A Second Wind
Staples' renewed focus on home-office and business needs is proving a good fit
If you want to know how the U.S. economy is faring, Staples might be a good place to start. The archetypal office supply superstore is a good barometer of the hiring and expansion plans of business. The company had phenomenal growth in the 1990s during the stock market boom, when everyone seemed to be quitting day jobs to trade Internet stocks in newly outfitted home offices. Then 2000 came around, and "our business softened up dramatically," says CEO Ron Sargent.
But Staples survived and indeed prospers today like never before. Through October 30 of last year, earnings rose 64 percent to $457 million on an increase in sales of nearly 11 percent to $10.4 billion. The company reports full-year numbers in February. Also, last year Staples announced its first-ever dividend and said it would buy back up to $1 billion of its stock.
The revival has been no accident. The downturn prompted Staples, which had been living the typical cycle of a growth company with little time for management to reflect upon its success, to do a little soul-searching. Guided by customer research, managers undertook a pencils-to-printers review of the operation. One finding: Even though home- and small-office customers contributed two thirds of the revenues, they accounted for 90 percent of the profits. "We heard the product mix was a little too consumerish," Sargent says. "Also the marketing. We heard our service was average." What's more, customers thought the store format "was a little '80s, a little too warehouse club," he adds. "The other big complaint we got from our customers was 'I know it's here in the store, but I can't find it.' " Surprisingly, cost was not a major factor in the buying decisions of its customers, Sargent says, noting that it did not even make it into the top 10 reasons shoppers chose an office superstore.
So Staples did a makeover, with its newer stores sporting a "racetrack" format that features lower aisles (so you can see what is available in the next one), signs that tell you what's in each aisle, and grouped specialty departments like mobile computing, copy centers, and office furniture. It also trimmed some 800 items from its product list. Every store employee was put on an incentive program, by which store clerks can get an additional $1 to $3 an hour of pay if the store meets certain benchmarks. "Mystery shoppers" prowl the aisles of every store once a month on average.
A snap. Most recently, the retailer has penned a new advertising and marketing campaign around the word "easy" that features the different ways Staples serves its customers, from in-store buying to online shopping and delivery options. One example is rebates. Now a customer can buy a product in a store, receive an invoice with a rebate authorization number, punch it in at Staples.com, and get a check back within four weeks. "What we've done with rebates is just a home run," says Shira Goodman, executive vice president of marketing. "Rebates just got in the way of making buying office products easy."
The change is more than merely cosmetic. The retailer is also branching out, literally and figuratively. Staples will soon invade the Chicago market, where competitors OfficeMax and Office Depot are well positioned. This year, it expects to add about 100 stores in the United States to its more than 1,100 existing outlets. Then there is expansion overseas in Europe and in China, where Staples recently formed a joint venture with OA365, one of that country's largest office-supply chains.
Staples is also moving into new lines of business and getting more out of existing ones. Many of its stores now sport new copy centers, which bring in about $300,000 yearly on average. It is putting a great emphasis on its delivery business, both for home-office and consumer customers, as well as a contract business that supplies major companies with all their office needs. For example, it recently signed a five-year, $275 million deal with Bank of America. "It's probably the fastest-growing part of our business right now," says Chief Operating Officer Michael Miles. "It's a very symbiotic business. When the stores open up, delivery picks up."
The new business plan has drawn favorable reviews on Wall Street, where Staples stock has been outperforming the broad market by a comfortable margin. "Staples continues to set itself apart as the leader in the office products space," Deutsche Bank analyst Michael Baker wrote following the company's third-quarter results. "The company is in a better financial, strategic, and competitive position than in recent history."
Improvements in inventory management, supplier relationships, and a focus on high-profit products like printer ink cartridges and digital photography supplies have enabled Staples to boost its operating margins from less than 5 percent in 2000 to nearly 8 percent in 2004. Meanwhile, the company has reduced its annual capital expenditures and increased its overall return on assets. All of which has yielded a growing hoard of cash--more than $700 million a year--when five years ago, the company had negative cash flow. It's all part of a strategy that is aimed at broadening the company's investment appeal, convincing mutual funds and other institutional investors that Staples is more than the prototypical growth company. That explains the dividend.
One place the cash won't be spent is on fancy digs for corporate officers. Sargent has a modest office, hardly larger than any other manager would command. He sits behind a desk that looks like (and probably is, Sargent says) a castoff from one of his stores. When a visitor asks for a copy of some financials, Sargent is quick to get it himself.
Gordon Marchand of Sustainable Growth Advisers, who along with partner George Fraise co-manages the John Hancock U.S. Global Leaders Growth Fund, says he owns Staples shares because of the company's repeat customer base, global presence, and ability to dictate prices in the market. "Staples, like a Dell or a Wal-Mart, is among the most efficient competitors. They can compete on price. Their execution is flawless."
With all its recent success, the question begs: What could go wrong?
Rivalry. Absent an economic downturn, the biggest threat is increased competition from the likes of Office Depot and OfficeMax, both of which are moving in the same direction as Staples. Right now, though, OfficeMax seems preoccupied with an accounting scandal that has already claimed its chief financial officer, who resigned following revelations that the company had uncovered wrongdoing in the way it accounted for some rebates. Then there's the perennial fear of all retailers--that Wal-Mart will lock its radar onto them. That could happen, as the giant discounter already stocks many office products. But so far, it hasn't been one of Wal-Mart's top priorities. As for the others, Miles says, "Staples has been able to be profitable in three-player markets."
Future lifestyle trends bode well for the company, too. Most demographers and labor experts predict more employees will work at home. Who really expects anyone to become less technology-tethered or less likely to take work home in the years to come? And where the workers go, the office supplies usually follow.
Staples at a glance
Founded: May 1986, Brighton, Mass.
CEO: Ron Sargent
Annual sales: $13 billion
Net 2004 income: $457 million (through October 30)
Number of stores: 1,662 (1,406 in North America, 256 in Europe)
Employees: 60,000
Most popular products: Printer cartridges, paper
This story appears in the January 31, 2005 print edition of U.S. News & World Report.