There are dozens of ways to manipulate the customer lists, and Staples is still at an early stage of figuring out what kinds of targeted marketing are most effective. "Our approach is to try to get existing customers to spend more," says Krasnow. "Many customers think of us just for supplies, so we're focusing on business machines and furniture. We're targeting the people who are regulars and spend a lot; we have a chance to supply all of their needs."
What does the marketing system mean in terms of competing for customers? "Most companies are locked into a one-dimensional mentality of 'What does the marketing cost me?' " says database marketer John Stevenson. "But Staples has the capability to go into the next dimension. Instead of just managing an ad budget, the company can speak to me, the customer, and ask me what I need. It knows exactly what direct marketing accomplishes, so it can look at it as a series of relationships with its customers."
The company has raised $35 million in venture capital, recruited a solid management team, developed a sophisticated database of customers -- all this, and only now has it reached the eve of its first competitive test.
Stemberg was correct four years ago to assume that his idea would be copied. About 20 Staples clones have entered the business. Two of them -- Office Depot Inc. in the Southeast and Office Club in California -- already have raised $56 million in public offerings. And a pair of deep pockets that came late to the game, K mart Corp. and Ames Department Stores Inc., are staking out positions in the resurgent Rustbelt.
As these competitors meet head-to-head for the first time, questions about whose strategic choices were the wisest will begin to be answered in the marketplace.
Stemberg, for instance, has chosen to forgo some growth in order to strengthen the company internally. Nowhere are such trade-offs more apparent than in his decision to build a distribution center, which is located off an interstate highway in rural Putnam, Conn. The facility cost $6 million to build and tied up a total of $10 million in working capital -- fully 29¢ out of every dollar of start-up capital the company had raised.
But Stemberg is convinced that Staples will get a healthy return on its investment. Operating in northeastern metropolitan areas, Staples faces much higher costs for leasing retail space than do many of its competitors. The distribution center's inventory storage capacity enables the company to operate smaller stores than the other chains but still offer the same variety of goods; the average Staples store is 35% smaller than Office Depot outlets operating in the Southeast.
Even more important, says Stemberg, the distribution center helps Staples keep merchandise in stock. "In competition with the clones," Stemberg says, "it will come down to who has the lowest costs and the best in-stock position." Business customers can't wait for back orders, and those who can't satisfy their shopping lists at Staples may never come back. Stemberg argues that a distribution center makes it possible for the company to replenish its shelves much faster than orders from store to manufacturer.
That assertion can't be tested until the chains begin competing directly. Meanwhile, none of Staples's competitors has followed Stemberg's example, choosing instead to contract with vendors who ship directly to each store, thereby freeing up precious capital for expansion.
Even some of Stemberg's own backers vehemently opposed the distribution center when it was formally proposed in 1987. "It was my view that resources should be committed to more rapid expansion of the stores," says Fred Adler, whose Manhattan-based venture capital fund owns more than 9% of Staples. "There is a lot of competition in the market, and it's important to get the best possible locations before the others do. The most important thing is to try to dominate as many markets as possible. That money could have opened another five to seven stores for us, at the least."
Stemberg's strategy has already cost Staples in one respect. In terms of size, the company has surrendered leadership in the retailing category it started. Office Depot is larger; 1988 sales reached $132 million and the company plans to have 55 stores in operation by year end, compared with 39 for Staples.
In its third fiscal year of operation, which ended April 30, Staples registered sales of about $120 million, less than Office Depot but still about three times what Stemberg had projected in his business plan. Sales are expected to double again next year.
Staples, though, still hasn't proved that it can make money. Its cumulative losses since its inception in 1985 total $14.1 million, and only in the quarter that ended January 28, 1989, did it report its first profit, $858,000 on $34.8 million in sales. Nevertheless, the company went public on April 28, raising nearly $62 million.
Staples approached its IPO as a company that was designed from the start to be big -- big and sophisticated. Few companies start life as well endowed -- plenty of capital, management experience, and infrastructure. Even that is no guarantee of success. "I once heard the process of building a company described as trying to do needlepoint on water skis," says Stemberg. "You're going so fast and things are coming up at you at great speed, and at the same time you are doing your needlepoint, too -- trying to fine-tune the operation.
"I'm looking forward to the competition. This will be the real test of what we've invested in the business."
