(FORTUNE Magazine) – Robert Sallada walked into a Staples store in Charlottesville, Virginia, last year, looking for some map pins but not much in the way of service. He expected, he says dismissively, the kind of shopping experience that "Kmart is the epitome of." Staples, after all, is an office-supplies discount store. Turned out the store didn't have the unusual variety of map pins Sallada was after, but the sales associate helping him was quickly on the phone to the manufacturer of a similar pin. After Sallada returned to his 15-employee furniture business, the Staples worker faxed him information on the pins. All this, Sallada marvels, for an order of no more than $20. Says he, still sounding incredulous: "I walked in a few months later, and the clerk remembered my name. It really impressed me." Sallada is now a regular Staples shopper and plans to spend a couple of thousand dollars annually at the store.

What Sallada and many others now realize is that Staples cares deeply, very deeply, about pleasing customers. Such pampering, combined with great prices, has helped transform Staples from a nobody -- the company didn't even exist ten years ago -- into America's hottest retailer. In this year's Fortune 500, Staples posted the best total return to investors for 1994 among specialist retailers. Analyst James Stoeffel of Smith Barney projects that sales this year will increase 45%, to $2.9 billion, with profits jumping 58%, to $63.1 million. Staples' stock recently traded at about $30, a rich 34 times 1995 estimated earnings.

But that kind of success doesn't mean Staples can rest easy. Competition is heating up in the rapidly growing, $8 billion office superstore business. Tough competitors like Office Depot and OfficeMax are also cutting costs and boosting service. To keep profits flowing, Staples must reinvent itself, raising customer service to a new level. Says CEO and founder Tom Stemberg, 46: "We clearly need to become more intimate with our customers. We're way better at service than we were two years ago, but I don't think we're nearly as good as we need to be."

But just what is this customer intimacy Stemberg's talking about? In a sense it is very much like one of those value disciplines popularized by consultants Michael Treacy and Fred Wiersema in their best-selling book, The Discipline of Market Leaders. Their elegant and occasionally simplistic premise is that companies become market leaders by delivering superior customer value in one of three disciplines-operational excellence, customer intimacy, or product leadership-while meeting industry standards on the other two.

While Staples still intends to offer great prices on its paper, pens, fax machines, and other office supplies, its main strategy is to grow by providing customers with the best solutions to their problems. The idea is to emulate customer-intimate companies like Home Depot and Airborne Express. These companies do not pursue one-time transactions; they cultivate relationships. As Treacy and Wiersema put it in their book, "They specialize in satisfying unique needs, which often only they, by virtue of their close relationship with-and intimate knowledge of-the customer, recognize."

Stemberg didn't always have a passion for the customer. Before he founded Staples, he worked in the grocery business, where he was one of the first to introduce the concept of generic products to food retailing. In the early Eighties he was an executive at Edwards-Finast, a Connecticut supermarket company. But in 1985, in a dispute with the owners, he got fired. Searching for a new career, he contacted one of his old professors at the Harvard business school. The professor suggested he take the modern, efficient distribution methods of the grocery business and apply them to an industry untouched by them. After a bad experience shopping for office supplies, Stemberg decided he'd found his industry.

After raising money from venture capitalists and a former grocery competitor, Stemberg opened the first Staples store in Brighton, Massachusetts, in 1986. His warehouse stores were ugly, but buying power and efficient distribution let him offer customers huge bargains. Sales took off. Today he runs some 375 stores throughout Canada and in 21 states, with heavy clusters in California and the Northeast.

A couple of years ago this charismatic entrepreneur and his top management team realized that competing on price can take you only so far. To outstrip the competition, Staples would have to evolve into a more customer-intimate company. Says Jack Bingleman, in charge of Staples' North American superstores: "When the industry started out, it was not unlike the grocery store industry -- a low-cost, no-service, self-serve environment. We are now at a point where low prices and a good selection are not enough. You have to do a better job training your employees and making your stores easier to shop." Adds Martin Hanaka, Staples' president: "We need to develop a service culture that will set us apart."

So Staples is in the midst of pursuing customer intimacy. The job amounts to a total revamp of the $2 billion company. To achieve it, Stemberg is shaking up his management team, mining a killer database full of customer information, changing his employee reward system, and redesigning all the stores to make them more people-friendly. Here's how he's doing it. -- Know your customers better than they know themselves. To get to know its customers, Staples has been compiling lots of information about buying habits and storing it in a massive database. "Retailers usually don't know their customers from Adam," says Frederick Reichheld, who heads the customer-loyalty practice at Bain & Co. "Staples knows better than anybody who their customers are."

To get the information Staples used a membership card, which gave customers a discount on certain items every time they produced it at the register. Each time a customer used the card, Staples collected information about his buying habits. The company, for instance, did well with lawyers and dentists but not with school principals. Staples uses this knowledge to locate new stores where they will be convenient for their customers -- such as in neighborhoods with lots of law offices.

Another advantage of knowing who your customers are: You can work on building long-term relationships. Staples wants to do everything it can to get its best customers coming back to its stores. Since the database knows who those folks are, Staples can try to win their loyalty by offering them special discounts. In its Cincinnati stores, for instance, Staples is experimenting with a new rebate card that offers discounts to small-business customers who spend at least $100 a month. The database also alerts Staples to once loyal customers who have left the flock. When a salesperson sees that someone who, say, bought six cases of copier paper for six months has stopped cold, he can call to find out why and to ask if Staples can do anything to win the customer back. -- Make your stores more customer friendly. Staples is working hard to see that customers have a pleasant experience shopping in its stores. That isn't a sure thing. Many of the company's older stores are laid out badly, confusing to people trying to find an item quickly, check out, and leave. To fix that, Staples is redesigning all its stores. The remodeled stores boast better lighting, wider aisles, and better signs. They are a hit with consumers; Staples is posting incremental sales gains of 7% in these stores. Says Smith Barney's Stoeffel: "That's a very good number. They need about 2% to break even on the remodeling cost. If you're doing 31/2 times that, that's a nice return on business."

Making the stores an easier place to shop is something of an obsession with Jack Bingleman, the head of Staples' superstores division. Follow him down the aisle of a Staples store, and he'll pull a box of file folders from the shelf and quickly tick off the information a customer must see immediately: the number of folders, the size and color, and any special features that ought to be highlighted on the box. As it often does, Staples worked with the folder manufacturer to develop packaging that included a window so that the customer can see the color without opening the box. A trivial detail, you sniff. "Retail is detail," counters Bingleman. "When you make the store simple, you can afford to have service where you need it." Freeing up sales associates from the routine -- and tedious -- queries about pens or copier paper means being able to deploy them in force where good service is needed most: in the electronics section of the store. This is where Staples sells big-ticket items like computers, printers, and fax machines. Those items today account for more than 40% of sales in the stores. The last thing the company wants is a customer walking out of the store because no salesperson was around to explain how a fax or computer worked.

-- Encourage management to spend its time thinking about the customer. Creating a customer-intimate organization often means changing how management allocates time. Until a couple of years ago, Staples' meetings were dominated by the challenge of getting new stores open on time. The nitty-gritty of customer service often took a back seat to the demands of rapid growth. That's changed, as a recent three-hour sales meeting attended by CEO Stemberg suggests. As the managers sat around the table, the agenda was detail, detail, detail -- all aimed at providing customers with better service. Why are the Nautica bags in the stores priced so high ($89.99)? How can the delivery of monthly bonus checks for sales associates be speeded up? Might that not boost morale and improve their attitude when dealing with customers? What's the secret to making Generation X employees better salespeople? (If you think the answer is to be more sympathetic to their whining, you're wrong; company executives believe they like to be trained more than most employees.) A significant portion of the meeting, which is notable for its absence of grandstanding, is taken up by a Staples buyer providing an update on when a popular variety of whitewashed office furniture will be available in the stores. Over a video hookup that the company uses regularly and effectively, Dick Neff, the head of California operations, snaps: "We're looking pretty sparse. We need to get that furniture." Stemberg understands that having his managers spend lots of time solving customer problems sends clear signals to everyone about the organization's priorities.

Meetings like this offer a view not only into the style of the company but also into the personality of its founder. Stemberg, who likes to pepper his speech liberally with the phrase "busting my/our/his balls," displays a general impatience with conventional corporate decorum. For instance, Staples' last quarterly management meeting, where informal dress--including sweat shirts--is de rigueur, took place in a church that one manager reported gleefully had been loaned by a parish that uses Staples' parking lot on weekends. Executives projected the company's first-quarter sales results onto the front wall. Numbers were framed incongruously by a cross on one side and a guitar and drum set on the other. (So much for plush off-site meetings.)

Stemberg believes strongly that all resources should be spent on what will please the customer, not on corporate perks. He and all employees buy only coach airline tickets. The company's four-year-old headquarters in Framingham, Massachusetts -- "they're already bursting at the seams," a cabdriver volunteered -- looks as if it was furnished in a hurry at a garage sale. -- Improve customer service by improving incentives. Such frugality is endearing when manifested at your corporate headquarters, but when reflected in the wages of your store sales associates it can trip up the best-laid plans to become a customer-intimate company. Staples' position is that the economics of the discount-store business allow it to pay only the prevailing average wage in the industry. Trouble is, an average wage often translates into average service, one reason retailers like Home Depot pay above the norm. Instead of hiking wages across the board, Staples is putting in place bonus packages only for key store employees. Stemberg hopes this will encourage them to improve service in the stores. But he has a way to go. Some customers are not bowled over by the treatment they get. Says Gilda Yolles Mintz, a public relations consultant in New Jersey who describes herself as a big fan of Staples' liberal return policy: "Staples' service is just matter of fact. Maybe it's difficult in this part of the country to get retail staff who seem to be enjoying themselves." Adds Ben Shapiro, a Harvard business school marketing professor who taught Stemberg and has done consulting for Staples and "invested in it -- thank God!": "Their store service is mixed; it varies a lot by the store and by the individual. If Staples can do better, it can be a differentiator. It's a big opportunity."

To improve employee morale and thus service, Stemberg looked to the outside for talent. Less than a year ago he hired Martin Hanaka, a 20-year Sears veteran, to be his president. Hanaka is a man with a mission. Shedding his white shirt and tie for a sweatshirt, Hanaka has free rein to give Staples the store-level customer focus it lacks.

Hanaka sees his brief as bringing a new discipline to merchandising efforts in particular. This includes increasing the selection in the stores and motivating store managers with bonuses in a mystery-shopper program. He sends consultants incognito into the stores to shop. They evaluate service, indicating how courteous and knowledgeable the clerks were, and even rate their appearance. The managers whose stores score highest see the results in their paychecks.

Uppermost on Hanaka's list of priorities is "celebrating failures," a tip he picked up from Home Depot CEO Bernie Marcus at a Fortune conference this spring. The point Hanaka good-humoredly made was that in trying to serve the customer more imaginatively, every so often someone trips up. The danger is the tendency to cover up; not sharing those mistakes prevents other people from learning from your example. -- To acquire knowledge, acquire companies. A couple of years ago Staples faced a particularly nettlesome problem. While good at serving the needs of small businesses, the company wanted to start selling office supplies to Fortune 500 accounts but didn't really know much about serving that kind of customer. To fix that, Staples began buying companies that understood how to serve the medium-size to large buyers of office supplies. Says Ron Sargent, head of Staples' large- account and catalogue businesses: "We wanted to buy managerial strength."

As well as making strategic sense, Staples' acquisitions let it tap into the expertise of companies that are leaders in customer service. For instance, Staples recently bought National Office Supply, which had sales last year of $154 million. The company manages office supplies on a national basis for companies like IBM (a $20 million account) and Ford Motor. "It's outsourcing, really," says Evan Stern, who took NOS over from his father-in-law in the 1960s before selling it to Staples last year. The company sets up electronic order and payment systems for clients. And it customizes payment systems and product catalogues for company employees. At Dun & Bradstreet, for example, NOS created a separate supplies catalogue for employees of D&B's Moody's Investors Service division.

No customer request is too outlandish as far as NOS is concerned. It routinely delivers anything a customer might need, from truckloads of computer paper to company monogrammed golf balls for special events. The company even provided dog biscuits to First Fidelity, which the bank gave to customers who rolled up at their drive-in teller windows with mutts in the back seat.

-- Treat your people as you would like them to treat your customers. It is perhaps not too romantic to say that a sense of filial loyalty is one of Staples' strengths. Over the years Stemberg has formed strong relationships with his senior management team. Ron Sargent remembers Stemberg calling him every night when his newborn son spent a week in intensive care. As his company grows bigger, this CEO's challenge is to maintain that small-company spirit. Though the company has had an employee stock-ownership program since it was founded, motivating employees is about much more than that. Staples has quarterly town hall-style meetings called Stake in Staples, where senior managers report on the company's performance and solicit ideas at different locations. At Staples Direct, a $200 million catalogue business that sells to small-business customers and doubled in size last year, the division is implementing a Direct Effect award program. In it the employees themselves decide who gets bonuses for good service. The unusual thing about this program is that it was designed by the corps of telephone reps who take as many as 85,000 to 100,000 calls from customers every week. The retailer is also spending more heavily across the board on training. Staples Direct has had consultants call up and pretend to be customers; the insights gained have been rolled into the eight hours of training that associates receive every month. Says Jane Biering, vice president of operations, in her energetic, mile-a-minute fashion: "We learned about the importance of tone of voice and not putting people on hold. We learned we're abysmal at what's called up-sells -- selling products that are bigger or better, after probing customers about their requirements." As Staples continues to grow rapidly, will it become a victim of its own success? The company is now vaulting past the 18,000-employee mark. Communicating its passion about customers to all employees is becoming increasingly difficult. Two of the great retail stories of our time, Wal-Mart and Home Depot, owe much of their success to the almost messianic values of their founders. The question for Stemberg, it seems, is whether he can continue to build the same kind of intense relationships with employees and customers. One thing he can bet on: If he doesn't, his customers will be the first to let him know.