There's Nothing to Celebrate in Staples' New Venture

Need some bunting to go with your July 4 celebrations? A picnic table? Ketchup? Then naturally you'll just drive over to your local Staples (NASDAQ: SPLS  ) store to pick them up. What?!

Has selling pens, paper clips, and ink cartridges really gone down the toilet that much that the leading office supplies retailer risks muddling its brand with appliances and condiments? 

Sure, thinking outside the box can lead to new paradigms in business. Think of search king Google buying the Android platform and becoming the leading smartphone operating system. Or Netflix moving from simple content delivery to content creation.

Yet while there are any number of companies that have successfully escaped the strictures of their core competencies, there are many more that have become textbook cases for how to ruin a brand by doing so. Famed money manager Peter Lynch even had a word for it: deworsification, or when a company moves so far afield from its original business that management's time, effort, and money are diverted from the things that actually drive real revenue and profit growth, and the company as a whole suffers.

Some notable recent examples include Cisco buying the maker of the Flip digital camera, Yahoo!'s venture with Skype, Barnes & Noble's foray into becoming a tech company with its Nook, and Google's investment in just about everything else it develops. The company throws a lot of stuff at the wall, but we tend to celebrate what sticks and forget all the failures.

Staples may yet become one of the latest poster children for straying from your core strengths.

At some level, you can make the leap that these items are an extension of its break-room supplies, the one area that's been sustaining it in recent periods -- but I think patio furniture, barbecue grills, and coolers are a real stretch.

Last quarter, North American store sales fell 3.5% as same-store sales dropped 2% from the year-ago period, but it would have been worse had not break-room supplies sales helped offset the drop-off. They're what helped push its commercial business almost 2% higher.

The office supply industry is undergoing a serious retrenchment during the prolonged recession. Rivals Office Depot and OfficeMax are in the process of merging, which will help reduce a lot of the redundancies present in the sector, and Staples itself has closed almost 100 stores over the past year. Yet in today's global economic environment, there are simply still too many stores to profitably support all the players. So Staples trying to find a niche to exploit to play to its strengths -- in this case its break-room supplies -- is a good one, only the execution seems flawed.

Perhaps this will just be a test run to see how it plays out without too much of an impact, but I expect we'll see a writedown of inventory at some point related to all this summer picnic fare that investors won't find themselves celebrating.

Reed Hastings has defied conventional wisdom throughout his career, and Netflix's move into not only streaming content but original programming is an example of getting outside of one's comfort zone. With the television landscape changing quickly, new entrants like Netflix and Amazon.com are poised to disrupt traditional networks. The Motley Fool's new free report "Who Will Own the Future of Television?" details the risks and opportunities in TV. Click here to read the full report!


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