When it comes to the link in the supply chain that stands to be most affected by a surge in dealer acquisitions by the big boxes, the wholesaler comes near the top of the list.
Dan Binder, SVP of Buckingham Research, has estimated that Staples’ acquisition of Prime Office Products in mid-September could cost United Stationers $30 million to $40 million of business and believes that the move may be the start of a trend. A company research note says: "With an increased focus on the mid-market customer by all the national players, we are concerned that greater consolidation activity is ahead. Since independent dealers rely on the wholesaler to a much greater extent than the national players, we could see sales melt away if acquisition activity picks up. More recently, Office Depot has started focusing on the mid-market customer and we believe has an appetite to make reseller acquisitions in this space if the opportunity presents itself."
Staples itself, while not disclosing specifics, has hinted to OPI+ that it will "continue to look for ways to introduce or expand" its delivery business "where the opportunity presents itself".
Partly based on this consolidation theme – combined with a heightened level of direct to vendor activity – Buckingham Research has downgraded United’s shares from ‘strong buy’ to ‘neutral’ and has reduced estimates of the wholesaler’s 2006 total sales growth from 7 per cent to 5 per cent. "While we still have a very high regard for this management team, we are concerned that changes are abound and may impact the company’s sales growth in 2006 and possible Q405," the note says.
Dick Gochnauer, president/CEO of United, admits he expects Staples and Depot to make further purchases of dealers as they look to improve relationships with customers, who, in general, prefer to work with independent dealers rather than large retailers. But he claims he is not overly concerned. "I’ve seen this cycle before," he told OPI+. "And in the past, some dealers that have been acquired by large retailers have later decided it wasn’t the right way to do business. They have lost customers and then decided to go back on their own. I expect this to happen again. The relationship with the customer is critical."
When it comes to the importance of Staples’ business for United going forward, Gochnauer remains confident but fatalistic. "There will be short-term blips from acquisitions, but Prime, which was funded by venture capitalist firms, was always a build and sell proposition so its acquisition was not surprising," he says. "Prime was also a big dealer group whereas Staples’ recently-announced acquisitions [of the OP divisions of North Carolina-based Bumbarger’s and Ohio-based Consolidated Business Products] are very small…Staples is still an important customer for us going forward. Time will tell whether the value of its business for us will go down."
Jim O’Brien, SVP of SP Richards, agrees that acquisitions have the potential to impact wholesalers, but says he is unsure how much purchasing activity there is likely to be over the next few months. "Recently Staples has been more active on this front, but I don’t see this being too widespread," he told OPI+. "But saying that, at any given time there is any number of dealers in search of an exit strategy and the independent dealer represents 75 per cent of our business…We will keep our eyes and ears open."
Binder also claims that Staples’ Summit Initiative for its delivery business will be a bad thing for United and could mean that the retailer’s reliance on the wholesaler could be reduced "by almost half" over the next 18-24 months as a direct result. "Since we estimate that Staples is a $250-$300 million customer of United, a reduction of even $100 million could depress sales growth by 2 per cent next year," says a research note.
Gochnauer claims that the consolidation of Staples’ facilities will have some impact on the company but not to the extent that Binder claims. "As customers go through consolidation and optimising, they look at what items to stock and what to wholesale and Staples is no different. Moving from different platforms to one distribution centre means Staples will stock more items, which will have a negative impact on us. But on the flip side, Staples is expanding its product offering like everyone else, which is good for us."
He is confident that United’s internal investments will enable it to weather whatever changes follow. "We have remained bullish on our industry," he says. "We are moving into new products, new verticals, new markets, new ways to penetrate, and looking for ways to improve our efficiencies and service offering. We are also investing in our infrastructure and our IT."
Binder agrees that United’s internal strategies position the wholesaler well going forward. "While we believe the company will face headwinds in 2006 as a result of changes in the industry, internal initiatives should help the company to position itself longer term," he says. "Investments in systems should enhance the company’s competitive position as it not only gets its organisation more efficient, but also does a better job of enabling the small dealer to compete with larger national players."