Office Depot is buying OfficeMax for $1.2 billion. Why?

Competition Office supply retailing has been a tough business lately. Demand for paper, writing materials, envelopes, and many other products is falling as people do more and more work on line. On-line stores are making big inroads, just as they have done in books, music, and consumer electronics in the U.S. and the U.K. mass merchants are also selling more and more office products. It’s a fiercely competitive industry, with intense rivalry, demanding buyers, growing substitutes, and aggressive new entrants. Even the biggest competitor, Staples, can only manage a paltry 0.44% return on equity. It seems foolish to commit any more capital to an industry with so little potential for profit. Competitive position But the deal makes sense just because things are so grim in office supplies. It’s bad enough to be buffeted by the forces of a hyper-competitive industry, but it’s much worse to be facing such challenges from a weak competitive position. Office Depot and OfficeMax are among the industry’s top three competitors. Office Depot has about 19% of the office supply market and OfficeMax has 16%, while Staples has 30%. Amazon, W.B. Mason, WalMart, Costco, and the other competitors have the rest. Size matters. Companies with large market shares are generally more profitable than companies with smaller shares. They benefit from bigger economies of scale in production, marketing, distribution, and financing. They enjoy greater experience curve efficiencies, more bargaining power with customers and suppliers, and an advantage in attracting and retaining good managers. But it’s not absolute size or ranking among the leaders that matters, it’s relative size – how much bigger or smaller a company...

Competitive Strength Under Stress

Competition affects credit strength, and never more than in tough times. Favorable conditions can mask competitive weaknesses. Consider General Motors at the peak of the SUV craze. Unfavorable conditions can amplify weaknesses. Consider General Motors today.   This video is about Southwest Airlines and American Airlines and the recent problems in the airline industry. It explores the subject of sustainable competitive advantage. How does a company get it? How likely is it to last? The video is about four minutes long. [youtube...