COVID-19’s Impact on the Office Supply Market
The world of work is different right now. With so many offices closed and teams working from home, traditional demand for office supplies has taken a sharp dive. The office supply industry is already in seeming decline, and COVID-19 has accentuated this. With uncertainty in the air, the question is how permanent these changes might be. To learn more, GLG talked to Steve Schmidt, former President of Office Depot International and Office Depot North American Business Solutions Division. This interview has been edited and condensed.
To start, could you give us a brief overview of the office supply business?
The office products industry has been in a steady decline for the past 10-12 years. There are basically no proprietary technologies or software and no barriers to entry.
When you’re in a commodity-type business, price is the driver. Retail has been in steady decline for the past 12-13 years as retail relevance continues to decline with changing demographic trends. Those trends are going to continue. There’s been a major shift in product mix. When you think about going back 10 years or so, paper, ink, and toner represented 40% of the total business.
Now, all those categories are declining between 3% and 5% each year. As a result, we’ve seen a shift in the industry toward services because they provide you with some point of differentiation and higher margins, assuming you can gain a significant stronghold in the business.
It was surprising when Sycamore acquired Staples. This is a very difficult industry that’s trying to go through transformational change. There’s not a tremendous amount of optimism relative to the future. There is enormous growth of online competition and other challenges that will continue to exist.
How is COVID-19 and the lack of in-office presence impacting demand for office products?
COVID-19 is having a huge impact on the entire office products industry. When you look at the revenue base of Staples’ B2B business, 20% of its clients constitute 80% of its business. For the most part, these companies are those with staff who are working from home, reducing the need for office products. This will have a significant impact. If there’s an upside, it’s the dot com business. It’ll probably grow because employees working from home will likely drive some consumption. We’ll potentially see growth relative to e-commerce.
For Staples, a main concern – essentially everyone’s concern right now – is managing all its suppliers. How do they manage inventory? How do they manage sourcing from China? How do they work with the Essendants and SP Richards as wholesalers to manage that working capital down as much as possible?
Staples is also dealing with massive unemployment and some fairly large fixed costs. It’ll be interesting to see how it talks about its business. Being private, Staples won’t be as forthcoming as Office Depot, but this has a huge impact.
In a normal environment, how much visibility does a company like Staples or Office Depot have into its ability to move inventory? Do customers typically order as needed, or do they have recurring monthly orders?
Companies with more than 250 employees typically have three- to five-year contracts with Staples or Office Depot. A company’s experience with a client provides pretty good knowledge in terms of their usage by category. But these are not exclusive contracts and don’t prevent any client from buying any category from someone else. They do, however, create stickiness, and most clients order most of their products from Staples or Depot when they have that contract. With established contracts, you can manage your expectations about inventory and order consistency.
Smaller clients are more difficult to anticipate, with much more deviation because you’re dealing with millions of small clients who place small orders. There’s a lot less stickiness with your smaller clients, whose primary concern is price.
In 2008 and 2009, we saw 20% to 25% drops, but that was short term as we worked through the financial crisis. Our current crisis is very different. Businesses are shut down worldwide. This is a massive decline in business. There might be 50%, 60%, 70% drops in revenue over this period.
Changing demographics have accelerated the decline in office products. Today, there are more than 15,000 competitors online, and that’s accelerating. Changes stemmed from e-commerce and demographics, and even in how office products were being used. Companies like DocuSign basically tried to eliminate paper globally.
Both then and now, office suppliers like Staples face the real challenge of shifting to more services. They’re trying to become less product driven and more service driven. Staples is being very aggressive at this as it shifts business away from paper, ink, toner, pencils, pens, paper – everything that’s trending in a negative direction.
Can you compare e-commerce penetration for Staples versus Office Depot? Do you see the current situation pushing further e-commerce penetration for either?
I honestly don’t see much difference between Staples and Office Depot when it comes to e-commerce. Both have invested heavily in e-commerce. Both are doing the same thing as they try to grow the business.
But both are faced with Amazon’s utter sophistication. Amazon has the world’s finest supply chain, the world’s finest IT system, the world’s finest pricing dynamic system. When it comes to shopping and buying online, they just do it better than anyone else. What’s more, it has the stickiness of the brand itself and Amazon Prime.
They also face more than 15,000 competitors online. Essentially every category is online. There’s no cost to get into the business in the office products industry. Such competitors can be leaner and therefore cheaper. Staples and Depot have large infrastructure and overhead costs that these online competitors don’t, which will continue to be major challenges for them. This is one reason, I believe, that Sycamore broke these businesses into separate units. If you can run an e-commerce business without corporate overhead costs, it gives you a competitive edge.
About Steve Schmidt
Steve Schmidt served as President of Office Depot International with complete P&L and business responsibility for 68 countries outside the U.S. He joined Office Depot in August 2007 as President of the North American Business Solutions Division. Prior to Office Depot, Steve was President and CEO of ACNielsen. He also spent 18 years in the consumer packaged goods industry with Procter & Gamble, PepsiCo, and Pillsbury Food.
This article is adapted from the April 27, 2020, GLG teleconference “Staples: COVID-19 Impact on Office Supply Market.” If you would like access to this teleconference or would like to speak with Steve Schmidt or any of our more than 700,000 experts, contact us.
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