It takes out excess capacity.''  (note: I worked at Staples in the mid-1990s, when Stemberg served as CEO). 

I would agree that the merger will yield some significant cost synergies, provided merger integration is  managed well (a major caveat).  Moreover, the industry does have excess brick-and-mortar capacity.   Online players such as Amazon have taken a significant bite out of the traditional office supply industry in recent years.  The companies have closed some stores in response to the shift toward e-commerce, but more rationalization of the store base needs to occur.   The article points out that many experts think the three major office supply retailers have not downsized their brick-and-mortar footprints fast enough. 

I do have some concerns though.   I would ask the following question: Why will a merger drive out more excess store capacity than otherwise should have been eliminated by the companies individually?   The answer: Perhaps the merger's promises of cost synergies will create the public accountability that will drive necessary rationalization.   In other words, maybe you need the merger to push management to do what they otherwise have been slow to do. 

I also have a second question to pose:  How about the issue of taking on the e-commerce challengers?  Does the merger make these companies more formidable competitors relative to the Amazons of the world?  Perhaps, but I'm not so sure.  Again, the question for management is clear:  Why will a merged entity do the things to be successful against online competitors that the two firms have not otherwise been able to do to this point?  

Finally, I would offer one other concern.   In many industries, mergers that drive out excess capacity can help prop up prices.  When excess capacity exists, price wars often occur as firms try to fill that capacity and cover fixed costs.  However, in this industry, removing excess capacity may not yield major price gains.  Why?  The competitors setting the price level are not the brick-and-mortar players;  Amazon and other e-commerce players are pushing down prices.  That pressure won't change due to this merger.

Leo Kahn, Tom Stemberg, and Staples

Leo Kahn, a co-founder and former Chairman of Staples, died this week.  I worked at the firm back in the mid-1990s.  Tom Stemberg transformed the office supply industry with Kahn's help and guidance.  Before Staples, the industry was highly fragmented.  Stemberg brought the big-box concept to the industry, and in the process, created a much more efficient value chain which enabled customers to have a broad offering at low prices.

Kahn's death reminds me of some key lessons I learned about how Staples developed its business.  For starters, when Stemberg and Kahn began the firm, each new employee, regardless of their position in the organizational hierarchy, spent their first week at the company working in a retail store.  They would stock shelves, operate a cash register, unload incoming shipments, and assist shoppers.    Even the most senior hires took part in these activities in their first few weeks at the company.   Stemberg too spent a great deal of time in the chain’s stores, and he perused his competitors’ locations on a regular basis.    I love the idea of how Stemberg and Kahn wanted every manager and executive to understand the work going on at the store level.

In addition, Stemberg spent a great deal of time observing retailers, such as Costco, that did not compete directly with Staples.    He spent time visiting firms in other industries too.  For instance, he once set out to learn about customer service at Mobil, focusing on their Speed Pass Program, which was relatively new at the time.  He sought to make Staples as successful as possible by opening up to the possibility of learning from as many sources as possible.   

All leaders should try to learn from companies beyond their industry boundaries.  If you simply stay within your industry when benchmarking, it's likely you will end up engaging in me-too strategies, rather than truly innovating and differentiating.  Going outside your industry for ideas can help firms truly be distinctive.