Yesterday was not the kind of day that any fans of Staples (NASDAQ:SPLS) are keen to relive. It's a bit like watching your college team get to March Madness, and then lose to Northern Southwest Akron State. That's not a perfect comparison. Staples' big issues stem from the brand's inability to compete with online retailers like Amazon.com (NASDAQ:AMZN). So really, it's more like losing to Duke in the first round -- either way, it's a loss.
Online competition cutting into sales
All of the major office-goods retailers have been singing a similar song. Sales are generally falling, moving online, and focusing on value. Office Depot (NASDAQ:ODP) joined Staples in declining comparable-store sales, though Staples fared much worse.
Staples' core business relies on getting customers through the door, and its transition to the online model has been fraught with pitfalls. While the brand now generates about half of its revenue through its website , it seems to have been at the expense of in-store sales, instead of in addition to those sales.
As a result of weak brick and mortar results, Staples announced yesterday that it was going to shut 225 of its 1,846 North American locations. Management is hoping that it can both help increase the company's overall profitability by boosting the remaining locations and help put resources into businesses that will no longer be competing against Office Depot and OfficeMax, once those networks complete their merger.
For its part, Office Depot's most recent earning release was all about joining those two businesses together. While sale fell due to the aforementioned drop in traffic and average ticket values, the real work is focused on making one company out of two.
How Amazon fits in to the equation
Like all sectors that run into the Amazon Problem, office supply chains are trying to figure out how they can stay competitive while still making money. It's a difficult nut to crack, especially because Amazon doesn't seem to care about frivolous things like 'income margins' or 'making money', at least in the short run.
In 2006, Staples was bringing in a solid 8.1% operating margin , living in the heady days of a paperclip in every pot. In 2013, the company's operating margin was just over 5%. Amazon's ubiquity is hitting retailers where it counts.
Office Depot and Staples are also likely suffering from a dearth of small business customers. Amazon makes it easy for a smaller operation to get free shipping on cheap supplies. Stack that on top of a difficult environment for small-business owners, and you've got a recipe for as little excess spending as possible.
Staples' decision to close locations seems to be just one more acknowledgment of the change spreading across the retail world. Big-box stores are out, online shopping is in, and the companies that can't change with the times are going to get crushed. Online sales are the future, and making the most out of every sale matters now more than ever.
Staples CEO Ron Sargent knows that the company can't just adapt to the change it sees now; it has to predict future change. In yesterday's earnings call he said, "Not all the stores on this 225 list are unprofitable stores. In fact, some are profitable. But we also looked at the opportunity to better network our existing store network." If Staples is going to thrive, it's going to need a lot more of that mentality from the top down.