It was the Fourth of July weekend in 1985 when Thomas Stemberg, a recently fired supermarket executive, was working on a business proposal, and his printer ribbon broke. After driving all around Boston and finding all the typical suppliers -- small stationery stores and specialty office supply dealers -- closed or without a replacement ribbon in stock, he scrapped his original business plan and channeled his frustration into developing a new retail concept: The office supply supermarket.
The idea was to create a warehouse where customers could buy office goods at discount, direct-from-the-factory prices. Key to his plan was convenience -- in other words, plentiful in-stock items and generous store hours.
Ten months later, mother necessity's progeny debuted: The first Staples Office Superstore opened in the Boston suburb of Brighton, Mass.
Birth of the Big Box
The new retail recipe was part of an emerging trend spearheaded by Wal-Mart Stores (NYSE: WMT ) , Home Depot (NYSE: HD ) , and Best Buy (NYSE: BBY ) -- all of which were in the early stages of revolutionizing the big-box superstore concept.
It didn't take long for Staples to stake its territory. Today, Staples (Nasdaq: SPLS ) is the world's largest office products company, with more than $24 billion in sales and an online arm (Staples.com) with business that ranks up there with Internet behemoths like Amazon.com (Nasdaq: AMZN ) .
Tom Gardner recommended Staples for Motley Fool Stock Advisor members in the October 2007 issue. Staples' performance has endured but a mere paper cut in comparison to other recession-ravaged retailers. Since the recommendation, the company is ahead of the S&P 500 by more than 35 percentage points.
Hmmm, that seemed easy
Part of the Staples success story is about brand. In a manila-envelope bland industry, the company has created a bona-fide marquee.
Chances are someone in your office has an "Easy Button" on their desk. Or maybe you saw Nancy Pelosi use it after she signed the energy and climate change bill in June. "That was easy," said the House speaker after she pushed a red Staples "Easy Button." Perhaps even more impressive is that people actually purchase Staples marketing schwag. Think about it: When's the last time you were willing to shell out cash for one of your suppliers' logo-emblazoned gewgaws?
The red "Easy Button" (rolled out in 2005) is more than just a gimmick to Staples' management -- it is the embodiment of the company's core competitive position. When they asked customers what was most important to them, the top answers were in-stock items, knowledgeable people, fast checkout, and next-day delivery.
In other words, make it easy. So that's what Staples did.
Lately, a lot of businesses are clamoring for that "Easy Button." Same-store sales for most of the industry are down, yet Staples continues to plow ahead by grabbing market share in both its retail and delivery segments.
The company is no stranger to hard times and shifting business strategies. During the last economic downturn in the early 2000s, Staples slowed its domestic store expansion, shifted focus to small-business customers and away from individual consumers, and made several strategic acquisitions to expand business in the U.S. and abroad (Minneapolis-based Medical Arts Press, France's Guilbert, Italy's MondOffice, and the U.K.'s Neat Ideas, to name a few).
The recession strategy worked: In 2002, Staples' sales surpassed those of its chief rival Office Depot (NYSE: ODP ) ($11.6 billion vs. $11.4 billion).
Will Staples be able to offer a repeat performance this go-round? Read on to see what we learned when we met with management.
How to grow during a downturn
Ron Sargent, chairman and CEO of the office supply giant, took some time off from preparing for this fall's back-to-school season to chat with Stock Advisor associate advisors Andy Cross (TMFOpie) and Alex Scherer (TMFEnochRoot).
Like that of Staples' founder, Sargent's career started in supermarkets, where he worked his way up from stock boy to management at Kroger (NYSE: KR ) . He joined Staples in 1989, and launched the company's delivery business in 1991. He became CEO in 2002 and was elected chairman of the board of directors in 2005.
Sargent spoke to us at length about the company's strategy for grabbing market share and growing the most profitable parts of the business -- moves that he points out are very deliberately a carbon copy from his early 2000s playbook: "During the worst recession of our lifetime, we had a three-step recession plan: The first step was to take great care of customers, because they remember when they are not treated well. The second step was to hunker down on expenses, which all good companies do in a recession. The third point was to invest for the future," Sargent says. "That is how we got through the last recession very well, and I think it is true of this one."
That's not to say that Sargent doesn't have big plans and big goals for the company, both near-term and 10 to 15 years hence. During our hour-long conversation, Sargent talked about strategies that contribute to Staples' success in good times and bad. Edited excerpts from the interview follow.
Staples' six recession strategies
1. Get everyone at the company personally invested in your success.
Ron Sargent: Getting your employees feeling like owners is always a good thing. We are getting to be a pretty big company these days, but we try to operate it much like it is still a small company ... We do a lot of promotion from within, and we try to create opportunities for talented people to run businesses at a very young age, letting them be mini entrepreneurs within this $24-$25 billion company ... The people who are running our stores are running $5 and $6 million businesses.
From the very early days, we tried to get Staples stock in as many people's hands as we possibly could. We issue restricted stock all the way down to every sales rep in the company, every store manager in the company, and we push very hard on employee stock purchase plans for every single person in the company ... We have done very well by a lot of those people. The stock has done very well. If you have been here for 10 years, you have done fine, and if you have been here for five years, you have done OK. I think getting people to buy into the fact that we want you to get rich slowly is a motivator for a lot of people as well.
We are pretty much all on the same bonus plan: 40% of our bonus is based on return on net assets, 40% on earnings-per-share growth, and 20% based on customer service. It is really driven by the numbers, and we tend to all fail together, or we all succeed together.
2. Take small, steady steps, not giant, risky leaps.
Sargent: I have been here for 20 years, and it has been great seeing the company evolve. But most important is maintaining the culture we had way back when, and our incredible, single-minded focus on the customer ...
There is a concept that I stole from Jim Collins [author of Built to Last and Good to Great] -- we call it "20 miles a day." He writes that the best armies are the ones that move forward 20 miles a day, and that that is a whole lot better than moving 30 miles up the first day, ten miles back the second, and then 15 the third. It's about constant progress day after day after day after day, and while you don't feel like you have gone very far in a single day, you look up a year later, or five years later, and you realize that you have made great, great progress. Everybody in the company knows about "20 miles a day."
3. Fill up the gas tank so you're ready to hit the road when business comes back.
Sargent: There are four or five big investments we are making. The biggest one is the investment we made in Corporate Express, and the investment we are continuing to make in Corporate Express to integrate it.
Our competitors are closing stores, but we are still opening a new store every week. One concept we are trying to fine-tune during the recession is called Staples Copy and Print Shop. It is a 4,000 square foot half copy shop and half office supplies store that you would put in like either suburbs, or downtown. It is much like the little traditional Kinko's; there are 1,900 Kinko's around the country. We only have 17 of these open today, but assuming we can perfect the concept and assuming the economy turns, which it will, we will be able to step on the gas when times get better.
Another [area of investment] is Easy Tech, which is the Staples version of [Best Buy's] The Geek Squad. It is now our fastest-growing business, where customers can either come to our stores or have us come to their small business or their home. It really goes after providing all the help that people need. That business is a small base, but last year, we were growing 50%; this year we are growing 300%.
Internationally, we have entered several emerging markets. We have entered Brazil and Argentina and China and India, and there, the plan is to grow as fast as we possibly can while breaking even. So, while we are not trying to make any money, we are going after share and grabbing it. We are already the largest in China and India, which feels pretty good. ... If we can kind of be synonymous in people's mind with office supplies, and if we can get Easy Buttons given to every middle-class family in India or China, that will pay big dividends 10, 15 years from now.
4. Find the right balance between growth opportunities and profit opportunities.
Sargent: There are three big mega trends that can affect our business in a positive way, and there are probably two that affect our business in a negative way in terms of profitability. The ups are delivery, services, and brand (the Staples brand). The downs would probably be technology and international. Our job is to try to manage them so that the total of all those together is slightly up every year.
On the positive side, services are the fastest-growing part of our business. I think more and more service and services -- whether that is copy shop service, whether that is in-store copying, whether that is Easy Tech services -- will be very good for our margins because they are more profitable for the business.
On brands, quick, name five brands of office supplies. Brands are not as important in the office products industry, so I'm thinking, why can't Staples brand be the national brand office product? Five or six years ago, the Staples brand was about 12% of our business. Today, it is 25% of our business, and we think the Staples brand could be 35% of our business down the road. And that is all good margin.
The final thing on the positive side again speaks to margin. I think our delivery business will continue to grow faster than our retail business. Because delivery is more skewed toward office supplies and less [toward] technology, it is more profitable, and it is way less capital intensive because you don't have the 20-year leases to sign.
On the downside, international growth and technology [are] going to continue as bigger and bigger parts of our mix. And neither of these is as profitable as our core today.
5. Exploit the silver lining in business lulls.
Sargent: The good news about the recession is that you can attract great talent that you may not have gotten a year ago because either they wanted more money than you could afford, or they had other choices. We have really used this recession as an opportunity to upgrade the talent in the organization. Also, bringing in some outside talent makes the people inside really step up their game.
Also, our retail business and traffic seem to be picking up pretty well, and that is typical in a recession. When people lose their jobs, they either do something from home, or they start their own business, or they work on getting their resumes together. That happened in 2001, and that is happening now.
6. Remember, recessions don't last forever.
Sargent: Recessions don't last forever -- but really good companies do. Right now our competitors are doing all the things that you would typically kind of think about doing in a recession -- squeezing, cutting back on service or substituting items without letting everybody know about them. We are trying not to do that. Instead, we are using this as an opportunity to gain share so that when things do get better, and when people do come back to work, we are going to have a lot more customers.
Somebody told me the other day that 64 of the Fortune 100 companies are Staples customers. I think two of our competitors have in total around 32, and some regional guys have the rest. So in a staff meeting, the question was, how are we going to get the 36? How are we going to get them quick?
We do a lot of benchmarking with everybody about everything. I wish our stores were as exciting as Best Buys'. I wish our prices were as low all the time everywhere as Wal-Mart's. I wish that our service was as good as Nordstrom's. But we don't have to look outside to develop who we are and what is important to us.