1)Using the Porter Framework analyze and describe the industry in the late 1980s. Why was it ripe for rationalization. (You should create a Porter Framework industry chart as part of this question but be sure to explain what you show.) How has it changed between 1980 to 2015 and what was Staples role in that change if any. Describe the change in the context of the Porter model.

2) Using the Porter Framework analyze and describe the industry in the late 1980s. Why was it ripe for rationalization. (You should create a Porter Framework industry chart as part of this question but be sure to explain what you show.) How has it changed between 1980 to 2015 and what was Staples role in that change if any. Describe the change in the context of the Porter modelThe Staples concept in the early years was quickly imitated and competition intense. How and why was Staples able to emerge from the pack as the industry leader. Will it remain the industry leader. What forces are at play that will determine Staples success for the next 30 years

VINTRODUCIION pound matters, retailers such as Walmart, Costco, and Amazon.com had expanded their office supplies offerings and were becoming increasingly tough com- It was 1985, and 36-year-old retailer Tom Stemberg petitors for Staples. In 2007, before the crisis hit, Stawas being interviewed by the CEO of the Dutch- ples' return on invested capital stood at 19.16%, but it based warehouse club, Makro, for the top job at declined to 9.11% by 2014 . Staples revenues peaked in Makro's nascent U.S. operation. Stemberg didn't 2013 at $25 billion. By 2014, they had fallen to $22.5 think Makro's concept would work in the United billion as Staples closed poorly performing stores. Net States, but he was struck by one thing as he toured income dropped from \$974 million to \$135 million Makro's first U.S. store in Langhorne, Pennsylvania: over the same period. office supplies were flying off the shelves. "It was ob- Faced with an increasingly tough competitive vious that this merchandise was moving very fast," he environment, in early 2015 Staples announced that later recalled, "That aisle (where the office supplies it had reached a deal to merge with its largest rival, were located) was just devastated." Stemberg began Office Depot. Federal regulators had disallowed a to wonder whether a supermarket selling just office similar proposed merger in 1997, but Staples and supplies could do to the office supplies business what Office Depot believed that this time the merger would Toys R Us had done to the fragmented toy retailing be approved given the significant change in market industry - consolidate it, and create enormous eco- dynamics since then. 2 nomic value in the process. Within a year, Stemberg had founded Staples, the first office supplies supermarket. Thirty years later, Staples was the leading retailer in the office supplies business, with 1,679 stores in the United States and Canada, and another 284 internationally in 23 countries. Although the company had performed well for most of its history, the 2008-2014 period proved to be extremely challenging. Demand fell in the face of a sharp economic pullback following the 2008-2009 By 1985, despite his young age, Tom Stemberg global financial crisis. The period was character- had assembled an impressive resume in retailing. ized by intense price competition between Staples He had been born in Los Angeles but spent much and its rivals, which depressed profitability. To com- of his teens in Austria, where his parents were originally from. He moved back to the United price on turkeys. Technically that made Kahn's States to enter Harvard University, ultimately grad- claim incorrect-a point that Stemberg made to the uating with an MBA from Harvard Business School Massachusetts attorncy general's office, which told in 1973. Stemberg was hired out of Harvard by the Kahn to pull his ad. Jewel Corporation, which put him to work at Star In 1982, Stemberg left Jewel to run the grocery Market, the company's supermarket grocery divi- division of another retailer, First National Supersion in the Boston area. markets, Inc. To build market share, he decided to Henry Nasella, Stemberg's first boss at Jewel, who take the company into the warehouse food business, would later work for Stemberg at Staples, remembers imitating Kahn's Heartland chain. Stemberg soon meeting Stemberg on his first day at Jewel: "He came came into conflict with the CEO at First National. in 15 minutes late, his hair too long, his tie over his As he later admitted, "I probably didn't do a very shoulder, his shirt hanging out over the back of his good job, in a corporate political sense, of making pants. I thought, what in the world do I have here?"3 sure he understood the risks in what we were trying What he had in the disheveled Stemberg, in turns out, to do. The situation was very stressful." In January was a brilliant marketer. Stemberg started out on the 1985, things came to a head and Stemberg was fired. store floor, bagging groceries, stocking the aisle, and It was probably the best thing that ever happened ringing up sales at the checkout counter. However, to him. he rose rapidly. By the time he was 28 , he had been When Kahn heard that Stemberg had been named vice president of sales and marketing at Star fired, he quickly got in touch. Kahn had just sold Market, the youngest VP in the history of the Jcwel his own business for $80 million, and he was lookCorporation. ing for investment opportunities. He had developed Stemberg became known as an aggressive mar- great respect for his old adversary, and wanted to keter, competing vigorously on price and introduc- back him in a new retailing venture. As Stemberg ing generic brands (he developed and launched the paraphrases it, Kahn said "I want to back you in a first line of "generic" foods sold in the country). 4 Ac- business, kid, what have you got in mind?"? Kahn cording to Stemberg, "It was a nutso thing we were agreed to put up $500,000 in seed money to help trying to do, and the fact that it worked out well was Stemberg develop a new venture opportunity. He a miracle. We opened all these big stores, and we also took on the role of mentor, evaluating Stemwere trying to take market share away from people berg's ideas. who were much better financed than we were. They Initially, Kahn and Stemberg looked at the busiretaliated and lowered prices ... I learnt to experi- ness they both knew best, supermarket grocery retailence the challenges of rapid growth. There was no ing. But they were put off by the intense competition better experience to have been through. It taught me now raging and the high price they would have to pay the necessity of having infrastructure and putting it for properties. At this juncture, Bob Nakasone, the in place."s then president of Toys R Us, stepped into the picture. One supermarket that Stemberg battled with Nakasone had worked at Jewel alongside Stemberg was Heartland Food Warehouse, the first success- before moving to Toys R Us. It was Nakasone who ful, deep-discount warehouse supermarket in the urged Stemberg to "think outside of the food box." country, Leo Kahn, one of the country's leading Nakasone told Stemberg that there were more simisupermarket retailers, ran Heartland. Kahn had larities than differences across product categories, and started the Purity Supreme supermarket chain in that profit margins were much better outside of the the late 1940s, making him one of the founding grocery business. fathers of the supermarket business. Stemberg and While mulling over possible entrepreneurial opKahn fought relentless marketing battles with each portunities, Stemberg continued to explore other other. In a typical example of their tussles, at one options, including working for an established retailpoint Kahn ran ads guaranteeing that his custom- er. This parallel search took him to Makro for a job ers would get the best price on Thanksgiving tur- interview, and it was there that he suddenly realized keys. Stemberg responded with his own ads prom- there was a possible opportunity to be had in starting ising that Star would match the lowest advertised the Toys R Us of office supplies. than the grocery business, and was not well served by modern retailers. Stemberg replied that he had been thinking about office supplies. Salmon responded, "Gee, this is a really big idea." Hot on the heels of his trip to Makro, Stemberg started to think about his idea. The first thing was to get a Scoping Out the Opportunity by asking people if they knew how much they spent Stemberg ended up hiring a former teaching assison office supplies. In his words: tant of Salmon's for $20,000 to do some basic market There was this lawyer I knew in Hartford, research on the industry and validate the market. As which is where I lived then. If ever there was he tells the story: a cheap bastard in this world, he was a cheap _ I never forget the night I went to her house and we bastard. And I said, "Gee, how much do you went through the slide deck. I always want to jump spend on office supplies?" He said, "Oh I don't ahead. And she puts her hand on my hand and says, know, I guess about a couple of hundred bucks "Wait, we will walk through it." She's teasing us! a person, 40 people in the office, I bet you we Finally she said it was a $45-billion market growing spend ten grand." I said, "Do me a favor will at 15% per year. And it turns out she was lying. That you? You've got good records. Go through was actually at the manufacturer level. It was actually your records and tell me exactly how much you more than $100 billion already if you looked at retail. spend." He calls me up the next day. "Son of a She confirmed that the pricing umbrellas were as big bitch, I spend $1,000 apiece! But I'm getting a as we thought they were, and that small businesses discount, I'm paying 10\% of list." I said, "Toys victimized the way we had said they were. I was pretty R Us is paying 60% of list." He says, "Are you damn excited during the long drive home." kidding me? You mean I could save like half? I The market growth was being driven by favorable could save like twelve grand?' In his mind, this demographic trends. The United States economy was is the payment on his new Jaguar, 8 recovering from the recessions of the late 1970 s and early Stemberg began to think that this idea had potential. wave of new technology was finding its way into AmeriHe reasoned that people want to save money-and in can businesses, including personal computers, printers, this case the savings might be substantial -but they faxes, and small copiers, and this was driving demand didn't even know they were paying too much. Small for office supplies, including basic equipment and conbusinesses in particular, he thought, might be a viable sumables like paper, printer ink, diskettes, and toner. target market. While working on the idea, the print- The wave of downsizing that had swept corpoer ribbon on his printer ran out. It was a weekend. rate America in the early 1980s had a beneficial side He drove to the local office supply store in Hartford, effect-unemployed people were starting their own which was closed. He went to another, but that was businesses. The rate of new-business formation was also closed. He ended up going to BJ's Wholesale the highest in years. There were 11 million small Club, a deep-discount warehouse club. BJ's was open, businesses in the country-Stemberg's proposed and they sold office supplies at low prices, but the se- target market-the vast majority of which had lection was limited and they didn't carry the type of less than 20 employees. This sector was the engine ribbon Stemberg wanted. Stemberg immediately saw of job growth in the economy: Between 1980 and the opportunity. 1986, small enterprises had been responsible for a Around the same time, Stemberg went to see anoth- net increase of 10.5 million jobs. Many of these new er mentor of his, Walter Salmon, who taught retailing jobs were in the service sector, which was a major at Harvard Business School. Over lunch they discussed consumer of office supplies. Each new white-collar the supermarket business and Stemberg's quest. Salmon job meant another $1,000 a year in office supplies. asked Stemberg if he had thought of applying his retail- Stemberg's research started to uncover an industry ing skills to a product category that was growing faster that was highly fragmented at the retail level, but had some huge participants. Upstream in the value chain this he called Boise Cascade, which operated as both were the manufacturers. This was a very diverse col- a dealer and a manufacturer, to see what service they lection of companies including paper manufacturers might offer. First he called on behalf of Ivy Satellite such as Boise Cascade, office furniture makers, manu- Network, a small company that Stemberg owned that facturers of pencils and pens, the Bic Corporation, broadcast events of Ivy League schools to alumni 3M (which supplied Post-it Notes and much more around the world. Boise wouldn't even bother to besides), office equipment companies like Xerox and send a catalog to this company. Then he called Boise Canon (manufacturers of copiers and consumables), back, this time representing the 100-person office of a and manufacturers of PCs, printers, and faxes such as . friend of his who was a food broker. This time Boise Apple, Compaq, and Hewlett Packard. was happy to send a representative to the food broker. Then there were the wholesalers, some of which The representative offered the broker deep discounts. were very large, such as United Stationers and McKes- A Bic pen from Boise that cost Ivy $3.68 cents from son. The wholesalers bought in bulk and sold to busi- the local stationary store was offered for just $0.85. ness clients and smaller retail establishments, either More generally, Stemberg found that while an office directly or through a network of dealers. The dealers manager in a company with more than 1,000 employoften visited businesses to collect orders and arrange ees could often obtain discounts averaging 50% from for delivery. The dealers themselves ranged in scale dealers, small businesses with fewer than 20 employfrom small, one-person enterprises to large firms that ees were lucky to get a 10% discount and often had to sold through central warehouses. Some dealers also pay full price. 10 had a retail presence, while others did not. Manufac- Stemberg also found a study produced by returers and wholesalers would also sell directly to large searchers at the Wharton School that seemed to business through catalogs or a direct-sales presence. confirm his suspicions: The retailers fell into two main categories. There Essentially they first asked dealers, "What were the local office supply retailers, generally small does the customer want?" Ninety percent of business themselves, and there were the general mer- the dealers said better service, and 10% said chandise discounters, such as BJ's Wholesale and other. Then they asked customers, and 90% Wal-Mart. The smaller retailers had an intrinsically of the customers said what they really wanted high cost structure. They were full-service retailers was lower prices. Ha! The dealers were totally who purchased in small lots, and delivered in trucks out of touch. They were making 40% to 50%, or sold out of the store. The general merchandise dis- the wholesalers were making 30%, and the counters purchased from wholesalers or direct from manufacturers were making huge margins. Evmanufacturers, and their prices were much lower, but erybody's rich, fat, and happy, and they're all they did not carry a wide range of product. going: "What's wrong with this?"'1 On the consumer side, most large businesses had dedicated personnel for purchasing office supplies. They either bought from dealers, who purchased Creating the Company directly from manufacturers or through wholesalers, or bought direct from the manufacturer them- Stemberg knew from experience that for Staples to selves. Large firms were able to negotiate on price and succeed it would have to execute well, and do to that received discounts that could be as large as 80% of the it needed experienced management. Stemberg turned list price on some items. Businesses of fewer than 100 to people he knew, managers who, like him, had risen people did not generally have someone dedicated to quickly through the ranks at the Jewel Corporation or managing office supplies, and they tended to rely pri- other Boston-area retailers. From Jewel came Myra marily on dealers. For these companies, product avail- Hart, who was to become the Staples group vice presiability, not price, was viewed as key. In even smaller dent for growth and development; Todd Krasnow, who firms, the convenience of being able to get office sup- became vice president for marketing; Paul Korian, plies sermed to matter more than anything else. Staples's vice president of merchandising, and Henry Consistent with his initial insight, Stemberg found Nasella, Stemberg's mentor at Star market who subthat the big dealers ignored smaller firms. To verify sequently became president of Staples. The CFO was Bob Leombruno, who had bought Mammoth Mart, a store? How big a population base would be needed to failed retail operation, out of bankruptcy for a group support a store? What kind of selection was required? of investors. Stemberg took on the CEO role, while How many stock keeping units (SKUs) should the Kahn became chairman. Most of these people start- store offer? And there was the problem of educating ed working full time on January 1, 1986. They gave customers: If potential customers currently didn't up secure jobs, high salaries, and annual bonuses for know that they were paying excessive prices for office reduced compensation and 14-hour days. supplies, and consistently underestimated how much According to Stemberg, the pitch to prospective they spent on the category, what could Staples do to managers was this: change this? I'm going to give you a big chunk of stock in To keep prices low, Staples would need to cut this thing. This is your chance. We're all going costs to the bone and be managed very efficiently. to work our tails off. We're going to work cra- They would have to get manufacturers or wholesalzy hours. But here you'll be part of a retailing ers to deliver directly to Staples. How could this be revolution. If you own 2% of the company and done? Wouldn't wholesalers and manufacturers create it gets to be worth $100 million, you'r going channel conflict with dealers and established retailers to make $2 million. 12 by delivering straight to Staples? How was this to be resolved? Staples also needed to minimize its invenmember of the top management tory, thereby reducing its working capital needs. ManBy a soment knew that if they could turn inventory over company, Stapes. Refect a name for this nascent 12 times a year, and delay payment to vendors for 30 company, Staples. Reflecting on how it came about days, then vendors would essentially finance Staples's years later, he noted: inventory. Pulling that off would require state-of-theI'm driving between Hartford and Boston. I'm art information systems, and the state of the art at the thinking about names. Pencils? Pens? 81/2 by 11 ? time in office supplies did not include barcoding on Staples? Staples! Staples, the Office Superstore. individual items. How was Staples to deal with this? That was it. The bad thing about the name was _ There was also the potential competition to worry that when we started out, we had to explain to about. Stemberg was sure that once Staples unveiled its everybody what it was. Office Depot basically concept, others would follow quickly. To preempt comcopied Home Depot and put the "office" in petitors, the plan called for rapid rollout of the concept, front. It was Home Depot for the office, and it with sales ramping up from nothing to $42 million after lived off the Home Depot name. Office Club ' 3 years. This would require considerable capital. It also was a Price Club for the office. It lived off the required that the concept be easy to replicate, so thai Price Club name. In the early days ours was once the first store was opened, others could be openec actually a problem. But those other names in quick succession. This meant that the systems that aren't a brand. Ours is a brand. 13 were put in place for the first store had to be the right With the management team in place, the next wasn't much room for error. steps were to refine the concept and raise capital. The As the management team refined the concept, they concept was straightforward; implementing it would came to the realization that information systems were not be. The plan was to offer a wide selection of key to the entire venture. With the right informatior merchandise in a warehouse-type setting with prices systems in place, Staples could track sales and inven. deeply discounted from those found at smaller retail- tory closely at the level of individual items and figure ers. Because it was to be a supermarket, the idea was out its gross profit on cach item sold, and adjust it: to move from a full-service to a self-service format. At merchandising mix accordingly. This would be a de the same time, they recognized that staff would need parture from existing retailers, the majority of whicl to be trained in office supplies so that they could pro- lacked the ability to calculate profit on each iten vide advice when asked. sold and could only calculate the average gross profi To make the concept viable, a number of issues across a range of items. The right information sys had to be dealt with. Where should they locate the tems could also be used to collect data on customer: at the point of sales, and this would assist greatly in run from 30 minutes to 2 hours. Someone would rush rnarket research and direct marketing to customers. out to get sandwiches for lunch, and they would keep On the other band, raising capital proved to be working. The workday came to a close at 9:00 or 10:00 easier than anticipated. Stemberg valued Staplos at p.m. There was no template for what they were doing; $8 million, even though it was still little more than they knew they had to put a system in place that would a concept, a management team, and a business plan allow them to quickly roll out additional stores. full of unanswered questions. He went looking for One of the most difficult tasks fell on the shoul$4 million, which he would exchange for 50% of the ders of Leombruno, the CFO. In addition to setcompany. The venture capitalists were initially reluc- ting up an accounting system, he was put in charge tant. They held back, waiting to see who would com- of installing the entire information system for Stalmit first. They also valued Staples at $6 million and ples. The system had to be able to track customer wanted a 67% stake for the $4 million in first-round purchases so that Staples could reorder products. financing. Stemberg balked at that, and instead fo- The cash registers, which were to be connected cused his efforts on one firm that seemed more will- individually to the system, had to be easy to operate ing to break away from the pack. The firm was Bain so that there would be no congestion at the checkVenture Capital, whose managing general partner, out stands. Stemberg was adamant that the register Mitt Romney, later observed that "A lot of retailing receipts indicate the list price of each item, as well startups come by, but a lot of them are a twist on as a much lower Staples price, and an even lower an old theme, or a better presentation... Stemberg price for customers who became Staples members. wasn't proposing just a chain of stores, but an entire- He also wanted the system to collect detailed demoly new retailing category. That really captures you graphics on each customer. attention. It slaps you in the face with the idea that Leombruno insisted tht the system be able to do this could be big." (Romney later became governor two things. The first was to calculate the gross profit of Massachusetts). 14 margin Staples made on each item sold. Most retail- To validate the business concept, Romney's firm ers at the time could only calculate the average profit surveyed 100 small businesses after being urged to margin across the mix of inventory. Second, Leomdo so by Stemberg. Auditing invoices from these bruno wanted to make sure that inventory turned companies for office supplies, Romney discovered over at least 12 times a year, and good information what Stemberg already knew-the companies were systems were the key. With most vendors requiring spending about twice what they estimated. Romney payment in 30 days, an inventory turnover of greater then ran the numbers on his own company and found than 12 would allow Staples to cut its working capital that his firm would save $117,000 a year by purchas- requirements. ing supplies at the discount that Stemberg promised. As the wish list for the information systems That was enough for Romney, and he committed to grew, it soon became apparent that it would not be investing. Others followed and Staples raised $4.5 mil- possible to do everything in the allotted time span. lion in its first round of financing, which closed on No existing software package did what the manageJanuary 23d,1986. This gave the company enough ment team wanted, so they had to hire consultants capital to go ahcad with the first store. In return for to customize existing packages. In the end, several the financing, Staples had to give the VCs a 54% stake proposed features were dropped. However, at Stemin the company. To get the money, however, Staples berg's insistence, the three-way price requirements had to commit to opening its first store on May 1st, remained. To track sales and inventory levels, Sta1986, and to meet a plan for rolling out additional ples assigned a six-digit look-up code for each item. stores as quickly as possible. While entering the codes was a slower process than scanning items, most manufacturers in the office The First Store _ supplies business were still not marking their prodagement team went into overdrive. They would meet Another problem was to get suppliers to ship every morning at about 7 a.m. in a session that could products to the first Staples store. The company was asking suppliers to bypass the existing distribution system, and risk alienating longtime customers in the established channel of distribution. To get suppliers on board, Staples used a number of tactics. One was a visionary pitch. The company told suppliers that they were out to revolutionize the retail end of the industry. Staples would be very big, they said, and it was in the best interests of the suppliers to back the start-up. Stemberg's punchline was simple: "I'm going to be very loyal to those Staples had set of target of $4 million in first-year sales from its Brighton store, but within a few months the numbers were tracking up toward a \$6-million annual run rate. The concept was starting to work. to get suppliers to deliver to Staples. The number of customers coming through the door the venture capitalist backer's of Staples, every month was growing, but it was not only cusBessemer Venture Partners, also owned a paper tomers that were coming. One day Joe Antonini, the manufacturer, Ampad. Bessemer told Ampad to CEO of K-Mart, was spotted walking around the start selling to Staples, which they did, even though Staples store. Around the same time, Stemberg heard existing distributors complained bitterly about the from contacts that Staples had been mentioned at a arrangement. Wal-Mart board meeting. He realized that if other Finding real estate also presented a problem. As an discount retailers were noticing Staples when it had enterprise with no proven track record, Staples found just one store, competition could not be far behind. it difficult to rent decent real estate large enough to Wist Within 5 months of the opening of the first Staples stock and display the 5,000 SKUs that it was plan- store, a clone had appeared in the Southeast: Office ning for its first store, and to do so at a decent price. Depot. Needing money fast to fund expansion and Most landlords wanted sky-high rent from Staples. In lock in Staples territory, Stemberg went back to the the end, the best that Staples could do was a site in venture capitalists. While the initial backers were only Brighton, Massachusetts, that was within sight of a willing to value Staples at $15 million, Stemberg held housing project and had failed as a site for several dif- out for and got a valuation of $22 million, raising an. ferent retailers. The one redeeming feature of the site other $14 million. He pulled off this trick by finding was that it was smack in the middle of a high concen- institutional investors who were willing to invest or: tration of small businesses. a valuation of $22 million. He then went back to the Despite all the problems, Staples opened its first original VCs and told them that the deal was closing store on May 1, 1996. The opening day was busy, fast, which persuaded them to commit. but only because everybody who worked at Staples By May 1987, Staples had three stores open anc had invited everybody they knew. On the second planned to increase the number to 20 by the end of day, just 16 people came through the store. On the 1988 (in the event, it opened 22). Sales were running third day, it was the same number. A few weeks of at anywhere from $300 to $800 per square foot. Ir this, and Staples would have to shut its doors. Des- contrast, high volume discount stores were lucky tc perate, Krasnow decided to bribe customers to get get $300 per square foot. By mid-1989, 3 years after them into the store. The company sent $25 to each its first store opened, Staples had 27 stores open ir of 35 office managers, inviting them to shop in the the Northeast and an annual sales run rate of $121 store and pass along their reactions. According to million, way above the original 3-year target of $4 : Krasnow, "A week later we called them back. They million. The stores now averaged 15,000 square fee had all taken the money, but none of them had come and stocked 5,000 items. into the store. I was apoplectic."'66 In the end, nine Explaining the success, Stemberg noted; "From : of them finally came in, and they gave Staples rave value perspective, I think there is no question that w reviews. Slowly the momentum started to build and, have been a friend to the entrepreneur. If you look a by August, lines were starting to form at the cash the average small town merchant, we've lowered th: registers at lunchtime. costs of his office products - where he was once payin; say $4,000 to $5,000 a year, now he's paying $2,000 or The high cost of real estate in the Northeast led $3,000. We've made him more efficient."'7 Staples to establish its first distribution center in 1987 Helping to driving sales growth was the develop- (it now has some 65 "delivery fulfillment centers" and ment of a direct marketing pitch. Every time Staples larger "distribution centers" in North America). This opened a store, it purchased a list of small businesses decision was hotly debated within the company and within 15 minutes driving distance. A group of telemar- opposed by some investors who thought that the capiketers would go to work, calling up the buyer of office tal should be used to build more stores, but Stemberg supplies at the businesses. The telemarketers would tell prevailed. The distribution center was located off an them Staples was opening up a store like Toys R Us interstate highway in an area of rural Connecticut for office supplies, ask them how much they spent on where land was cheap. The facility cost $6 million office supplies every year (often they did not know), cite to build, and tied up a total of $10 million in worktypical cost savings at small businesses, and sent them a ing capital, almost $0.29 out of every dollar that the coupon for a free item such as copy paper. Slowly at first. company had raised to that point. But Stemberg saw the customers would come in, but momentum would this as a necessary step. The inventory storage capacbuild as customers realized the scale of their savings. ity at the distribution center enabled the company to Every time a customer redeemed a coupon at a operate with smaller stores than many of its rivals, store, they were given a free Staples Card. This "mem- but still offer the same variety of goods. By 1989, the bership" card entitled cardholders to even deeper dis- average Staples store was 35% smaller than the Office counts on select items. The card quickly became the Depot outlets that were then opening up all over the lynchpin of Staples direct marketing effort. From the Southeast, saving on real estate costs. The distribucard application, Staples gathered information about tion center also helped save labor costs, because wages the customer-what type of business they were in, are lower in rural areas. Equally important, inventory how many employees they had, where they were lo- storage at the distribution centers allowed the stores cated, and so on. This information was entered into a to remain fully stocked. A Stemberg noted: "In comcustomer database, and every time a member used that petition with the clones, it will come down to who has card, the card number and purchases were logged into the lowest costs and the best in-stock position. 15" the database via the cash register. This gave Staples The expansion strategy at Staples was very mereal-time information about what was being purchased thodical. Stores were clustered together in a region, and by whom. This information then allowed Staples even to the extent that they cannibalized each other to target promotions at certain customer groups - for on the margin, so that Staples could become the domiexample, card holders who were not making purchas- nant supplier in that market. The early focus was on es. The goal was to get existing customers to spend major metropolitan areas such as Boston, New York, more at Staples, a goal that over time was attained. Philadelphia, and Los Angeles. Although high real Because Staples started to reach so many of its estate and labor costs in these areas were a disadvancustomers through direct marketing (about 80% of its tage, strong demand from local businesses helped comsales were made to cardholders), it was able to spend pensate, as did the distribution centers. In 1990, Staples less on media ads; in some areas, it dropped media open its second distribution center, in California, to advertising altogether, saving on costs. This was an support expansion there. important source of cost savings in the Northeast, The expansion at Staples was fueled by the prowhere media is expensive. ceeds from a 1989 IPO, which raised $61.7 million of A problem that continued the bedevil Staples as it ex- capital enough for Staples to accelerate its store openpanded was a shortage of good real estate locations that ' ings. By mid-1991, Staples's store count passed 100. could be rented at a reasonable price, particularly in the Northeast. Finding a good site in the early days required flexibility; at various times Staples converted anything Competition and everything from restaurants to massage pariors into A rash of imitators to Staples soon appeared on the Staples stores. As the company grew, its real estate strat- market. The first of these, Office Depot, focused on egy started took on a defensive aspect, with Staples bid- the Southeast. By the end of 1988, Office Depot had ding for prime sites in order to preempt competitors. 26 stores, Office Club had opened 15, Biz Mart had mid-2000s, and online sales from all three were cut- launched a business-to-business office products initing into demand for product from physical stores. tiative, so I'm sure they are knocking on the door." 0 Staples, too, saw its online sales grow cven as sales It remains to be seen whether the FTC will agree. from its physical stores stagnated or declined. By 2015, over half of all of Staples sales in North America were online. Staples responded to this trend by announcing in NOTES March 2014 that it would close up to 225 of its North American stores by the end of 2015 as part of a corporate goal to reduce its annual operating costs by 1. S. D. Solomon, "Born to Be Big," Inc, June 1989, $500 million. At the same time, the company would p. 94. continue to expand its online offerings. In 2013 and 2. M. de la Merced and D. Gelles, "Staples and Office 2014 , it increased the number of products sold on its Depot Say Merger Will Keep Them Competitive," website, Staples.com, from 100,000 to 500,000. Ron New York Times, February 25, 2015. Sargent expected this number to reach 1.5 million 3. S. D. Solomon, "Born to Be Big," p. 96. by the end of 2015 . Most products will be shipped 4. T. Stemberg, "Staples for Success," Knowledge directly from the manufacturer to the customer, with Exchange, Santa Monica, California, 1996. Staples acting as an intermediary, much as Amazon 5. M. Barrier, "Tom Stemberg Calls the Office," does. 38 Nation's Business, July 1990 , p. 42. With their sales also falling, Office Depot and 6. Tbid, p. 44. Office Max completed a \$1.2-billion merger in late 7. Ibicl. 2013. The two companies cited the growth of Internet 8. T. Stember and D. Whiteford, "Putting a Stop to sales as a prime reason for the merger. The FTC, which Mom and Pop," Fortune Small Business, October had opposed the proposed merger between Staples 2002, p. 39. and Office Depot in 1997, blessed this merger, noting 9. Ibid. that the deal "was unlikely to substantially lessen com- 10. T. Stemberg, "Staples for Success." petition." "19 The merger was expected to reduce the 11. T. Stember and D. Whiteford, "Putting a Stop to costs of the combined entity by $400 to 5600 million Mom and Pop," p. 40. peryear,primarilybyclosingduplicatestores.Inlate2014,thehedgefundStarboardValuean-12.T.Stemberg,"StaplesforSuccess,"p.17.13.T.StemberandD.Whiteford,"PuttingaStopto nounced that it had taken a position in both Sta- Mom and Pop," p. 41. ples and Office Depot. Jeffrey Smith, the CEO of 14 . S. D. Solomon, "Born to Be Big," pp. 94-95. Starboard Value, has emerged as a powerful activist 15. T. Stemberg, "Staples for Success," p. 24. investor over the last few years, taking large posi- 16. Tbid. tions in companies and then urging them to change 17. T. Stember and D. Whiteford, "Putting a Stop to their strategy. Smith urged Staples and Office De- Mom and Pop," p. 40. pot to merge, stating that if they did not, he would 18. S. D. Solomon, "Born to be Big," p. 100. mount a proxy battle to get board seats in both 19. T. Stemberg, "Staples for Success," p. 97. companies and push a merger through. As it turned 20. Tbid. out, neither company needed much encouragement. 21. N. Alster, "Penney Wise," Forbes, February 1, In February 2015, the two companies announced 1993, pp. 48-51. a$6.3-billionmergeragreement.Ifthedealgoes22.T.Stemberg,"StaplesforSuccess,"p.97. through, it will create a company with $34 billion in 23. R. C. Rouland, "And Then There Were Three," revenues and 4,400 stores worldwide. Both Staples Discount Merchandiser, December 1994, p. 27. and Office Depot argue that the proposed merger is 24. L. Montgomery, "Staples: Buy the Laggard," necessary to compete in a worid where bigger store Financial World, November 9, 1993, p. 22. chains and online competitors have reduced prices Anonymous, "The New Plateau in Office Supand provided new competition. Reflecting on these plies," Discount Merchandiser, November 1991, developments, Sargent noted; "I think Amazon just pp. 50-54. NEEDS \#