Staples has told financial analysts that it is aiming to increase the average order size of its Corporate Express customers by 25 percent.
After meeting with analysts in Europe last week, Staples revealed that it wants to raise the average order size of CE customers from $160 to $200, in line with Staples’ company average.
It intends to achieve this by increasing the number of products ordered, not by raising prices, according to Citigroup analyst Kate McShane in a note to clients.
Raising the profitability of Corporate Express orders is one of strategies linked to the estimated $300 million in synergies that Staples is targeting following the CE acquisition. CE currently has a higher level of $50 dollar orders that are unprofitable, especially when free delivery is included.
McShane thinks the $300 million figure is still conservative despite noting investor reservations about the ability of Staples to raise CE margins to the required levels due to a lower margin mix. CE has a higher mix of Fortune 500 companies in its customer base and this business tends to incur higher servicing costs per dollar spent than with the more lucrative small and medium business sector. Hence the plan to increase the overall order size to try and offset some of these fixed costs. Encouraging more online ordering is also expected to help.
McShane also noted that Staples will need to refinance its $2.5 billion bridging loan from the CE acquisition by July 2009.
Because of the tighter credit markets, Staples says that it is likely that the refinancing will result in higher interest payments, which McShane estimates as almost $270 million for the 2010 financial year, up from management’s previous top estimate of $250 million.
Nevertheless, because of Staples strong cash flows – which has enabled it to pay down around $900 million of CE-related debt recently – it is expected that $1.5 billion in cash will be freed up to debt repayments over the next couple of years, even in light of the current economic slowdown.
While the economic situation is not expected to improve in the near term, market share gains from weakened rivals Office Depot and OfficeMax are weighing in Staples’ favour, added McShane.
Staples also said that it is heavily focused on reducing expenses and that it is looking at every "non-customer facing angle" to reduce costs. This includes reducing opening hours at lower volume stores and cutting back on marketing to the consumer market.
Going forward, Staples would appear to be clearly the best positioned of the "big three" to take advantage of the market when the upturn finally happens.
Office Depot’s recent announcement of 126 store closures, for example, while limiting the damage in 2009, is also likely to limit its ability to grow once the economy improves.