Officeworks going once, going twice…

 

Australia’s office products community remains baffled and completely in the dark as to the future ownership and security of its leading national OP superstore chain, Officeworks.
Following the announcement in February that Coles Myer – Officeworks’ parent – put itself up for sale after a raft of unsatisfactory financial results and failed restructuring attempts, investors, analysts, as well as the Australian media, have gone into overdrive. Most of the interest in Coles over the past few weeks appears to be directed at Officeworks and discounter Target – just two of the company’s many divisions. The facts for now appear to be as follows:
2006: US private equity firm Kohlberg, Kravis and Roberts (KKR) offered AUD$18.2 billion ($15.2 billion) for Coles; the deal was flatly rejected.
3 April 2007: Australia-based finance and industry conglomerate Wesfarmers launches a AUD$19.7 billion takeover bid; in the run-up to this, it bought 11.3 percent of Coles shares, enough to make life difficult in case of a rival offer.
13 April 2007: Woolworths, Australia’s largest retailer and Coles’ biggest rival, said it was interested in the Officeworks and Target divisions of Coles.
20 April 2007: According to Reuters reports, Woolworths hopes to undertake due diligence on Officeworks and Target (but not seek information on other business units where it competes directly with Coles). Woolworths is also rumoured to be potentially teaming up with KKR to launch a rival bid for Coles.
With the wires still hot from speculation, rumours and a smattering of facts, the question of course is: What’s going to happen to Officeworks, and what would be the best all-round scenario for the OP chain and the OP community at large?
Officeworks is the only OP superstore operator in Australia and as such has no like-for-like competitor. Mass merchandiser BIG W, part of the Woolworths stable, is perhaps the nearest rival, with small OP retailers, dealers and their buying groups also competitors, but at a less threatening level.
According to an industry source in the market, a takeover by Woolworths remains unlikely. OPI‘s insider said: "This outcome would be seen as a monopoly of the market. However, if this was to happen it would be negative for manufacturers as well as competitors in the OP market."
Perth-based Wesfarmers, meanwhile, is widely known to Australian consumers for its chain of hardware superstores called Bunnings. This dominates its sector in a similar way to Officeworks in OP retailing. If Wesfarmers gained control of Officeworks, in the short term probably not much would change for the local OP market. Wesfarmers is not a global player and is unlikely to start ramping up direct imports or private-label products, so local vendors have little to fear.
The likes of Corporate Express Australia (CEA) are also unlikely to lose any sleep just yet, unless Officeworks’ new owner has an interest in the contract business, potentially regarding it as a profitable way to expand the chain’s reach. The impact on dealers would be similarly insignificant.
That said, Wesfarmers – or whichever bidder comes out on top – must have a growth strategy. Officeworks currently has approximately 108 stores, a number that is unlikely to change massively on a standalone basis. As OPI‘s source in Australia said: "If Wesfarmers was to use its existing Bunning locations and incorporate an OP department within these stores, stocking perhaps just the popular SKUs, this could be a serious threat as it would give them a further 100-plus outlets."
For now it seems that Officeworks will remain in Australian hands and that would certainly be the best all-round solution for the local manufacturing community.
However, French giant Carrefour and the UK’s Tesco have also persistently been named as possible takeover candidates. Neither company has substantiated these rumours and no official bid has been made as yet.
The sale to a large international company, especially one that already has an involvement in office products, would not be good news for local players. Any such firm would use its global purchasing power and thereby compress local vendors’ margins, as well as market share, through direct imports and own brands. Small dealers and retailers would find it similarly difficult to compete.
The biggest concern for the contract stationery channel – and CEA towers above the rest here – is that Officeworks’ new owners may have a contract stationery as well as a retail presence. With Officeworks already having a direct arm through the former Viking business, a combined retail/direct/contract presence could be a serious threat to CEA – or any player for that matter.
So how about Staples as a potential takeover candidate? Wouldn’t that throw a spanner in the (Office)works?