Office Depot – Staples deal will change big-box landscape SCT Week

And then there was one.

Pending regulatory approval, Staples is prepping to become the only office-supply retail game in town after announcing its intent on Wednesday to swallow up Office Depot, which about a year ago completed its own acquisition of yet a third sector name, OfficeMax. The $6.3 billion Staples–Office Depot deal would result in the closure of about 1,000 stores in the coming years, reducing the income of U.S. retail landlords by some $350 million per year, estimates David Strasser, a Janney Montgomery Scott retail analyst, in a report. Roughly half of all Office Depot stores are located within five miles of a Staples store, Strasser notes. Worldwide, the two chains operate some 4,000 stores combined. Office Depot, which is still working through the closures of hundreds of redundant stores from its OfficeMax merger, has about 1,900 U.S stores, while Staples has about 1,300. The brands will eventually be combined under the Staples name.

Staples, already in the process of closing roughly 225 weak stores, says its larger scale would boost profits and help establish a better position from which to compete with online giants like Amazon.com and such big-box names as Walmart and Target. Staples CEO Ronald L. Sargent, who would lead the merged company, cites Amazon’s newly launched business-to-business office-products initiative as one concern. “They’re knocking on the door,” he said during an analyst conference call. The deal, which Sargent says should result in cost savings of about $1 billion per year, has been in the works since September. Regulators blocked a proposed merger of the two chains in the 1990s on antitrust grounds. In 2013 Office Depot paid $1.2 billion for OfficeMax, resulting in closure of about 400 redundant U.S. stores.

Staples and Office Depot say there will be no immediate closures besides those already announced. It could take between 12 and 24 months before Staples can determine any additional stores it would close, says Nathan Shor, a vice president in the Richmond, Va., office of Norfolk-based S.L. Nusbaum Realty Co., who represents several retail landlords. “There are some good-quality tenants out there, such as specialty grocers, who can backfill these spaces,” he said. “Landlords will be resilient and adapt.”

One big challenge for the merged entity will be how best to use the remaining physical spaces to enhance and augment the online experience, says Walter Wahlfeld, executive vice president of retail corporate services at JLL. The two chains’ combined customer database should strongly support that effort, he says. Though there are a number of retailers seeking quality space in the chains’ 12,000-to-25,000-square-foot size range, some space will no doubt be “decommissioned” from use and broken up into smaller units, Wahlfeld says.

The companies’ store-closing strategies will differ from market to market, according to broker Jason Baker, a partner of Houston-based Baker Katz, who had represented OfficeMax. In the Houston area, Staples was the No. 3 name prior to the Office Depot–OfficeMax merger and the last to enter the market, Baker notes. “So Staples has an opportunity to really improve their real estate — that is, if they still see themselves as a bricks-and-mortar retailer going forward,” he said.

Sales at both companies have lagged in recent years. Staples posted some $4.6 million in sales per store across its portfolio in the 12 months trailing its most recent quarter — a year-over-year decline of 6.8 percent, according to eMarketer. The retailer averaged $235 in sales per square foot during that span, off 4.9 percent. Office Depot averaged nearly $3.6 million in sales per store in its own trailing 12 months, a year-over-year decline of 7.4 percent; the chain posted $157 in sales per square foot across its store portfolio, off 6.6 percent. Staples’ annual sales post-acquisition are expected to reach about $39 billion.

Analysts speculate that the acquisition could take up to nine months to get past antitrust regulators, who might require the merging retailers to sell some stores to other operators. Strasser estimates that the merger will cut advertising expenses down from a collective $1 billion annually to about $600 million. The deal makes financial sense, he says, “and is necessary to the long-term health of these two companies.”