Staples Deal Goes Straight to the Glut
Combination Makes It Tougher for Others to Close Stores
If Staples ’s planned purchase of Office Depot succeeds, one of the first things the combined office-supply giant likely will do is start closing stores. And that will only add to the glut of available floor space in areas where few retailers are interested in expanding.
Staples’s announcement Wednesday that it will buy Office Depot for $6.3 billion little more than a year after the latter merged with OfficeMax shows how much the retail sector has changed. So does the companies’ belief that regulators, which blocked the same merger 18 years ago, will bless one now.
Two big forces have hit retailers since then: First, the housing bust ended the migration toward newly built outer suburbs that drove many expansion plans. Second, the rise of e-commerce whittled away business from big boxes and superstores, just as the latter did to mom-and-pop retailers in the 1990s. The result: There is far more retail space than sales to sustain it.
There is 12.2 billion square feet of retail space in the 210 largest metro areas in the U.S., according to research firm CoStar Group, or about 50 square feet per capita. That compares with 47 square feet per capita in 2000, and 44 in 1990.
Meanwhile, sales growth away from the Internet has been less than tepid.
Available data suggest that retail sales excluding e-commerce came to $4.39 billion in 2014. Adjusting for the Federal Reserve’s preferred measure of consumer inflation, that is just 1.5% above 2007. And with e-commerce continuing to take away share, a revival doesn’t look likely.
So it is imperative for retailers to shed underperforming stores and focus efforts on smaller-format locations closer to urban centers which can generate strong sales despite the online threat.
But this process can be long and difficult. While closing a store in an undesired location can bring benefits, it also comes with a cost. If it is an owned store, the retailer will struggle to find a buyer. And if it is on a long lease, the retailer will be on the hook.
Staples and Office Depot, both of which have been closing stores recently, aren’t as challenged in this regard as many rivals.
Most of their stores are on leases, and their annual filings suggest many of those come due fairly soon. Moreover, a single company will be able to close stores in relatively desirable locations where their leases are valuable to shopping-center operators looking to bring in higher-volume retailers. According to UBS, which forecasts the combined company would reduce its U.S. store count to 2,728 in 2017 from an estimated 3,428 currently, 53% of Staples stores are within 5 miles of an Office Depot store.
But as those stores close, it will be that much harder for troubled retailers that have been working to cut their square footage, such as Sears Holdings and J.C. Penney , to sell stores and get out from under leases. For them, an already painful process just got a little more so.