Judge’s Opinion: Staples And Office Depot Aren’t Desperate Penguins On An Iceberg Yet

Image courtesy of Mike Mozart and frankieleon

At the beginning of 2015, Staples proposed an acquisition of the then freshly merged Office Depot and OfficeMax. They insisted that the cost savings would help them battle online rivals and keep their costs low to stay competitive. Ultimately, a federal judge sided with the FTC and put a temporary stop to the merger, and ultimately the companies gave up on the idea of merging. The judge’s opinion has been released, and now we know why.

The companies’ retail business didn’t have very much to do with it at all. Consumers can buy pens or paperclips at Walmart or from Amazon easily, while it’s less difficult for large national businesses to do so. This is a world that’s largely hidden to anyone who doesn’t handle procurement for their own workplace, but there are specific needs that large companies, like members of the Fortune 100, have when shopping for office supplies.

In opening arguments, an attorney for Staples and Office Depot compared the two companies to penguins on a melting iceberg, working together to stave off disaster. In this metaphor, perhaps Amazon is a whale lurking in the ocean next to the iceberg.

The problem is that smaller regional competitors can’t offer low enough prices since they deal with wholesalers instead of the manufacturers. Amazon does source from manufacturers, but they don’t have the infrastructure yet to bid on commercial contracts and handle payment by invoices.

When a company sends out a request for proposals, it wants vendors to compete for the lowest bid. There’s intense competition, and if Staples and Office Depot were to merge, they would have no competition in the national market. The largest customers of office supply companies pay about half what consumers would for the same items in a Staples or Office Depot retail store.

“Here, the record evidence shows that large B-to-B customers do not view any alternative sources for bulk procurement of basic office supplies that would retain the current competitive conditions of the market,” the judge wrote in his opinion.

As explained to the court by large customers of Office Depot or Staples like McDonald’s and the utility AEP, for companies with offices spread nationwide and who purchase more than $500,000 worth of office supplies per year, having a national supplier that’s equipped to provide a high level of service is important.

Some of the advantages of buying from one of the two big suppliers include:

  • Nationwide delivery to desks (so they don’t have to hire employees to deliver supplies)
  • Sophisticated information technology, such as special limited online catalogs
  • Streamlined invoicing
  • Next-day delivery so they don’t need to store large amounts of supplies
  • Delivery to a wide geographic area for offices across the country

The companies’ argument depended on the coming threat of Amazon business, but they couldn’t prove that Amazon Business is about to take over their market. Most of the figures on Amazon’s present and future were redacted from the record at Amazon’s request, but even the executive in charge of Amazon Office couldn’t say whether the company will be capable of competing on a national level with Staples and Office Depot within three years.

amazonmax

Leaving only one vendor capable of that is precisely how monopolies work.

MEMORANDUM OPINION [PDF]