Born to Be Big

Staples, an innovative supermarket for office supplies, braces itself to face new competition.

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Tom Stemberg's battle to dominate the industry he created

Staples Inc. was never your average new business. When founder Tom Stemberg opened the first Staples store, he was launching an entirely new retailing category: the office-supply warehouse. Certain the concept would be copied, Stemberg set out to build a big company -- fast. Three years and $120 million in sales later, Staples is only now preparing to face its first major competitive test.

-- S.D.S.

The aisle stocked with office supplies was torn apart: boxes ripped and empty, pens sticking out of the paper display, batteries rolling on the floor. For Tom Stemberg, out of work, looking for a job, at the end of the world in Langhorne, Pa., this was the greatest sight he had ever seen.

"It was obvious that this merchandise was moving very fast," Stemberg says. "That aisle was devastated." Stemberg was at Makro Inc., the warehouse club, to interview for the top job. When he later checked with industry analysts, he discovered that office supplies accounted for up to 7% of warehouse club store sales. Up to 7%? In stores the size of Texas, only 100 office-supply items accounted for that large a volume?

Bingo. While his interviewers asked him about his previous positions, Stemberg was imagining a chain of warehouse stores selling nothing but office supplies at a huge discount. Months later, when he presented his business plan to Mitt Romney, the managing general partner of Bain Venture Capital, in Boston, his instincts were confirmed. "He wasn't proposing just a chain of stores, but an entirely new retailing category," says Romney. "That really catches your attention. It slaps you in the face with the idea that this could be big."

As big, perhaps, as Toys "R" Us Inc., the $4-billion toy retailer. What was so exciting about Stemberg's idea was its rich lineage, traceable to a group of renegades whose new ideas had swept retailing over the past 15 years. The old full-selection department stores like Sears were in trouble, their product lines sliced and diced into specialty stores that delivered a wide selection of products at discount prices. Toys "R" Us had done it in toys, Circuit City Stores in consumer electronics, The Home Depot in building supplies.

Stemberg believed he could deliver the same wide selection and low prices in an office-supply warehouse business called Staples Inc. Like Toys "R" Us and the others, Staples would shake up a fragmented industry by creating a new distribution channel for its products.

Manufacturers of office supplies typically sell their merchandise to half a dozen major wholesalers around the country. These wholesalers, in turn, sell to the stationery stores and office-supply dealers and provide them with thick catalogs stamped with the dealer's name.

Only the very largest corporations get a big break on price. They buy in bulk from wholesalers or dealers and pay about half the retail price. But a smaller company ordering from a dealer's catalog receives a discount of only 10% to 15%.

Stemberg wanted to disrupt that cozy network. Staples would buy directly from the manufacturers, cut out the wholesalers, and pass on the savings to its customers. That's how 12 yellow pads for $11.55 at an office-supply dealer go for $3.99 at Staples.

Apart from his desire to create a more efficient distribution channel, Stemberg knew that his customers, small businesses, were the most dynamic sector of the U.S. economy. While large companies were cutting back masses of people, small enterprises had taken up the slack and were responsible for the net increase of 10.5 million jobs in the United States between 1980 and 1986.

Moreover, the growth of the service economy, with its reliance on office equipment and supplies, promised to fuel the sale of paper, diskettes, and assorted paraphernalia for years. Each new white-collar job meant another $1,000 in office supplies every year, a bill that Stemberg figured he could cut in half.

What clinched the idea for Stemberg, though, was the immense size of the retail market: $85 billion a year at the time and growing at 11% annually, with small business accounting for more than half of that. "I smelled success," he says. "I'd sensed it before, but when I heard those numbers, I smelled it."

Once he'd circulated his business plan, others would smell it, too -- of that Stemberg was sure. Good ideas are copied quickly. Within months, no doubt, there would be Staples clones all over the country.

For Stemberg, that meant one thing: Staples would have to be far more sophisticated than the average start-up. It would have to grow quickly to establish itself as the dominant player in the market. But fast growth alone wasn't enough; too many pioneers in other industries had been overtaken by the companies that followed, companies that executed the day-to-day details better. Staples would have to grow smart -- with the capital, management, and infrastructure to compete and win over the long term.

Financing the kind of growth that Stemberg anticipated -- $42 million in sales after three years -- required ready access to capital, and lots of it. That, as it turned out, was the easiest part.

When he read Stemberg's business plan, venture capitalist Romney embraced the idea. "A lot of retail start-ups come by, but most of them are a twist on an old theme, or a better presentation," he says. Not Staples -- it was an entirely new retailing category.

To test the idea, Romney's firm surveyed 100 small businesses. "I went to Stemberg and said the concept sounded great but wouldn't work," says Romney. "They just weren't spending enough money on supplies to care. But Stemberg told me to go back and get their invoices, because they were spending far more than they thought."

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