Why Staples Is Turning Floor Space Into Offices

Staples (SPLS) recently announced plans to turn part of three of its Massachusetts stores into office space with a company called Workbar.

In this segment from the Market Foolery podcast, Chris Hill, Taylor Muckerman, and Jason Moser talk about some of the creative ways companies have repurposed excess floor space in the past, how and when we might know if the Staples idea works out, and one bricks-and-mortar company that hasn't yet addressed the issue but might need to .

A transcript follows the video.

This podcast was recorded on April 4, 2016.

Chris Hill: Staples has found a new use for some of its stores: turning parts of them into offices. Staples announced a new partnership in Massachusetts with a company called Workbar. And basically, some of their locations are now going to be carved up.

This is something that hasn't made its way, Taylor, into the public markets in a significant way. But it's something that we've talked about from time to time, office sharing, sharing resources, that sort of thing. And we're seeing it in major cities, and it's pretty interesting to see Staples look at their footprint. I think this is a really interesting test for them.

Taylor Muckerman: I agree. And it's seemingly going to be pretty easy. Both of the companies have agreed to three Boston-area locations. Bringing in new foot traffic, hopefully. They're office workers, you're working in an office supply store, so hopefully you bring in some new revenue on top of the rent that they're going to charge.

The deals on how much they're going to be charging haven't necessarily been worked out. But it looks like they're giving up around 10%-15% of the average floor space of a Staples store to this new deal. They're following in the footsteps of, I guess, what Macy's and Sears have tried, allocating floor space, renting it out to other, either retailers or other office space companies. 

So, it seems unique. The revenue has been declining for the last four years, cash from operations has been declining for the last four years, and they're still trying to close the Office Depot deal for $6.3 billion. So, at least they're trying, and it seems like a low-cost effort to bring in new foot traffic. They're not building new stores, they're just reallocating the use of said stores that they already have in existence. So, I think it's a small bet that they could easily roll out across more than just three stores, if it does seem to work out initially.

Hill: Don't you think we're going to know this calendar year whether or not this works? Because, if this test, in just three locations, if this works, I have to believe, before the end of the year, they're going to be announcing more of these.

Jason Moser: I would think so. I mean, I think, to Taylor's point, I think this is a low-cost bet on their part. I think it's one that you have to make in this space. I think the traditional retailers with their brick-and-mortar presence, it's not that the physical property is any less valuable, it's just how you're using it.

So, a decade, two decades ago, when people were more apt to go out physically shopping and looking around in stores, that behavior has just changed dramatically here over the course of the past couple of decades. And so, now, you just have to figure out something else to do with that property. So, you made a great point there with Sears. Sears tried the same thing, leasing out some of that valuable floor space--

Muckerman: To big retailers like Dick's (DKS 0.04%) and even Whole Foods and a few others.

Moser: Sure. And, you mentioned Dick's Sporting Goods. Dick's Sporting Goods is doing something similar in that they have this ship from store initiative now where they're basically incorporating their e-commerce business in with that big physical infrastructure that they already have in their stores. So, if you place an order online, it's very possible that order will be coming from an actual Dick's store, instead of building some new distribution center.

And we've talked about this in MDP as well, in regard to Costco (COST -0.32%), because for all of Costco's strengths, it is the case that people are shopping, obviously, differently today than they were before. And so, we wonder, over the next 10, 20, 30 years, will Costco perhaps look at tying up with other potential businesses to form partnerships to be able to utilize that physical space, to leverage it, to bring more sales through an e-commerce model? Those are things you have to try, because you already have that big, physical asset there. It is valuable, it's just, you have to figure out different ways to use it, I think, today than you had to before.