Staples: Changes Are That Easy
By: Ann Kamau & Lambros Tetoros
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
The Pointed Truth
Staples has had a tumultuous year. After announcing an optimistic solution to merge the company with Office Depot in 2015 in an attempt to offset severely declining sales, a 2016 ruling against the merger sparked the resignation of CEO Ron Sargent. In the following months, the company’s stock price plummeted 20.7 per cent in two days as investors lost trust that the once-dominant superstore could make a comeback. Faced with competition in the office supply industry from Amazon, Walmart, and Costco, Staples is struggling to retain its share of an ever-shrinking market.
To mitigate the damage of sales decreases on its bottom line, Staples has been working to lower operating costs by closing brick-and-mortar stores across North America. The company has relied on its e-commerce platform to prevent revenues from declining at a faster rate than its costs. However, although operating margins have increased from 1.3 per cent in 2015 to three per cent in 2016, competing predominantly in the e-commerce space may not be a sustainable solution. To mitigate the threat of increased losses from its consumer segment and differentiate itself from e-retailers, Staples should refocus resources on building out a consulting service for its business-to-business segment.
Paper Cuts
The office supply store market in the U.S. has seen a 5.5 per cent decline from 2011 to 2016. The trend illustrates the shift to a technologically-integrated society with less need for the products provided by traditional office supply stores. The core concept of a specialized office supply store has begun to fade to irrelevancy. As a result, competitors in this industry are emphasizing convenience to consumers looking for a simple, in-store purchasing experience. Individual consumers are looking to competitors such as Walmart, Amazon, and Costco, which are successfully cross-selling product lines, to eliminate the need to visit specialty office supply stores. This increased competition is why Staples sought to amalgamate with Office Depot. The combined office equipment conglomerate would be well-equipped with the financial flexibility to take on higher-risk opportunities, including shifting its business model to excel under challenging market conditions.
Staples has seen a decline in market share, giving large e-retailers such as Amazon and eBay the opportunity to enter this market with a more convenient one-stop shop offering. While Staples has actively worked to cut costs, there has not been an aggressive push to increase revenue which is imperative to improve profitability. The company can drive this change by creating more value for corporate customers in its business-to-business segment. Staples’ sales mix includes key focal points in office supplies, business technology, and services. Business technology and core office supplies have decreased as a percentage of cumulative sales over the last five years, moving from 18 per cent and 29 per cent in 2011 to 13 per cent and 25 per cent in 2015, respectively. In contrast, the services segment has seen significant growth from 5.7% in 2011 to 9.5% in 2015. These patterns are in line with Staples’ plan to close select stores. In 2015 alone the company closed 50 more of its 1,607 North American locations.
Staples has become less competitive in these areas due to market saturation. Currently, Staples’ North American in-store and online segment represents 46 per cent of sales, where in-store and online sales represent B2C channels. On the other hand, B2B entails the company’s comprehensive service offerings to commercial clients, such as customized account support. Staples mediates its B2B interactions through Quill.com, an online storefront directed at small- and mid-sized businesses, and Staples Business Advantage, a platform for large corporate customers. The growth Staples needs to succeed as an organization can be found in this B2B space. The company’s ongoing focus should be in the service area, which has gained consecutive increases within Staples’ overall sales mix. In this area the knowledgeability and expertise Staples embodies is a valuable asset it can harness in order to stand apart from the competition.
Progressing Past The Ball Point
Increasing focus to its business-to-business operations will not restrict Staples’ current strategy of closing brick-and-mortar locations, as cutting underperforming stores will help the company retain profitability. However, since Staples has a well-recognized brand name, especially among businesses, the company can expand to new verticals in the B2B space. In particular, the company’s sales force expertise can be exploited to create a unique value proposition big-box stores cannot provide. Staples can differentiate itself by exploring a B2B consulting service which that will allow customers to work hand-in-hand with Staples to identify and solve inefficiencies in their own organizations.
Staples should position members of its sales force as expert consultants within small- to medium-sized businesses as a means of capitalizing on their valuable knowledge. Having a Staples expert consultant work with B2B customers will allow businesses to maintain low operating costs while encouraging companies to explore which new technologies that are best suited for their needs. Expert consultants would work on site with business customers to gain an understanding of what their needs are for office supplies and technologies, and identify the Staples order that would optimize the client’s day-to-day work.
In order to maximize the value added to the consumer, Staples should consider targeting small- to medium-sized businesses, who often have few or no staff dedicated to optimizing company throughput. Having an employee work with customers as a professional advisor will also help Staples push marketing strategies. The consultant would determine a need or area of improvement and make a recommendation from Staples’ product offerings. This could stimulate the buying cycles of Staples’ customers, leading to more purchases and achieving a reliable revenue stream.
If pursued, this option would help Staples give customers the tools they need to solve existing problems. Internal consulting will benefit the customer by providing the expertise to make cost-saving improvements that customers are unable to identify themselves. This allows Staples to fully deliver on its mission statement to help businesses succeed in every aspect of operations.
Consumers’ buying patterns will change. Continuous purchases throughout the year will be less prominent. Taking its place would be lower frequency, higher volume purchases as a result of guided expert advisory. Staples could expect to see its services category represent a larger part of its sales mix. The business technologies segment could also grow and rebound from previous declines due to up- and cross-selling.
The Easy Button
To build adoption of this B2B consulting service, Staples will have to convince the small- and medium-sized businesses that they need advisory. With inertia having a huge impact on restricting new technology in family-owned businesses, the cost would have to be low to onboard those businesses as consulting customers. To mitigate the cost barrier for smaller businesses, Staples could incorporate the cost of consulting within the price of the products purchased as a result of the service. For some orders, Staples would be able to use volume discounts, possible through upselling, to negate the costs of consulting to the end consumer and even offer discounted products. In either case, optimizing business results for the customer is necessary for this segment to add value.
The roll-out timeline for the service would be around one to two years. There are two necessary actions to ensure a successful launch. First, Staples should establish a consulting network at remaining locations. The existing sales force can leverage its expertise and additional training to provide this service, supplemented by external hires. Second, Staples needs to maintain connections with existing B2B consumers, cultivating a network of businesses that already shop in-store or online, and assign new advisory staff to these clients. Revenue growth for Staples must be synonymous with revenue growth or cost-cutting for clients. The successful impact of these consultants would not be observed until after early financial reporting periods.
The new, internal consulting practice would allow Staples to realize a larger percentage of overall revenues through B2B operations. In conjunction with closing down North American stores, launching into B2B consulting will decrease the B2C sales mix, further removing Staples from this segment. Over a three-year period, the service-based segment will see cost savings of over 1.5 per cent, representative of the streamlining of sales processes associated with old stores.
In terms of customer adoption, financial estimates are moderate. Understanding that this new service likely would not be adopted immediately, sub-50 per cent adoption into perpetuity was applied. At a 3 per cent fee to all completed sales after using advisory services, the implied sales impact averages around $50 million in revenue at the start, increasing by 200 per cent two years thereafter.
For Staples’ long-term success, there must be recurring revenue in this segment as it grows. In the next 10 years, it is predicted that the new segment could attract up to 10 per cent of total current sales.
Tackling Virtual Pens
The consumer market for Staples is not what it used to be. The dated business model it uses in the big-box and e-commerce dominated landscape is proving to be unsustainable. The divergence into a new vertical service stream allows Staples to transition from an office supplies store to a business partner. This can help it differentiate its offerings to B2B clients. This implementation will encourage sales of its business technology segments and provide new cross-selling opportunities. As a whole, Staples will benefit from the ability to understand the needs of its client organizations before looking to a competitor to purchase. To separate itself from the e-commerce giants and big-box retailers, Staples must utilize a revamped service focus with its traditional broad office supplies backing. Through this initiative, Staples will find itself on an arduous but worthwhile path to recovery.