Analysis: Thinking outside the (big) box

Office Depot makes two acquisitions that point the company in a B2B direction.

In the past few weeks, Office Depot in the US has made two significant acquisitions which give pointers to its strategic direction – and they have come as something of a surprise.

With industry speculation rife that it would acquire Staples’ US retail store network once Staples went private, Depot has made moves in two other areas: tech services and the B2B mid-market.

The largest and most transformative of these deals is the $1 billion acquisition of IT and tech services firm CompuCom which is expected to close by the end of this year (see below).

No less interesting than the CompuCom purchase was the news that Depot had acquired one of the largest independent office supplies dealers in the US, snapping up $150 million Complete Office Solutions, effective 2 October, for an undisclosed sum.

Complete – founded in 2003 by former Corporate Express Australia execs Ted Nark and Rick Israel – has grown from sales of $1 million in its first year to about $150 million through a combination of acquisitions and organic growth. It employs more than 300 people and operates out of three divisions in Washington state, Wisconsin and California, all of which have been acquired by Office Depot.

No plans to integrate

Providing some background to the deal, Nark said he and his partners hadn’t been actively marketing the business, but received an offer from Office Depot that they felt was in the best interests of employees and customers. He declined to comment on whether an approach had been made by Staples as well – which has been looking to buy more independent dealers – or indeed if any acquisition offers had been received from other independent dealers.

Interestingly, Nark confirmed that Office Depot would run Complete independently, keeping its name, staff and distribution facilities – which are being leased by Depot. Apparently, there are no plans at this stage to integrate the dealership into Depot’s Business Solutions Division (BSD), but instead it will operate as a standalone unit focused on mid-market customers.

While Nark himself will no longer be involved in the business, Israel and the senior management team – Dave Patterson (Washington state), Ron Beam (Wisconsin) and Ted Walter (California) – are all staying on, and no change is being made to things such as the business model and sales reps’ commission plans.

“This company differentiates us among competitors because of the strong ties it has established within the local community, as well as the attractive customer base and diverse offering that includes significant penetration in cleaning, breakroom and furniture,” said BSD President Steve Calkins in an official statement. “We intend for Complete Office to stay true to the local relationships for which it’s known while adding the power of our national brand to catapult it to further growth.”

We often hear the term ‘business as usual’ thrown around somewhat haphazardly when acquisitions of this sort are made, but this may be one of those occasions when it actually holds true. Nevertheless, there will be ramifications for the independent dealer channel: Complete was a first-call Essendant dealer and a member of the Pinnacle Affiliates network, so the impact of the acquisition will undoubtedly be felt at those two organisations.

Cautionary tales

Much of the talk of dealer acquisitions over the past 12 months has involved Staples, which publicly stated after its attempt to acquire Office Depot failed in 2016 that it was looking to grow externally in the mid-market segment.

As Staples goes through internal changes following its own acquisition by private equity firm Sycamore, Office Depot has opportunistically stepped in and picked up one of the largest and fastest-growing dealers in the US; it’s another sign of Depot’s rejuvenation under new CEO Gerry Smith.

The fact that the company is planning on running Complete separately is noteworthy; there have been many tales of botched acquisitions by the big boxes over the years that rip the soul out of local dealers. This way, Depot is hoping to get the best of both worlds, combining its purchasing power and national brand with the entrepreneurial spirit and local touchpoints of an independent dealer.

It will now be interesting to see how Depot approaches developing Complete. Between the dealer’s eastern-most Wisconsin base and its operations in the states of Washington and California lies a vast expanse of mostly thinly populated states. If Depot intends to “catapult” Complete to further growth, as it says it will, then an aggressive roll-up of larger dealers in these markets might be one way of achieving that, using the experience of a management team that has a strong track record of successful acquisitions.

Depot’s $1 billion IT move

Office Depot has called its acquisition of IT provider CompuCom Systems – a company that procures, installs and manages the lifecycle of hardware and software for businesses – the first step in its strategy to become a business services platform.

The purchase looks to be a key part of Depot’s transformation as it shifts focus away from retail and transactional products, and expands into the more valuable workplace services. Bringing an IT provider on board opens up a fragmented $25 billion market and makes it the first company in the US to provide a nationwide network of enterprise-level tech products and services. The proposed model also fits well with its omnichannel platform, particularly with its last-mile footprint.

CompuCom’s established SMB offering Tech-Zone is to be placed within some of Depot’s 1,400 retail locations. This is expected to improve per-store profitability as added services sales and foot traffic increase.

“Technology is the office supply of the future,” said Office Depot CEO Gerry Smith, who joined the company earlier this year from tech giant Lenovo. His appointment in February was followed by a number of other additions to the management team, all with strong IT backgrounds, so the direction of his strategy seems quite clear.

Smith said the combination with CompuCom’s enterprise IT services gives Depot the credibility and scale to build a sustainable platform and stand apart from the competition.

Indeed, one of Depot’s biggest rivals right now is Amazon, which doesn’t currently have an IT services offering, so this diversification could be vital if it is to keep the online giant at bay.

The deal also brings to mind a similar move by Staples which launched its own IT division in 2010. Staples Technology Solutions, as it is called, struggled to take off as Staples failed to convince customers of its ‘credibility’ as anything other than an office supplies retailer. 

It seems Depot is aiming to avoid this pitfall by snapping up an already well-established player which has the scale and expertise needed to be taken seriously. CompuCom certainly brings things to the next level in terms of big-box tech solutions.

Retail mash-up unlikely

The CompuCom acquisition does throw into doubt the likelihood of Office Depot acquiring Staples’ 1,200 US stores – which, frankly, was a strategy where it was difficult to see the long-term benefits. While there were retail-centric messages coming out of Boca Raton several months ago – when Depot was seemingly in negotiations with Staples – now the talk is of “pivoting” the company away from the traditional retail model and into a broader business services and tech products omnichannel ‘platform’.

This still includes retail, but Office Depot will in the short term have its hands full integrating the CompuCom Tech-Zone kiosks in its stores and developing other areas where it can combine tech services and supplies distribution. The last thing it needs is the distraction of what would almost certainly be a disruptive retail mash-up with Staples.