Putting a Stop to Mom and Pop
(FORTUNE Small Business) – Like all great business ideas, Tom Stemberg's makes you wonder why nobody had ever thought of it before. A supermarket for office supplies--why, smack my forehead! But great ideas are products of their times. Staples was conceived in the mid-1980s, on the verge of the longest-running economic boom in U.S. history. A boom, moreover, driven not by corporate America, which has known all along where to buy cheap pencils, but by entrepreneurial America, which took to the Staples concept--huge selection, deep discounts, and long hours--like oxygen molecules rushing to fill a vacuum.
If Stemberg, now 53, had a rare feel for the new market he was serving, it's because he was part of it himself. After graduating from Harvard Business School he spent 12 years climbing the corporate ladder, first at Jewel's Star Market, then at First National Supermarkets. When First National sold Stemberg's Edwards-Finast division from under him in 1985, he was out of a job and eager to start something on his own. "I felt I was ready to run a business," Stemberg says now. "I didn't like the politics of big companies."
Starting with a single store in Brighton, Mass., Stemberg built what today is an $11 billion company with nearly 1,500 retail outlets, spawned three major copycat competitors, and forever changed the way we look at list prices for paper clips. Early this year he relinquished the CEO title to Ronald Sargent. Still chairman, Stemberg spends more time now on his small portfolio of startups. His story of how Staples began dispels what he calls "the single greatest myth about entrepreneurs--the swashbuckling, seat-of-the-pants image." Says Stemberg: "I've spent a lot of time talking to Michael Dell and Fred Smith [Federal Express]. Most great entrepreneurs are extremely analytical. Once they pull finally the trigger, no question, they run like hell. But not before they calculate the downsides and the risks very, very carefully." --David Whitford
"For me there was no one eureka moment with Staples--it was a confluence of moments. I had just left my job at First National Supermarkets, and I was being recruited by the new industry of the mid-'80s, the wholesale clubs. Sam's had just started up--Price Club, Costco, Makro. So I go down to Langhorne, Pa., for an interview with Makro. Why? Because the Harvard basketball team had never beaten Princeton and Penn on the road in the same weekend, ever, and I thought they had a shot to do it that year (in fact, they ultimately did). Anyway, Langhorne is halfway between Princeton and Penn. I wanted to see those games and figured this was a free way of getting down there.
So I'm being interviewed by the CEO of Makro. And I said, 'You know, this is not going to work in the U.S. Maybe if it just became a superstore, though, like a Toys "R" Us for office supplies.' Those were the words I used. At that point it registered as an idea I should think about. So I started thinking about it. There was a lawyer I knew in Hartford, which is where I lived then. If ever there was a cheap bastard in this world, he was a cheap bastard. And I said, 'Gee, how much do you spend on office supplies?' He said, 'Oh, I don't know, I guess about a couple of hundred bucks a person, 40 people in the office--I bet you we spend a grand.' I said, 'Do me a favor, will you? You've got good records. Go through your records and tell me exactly how much you spend.' He calls me up the next day: 'Son of a bitch! I spend $1,000 apiece! But I'm getting a discount. I'm paying 10% off list.' I said, 'Toys "R" Us is paying 60% off list.' He says, 'Are you kidding me? You mean I could save, like, half? I could save like 12 grand?' In his mind this is the payment on his new Jaguar.
Now I'm thinking, You know, this has some real potential. Big market. People want to save money. They don't realize they're getting hosed. I began doing some work. It was a Friday, Fourth of July weekend. Have you ever been to Hartford? Hartford is a miserable place. On the weekends everybody leaves. They go to New York. They go to Boston. They go to the seashore. They go to the mountains. There's nobody there. But I'm working my butt off. And the ribbon on my ImageWriter printer from my Apple IIC computer goes. And I need a new ribbon. So the first thing I do, I drive down to the local office-supply store in downtown West Hartford, called Plimptons, and it's closed. I go around the corner into Business Land, same thing. I drive up to BJ's Wholesale Club, and it had good prices on the printer ribbons it carried, but mine was not one of them. I said, "Oh, I'm fucked." As an entrepreneur, not only do you get ripped off when you can actually buy this stuff, but many times you can't buy it at all!
Then I also had a mentor, a guy named Walter Salmon, the retail guru who teaches at Harvard Business School. I had lunch with Walter one day during the time I was thinking about all this stuff. I told him about a supermarket deal I was looking at. And he sort of leaned back, you know: 'Tom, do you in your heart of hearts believe you can out-execute Shaws and Stop & Shop [two big New England chains]?' And I said, 'Walter, I think we can be different. I wouldn't say we could out- execute them. They're both very good.' He said, 'Well, as an alternative, have you thought about applying your distribution skills to a category that is both growing faster and less well served by modern distribution channels?' Those were his exact words. And I said, 'Well, as a matter of fact, I have: office products.' And he said, 'Gee, this is a really big idea.'
At one point I spent $20,000 and hired a woman who had been Walt Salmon's teaching assistant and had her validate the market for us. I'll never forget the night I went to her house and we went through the slide deck. I always want to jump ahead. And she puts her hand on my hand and says, 'Wait, we'll walk through it.' She's teasing us! Finally she said it was a $45 billion market growing at 15% a year. And it turns out she was lying. That was actually at the manufacturer level. It was actually more than $100 billion at that point already, if you looked at retail. She confirmed that the pricing umbrellas were as big as we thought they were, and that small businesses were being raped the way we had said they were. I was pretty excited during the long drive home.
Now, Wharton, at the University of Pennsylvania, had done a study of the office products industry. It was wonderful. Essentially they first asked dealers, 'What does the customer want?' Ninety percent of the dealers said, 'Better service' and 10% said, 'Other.' Then they asked the customers, and 90% of the customers said what they really wanted were lower prices. Ha! The dealers were totally out of touch. They were making 40% to 50%, the wholesalers were making 30%, and the manufacturers were making huge margins. Everybody's rich, fat, and happy, and they're all going, 'What's wrong with this?'
Until a guy like me came along, the answer was nothing. The manufacturers were under tremendous pressure from the dealers. You know, 'If you sell to Staples, we'll shut you off.' The worst was the Harvard Coop. The Harvard Coop told McKesson, the big wholesaler, that if it sold to Staples the Coop was going to shut them off. We actually went after the Harvard Coop. We did price comparison ads with the Coop: 'Why would somebody as smart as the Harvard student pay $3.68 for 79-cent-a-dozen pens?'
We were lucky, too, in that we had some great industry ties. William Blair, a venture firm in Chicago, was an investor in our company. They brought a bunch of companies public--including United Stationers, which today is still a big wholesaler. They took me out to meet the chairman of United Stationers. He told me this was a dumb idea. 'Customers want better service,' he said. 'They don't want better prices. Forget it. It will never work. You'll fail.' That's what he thought. But William Blair's venture fund invested in us, which helped us a lot, since a lot of the manufacturers were invested in it. And those manufacturers thought, You know, we ought to at least play with these guys, because it's probably gonna work, and we don't want to be left on the outside. Bessemer Venture Partners, another investor, happened to own Ampad, the big paper company out in Springfield, Mass. And because Bessemer was on the board of directors and called them up and said it was an investor in Staples, Ampad opened up to us, no questions asked, even though a lot of people were screaming at it.
We opened the first store, in Massachusetts, on May 1, 1986. By August, early September, we were getting lines at lunchtime. One of those days I came down from the office at lunchtime to help out. I started seeing lines at the register, and people talking about what a great deal they were getting. And you started seeing people who had driven down from Maine and up from Weymouth, Mass. That's when I started saying, 'This could work.'
Then Bain [& Co., the consultants], which did a lot of work for Avery Dennison, a wholesaler in the business, gave us a boost. They were telling their client, 'We think the value channel will grow, and if you're smart you'll partner up with Staples before your competitors do.' They did, and it worked for them. Another break--it took a while, but the Canon guy finally agrees to send a sales rep up to come meet with me. I say, 'Meet me at lunchtime.' I take him to the store. It's a mob scene. And he just says, 'I'll sell to you.' About a year or two later Hewlett-Packard puts this huge task force together--they decide they're gonna sell to us. And so one by one the dominoes fell.
At the time we had this one stinking store in Brighton, Mass. One day I'm walking around, shopping, and I recognize this guy. It's Joe Antonini, the CEO of Kmart. His industrial spies had reported to him there was this hot new business opening up there. Now if he is in my store, and I have one store in Brighton, this obviously has a whole lot more weight and more potential than even I think it does. I also heard a story from Charles Lazurus, CEO of Toys 'R' Us, that spring. He was on the Wal-Mart board. Each year the Wal-Mart executives have to identify the biggest new idea in retailing, the biggest threat to Wal-Mart--at least, Sam Walton used to do that in his day. And the executives report to the board. Lazarus reports to Robert Nakasone, a Toys 'R' Us executive who's also on my board, who says they reported that the biggest new idea in retailing is the Staples thing up in Massachusetts. And I said, 'Oh, the jig is up. This is going to be a race.' And sure enough, it turned out to be one.
From a value perspective, I think there's no question we've been a friend to the entrepreneur. If you look at the average small-town merchant, we've lowered the cost of his office products--where he was once paying, say, $4,000 or $5,000 a year, now he's paying $2,000 or $3,000. We made him more efficient. We made female entrepreneurs working out of the home more efficient. I'm sure we've had some deleterious side effects along the way too. Back in those days there were, I don't know, 15 major wholesalers. I think there are two today. There were 14,000 dealers. Today there are 6,000. But the positive benefit of what we've done for the productivity of small business and entrepreneurs lets me rest very comfortably in the confessional when I go.
Oh, yeah, the name. I'm driving between Hartford and Boston. I'm thinking about names. Pencils? Pens? 81/2-by-11? Staples? Staples! Staples the Office Superstore. That was it. The bad thing about the name was that when we started out, we had to explain to everybody what it was. Office Depot basically copied Home Depot and put the word 'office' in front. It was a Home Depot for the office, and it lived off the Home Depot name. Office Club was a Price Club for the office. It lived off the Price Club name. In the early days ours was actually a problem. But those other names aren't brands. Ours is a brand."