How Staples Can Adapt Its Principal Office Supplies Business in the Age of E-commerce

Staples must become a different kind of retailer in the age of e-commerce with value-added services beyond product distribution.

Mar 29, 2014 at 1:28AM

Staples (NASDAQ:SPLS) has had stagnant sales growth for the last five fiscal years; maybe it's time that the company reorganizes itself in yet another private-equity deal, to come out with a new line of staple offerings for today's changing office-supplies market. The ways office supplies are offered and consumed have evolved in the age of e-commerce and digital consumption, but office-supplies store operators, including Staples, have remained largely the same. Office Depot (NASDAQ:ODP) recently acquired Office Max, but merging with competitors to become bigger may do little to bring disappearing customer demand back to stores. Like many brick-and-mortar retailers, office-supplies operators face similar structural challenges to their old retail business models.

Old retail concept
Office-supplies companies, like Staples and Office Depot, came to exist when people needed a special place to get their stationery. Nowadays, to get basic office supplies, people don't need to go anywhere, thanks to online shopping. Even when they do, other retail outlets of all sizes, from big box supermarkets such as Wal-Mart to street corner drug stores like Walgreen, all offer commonly used stationery supplies, partly replacing the need for stand-alone office-supplies stores.

Moreover, because of digitalization at work and in school, people are buying less old-time office supplies, including paper, pens, envelopes, staplers, staples, etc. As demand for traditional office supplies wanes, it's no surprise that sales for Staples and others have declined over time.

The root of the problem for Staples and others in the office-supplies market is that customers don't come to office-supplies stores the way they used to. The traditional retail concept that Staples and others still rely on to operate their stores now adds less value to today's customers. Moving goods through the supply chain to consumers was a challenging task that retailers needed to take on in the past.

Current retail environment
Merchandise distribution is less challenging in today's inter-connected marketplace. Staples recently announced the closing of 225 stores, which seems like a natural reaction to the current changing market conditions. In comparison, Office Depot added a chain of Office Max stores by merging their two operations. This looks like a less logical response, given that there isn't a booming office-supplies market in the making.

However, closing stores is only a defensive reaction as a result of realizing what customers may no longer need. Taking proactive moves, Staples must first learn what customers really want for today's office supplies. Switching to online selling may seem like a business initiative, but a separate presence of staples.com may contribute little to how Staples could better operate its existing stores. It's just another online operation among many other online sites -- unless, of course, Staples can connect what's online with what's in its stores.

The lingering issue is how physical stores can remain a value-added business proposition in the age of e-commerce. To ensure continued relevancy, online tools may be used to provide digital access to a store's physical setting. For example, online access to updated store inventory information may incentivize some customers to make a store trip for supplies that can't be conveniently bought online. Also, given the continued decline in its store sales, but a trend of increasing online orders, Staples could, over time, convert some retail stores into distribution centers or pick-up sites for online operations. This would save the company delivery and shipping costs.

Potential future changes
As the largest office-supplies retailer, Staples ultimately has to envision a modern retail concept to justify the need for continued physical retail presence in the age of e-commence. The reason why a retail store was there before may not provide the same valid grounds for its being there today. The traditional retail idea of channeling goods to customers through retail stores is no longer the most relevant in today's product distribution.

However, Staples remains product-centric with a vision of striving to offer every product that customers need. The company expanded its business with new models of contract selling and catalog business; but these are mere old-school retail-store tactics used to reach out to business customers. To add real value, today's retailers may have to go beyond distributing products; they may have to provide additional services that can create product uses and stimulate customer demand.

One such service that Staples could offer would be office designs that illustrate what office supplies may go into the setting up of different offices. With the service, Staples could make suggestions to customers about their office-supplies purchases, instead of being concerned about losing customer demand. Different model office designs could be conveniently shown on the company's website to avoid taking up expensive retail space. Service-supported retailing helps transform the old retail concept to maintain the vitality of today's retail business. Staples can either take initiatives to change its old retail practice or continue its decline and wait for activist investors to come in and show it the new way.

By all means, Staples and other traditional retail stores should compete with online office-supplies retailers. But Staples would do much better if it could also lead the efforts to redefine the value it could offer as a service-oriented retailer. When customers value the additional product-use services, they'd likely buy the recommended products from the retailer.

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Jay Wei has no position in any stocks mentioned. The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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