Office Depot and OfficeMax merger to create supply chain synergies, but will that be enough?

The office product industry is about to become smaller. Office Depot and Office Max have agreed to merge, to become the world’s second largest office product company behind Staples. The pair had combined revenue of approximately $18.5bn in the last fiscal year. They expect to save about $400m-$600m per year within three years through layoffs, streamlining of back-office functions and combined advertising.

Like much of the retail industry, office product retailers such as Office Depot, OfficeMax and Staples are adapting to a new retail environment. As more spending for such goods shifts to the internet, these companies have had to adapt and adjust their supply chains. While Staples took a similar approach as Amazon and expanded the number of fulfillment centers closer to end-users, Office Depot has taken a different approach and opted to consolidate facilities. As of 2012, the company had 13 distribution centers and 2 cross dock facilities in the US and 23 distribution centers outside of the US. Both Office Depot and Staples facilities are highly automated and utilize robotic systems such as Kiva for order fulfillment management.

OfficeMax, the smallest of the three companies, has 38 distribution centers in the US, Puerto Rico, Canada, Australia and New Zealand. While Staples has created specialized fulfillment centers for online orders, OfficeMax appears to fulfill retail, businesses and online orders within the same facilities.

While it is likely the combined Office Depot and OfficeMax will result in a further consolidation of distribution centers, the fate of each one’s Mexican venture may be in question. Earlier this month, various publications reported Office Depot was in talks to sell its 50% stake to its partner, Grupo Gigante. The partnership has over 200 stores in Mexico and Colombia and generated approximately $24m for Office Depot last year. OfficeMax also has a joint venture in Mexico and operates about 82 stores in the country. It is not certain what the status of OfficeMax’s joint venture will likely mean to this merger.

Once approved, the combined Office Depot and OfficeMax should be able to offer supply chain savings, however, even the office supply leader, Staples is struggling as competition from online retailers such as Amazon take a bite out of revenues. Therefore, brick & mortar retailers will need to provide innovative solutions in order to compete effectively.