Staples, Inc. Business Information, Profile, and History

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History of Staples, Inc.

Staples, Inc. is the country's largest operator of office supplies superstores, offering a vast selection of products at low prices, primarily to small business owners. Staples pioneered this concept in 1986 and grew rapidly after opening its first store in the Boston area. The company subsequently expanded to areas outside the Northeast; by the early 2000s, there were about 1,300 Staples outlets located both in major metropolitan areas and smaller markets in 45 states, the District of Columbia, and 10 Canadian provinces. In addition to the retail operations, the company runs a delivery business that encompasses catalog and Internet businesses under the Staples and Quill names, as well as contract stationery businesses, which deliver office supplies to medium-sized and large companies. Staples' European operations consist of nearly 200 retail outlets, under the Staples name in the United Kingdom and Germany and under the name Office Centre in the Netherlands and Portugal. The firm also runs a number of international mail-order office-products businesses: JPG and Bernard in France and Belgium, Kalamazoo in Spain, Neat Ideas in the United Kingdom, and MondOffice in Italy.

Pioneering the Office Supplies Superstore Concept: 1980s

Staples was founded in November 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 7 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 workforces, small businesses were taking up the slack in the American economy, signaling 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 stationery stores. The dealers sold supplies to large corporations, while stationers catered to small businesses and individuals. Along the way, however, 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. Stemberg hoped with this idea to gain a portion of the office supply market significant enough 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 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' 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 multistep marketing program. Through telemarketing, Staples identified customers and enticed them into the stores. The profiles and buying habits of customers then became part of an extended database, 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 1986 the company opened its second store in Woburn, Massachusetts, another suburb of Boston. A third location emerged 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 onsite 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 its 136,000-square-foot processing and distribution center in Putnam, Connecticut, in 1987. The decision to proceed with this project aroused controversy among Staples' management because the investment meant that the company would postpone becoming profitable for an even longer period of time.

Late 1980s: Expanding Throughout Northeast, Going Public

In June 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, with 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 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 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 cost 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 stationery 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.

Early 1990s: Further Growth

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. The new system allowed Staples to set up a toll-free line for orders, which were then shipped for delivery the next day. The operation was dubbed Staples Direct.

In July 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 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 The Business Depot, Ltd., 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 1992 Staples expanded into another region of the United States 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' stock. Wall Street had lost confidence in the company in early 1993 after Staples' 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, for $99 million; and Spectrum Office Products, of New York, for $23 million. The former company boasted a nationwide distribution system.

Mid-1990s: Still Growing, Despite Blocked Merger with Office Depot

In April 1994 Staples bought seven former Office America stores in Virginia, Arizona, and Kentucky 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, for $15 million. A fourth contract stationer, Philadelphia Stationers, was later bought for $14 million. These moves were all designed to increase Staples' size and penetration of the office supplies business, and they helped the company's revenues surpass the $2 billion mark for the fiscal year ending in January 1995.

Staples next launched a two-year, $240 million program to open an additional 170 new stores, entering still more new markets in the process, and to refurbish all of its existing outlets. The remodeling effort featured wider aisles, bigger in-store signs, and improved lighting. The company also launched a new advertising campaign in 1995, one that featured the tag line "Yeah, we've got that"; the ads, which captured several advertising awards, ran through early 2003. In the meantime, the latest expansion pushed 1995 sales past $3 billion, making Staples only the sixth company in U.S. history to reach that mark within ten years of its founding. The following year the firm opened its 500th store. Also in 1996, Staples bought out its partner in the U.K. and German ventures, Kingfisher, in a £29.4 million deal. By this time there were 34 Staples outlets in the United Kingdom; the MAXI-Papier stores in Germany were subsequently rebranded under the Staples name.

In the boldest move yet in its brief history, Staples reached an agreement in September 1996 to acquire its main rival, Office Depot, for $3.36 billion in stock. The deal had the potential to create the dominant player in the office-supply superstore sector, with 1,100 stores and annual revenues in excess of $10 billion--far eclipsing what would be the number two player, OfficeMax, Inc., which had about 500 stores and sales of just over $3 billion. In an attempt to head off antitrust objections, Stemberg and other officials from Staples and Office Depot tried to emphasize that the superstores did not just compete against each other--they also competed with mass marketers such as Wal-Mart Stores, Inc., warehouse clubs, direct marketers, and others. The Federal Trade Commission (FTC), however, did not buy this argument, with the agency's chief concern being that the merger would significantly reduce competition in a number of markets where the two firms were competitors, leading to price increases as high as 10 percent. The FTC voted to block the deal in March 1997 and one month later rejected the deal again after Staples had reached an agreement to sell 63 stores to OfficeMax. The FTC then sued to stop the deal, and in late June a federal judge granted a preliminary injunction to block the transaction. At this point, Staples and Office Depot abandoned their merger plans, conceding defeat.

Late 1990s: Surpassing the 1,000-Store Mark

In the wake of this setback, Staples lost no time in reasserting its position as the office supplies superstore growth leader. During 1997 the company opened 128 new stores in North America, bringing its store total to more than 740. Revenues for the year topped $5 billion, making Staples the seventh company in U.S. history to reach that mark in a dozen years of operation or fewer. The expansion pace quickened in 1998, as 174 more stores made their debuts. That year, Staples also acquired Quill Corporation for about $685 million in cash and stock as part of its effort to expand beyond retail outlets. The privately held Quill, based in Lincolnshire, Illinois, was a seller of office supplies via catalog and through direct (or "contract") sales to businesses. Quill, which had 1997 revenues of $555 million, continued to operate independently as a Staples subsidiary. Other important developments in 1998 included the launching of the Staples online retail store, staples.com, and the promotion of Ronald L. Sargent from president of North American operations to president and COO of Staples (Stemberg continued to serve as chairman and CEO).

Staples' European operations were bolstered considerably in 1999 with the acquisitions of three companies: Sigma Burowelt of Germany, Office Centre of the Netherlands, and Office Centre of Portugal. Sigma Burowelt operated 15 office supply stores; these were subsequently rebranded under the Staples name, increasing the total in Germany to 41. There were 21 Office Centre outlets in the Netherlands and five in Portugal, as Staples entered those two markets for the first time. The Office Centre stores were conceptually different from the typical Staples outlet--they had more of a business-oriented membership format and were similar to warehouse clubs in the United States. Overall, Staples now had about 120 European stores. Later in 1999 the company opened its 1,000th store worldwide, becoming the first office supplies superstore retailer to do so. Also, the Staples Center opened in Los Angeles that year as the new arena home for the Lakers professional basketball team and the Kings professional hockey team. In this corporate sponsorship deal, Staples, Inc. agreed to pay $100 million over a 20-year period. In the fall of 1999 Staples created a tracking stock for its Internet operations and began selling shares in the stock in private transactions.

Early 2000s: Competing in Uncertain Times

After a remarkably and consistently successful performance since its founding--sales and earnings had increased 30 percent per year for 12 years--Staples finally ran into trouble in the early 2000s. During the latter months of 2000, the retail market for office supplies began foundering. The boom years of the 1990s were over, and the growth of small businesses and home offices--the core of Staples' customer base--was fading away. Early in 2000 the company announced plans to sell its Internet tracking stock through an initial public offering (IPO), but the bursting of the stock market bubble soon thereafter forced Staples to abandon this plan (the tracking stock was later converted into Staples stock). Furthermore, the firm had made a number of investments in various Internet services that were offered through its web site, which proved to be a money-losing strategy. Staples announced in January 2001 that it would take a $206 million writeoff related to various web investments. As a result, net income for fiscal 2000 totaled just $59.7 million, compared to $315 million for the previous year, although revenues increased 19 percent and surpassed the $10 billion plateau for the first time. Later in 2001, the Internet operations were merged into Staples Direct, the company's thriving catalog unit.

In February 2002 Sargent was promoted to president and CEO, while Stemberg remained chairman. Sargent was charged with leading Staples through its transition from a growth-oriented young retail firm to a more mature company competing in an industry dealing with an increasingly saturated U.S. market. Changes began almost immediately. In March 2002 Staples announced a plan to close 31 underperforming stores, most of which were located in small towns, taking a charge of $50.1 million in the process. The company also considerably slowed its pace of expansion, opening just 72 new stores in North America and 14 in Europe during fiscal 2002, compared to 117 and 19, respectively, the prior year. Furthermore, expansion into new markets was curtailed as well. Many of the new outlets were located in large metropolitan areas where Staples already had a presence. The company also launched a remodeling effort, converting a significant number of stores from the original warehouse design to more of a boutique look, with an open design and lower shelves--all aimed at making it easier and faster for customers to find what they were looking for. The new format was supported through an advertising campaign, launched in early 2003, featuring the new slogan, "That was easy." Finally, under Sargent, Staples eliminated hundreds of items from the store shelves as it sought to shift the chain's focus away from casual shoppers toward small businesses and what were termed "power users." The latter were defined as customers who purchased more than $500 per year of office supplies, and such customers included home-based businesses, persons with home offices, and teachers. Small businesses and power users accounted for 70 percent of Staples' revenues and fully 90 percent of profits.

While overhauling its core North American retailing operations, Staples was also completing acquisitions at home and abroad. The company looked to purchase delivery-based businesses, which tended to have higher profit margins than retailing operations. In July 2002 Staples bought Medical Arts Press, Inc. (MAP) for $383.2 million. Based in Minneapolis with 2001 revenues of $168 million, MAP was a direct marketer of specialized printed office products and practice-related supplies to healthcare offices. MAP became a division of Quill Corporation. Staples in October 2002 spent EUR 806 million (US$788 million) for the European mail-order businesses of Guilbert S.A., a subsidiary of Pinault-Printemps-Redoute S.A. of France. The operations gained through this deal had revenues of about $425 million in 2001, and they sold office supplies and furniture via catalogs and Internet web sites to small businesses under several brands: JPG and Bernard in France and Belgium, Kalamazoo in Spain, Neat Ideas in the United Kingdom, and MondOffice in Italy.

Early indications were that Staples' various strategy shifts were paying off. Despite the continuing economic downturn in the United States, Staples managed to post an 8 percent increase in fiscal 2002 sales to $11.6 billion--a jump that enabled the company for the first time to surpass rival Office Depot (which reported 2002 revenues of $11.4 billion). Net income was a record $446.1 million. Staples planned to continue its more modest pace of expansion, opening between 75 and 90 stores in North America during 2003. Another 20 stores were slated to open in Europe that year, including the expansion of the Office Centre concept into Belgium. It appeared that Staples had gotten past the rough patch it encountered earlier in the decade and was ready to enter a new period of industry-leading growth.

Principal Subsidiaries: Hayes Marketing, Inc.; Medical Arts Press, Inc.; Quill Corporation; Smilemakers, Inc.; JPG Benelux SPRL (Belgium); The Business Depot, Ltd. (Canada); JPG SA (France); Reliable France SA; Bernard SA (France); Staples (Deutschland) GmbH (Germany); Mondoffice Srl (Italy); Business Office Supply B.V. (Netherlands); Staples Netherlands B.V.; Sistemas Kalamazoo SA (Spain); Neat Ideas Limited (U.K.); Staples UK Limited.

Principal Operating Units: North American Retail; North American Delivery; European Operations.

Principal Competitors: Office Depot, Inc.; OfficeMax, Inc.; Buhrmann N.V.

Chronology

• Key Dates:
• 1985: Thomas G. Stemberg and Leo Kahn found Staples, Inc.
• 1986: Founders open the first Staples store--the first office supplies superstore--in Brighton, Massachusetts.
• 1989: Company raises $37 million through an initial public offering.
• 1990: First stores in California are opened.
• 1991: Company establishes first non-U.S. venture, an investment in Canadian office superstore The Business Depot, Ltd.
• 1992: Staples enters the European market for the first time.
• 1996: Staples enters into agreement to acquire archrival Office Depot.
• 1997: Merger with Office Depot is blocked on antitrust grounds.
• 1998: Quill Corporation is acquired; staples.com is launched.
• 2002: Staples acquires Medical Arts Press, Inc. and the European mail-order businesses of Guilbert S.A.