100 Pennsylvania Avenue
Staples, Inc. is the country's third largest operator of office supplies superstores, which offer a vast selection of products at very low prices to small business owners. Staples pioneered this concept in 1986 and grew rapidly after opening its first store in the Boston area. The company has subsequently expanded to areas outside the Northeast, opening hundreds of outlets across the nation and beginning joint ventures overseas.
Staples was founded in November of 1985 by Thomas G. Stemberg and Leo Kahn, who had previously competed against each other in the Boston grocery market. Stemberg had worked in the New England food business since graduating from Harvard Business School in 1973. After his employer fired him in 1985 because of "philosophical differences," he used his year's worth of severance pay to explore other business opportunities.
Stemberg was interviewing for a job at a generalized warehouse club retailer when he noticed that the aisle featuring office supplies was in disarray, attesting to the popularity of the products, which moved quickly out of the store. When he learned that this small category of goods accounted for seven percent of all warehouse store sales, Stemberg recognized a niche market that would provide him with the opportunity he wanted.
In formulating his concept for an office supplies warehouse, Stemberg drew on several demographic factors. As large corporations cut their workforce, small businesses were taking up the slack in the American economy, signalling a quickly expanding, lucrative market. In addition, the service sector of the economy was growing rapidly, and such businesses typically used a good deal of office supplies.
Stemberg's plan called for the elimination of the middleman in office supply distribution. Traditionally, manufacturers of paper and other items sold their goods to one of six major wholesalers around the country. The wholesalers then sold their goods to office supply dealers and stationary stores. The dealers sold supplies to large corporations, while stationers catered to small businesses and individuals. However, along the way, the two layers of middlemen between the factory and the customer drove up costs dramatically.
With his Staples store, as he planned to call the outlet, Stemberg would collapse those two layers into one. Because supplies would be purchased directly from manufacturers, the store would be able to offer much lower prices than its competitors in the heavily fragmented retail environment. With this new idea, Stemberg hoped to gain a significant enough portion of the office supply market to justify purchasing in bulk. Stemberg expected that imitators would quickly copy his idea if it proved successful, so he set out to raise a large amount of capital to finance his company, hoping to expand Staples rapidly after its start-up and avoid losing ground to its competitors.
To do so, Stemberg approached his old nemesis Leo Kahn, who invested $500,000. In addition, Stemberg made presentations to venture capitalists in the Boston area and was met with an enthusiastic response. In the first round of financing, the company raised $4 million. With this money, Stemberg set out to recruit a management team. Looking for people who shared his philosophy of how to run a business, he sought out those with a similar background, bringing in people who had worked at the same national grocery chain that he had. By the spring of 1986 everything was in place.
The first Staples Office Superstore opened its doors in May at 1660 Soldiers Field Road in Brighton, Massachusetts, a suburb of Boston. Consisting of one vast, open 14,000-square-foot space, the Staples store had a typical warehouse decor, with concrete floors and an unfinished ceiling. A huge array of goods was stacked on metal shelves, and shopping carts were provided for customers at the front. More than 40 workers were deployed to ring up sales at six cash registers. In an effort to provide customers with one-stop shopping, the store stocked everything that could conceivably be used in an office, from paper and pens, to office furniture, to microwave ovens. Most products were offered at a price half as low as that of Staples's competitors.
To drum up business, Staples gift certificates were sent to 35 local small business office managers, who would be surveyed on their reactions to the store when they made a purchase. After five weeks, only nine of the certificates had been redeemed, and Stemberg learned that he had a sizable marketing task ahead of him.
The marketing push began with an effort to differentiate Staples from other stationery outlets, in order to draw the company's targeted customers into the store. The company invested more than $1 million in several linked minicomputers and a staff of three computer programmers and began amassing a database of small businesses. The database became part of a sophisticated multi-step marketing program. Through telemarketing, Staples identified customers and enticed them into the stores. Customers then became a part of an extended database that tracked their purchases, enabling Staples to offer special discounts and encourage repeat business. With these strategies, Staples was able to begin building a solid customer base. In November of 1986 the company opened its second store in Woburn, Massachusetts, another suburb of Boston. A third location came on line in Providence, Rhode Island, the following year, and the company began to plan for its expansion into the New York area.
As Staples broadened its geographical scope throughout the Northeast, the company decided to invest in a centralized distribution facility. Rents tended to be high in the crowded urban areas where Staples stores were located, and the company hoped that this move would allow it to offer a fuller selection in smaller facilities because fewer products would have to be stockpiled on site at each location. With the distribution center, the company believed that it could replenish its shelves faster than competitors who had to rely on manufacturers for supplies. In addition, the central depot cut down on freight costs, as manufacturers were able to ship large amounts of goods to one location. It also kept payroll costs low. Staples began work on their 136,000-square-foot processing and distribution center in Putnam, Connecticut, in 1987. The decision to go ahead with this project aroused controversy among Staples's management because the investment meant that the company would postpone becoming profitable for an even longer period of time.
In June of 1987 Staples made its first foray into the New York market, opening a store in Port Chester. By the end of the year the company had opened a total of nine stores that were clumped in the New York and metropolitan Boston areas. The following year Staples moved into the other major East Coast markets of Philadelphia and Washington, D.C. This was done in conjunction with the opening of the $6 million distribution center.
In the winter of 1988, Staples stepped up its marketing efforts by sending potential customers a special catalog. Wrapped around this brochure was a coupon promising a free pen and pencil set with a purchase of $10 or more. Of those who redeemed this offer, company data indicated that more than half would return to make future purchases.
By May of 1988 Staples had opened 16 stores, and the company's revenues had risen to $40 million. In its rapid Northeastern expansion, the company sought to lock up prime retail locations throughout the region so that competitors would have difficulty establishing their own stores. To support this rapid growth, Staples solicited three more rounds of financing from the investment banking community, raising a total of $32 million.
The number of Staples stores had grown to 23 by the beginning of 1989. Whenever Staples opened a new store, the company bought a list of all the small businesses located within a 15-minute drive of the outlet. Buyers of office supplies from these firms were then contacted by telemarketers who announced the store's opening and garnered data about the buyers' purchasing habits. In return they received a coupon for free copy paper that would hopefully bring them into the store and spur word-of-mouth advertising.
In addition, the company offered customers a free Staples card that offered discounts on goods purchased. When customers filled out a card application, the company got data about the nature of their businesses. The numeric code on the card also enabled Staples to track their purchases precisely. All of this information was collated at the company's headquarters on a daily basis.
In February of 1989 Staples introduced its Private Label products--generic office supplies at exceptionally low prices. This strategy was one that Stemberg had first implemented in the grocery business, when he introduced company-label groceries for Star Markets. In April Staples sold stock to the public for the first time, raising $37 million to fund its further expansion. By the end of that month, the company's sales had reached $120 million. Despite this strong growth in revenue, Staples had yet to make any earnings, although the company did turn in its first profitable quarter at the end of January, 1989. Overall, losses since Staples' founding had reached $14.1 million.
These losses were caused by the high costs of the company's start-up and expansion as well as the strong competition the company faced. As Stemberg had predicted, Staples had quickly been joined in the office supplies market by a host of imitators around the country. In mid-1989 the company slipped to second place in revenues behind Office Depot Incorporated; Office Club was making a strong showing in California; and retail giants Kmart and Ames were also deliberating a move into the stationary field. To counter these threats, Staples continued its rapid pace of new store openings. By the end of the year the company was operating 38 stores, and it had racked up sales of $182 million.
Building on these gains, the following year Staples moved to centralize its Northeast delivery operations through a hub-and-spoke system set up with its Putnam facility at the center. This warehouse was augmented with a 32,000-square-foot delivery distribution center. This new system allowed Staples to set up a toll-free telephone line for orders, which were then shipped for delivery the next day. This operation was dubbed Staples Direct.
In July of 1990 the company also commenced operations in a new market, Southern California. Staples made its inroad into this competitive field with three stores located in Orange County, California, and a separate California distribution facility. Staples had targeted Orange County because of its high number of small businesses and growing economy, viewing its move into this area as the first step of a planned 34-store California roll-out.
Staples followed its West Coast expansion with the introduction of a new retail concept, called Staples Express. The first of these stores was opened on Court Street in the heart of Boston's financial district. With a space only a third as large as the company's suburban stores, this facility stocked 2,700 items, or half of the usual complement, which were sold at the same low prices. Staples Express was designed to appeal to the small business operator in an urban area and was geared to quick trips and impulse buying on lunch hours and after work. Customer purchases were typically small, being no bigger than what a person could carry.
The unveiling of this prototype was part of the company's strategy was to dominate the office supplies market through three distribution channels: the suburban superstore, the urban ministore, and phone-in direct delivery service. Also in 1990 Staples began to buy its products overseas. To conduct international buying the company formed a subsidiary called Total Global Sourcing, Inc.
By the end of the year, the number of Staples stores had doubled to 74, including nine in California, and the company's sales had nearly reached the $300 million mark. Staples accelerated its California operations the next year when it bought ten Los Angeles stores from defunct superstore operator HQ Office Supplies Warehouse and converted them to Staples stores.
At the same time, Staples entered its first foreign venture, investing in Business Depot, Limited, a new Canadian office superstore. In the United States, Staples celebrated the opening of its 100th store, an outlet on Long Island in New York. By the end of the year, sales had risen 83 percent to reach $547 million, and earnings grew by 117 percent.
In June of 1992 Staples expanded into another region of the U.S. with the purchase of Office Mart Holdings Corporation for $3.1 million. This company owned ten WORKplace stores in Florida. Staples had now moved into direct competition with its biggest rival, Florida-based Office Depot.
That year Staples made additional progress in its campaign to expand overseas. The company bought a 48 percent interest in MAXI-Papier, operators of five office superstores in cities around Germany. Staples also signed a partnership agreement with Kingfisher plc to open office superstores in the United Kingdom. Sales at the end of 1992 reached $883 million. In 1993 Staples celebrated the opening of its 200th store, and at that time the company announced plans for an additional 130 store openings over the next two years.
This ambitious schedule was set despite fluctuations in the price of Staples's stock. Wall Street had lost confidence in the company in early 1993 after its two largest rivals embarked upon a rapid string of acquisitions, while Staples demonstrated difficulty rolling out a new line of personal computer products. To redress these problems, Staples pared down the number of machines and software programs it offered, to create a more manageable department. In addition, the company began to make a number of acquisitions of its own. Staples arranged to buy out its Canadian partner in the Business Depot for $32 million in early 1994. The company also signed agreements to buy two contract stationers: New Jersey-based National Office Supply Company, Inc., which cost $99 million, and Spectrum Office Products, of New York. The former company boasted a nationwide distribution system.
In April of 1994 Staples bought seven former Office America stores based in Virginia and began to convert them to Staples outlets. In July, the company announced that it would buy D.A. MacIsaac, Inc., a regional contract office supplier. These moves were all designed to increase Staples's size and penetration of the office supplies business as the company moved into the late 1990s. Although its market had become more competitive than ever, Staples appeared to be well-situated to continue its strong growth in the future.
Principal Subsidiaries: Office Mart Holdings Corporation; Total Global Sourcing, Inc.
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