Staples Inc. (NASDAQ:SPLS) Focusing On E-Commerce
Over the last few years, Staples has seen its revenue decline slightly from $24.6 billion (2011) to $23.1 billion (2013). On the surface, the decline in revenue appears to be a small issue. However, Staples' declining revenue is caused by several major problems. The decline in revenue has caused Staples' management to rethink their business model. Management has decided to reduce their physical footprint. According to USA Today, management is going to close 225 stores by the end of 2015. Staples' store closings strategy is partly due to declining sales, but can also be attributed to a transition toward e-commerce. Although, Staples has over 3600 stores around the world, the majority of Staples revenue is generated online.
|(% of sales)||2011||2012||2013|
Data: *Based on Internet Retailer Top 500 Guide
Over the last decade, Staples' online sales have been very strong. According to Internet Retailer, Staples' online sales ranked it second behind Amazon from 2007 to 2012. Naturally, management wants to focus on growing its largest revenue source. However, it is facing significant declines in offline sales.
Offline Segments Declining
The North American retail environment is very competitive. Large discount retailers are able to leverage their assets to fiercely compete on price. Currently, Staples lacks the size and infrastructure to compete solely on price. As a result, Staples' North American division has experienced same-store sales declines in 3 of the last 4 years.
|(annual % Change)||2010||2011||2012||2013|
|N.A. Same-Store Sales||-1%||0%||-2%||-4%|
North American sales have been terrible, but International sales have performed even worse.
International sales have declined over 10% each of the last two years. Staples' physical retail sales are quickly deteriorating. As a result, its push toward e-commerce is extremely important.
Online Sales Failing To Grow
In 2012, Staples was the second-largest e-retailer. In 2013, Staples fell to third-largest e-retailer, behind Apple (NASDAQ:AAPL) and Amazon (NASDAQ:AMZN), according to Internet Retailer. If Wal-Mart's (NYSE:WMT) online sales growth continues, Staples will fall to 4th on Internet Retailer's Top 500 Guide. Staples' decline from the top of the e-commerce world is the result of extremely slow sales growth. Online sales have only grown a total of 6% since 2009.
Data: Wall Street Journal Online Retail Sales Chart
Staples can't blame its lack of online sales growth on the e-commerce industry. eMarketer estimates e-commerce will grow above 10% for the next several years.
Staples' problem is the result of increased competition and slowing demand for its core products. On the 2013 4th quarter conference call, Ron Sargent, CEO, talked about Staples' struggles:
"Our customers are using less office supplies, they're shopping less often in our stores and more online and the focus on value has made the marketplace even more competitive."
As a result of decreased demand, the office supplies industry is consolidating. As the industry consolidates, competitors are closing stores and reducing their retail space. This should be a great opportunity for Staples to pick up additional customers.
However, Staples isn't acquiring the majority of the competitors' customers. The office supplies industry's consolidation has driven customers to look outside the industry.
On the 2014 Q1 conference call, Mike Baker, Deutsche Bank analyst, asked:
"I mean, the other guys talk about transfer rates in the 25% to 30% range, if you pick up 10% to 12% as well. Just curious what's your view on, what is the other 50%, 60%... where does that go?"
Ron Sargent, CEO, responded:
"I guess it goes everywhere... So it could go to contract, it could go online somewhere, it could go to mass merchants, Walmart, Target, Kmart there, but it's just hard to exactly calculate."
The office supplies industry is losing sales because of lower demand and outside retailers stealing their customers.
Staples' Plan To Re-Start Revenue Growth
Staples is the largest office supplies company in the world. Due to slowing demand, it is trying to increase its product offerings. According to USA Today, Staples plans to add 1600 new items to its stores. Staples is going to sell items which expand its business offerings, such as break room supplies, cards, and other office-centric products. Staples' in-store expansion is geared toward its core competence.
However, Staples' online expansion takes the company in a completely different direction. According to the New York Times, Staples.com is expected to offer 1.5 million items by the end of 2014. Staples' increased online offerings is an attempt to compete with Amazon and other major e-retailers. Yet, Staples doesn't have the resources or infrastructure to compete. Additionally, Staples' marketing department will have to spend heavily to change its brand, with resources it doesn't have. Currently, Staples is viewed as only an office supplies store. Yet, Staples.com sells tables saws, power drills, and other non-office related products.
Staples is try to capitalize on its early online success by simply offering more products. However, Staples doesn't have any real competitive advantage over Amazon and other retailers. Christine Komola, CFO, talked about Staples' gross margin compared to competitors "...we continue to have a gap with online competitors. And we're working to close that gap over time," on the 2014 Q1 conference call.
The Bottom Line
Staples' transition into e-commerce has been difficult. The transition has resulted in hundreds of physical store closings. International and North American sales growth has declined significantly. Staples' physical retail strategy is to create a more focused customer experience. This strategy should help prevent customers from leaving the office supplies industry. However, Staples' online strategy is doomed to fail. It is trying to compete with companies like Amazon and Wal-Mart. Both Wal-Mart and Amazon are better positioned to compete on price, product offerings, and customer service. Staples' online strategy and focus leaves little hope for near-term growth.
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