- EC sounding out third party opinions
- Amazon seen as unlikely competitor in Europe
Pan-European business contracts are a small percentage of overall office supply contracts in the EU, according to an industry source. But competition for national and local contracts could also suffer from the planned merger of Office Depot (NASDAQ: ODP) and Staples(NASDAQ: SPLS), industry sources said.
When the European Commission (EC) announced it was opening an in-depth investigation into the Office Depot/Staples deal on 25 September, it flagged concerns in the market for the supply of office products to business customers through international contracts in the EEA wide market. It also highlighted the market for the supply of office products to business customers through national contracts in the Netherlands and Sweden.
Office and Staples only face competition from Lyreco on one-stop shop EU-wide contracts, three industry sources said. These contracts would typically be concluded with corporations having subsidiaries in a number of EU member states, the sources explained.
There is a risk that in going from three to two players EU-wide the companies will be able to dictate prices, warned a second industry source. This source said that the EC recently reached out for their opinion. The source did not elaborate on whether the request took the form of a questionnaire, but he said that it did not involve extensive data demands.
According to the first source, pan-European contracts are still a small percentage of overall office supply contracts in the EU. Even large corporations may prefer to negotiate contracts at a national level, where several local players are present, a UK based industry source said.
Standards and requirements may vary across regions in the EU, the second industry source explained. Northern Europe and Southern Europe require a completely different range of products, this source indicated. In the Netherlands, for example, there is a specific standard of paper size and number of holes for paper which goes into dividers, he said.
National specificities in the EU markets prompted the EC to view B2B office supply markets as national in previous reviews. InBuhrmann/Samas Office Supplies (2001) the EC found that, while some contracts with large multinational customers located in the Netherlands could be concluded on a Europe-wide or even worldwide basis, distribution was still national in scope: such contracts were not concluded unless the distributor was established in the Netherlands.
On that occasion, the parties argued that distribution is organised on a national basis and demand is strongly influenced by national demand characteristics. Accordingly, catalogues are produced specifically for national markets and the product offering varies considerably from one country to another.
The Office Depot/Staples deal has generated mixed feelings among industry players in the EU, the industry sources said.
On the one hand the reaction has been very positive, as the merger will take out a lot of cost from the supply chain, the UK source said. But on the other, manufacturers are concerned due to pressure on prices, and smaller dealers fear increased competition, he added. The latter comment was echoed by two separate industry sources.
Competing with the big three can also be tough at a local level, where more competitors are present, the first industry source said. These companies can exploit their scale to offer discounted prices in local tenders, the source said.
Office supply contracts in Europe are typically awarded through tenders for institutions and large corporations, while small and medium businesses rely on catalogues for their office supply decisions, the first industry source indicated.
If a contract is awarded, say, for three years, you start to make profit only in the third year, and only companies of that size are able to sustain two years of loss-making, this source said. Smaller players don't have the financial resources to subsidize a contract for two years, he added.
Small and medium office suppliers can rely on other assets to win customers, such as a more dedicated and personal customer relationship, they said.
The companies would need to divest contracts, at least in Sweden and Netherlands, the national markets flagged as problematic by the EC, the second industry source opined. The easiest option is to sell off contracts to Lyreco or to local players, the source thought.
In Burhmann/Samas Office Supplies, the parties let go of the overlapping business in the Netherlands. This could be a possibility for the national markets concerned, said Vincent Verouden, economist and Director at E.CA Economics.
Remedying the concerns that the EC has on a pan-European scale could be more tricky, Verouden said. Divestments might require a buyer that is able to provide or organise this pan-European offering, he noted.
But, if the EC finds that economies of scale and density are strong, then it may not be easy to enter as a new player on a given market, Verouden said. To set up this business in a certain country, companies typically would need warehouses and a distribution network (e.g. lorries, vans). A distribution network also includes active sales people on the ground, the UK source commented.
If a company only had a few customers in the country and was not able to efficiently fill its warehouses and lorries, it would not be productive to enter that market. Industry players would not set up a business in a country which they would view as unprofitable, the UK-based source echoed.
Amazon - with the launch of its new arm Amazon Business - is being touted as a competitor to Office Depot and Staples in the US. EU players expressed scepticism at the idea of Amazon even being a competitor to Office and Staples in the EU. Amazon does not currently have a B2B offering in Europe, while it has one in the US, the sources pointed out. The company's plans to expand its B2B offering in Europe are unknown at present.