Summary
Facing the negative impact of cuts in spending by large US businesses, Corporate Express continues to produce disfavor amongst shareholders and analysts who feel that CEO Frans Koffrie has not kept promise of an imminent recovery. Most recently, the threat from Centaurus, coupled with declining share price and continued pressure from the key Office Supply players in the US has created the perception that a takeover bid could soon be forthcoming. Organic pressures in the US have come from the following: 1)General weakness of the economy in terms of mid and large size business spending. 2)Pressure from the Office Supply sector as they continue to push for share on the Contract side. 3)CE's lack of brand image in the US due to non-existence of retail store presence. 4)Limited resources and brand appeal that make media marketing, print, direct mail and e-commerce campaigns work well for the multi-channel players. 5)A business model built primarily on dependence of large business.
Analysis
Unlike the Office Supply sector that caters to all businesses from the smallest to Fortune 500 companies which gives their brand broader appeal, Corporate Express has continued to focus almost exclusively on large business and has stoically maintained this business model despite the continual share loss and internal struggles in the US. If the overall soft economy in the first 6 months of the year weren't enough to continually erode topline revenues, growth of the Contract segment at Office Depot and particularly Staples continues to produce favorable earnings results and share gains in the segment despite the fact that some of the annual contracts signed with large businesses are not necessarily profitable in the first year and are negotiated with hopes that the employee base at large companies can be leveraged to shop in retail stores, thus offsetting some of the gross margin loss on the parent corporation account. Recently, a prior held Corporate Express account with the State of North Carolina was under bid by close to $900,000 annually by Office Depot shedding some light on the fierceness of competition faced by Coporate Express against the multi-channel office products giants. Fortunately for Corporate Express, the #3 revenue player in Contract, OfficeMax has experienced its own internal struggles and similarly faces pressure from ODP and SPLS to maintain its existing large and midsize business relationships and topline revenue base.
Despite speculation that a potential buyout from one of the Office Supply principals(most likely SPLS or ODP) might encounter anti-trust issues and a battle with the FTC, one needs to be reminded that in the past, former Contract only players like Quill and Viking were acquired by SPLS and ODP, and last year, ODP acquired Allied with little, if any government resistance.
Perhaps the complete strategic review ordered by the Corporate Express Board(with 3 month targeted completion) will shed light on a turnaround strategy and a sorely needed business model refresh. Rhetoric won't fend off the pressure from Centaurus and further declines in market capitalization will more quickly, fuel the takeover flames by either venture capital activists or a player from the Office Supply sector. One thing is certain--positive change and outlook must be meaureable in days vs years or the grilling from shareholders and hedge fund reps will continue with perhaps the ultimate goal being the head of Frans Koffrie served in a Dutch oven!
