Staples: The First Casualty Of The Wal-Mart/Amazon War

Jul.21.14 | About: Staples, Inc. (SPLS)

Summary

Staples’ online revenue growth has stalled, and it could soon start falling.

Staples has no moat to protect it from Wal-Mart, Alibabba and Amazon.com.

Walmart’s strategy of using office supplies as an online loss leader could undermine Staples’ online sales.

We now know the identity of the first casualty of the escalating online retail war between Wal-Mart Stores Inc. (NYSE:WMT) and Amazon.com Inc. (NASDAQ:AMZN); it is Staples (NASDAQ:SPLS).

During 2013 Staples' online sales increased by just one percent, enabling Apple Inc. (NASDAQ:AAPL) to take Staples' coveted number two spot on Internet Retailer's list of biggest online retailers. That gives Staples a big problem because online sales made up 45% of its revenue.

Staples needs all the online sales it can get because revenues from its brick and mortar stores are dropping like a stone. Staples reported a TTM revenue figure of $24.17 billion in April 2013; by April 30, 2014, that figure had fallen to $22.95 billion. Staples' revenues fell steadily throughout 2013, going from $24.38 billion in January 2013 to $23.11 billion in January 2014. Since then, Staples' revenue has entered free fall, and it shows no sign of reversing.

One person who definitely noticed this trend was Mr. Market; Staples' share price fell by 30.2% between January 1 and July 13, 2014. Staples started the year at a pitiful $15.97 a share and fell to a low of $10.84 a share on June 30. At the close of trading on July 18, Staples was trading at $11.17 a share.

How Wal-Mart Is Killing Staples

The reason Staples' online sales growth has ground to a halt and may soon start falling is obvious: Wal-Mart. Wal-Mart's online sales rose by 30% in 2013 to $10 billion. Walmart.com's sales have caught up with Staples', and they could soon overtake it.

Wal-Mart is hurting Staples by offering many of the same items at comparable or lower prices. On July 18, 2014, I paid $15.97 for an HP 901 black ink cartridge at Walmart.com and got free shipping because I added a few other items to the order. I found the same item for sale at Staples.com for $15.99.

I also noticed that Staples is now offering free shipping on all orders of $29.99 or more. Wal-Mart's cutoff price is $50. That doesn't seem like a coincidence; Staples is having to resort to deep discounting to fend off Wal-Mart and its Sam's Club subsidiary.

I recently ordered a box of 25 10 X 15 inch Scotch bubble mailers from Sam's Club.com for one of my sideline businesses. I paid just $10.87, and I got free shipping. A similar pack of 25 mailers at Staples would have cost $25.29, and I would have had to pay for shipping.

It looks like Wal-Mart is using office supplies as a loss leader to grow its online business. Wal-Mart's hope is that a person that orders an ink cartridge or a ream of paper will then order a box of diapers or a case of motor oil as well.

Part of the reason I recently ordered from Wal-Mart was that I could get some items Staples doesn't offer, such as heads for my electric toothbrush and laundry detergent. Like Amazon, Wal-Mart has massive variety and excellent order fulfillment capability. Sam's Club can ship office supplies to my house with a one-day turn-around time.

Staples Has No Moat

Wal-Mart is effectively killing Staples with its massive inventory and its ability to deep discount. Those attributes combined with Wal-Mart's logistics expertise give the retailer a massive moat. Staples, in contrast; has no such moat because it specializes in office supplies.

The interesting thing is that Staples is not Wal-Mart's target in its war; the target is Amazon.com. The damage to Staples is purely collateral.

Wal-Mart's online offensive comes at a very bad time for Staples; the retailer is planning to close around 225 stores because of poor sales. Staples customers have gone online and are increasingly taking business to Wal-Mart, Amazon.com, and Apple.

Nothing shows Staples' vulnerability more than its reliance upon school supplies. The Wall Street Journal reported that Staples has killed a program to open post offices in its stores. The program was killed because the American Postal Workers Union was able to get two teachers' unions to join it in a boycott of Staples. The postal workers were mad because Staples employees are nonunion.

Staples' management was afraid that teachers would start telling parents not to shop for school supplies at its stores. With its recent revenue losses, Staples needs all the customers it can get.

Staples' recent troubles show us the future of online retail belongs to massive ecosystems such as Walmart.com and Amazon.com and perhaps Alibabba Group's (Pending:BABA) AliExpress.com, not category killers like Staples. As for Staples' future, I think it's looking more and more like an acquisition target. Its office supply business would make a nice addition to Wal-Mart's growing ecosystem. Or a good entry point into the U.S. market for Ali Express.

My guess is that Staples will only be one of many casualties in the growing war between Amazon.com and Wal-Mart. I have a feeling we're going to see far more casualties as the conflict heats up.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I conduct some online retail sales through Amazon.com.