Changing market dynamics for office supplies retailers by Sutherland Global Services

Changing Market Dynamics for Office Supplies Retailers February, 2014

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US Office Supplies – Market Overview Market Size

Annual Growth Rate

Major Product Categories

Stationery and computer paper

USD 60–70* Bn 2008

2009

2010

2011

2012

Greeting cards

2013

Office and school supplies

Magazines and newspapers

Office equipment

Furniture

Online Office Supplies Market Market Size

Annual Growth Rate

Major Online Product Categories

Major Players

Others 25.5%

Staples 39.0% Office supplies

USD 22.8 Bn 2007 2009 2010 2011 2012

Office Depot Inc. (including Office Max) 35.5%

Office equipment Stationery and computer paper

Source: Secondary Research, Sutherland Research and Analysis, * Sutherland Estimates

www.sutherlandglobal.com March 3, 2014

Cannibalization from other retail sub-segments

The Office Supplies retailers are witnessing low sales as a result of the "Digital Revolution" – Tablets, iPads and Cloud computing are lowering the demand for paper, printer and pen supplies

The Staples and Office Depots of the world are being challenged by lower-cost retailers like member-supported Costco Wholesale Corp.

Competition from online players

Digital revolution

US Office Supplies – Industry Challenges

Online retailers like Amazon, which have lower operating cost, are also selling Office Supplies at lower prices adding to the woes of the Office Supplies retailers

"Office Depot and OfficeMax and their larger rival, Staples, have all been struggling to adapt amid changing shopper habits and a slow economic recovery. They have been closing stores, downsizing others and trimming overhead, but investors and Wall Street analysts argue the changes haven't occurred fast enough — and aren't significant enough — to reverse the sector's diminishing financial results." – The Wall Street Journal

VS.

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"All three companies [OfficeMax, Office Depot, and Staples] could soon face an even larger existential threat than Amazon," The rapid digitalization of a workforce that has grown less reliant on notepads, pens, and printers. And that may be a trend no merger can solve." – Ryu Spaeth, The Week

Source: Secondary Research, Sutherland Research and Analysis

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Strategies of Office Supplies Retailers to Overcome Challenges (1/2) Reduce brick-and-mortar store space "It really comes down to a deal-by-deal situation, and if it really makes sense to pull the trigger and close the store, we’ve been aggressive in doing that if it makes sense for us. If we feel like the store’s profitability is good enough and even with risk for the next few years, it’s fine. We renew on a very short-term basis and we’ve been successful in doing so." – Demos Parneros, Head of Staples’ North American Operation

"The bigger stores "were wasted space", the new stores maintain 90% of the sales and are smaller, have more private-branded products with higher margins and place a larger emphasis on services instead of products." – Kevin Peters, President of North America, Office Depot

Increase profitability with greater online sales Staples planned to double the number of products on Staples.com to 300,000 by the end of 2013 As of June ,2013, Staples had sales split of 58% in-store and 42% online sales

$$ $$

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In 2013, Staples announced the development of a second e-commerce and engineering research facility in Seattle. The center will focus on the next generation of digital platforms, personalization, and big-data

"We are building on the strengths that are the foundation of our success by focusing on five key priorities: accelerate growth in our online businesses; fully integrate retail and online; improve retail store productivity; restructure our International Operations; and return cash to stakeholders." – Ron Sargent, CEO, Staples Source: Secondary Research, Sutherland Research and Analysis

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Strategies of Office Supplies Retailers to Overcome Challenges (2/2) Customer centric focus and multichannel marketing

In October, 2013, Staples announced it would match prices of Amazon, beginning November 3, both in stores and online

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Staples launched a growth plan, aiming to save USD 250 million annually by the end of fiscal 2015, in an effort to move beyond just office supplies and develop out its mobile and online presence

Diversifying product offerings

Staples is expanding its assortment in categories beyond office supplies. The largest Office Supplies retailer added another 70,000 new products on staples.com in areas like furniture, office decor and education, during the Q3, 2013. They continue to add assortment to quill.com and staples.ca as well. At the end of Q3, the expanded assortment on staples.com, staples.ca and quill.com was driving over USD 3 million in incremental sales per week Staples also expanded its relationship with Apple by offering the latest assortment of iPads on staples.com, quill.com and staplesadvantage.com

Source: Secondary Research, Sutherland Research and Analysis

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Deal facts

Rationale

In addition, Retailers may be forced to Consolidate; as happened in case of Office Depot and Office Max

In November, 2013, Office Depot acquired Office Max. The merger was aimed at: • Reducing costs • Consolidating stores • Improving relationship with suppliers • Enhancing their chances of taking on market leader Staples • Discount retailers like Costco and online rivals like Amazon

Deal value was USD 976 Mn The new company will operate under the name "Office Depot, Inc" Office Depot, Inc is assumed to have more than 2,100 stores and combined revenue of about USD 18 Bn The merger is expected to cut as much as USD 600 Mn in costs (excluding savings from store closing)

"They have become a bigger and leaner company, so for Staples it will become harder down the road," – Oliver Wintermantel, Analyst, International Strategy & Investment Group LLC

"Over the next few years, the merger will help Staples,"...."Staples will pick up sales as the merged company closes stores. Contract customers are also more likely to move over to Staples because of disruption caused by the tie-up."

– Gary Balter, Analyst, Credit Suisse Group AG

Source: Secondary Research, Sutherland Research and Analysis

www.sutherlandglobal.com March 3, 2014

End of Presentation