Staples CEO Sees Office Supply Consolidation To 'Two Or Less'

When I checked these numbers a few minutes ago (mid-morning, 6/3/11):

Staple’s stock is off 28.55%, year-to-date

ARC’s stock is up 14.36% year-to-date

This morning, I found an interesting article that contained comments by Staples’ CEO about possible “consolidation” in the office supply market space.

While “reprographics” and “office supplies” are very different businesses, there are certain similarities, and the businesses of both industries are certainly affected by “ups and downs” in the economy. I’m posting this article (about Staples’ CEO’s comments) because I’m planning to do a separate post, later on, about “exit strategies” for reprographers.

Here’s the article I mentioned……

Staples CEO Sees Office Supply Consolidation To 'Two Or Less'

First Published Friday, 3 June 2011 01:56 pm - © 2011 Dow Jones

By Maxwell Murphy

Of DOW JONES NEWSWIRES

NEW YORK -(Dow Jones)- The head of Staples Inc. (SPLS) said the weak office-supply sector will ultimately consolidate, as the three large chains become "two or less," and he called troubled smaller rivals Office Depot Inc. (ODP) and OfficeMax Inc. (OMX) a "natural pairing."

Ron Sargent, Staples chairman and chief executive, also lamented that its nearly 1,600 U.S. stores can't sell Apple Inc.'s (AAPL) popular products because Apple won't sell them to Staples. Apple products are sold at Staples stores in Canada and elsewhere internationally, where Apple has the need for Staples' distribution channel, and the executive expressed hope its U.S. stores would one day sell the iPad and other Apple wares.

Office Depot and OfficeMax would have an easier time securing approval for a merger from the Federal Trade Commission than would Staples if it tried to buy one of those two outfits, Sargent said Friday morning at a Sanford C. Bernstein conference. The FTC is often reticent to approve mergers that turn three rivals into two, on the grounds that consumers would be harmed, but Sargent said players like W.B. Mason, Amazon.com Inc. (AMZN) and others make the sector much more competitive than just the three chains.

Sargent acknowledged the seeming glut of office-supply stores in the U.S., but said there are still a handful of markets where Staples has no presence and wants to enter. Combined, the three chains have over 3,600 stores in the U.S.

Staples has hundreds of leases coming up for renewal in the coming years, and Sargent said it would be aggressive in either securing lower rents or moving larger stores to smaller locations, as its larger stores typically have several thousand square feet more than is optimal. As it opens stores selectively in new markets, it will also close stores in markets where it has too many.

For example, Sargent pointed to Augusta, Maine, which has two Staples, the result of a move to block the entry into the market of OfficeMax. He indicated that the two stores do more business than just one, but suggested that two is too many and one will be closed.

Office suppliers have struggled as consumers and businesses rein in spending and governments cut budgets. The already slim margins have been compressed by price cutting, a war many say can't be won by Office Depot or OfficeMax against bigger and better operator Staples.

Staples shares plunged last month, and roiled its competitors, by reporting disappointing fiscal-first-quarter result and lowering its forecast for the year. Office Depot and OfficeMax have struggled mightily, with Office Depot posting 13 consecutive quarters of year-over-year sales declines and OfficeMax reporting a similar slide in 13 of the past 14 quarters, with the one positive quarter showing only the slightest of gains.

Shares of Staples were off fractionally at $16.31, while Office Depot and OfficeMax were down 2.0% and 1.5%, respectively, in Friday morning trading. Staples is down 28.5% since the beginning of the year, while Office Depot has fallen 26.3% and OfficeMax has plunged 58.7% in that time.

-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171; maxwell.murphy@dowjones.com