Staples buys Medical Arts as point of differentiation - Brief Article

DSN Retailing Today, July 29, 2002 by Mike Troy

FRAMINGHAM, MASS. -- The quest for growth in the office supplies segment of retailing has prompted Staples to acquire a company called Medical Arts Press that last year sold $168 million worth of office supplies to doctors, dentists and veterinarians.

Staples agreed to pay $385 million to acquire the 52-year-old, Minneapolis-based company as away to tap into a $13 billion segment of a North American office supplies market that Staples executives contend is worth $254 billion. Medical Arts will operate under Staples' direct-mail Quill subsidiary a company Staples acquired in May 1998.

"Medical Arts Press serves the single most important vertical market," Staples chairman Tom Stemberg told attendees at a CIBC World Markets conference held the day after the acquisition was announced.

The acquisition comes as Staples and its two main office superstore rivals, Office Depot and OfficeMax, face an increasingly challenging environment in which to produce growth. Economic weakness of the past year, combined with increased head-to-head competition among the three chains, made sales growth difficult to achieve. In addition, new store expansion opportunities, while generally thought to still exist, have grown increasingly limited and led to sweeping strategic changes.

From Staples' perspective, it has slowed store expansion and focused on increasing the productivity of existing units, while positioning itself for growth in other areas, such as European operations and delivered products. The Medical Arts Press acquisition is a perfect example of the latter.

Although the acquisition won't do much to increase Staples' sales and profits in the short term, it strengthens a segment of the company's business that already is its best-performing, enjoys the highest rate of profitability and has the greatest potential for future growth. Staples' North American delivery business, which includes its Quill subsidiary and online efforts, increased sales last year by 8.2% to slightly more than $3 billion, while profits doubled to $205 million.

"We do not have any problems with the strategic fit of the acquisition. It fits with the company's Quill brand," according to UBS Warburg analyst Aram Rubinson.

The acquisition is expected to add a penny or two to Staples earnings per share next year, according to the company's estimates.

By comparison, Staples' North American retail business, which operated 1,261 stores at the end of the most recent fiscal year, suffered a profitability setback last year. Sales dipped to about $6.9 billion, while profits declined 25% to $321 million.

Staples aims to fix the profitability problem by redesigning its entire store base and opening fewer, smaller-format stores going forward. During 2001, five stores were remodeled and 76 stores were opened in an easier-to-shop and less-expensive-to-operate "Dover" format. This year, most of the 95 new stores planned for North America will be in the "Dover" format and another 125 will be remodeled to that design.

"Virtually the entire chain within the next three years will have the Dover look and hopefully the Dover sales productivity," Steinberg said.

The company's third business segment, European operations, consists of 175 stores in the United Kingdom, Germany, the Netherlands and Portugal and delivered products businesses in Germany and the United Kingdom. The European unit has improved its performance, but continued to lose money last year. Staples reported a $6.5 million loss on European sales of $796 million last year compared with a loss of $24.3 million on sales of $717 million the year before. Nineteen new stores were opened in Europe last year and another 20 are planned for this year.

Staples' three-pronged growth strategy of North American retail operations, European operations and a North American delivered products business gives the company plenty of room to expand in a global office products market valued at $400 billion. For the time being, though, as the acquisition of Medical Arts Press illustrates, the business that is the most attractive right now is the delivery of office supplies to customers in the United States and Canada.