BOCA RATON, FL-Assuming the proposed merger of Office Depot and OfficeMax clears the regulatory approval process and is consummated, it will be a boon for the retail sector in general and not only for the two office-supply giants as they band together to compete against market-leading Staples, Colliers International‘s Mark Keschl tells GlobeSt.com.
“It certainly allows them to match up better as a combination,” says Keschl, national director of the retail services group for Colliers, who’s based here—as is Office Depot. “This is one of the few categories of retail where you’ve always had three very strong and viable competitors. Having only two competitors will make for a more even playing field, for everybody.”
Keschl, who was SVP of real estate for Naperville, IL-based OfficeMax between 1993 and 1998, cites a number of factors why the combination with Office Depot would be a winner. Not least of these is the job they’ve done in the online channel.
“This merger certainly seems like a great step in the right direction for Office Depot and OfficeMax,” he says. “There are some nice synergies there. OfficeMax traditionally has gotten good reviews for its website presentation, and has always leaned toward the homeworker customer, the consumer customer. Office Depot has been more focused on the small-business and corporate customer.”
These synergies will help the deal go the distance, Keschl feels, overcoming some of its widely-reported shaky beginnings, such as the premature announcement of the merger in Office Depot’s fourth-quarter earnings release Wednesday morning. “Certainly in terms of their operational abilities and their offering to the customer, they seem to be a natural fit as well.
Analysts have predicted that the combined office-supply retailer will shed real estate. For example, Bloomberg on Wednesday quoted analyst Gary Balter of Credit Suisse as saying the merger could lead to Office Depot and OfficeMax closing or selling as many as 600 locations. Keschl disputes that prediction:”Any guess at the number of store closings is pure speculation at this point,” he says, noting that “it’s a complicated formula” to determine where and when to exit.
“Over the past few years, both Office Depot and OfficeMax have done a great job of downsizing, both in terms of the number of stores they operate and rightsizing the size of the stores,” he says. “Within those two existing platforms, I don’t see a lot of dead wood right now.”
If the merger does go through, the two chains are likely to be “very rational and take their time in terms of any additional store closings,” he says. “When you close a store, there are employee issues and inventory issues to deal with. It’s easier if you manage that process as opposed to mass closings. The number of stores that close will really be a function of the individual marketplace.”
In Keschl’s home base of South Florida, which hasn’t been overbuilt with stores because of barriers to entry, “we’ve absorbed all of the former Circuit City, Linens ‘n Things and Borders locations,” Keschl says. “There are still maybe one or two Borders out there that are two-level stores and therefore difficult to lease and to tenant, and they happen to be in good locations so the asking rents are high. A market like South Florida, San Francisco or Washington, DC/Baltimore will absorb closings fairly quickly. There’s demand for those boxes in good markets. In the secondary markets that were overbuilt, the additional boxes will not necessarily be good news.”
Moreover, any downsizing that does take place will be far down the road. For one thing, the two chains don’t expect their merger to close before year’s end. For another thing, the locations tend to be desirable.
“For OfficeMax, and I know that program well because I used to be VP of real estate there, those are really very good locations,” says Keschl. “The ideal location for an OfficeMax was a Target- or Home Depot-anchored shopping center, with good technical attributes like visibility and access. And other than some of the very early generation Office Depots, which tended to be located in business parks, they’ve tended to have fairly high quality real estate as well. If those become available, we should be able to absorb those.”