eamon kelly [email protected] important disclosures can be found in appendix
TRANSCRIPT
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
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Appendix