Amazon has finally decided to make office products a core focus. Is it a lot of fuss over nothing or should the OP community be getting worried? With the big boxes all having plenty on their plates right now, the timing has certainly been immaculate
Not so very long ago, Wal-Mart was regarded as the ultimate threat to the office products industry should it ever dare to offer a full-blown range of office products and make it a key product category. Its Back-to-School campaign alone is more than a match for those of Staples, Office Depot and OfficeMax put together – in a year when everybody has stepped up their efforts in order to combat slowing retail sales.
For the moment, however, all eyes are on Amazon, the world’s largest web retailer that, on 23 June, announced its full-blown foray into the office products space by launching a dedicated office supplies store on its US-based website Amazon.com. Not such a big deal, one might think. After all, Amazon has always sold office products in some capacity – pens, paper and the like, plus consumer electronics, software and office furniture.
The difference is that the company has stated its intent to also reach out to the B2B market rather than just aiming for the typical Amazon end-consumer, offering products to "the classroom, home office, small office, corporate office and everything in between". That’s pretty much the remit of the industry’s big three players – specifically their retail businesses – and not completely off the radar of the thousands of small- and mid-sized independent dealers in the US either.
And if that still doesn’t ring any alarm bells, in another spin of the tale, Amazon is said to have struck a deal with United Stationers for logistics support. Both Amazon and United refused to either deny or confirm any arrangement between the two parties, but OPI was reliably informed that a deal was definitely on the cards.
With the internet steadily gaining penetration in our industry, the likely backing of a major OP wholesaler in the US and Amazon’s huge brand equity, the move certainly makes sense for the company – and was cleverly announced at a time when Staples has its hands full with the Corporate Express acquisition and the other two major players have their very own battles to fight – both in the B2B and B2C arenas.
OPI‘s attempts to get a reaction from the big boxes – those likely to be most affected by the news – proved unsurprisingly futile. Only Staples responded with a generic statement that says: "Staples competes with a wide variety of companies, from superstores to clubs to discounters to local dealers. The important thing for us is to make sure we deliver on our promise every day of making it easy to buy office products, with great values and high quality. Regardless of what other companies do, we always stay focused on serving our customers and working hard on the things that we can control to drive our business."
Everybody knows that the retail sector in the US is currently underperforming, generally as well as for office products in particular. OfficeMax’s and Office Depot’s US same-store sales slumped by 10 percent in both companies’ recent Q2 announcements. Staples is due to release its Q2 results in early September, but its Q1 US comparable store sales were already down by 6 percent due to declines in customer traffic and average order sizes.
In other words, at a time of soaring fuel prices and slowing retail sales, the big three are having to push all the buttons to capture consumer spending and one way of doing that is to increasingly migrate customers to order online (see also ‘Office products – strong web potential", page 36).
Amazon’s CEO Jeff Bezos in a July Q2 conference call said that "higher fuel prices may be a relative advantage for us," adding that "even just driving ten miles these days is a few dollars worth of gasoline and consumers we are beginning to take that into account."
The analyst community has so far shied away from crying wolf over Amazon’s move into office supplies, even though the share prices of Staples, Depot and ‘Max plummeted following Amazon’s announcement in June – but then again the share price of just about every retailer went down at the time (combined shareholder jitters or mere coincidence?).
Goldman Sachs Analyst Matt Fassler says: "In terms of technology, Amazon is a really big player and as such a big competitor already. But it’s not a new name [in the OP sector or otherwise] and has historically been more of a B2C rather than B2B player, so I don’t think that it will really shake things up that much."
The bigger context, Fassler adds, is that there’s already plenty of competition in the OP world. "The fact that it’s already a very competitive space means that Amazon coming on more ‘full-blown’ doesn’t really move the needle that much."
Jefferies and Company Analyst Dan Binder agrees: "Office products is an appropriate category for Amazon [to get into]. That said, ‘Max, Depot and Staples are out there every day doing direct marketing, direct email, trying to generate business. The success of market share gain by Amazon will depend on their email marketing programmes, their promotional prices, etc."
On price alone, Amazon seems more than capable of holding its own, as a quick price comparison between the e-tailer, Staples and Shoplet, a web-only OP reseller and also a main third party seller on Amazon.com, reveals.
Amazon’s own store did the best deal for a Fellowes P-57Cs shredder by some margin and for a Canon Powershot Sd1100 digital camera; a third party seller was the cheapest for an HP78 inkjet cartridge inkjet (though there wasn’t a lot of difference between any of them); while Shoplet gave the best deal on six Expo board markers; Staples, by comparison, was the best placed for an HP Quickpack box of 20lb white copy paper and a six-dozen pack of Dixon Ticonderoga Yellow #2 HB pencils.
If this reveals anything, it’s probably what most home and small office customers going online know already – that traditional office suppliers aren’t typically the most competitive when it comes to more expensive technology products.
In terms of sheer range of office supplies, Amazon’s offering is unbeatable. According to Chris Rupp, the company’s Director of Merchandising for computers and office supplies, as many as 500,000 items would be featured on the Amazon.com site. These include those offered by Amazon directly or by any of its third party companies that sell on Amazon (whether they fulfil the order themselves or have that done through Amazon as part of a special deal).
At first glance, this number is mind-numbingly impressive. On second thoughts, however, it has raised more than just a few eyebrows, being so wildly out of sync with what even the largest broadline OP wholesalers in the US can offer (in excess of 40,000 SKUs in the case of a SP Richards or United Stationers).
Even factoring in all manner of category extensions and applying the term office products/supplies in the loosest possible way, one would be hard pressed to come up with even half that figure, making it a somewhat questionable claim.
The other issue is that buying directly from Amazon as well as from its thousands of third party sellers can make for a frustrating shopping experience, with multiple consignments – and as such multiple delivery charges and invoices – often being the order of the day.
OPI expects that Amazon’s vastly increased OP range means that more products are now available directly from Amazon rather than third party companies, thereby eliminating some of these frustrations, but Amazon couldn’t confirm this assumption.
What it all means for these third party listings is equally open to interpretation. Notoriously secretive about the ‘deals’ that they sign up to, both Amazon and its sellers are keeping quiet about details of their specific listings on Amazon.com, about the price they pay for the privilege and the specific rankings procedure.
The general expectation would be that more OP business for Amazon in general also means more business for third party sellers. Shoplet.com, which struck a relationship with Amazon last year, for example, frequently comes up in product searches, as does Discount Office Supplies (which, interestingly, is a subsidiary of Corporate Express) or BuyOnlineNow.com. Office Depot’s relationship with Amazon, meanwhile, seems to have come to a halt.
As Binder alluded to, Amazon’s success will depend on its marketing approach. There’s little doubt that the web giant will take market share away from several channels, and the big boxes look to be first in line. Mass merchants like Wal-Mart or the big supermarkets are also set to suffer – and that’s business that none of the traditional OP players have enjoyed in the first place.
But all of the above are to some extent retaliating with upping their own web presence, some at a retail as well as a contract level (Staples being a good example).
As for independent dealers, it’s likely that Amazon’s move will impact on the business of some very transaction-orientated website-driven B2B as well as B2C dealers. But few dealers are currently prospecting for business over the web and the limitation often lies in technology.
Paul Gatens, SP Richards’ Director of Marketing Information, says: "If dealers want to play the e-tail game, they’re going to have to build their own website and be unique. Independent dealer systems sites are very B2B procurement-focused at the moment, as opposed to being structured like an e-tail site. And even if a company like ECI2 could build a site that was more e-tail look and feel, you would still have the problem of how to get that site listed on Google and come up high on searches."
For most dealers, the benefits are unlikely to be worth the effort and expense. And Mike Gentile, President/CEO of US dealer group is.group, for one, is relatively unconcerned about the future well-being of independents with this new competitor in the fray: "This deal is only going to be meaningful if it materialises into something more disciplined and market-focused. All it is right now is a potpourri of products that have been put on a site by hundreds and hundreds of third parties. It does not have the sophistication of many of the online companies in our industry, whether they are independent dealers or the big boxes. "Small- to mid-sized business customers want service. They want to be able to pick up the phone to enquire about price and availability, about returns or service issues and they won’t be able to do that with a portal like Amazon."
Gentile is also unperturbed about Amazon’s widespread target group. "If Amazon starts targeting corporate customers, it’s a strategy I call spraying and praying. This results in low margins and low growth. You can’t spray and pray and be everything to everybody. But I hope that this is Amazon’s strategy, because it’s going to spend a lot of dollars and time without moving the needle."
Amazon’s Rupp wouldn’t be drawn on the extent of the company’s efforts into attracting specific customer segments and launching targeted marketing campaigns. Instead, she refers to Amazon’s All Business Center, a service launched just under a year ago which aims to fit the needs of small- to medium-sized businesses.
Amazon.com Corporate Accounts meanwhile targets purchasing managers of national and global corporations, teachers, small business owners or government workers. It allows them to set up a corporate account at Amazon.com, pay by purchase order and share credit lines with other employees. Pay-in-full credit lines, on the other hand, allow large corporate businesses and government institutions to place large orders and pay on a monthly basis.
So it appears that some of the ‘facilities’ needed to operate at the B2B level are already in place.
Long way from contract stationery
That said, the notion that Amazon could become a meaningful competitor to either an independent dealer or indeed a Staples/Depot/’Max on a contract basis for now seems far-fetched and very unlikely indeed.
Perhaps it’s the perception that Amazon is essentially a B2C company, a unique brand that has made online shopping for the home user in particular a more pleasurable experience than ever before. Or perhaps it’s the sheer scale of product as well as the supplementary information on Amazon.com that seems so overwhelming.
A fairly specific search for ‘3M post-it notes’ renders 654 results, a more vague one for ‘stapler’ 1,228 results. Key in ‘copy paper’ and the result is a staggering 21,836 search hits. All this can be narrowed down very easily with features such as customer reviews, pointers towards what other people have looked at and bought, preferential supplier lists or of course a previous order history.
Amazon.com’s office products store will undoubtedly have an impact on the OP industry. The consensus for now however is that this will manifest itself through ripples and over time rather than as an all-engulfing tsunami.
Office products – strong web potential
No other company can beat Amazon in terms of sheer scale when it comes to internet shopping. In Internet Retailer’s 2008 edition of its Top 500 Guide of US-based e-tailers (see extract below), the online behemoth towers head and shoulders above the rest, with 2007 sales of $14.8 billion and well over 200 million monthly visits to its website.
But while mass merchants like Amazon and its offline equivalent Wal-Mart (which ‘only’ came in 14th place in the e-tailing rankings) are all things to all people with their vast product portfolio, specific product categories also fare well on the web. In fact, one industry where the internet is quickly becoming the dominant channel in retail terms is office supplies. Only a decade ago, the web barely existed for OP retailers – now it accounts for 37 percent of total retail sales, according to Jack Love, Publisher of Internet Retailer.
For industry leader Staples, the web has been a profitable revenue stream. Its total global e-commerce sales in 2007 stood at $5.6 billion, a 14 percent increase from $4.9 billion in 2006. And at a time when US retail sales are slowing and the economy is plodding along at an unremarkable pace, the number of new online shoppers (64 percent of all traffic, compared to 31 percent for Amazon) as well as those that buy rather than just browse (9.6 percent conversion rate) is hugely encouraging and bodes well for the future.
And while Staples is the biggest of the OP industry’s online players, coming in second place overall in Internet Retailer’s rankings, OfficeMax’s share of online sales compared to its total sales is impressive with 35 percent, easily beating its larger rivals (Depot’s 32 percent and Staples’ 29 percent). ‘Max is also the fastest growing web platform of the three, with a growth rate of 23 percent.
Despite the one-stop convenience that an Amazon or Wal-Mart offers, the OP players’ average order value far exceeds that of the mass merchants, doubling in the case of an Amazon/Staples comparison ($165 versus $325). ‘Max shows a stunning $430 average ticket, nearly four times that of Wal-Mart.
Amazon: Master of the web
Amazon.com is not only the biggest kid on the block as far as web revenues are concerned, it’s also become a best-in-breed example for continuously coming up with new technologies and platforms to sell more merchandise to customers. Over 13 percent of all web sales in the US currently go through Amazon.
But it’s not just about luring people to its website and turning them into returning customers. Amazon also knows how to make a profit. The e-tailer grew its net income from $190 million in 2006 to $476 million in 2007 – how many companies manage to increase their profit by 150 percent in the space of just one year?
As for its latest quarterly results, Amazon has seen Q2 sales jump by 41 percent to $4.06 billion. And while the likes of Office Depot and OfficeMax have been reporting 10 percent plus declines in US same-store sales in their Q2 results, high fuel prices and a sluggish economy in many parts of the world seem to be just what Amazon has needed to boost its performance.
Since starting in 1995 as an internet-based sales platform mainly of books, the company now sells everything from electronic equipment and office supplies to toys and beauty products. But it hasn’t merely added products to its portfolio. Two years ago, it began providing warehousing, delivery and other logistical support to small- and medium-sized third-party sellers on its website, a move that has proved extremely profitable and popular. Features like ‘Fulfilment by Amazon’, the membership (and fee)-based Amazon Prime free two-day shipping programme or the new Amazon TextBuyIt, a service that lets customers use text messages to find and buy products sold on Amazon.com, have all been designed with customers’ convenient shopping experiences in mind – and the results speak for themselves.
With a loyal customer base and resources way beyond those of a typical web-only operator – the company spent $818 million on new content and technology, and $1.3 billion on its fulfilment services in 2007 – it’s hard to see how the Amazon bubble could possibly burst anytime soon, especially with a management team that is constantly looking for and investing in new opportunities – including the full-blown foray into office products.