eamon kelly ekelly@cleveland-research.com important disclosures can be found in appendix

EAMON KELLYEKELLY@CLEVELAND-RESEARCH.COM

Important Disclosures can be Found in Appendix

Most Important Topics• Recent Industry Insights

• Merger/Industry Update: Scenario Analysis and Opportunities

• Market Share Shifts & What to Expect from Amazon

Recent insights on the industry and merger

WHAT’S NEW?

Office Products Industry - Recent Insights

Independent share gains

• More inbound inquiries from large accounts given declining service levels

• Especially prevalent in Northern part of country

• Recent national account language implies dividing up contracts to smaller businesses

Office Products Industry - Recent Insights

Office/Industrial lines blurring

• More activity from industrial players in office (ie Grainger)

• Larger suppliers correctly merging their respective teams

• Share opportunity likely means more partnership/consolidation coming

Office Products Industry - Recent Insights

Office Depot

• Heavy private label focus

• Merging of OfficeMax systems problematic for suppliers and customers

• Employee turnover an issue– Relatively stable at the top but less so throughout organization

Office Products Industry - Recent Insights

Staples

• Consumer shopping patterns greatly aided their back-to-school season

• Remain aggressive on commercial contracts; very active considering there is a pending merger

• Continue to see significant push to BOSS categories (Beyond Office Supplies)

Main Obstacles

MERGER

Large contracts the point of contention

• Plentiful competition at retail

• Overall market share not a deal breaker

• Large enterprise sub-market is the issue

• Not as problematic on a local basis, significant issue on national basis

Estimates on market share

• Staples has some form of contract with ~90% of fortune 100 and 1,000 companies (company disclosed they had contracts with 66 of America’s Fortune 100 back in 2013).

• Staples/Depot likely have ~30-35% combined share in core office supplies

• As much as 80%+ share on high-use categories (ink, toner, paper)

Is there a market share threshold?

Market Share ~28% 30-35%National Competitors? The Largest Two The Largest TwoMost significant Overlap? Large National Customers Large Enterprise CustomersProposed Divestitures 21% of US Foods Out Clause = 10% of US BusinessFTC Decision BLOCKED ??Source: Company Reports; CRC Estimates

Sysco/US Foods – Relevant Hearing Takeaways

• Total share of 28%, but studies showed share of national broadline services was closer to 65-70%– “…clear presumption of harm to competition in market share

and market concentration on national and local level…”

Important distinctions:• Differentiating local/national levels• Taking into account both total share and share of sub-

markets (national broadline services)

Sysco/US Foods – Relevant Hearing Takeaways

HPSI testimony paints familiar picture:

• The GPO authorizes 9 distributors (agnostically) to sell to their members

• Sysco and US Foods were the 1st and 2nd options in ‘dozens’ of member markets and made up 65% of their total business

Sysco/US Foods – Relevant Hearing Takeaways

Judge implied that even if share numbers weren’t totally accurate:

1. The two companies were often viewed as the only two viable options for coast-to-coast service

2. Many customers prefer one-stop shop vs. piecing together local distributors

Scenario Analysis

POTENTIAL MERGER OUTCOMES

Staples/Depot - Potential Outcomes1. Deal gets blocked by FTC and upheld

2. Deal goes through after additional divestitures

3. Deal goes through as currently proposed

Staples/Depot - What happens next?Scenario #1: Deal gets blocked

Dealer market share opportunity• End-user waiting to see how deal shakes out, but already some

shift in contract share

• Service level on accounts has deteriorated

• Company still in the middle of a massive systems overhaul

• Smaller levels of consolidation likely flow-through

Staples/Depot - What happens next?

Scenario #1: Deal gets blockedSupplier partnerships• Share shift supports Staples, Independents,

Amazon

• Office Depot private label approach intensifying, long-term position handicapped by recent disruption

Staples/Depot - What happens next?Scenario #2: More Divestitures

Tough to make work – acquiring company(ies) can be very selective

• Would have to rework out-clause (Staples can currently back out of deal requiring >10% divestiture)

• Attractive assets likely would be the ones switching hands

• Some combination of fulfillment centers and enterprise contracts moving to other players

Staples/Depot - What happens next?

Scenario #2: More Divestitures

Opportunities:

• Partnering with asset-gainers (acquiring companies can be selective)

• Enhances competitive position around large contracts

Staples/Depot - What happens next?Scenario #3: Approval

Expect end-users to spread business around• Large enterprise customers likely overexposed on core office

supplies

• Increased interest in working direct with suppliers or moving business

• Big opportunity for TriMega/isGroup members

• Amazon getting more involved already with Amazon Business

Share Opportunities with GPO’s1. Increased bids already flowing in with declining

service levels

2. Already seeing government contracts hinting at desire to work with a combination of smaller businesses (FAA).

3. No merger: worries on Office Depot• Merger: natural disruption, diversification

What is the ‘new’ ideal product mix?

2011 20140.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

57.9%54.8%

42.1% 45.2%

Staples - Product Mix Change in last 4 years

Core Office Everything ElseSource: Company Reports

What is the ‘new’ ideal product mix?

Ink,Toner,Paper Core Office Jan/San0%

5%

10%

15%

20%

25%

30%

35%

40%

28%

16%

7%

36%

22%

15%

Category % of sales from eCommerce

2013 2014Source: CRC Benchmarking

Industry shifts and the Amazon impact

MARKET SHARE

Growth gap grew wider in 4Q14 and has sustained

• 3-4% outperformance has moved to 6-7% in recent quarters

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

Staples vs. Office Depot - NA Commercial

Staples DepotSource: Company Reports: CRC Estimates

Independent Share Gains

1Q14 2Q14 3Q14 4Q14 1Q15 2Q15

-6.0%-4.0%-2.0%0.0%2.0%4.0%6.0%8.0%

10.0%

Independent Share Gains

Staples Depot IndependentSource: Company Reports: CRC Estimates

Amazon & Market Share - Clearly not incremental

• Total retail growth has slowed markedly despite stable eCommerce growth

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

0.0%2.0%4.0%6.0%8.0%

10.0%12.0%14.0%16.0%18.0%20.0%

14.0%

1.0%

eCommerce Growth vs. Total Retail

eCommerce Total RetailSource: U.S. Census

Amazon Growth in Office Products

2013 2014E 2015E0%

10%

20%

30%

40%

50%

60%

70%

45%

58%65%

Amazon eCommerce GrowthTotal Office

Source: CRC eCommerce Benchmarking Study

Amazon Growth in Office Products

Source: CRC eCommerce Benchmarking Study

Jan/San Traditional/Core Office Ink, Toner, Paper0%

20%

40%

60%

80%

100%

120%

140%

160%

180% 163%

60%

23%

Amazon Category Growth

Amazon Growth - Where is it coming from?

Amazon & Market Share - Where is it coming from?

Office Products Retail • Much less disruptive on commercial front to this point• Amazon Supply was estimated at ~$1B, with heavy industrial

mix

• Impact more noticeable at retail• Staples last positive comp was in 1Q-2012• Depot: +1% last quarter, flat in 3Q10, every other

quarter in last 8 years was negative

What to expect

AMAZON BUSINESS

Amazon Business – What to Expect1. Vastly improved platform

2. Leaning heavily on 3P

3. Back-to-Business event planned for Jan-Mar (never done before)

4. Disclosed they do have a field sales force calling on customers (historically did not) and incremental live customer support.

Amazon Business – What to Expect4. A wave of ‘business only’ SKU’s

5. Likely more disruptive on smaller accounts initially

6. Still have some hurdles on national account front; likely a longer-term goal

7. Expect more tangible volume discounts in 2016 – looking for them to be supplier funded

Amazon Business – What are we looking for?

Amazon private brand approach• Office superstores dedication to private brand has

pushed some business to Amazon

• Hearing Amazon will be making larger push here with Amazon Basics brand

Amazon Business – What are we looking for?

A platform for national accounts?• Behind on tailored pricing• Volume discounts not even rolling out until

2016

• Skeptical in near term:o Less likely to use loss leaders o Not getting pricing of larger customers

Amazon Business – What are we looking for?

What is the main goal?• Previous iterations showed more interest in

industrial

• Amazon Business doesn’t discriminate (selling everything)

• Bottom line: B2B is one of easiest way for them to leverage B2C assets

Conclusion

• Combination of disruption and uncertainty yields greater likelihood of share shift

• Independent share gains are tangible - Future shifts likely head towards independents, Staples, and Amazon

• Macro backdrop not perfect (employment) but healthy enough to grow through share gains

• AmazonSupply was flawed; Amazon Business is more of a threat, especially in SMB

40

Disclosures: I, Eamon Kelly certify that the views expressed in the research report(s) accurately reflect my personal views about the subject security(s). Further, we certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in the research report(s). The analysts responsible for the preparation of this report have no ownership stake in this company. Cleveland Research Company provides no investment banking services of any type on this or any company. Proprietary research and Information contained herein which forms the basis for findings or opinions expressed by Cleveland Research Company may be used by Cleveland Research for other purposes in the course of compensated consulting and other services rendered to third parties. The information transmitted is intended only for the person or entity to which it is addressed. Any review, retransmission, dissemination or other use of, or taking of any action in reliance upon, this information by persons or entities other than the intended recipient is prohibited. If you received this in error, please contact the sender and delete the material from any computer.

Member FINRA/SIPC

Appendix