Rysavy had never had formal business training. In fact, even capitalism was new to him. "I knew nothing about business," he says. "In Czechoslovakia, private business was called 'illegal enrichment." To better understand the specific problems he would face as a manager, Rysavy pored over every relevant book and magazine article he could find. "It was Cornflake University -- I learned from business articles I read over breakfast," he says. "I clipped articles. I wanted to know what mistakes were made by CEOs of growing companies. So I read articles to find the relevant answers, to get ideas to think about."
He had planned to open additional health-food markets, but a touch of serendipity changed all that. One of his neighbors owned an office-supply store in downtown Boulder and wanted to sell it. The store was losing money on about $300,000 a year in sales. But when Rysavy took a look at the business, the problems seemed not at all difficult to fix. He bought the store cheaply, paying $100 and assuming $15,000 in overdue accounts payable.
When he took over, Rysavy installed a computer system to track customers and sales. It was obvious that sidewalk business could not pay the bills, but Rysavy was intrigued by a handful of successful accounts with local companies that bought office supplies in large quantities. To Rysavy the future of the operation seemed obvious: move away from retail sales and instead focus on the corporate side. Following that strategy, he says, he expanded sales nearly eightfold within a year, to $2 million, with a pretax margin of 14%. His quick success in one office-supply store made him think, Could he do the same thing in multiple locations? In the fall of 1987 Rysavy sought the answer. He hired a researcher to collect material on the office-supply industry. That December he packed a pile of documents two feet tall and went to Maui for two weeks of reading.
What Rysavy discovered in his reading was a huge industry riddled with inefficiencies. Thousands of office-supply dealers split a market worth more than $100 billion. Because almost all the dealers were small -- with less than $25 million in sales -- and served local markets, they did not enjoy the sales volume they needed to make direct purchases from manufacturers. Instead, dealers purchased most of their items from wholesalers at prices up to 30% higher than what manufacturers charged. In addition, with the number of office products exploding in recent years, most dealers carried large, slow-moving inventories.
A few savvy merchants -- Staples and Office Depot among them -- had already grasped the opportunity to bypass wholesalers. By 1987 they were just beginning to terrorize local dealers by opening superstores in which they sold office products at discounted prices. But superstores served mostly retail customers and small businesses. What Rysavy saw was an opportunity to do the same thing for midsize and large companies.
Purchases by corporations with more than 100 employees accounted for $30 billion of the annual office-supplies market. And by selling directly to those customers instead of operating superstores catering to walk-ins, Rysavy was certain he could generate better returns on capital. "I figured I could cover all of the United States from 20 warehouses," he says. "Office Depot would need 2,000 superstores." He also figured that a big corporate supplier could cover the country with $40 million to $50 million in inventory, a small fraction of what a network of retail superstores would require. While merchants like Staples were opening bright new retail stores, Rysavy decided that it made more sense in the corporate side of the market to buy existing companies rather than start new operations from scratch. Corporate customers tended to remain loyal to their supplier for a number of years, so starting from scratch would require an extended period of building the business -- all the while accumulating losses. And because many local office-supply companies were doing poorly, Rysavy figured he could make the acquisitions inexpensively. After analyzing the market potential, he says, "I was astounded."
The opportunity to be first in the market would not last long, however. Rysavy knew it was time to move -- and quickly.
* * *
Rysavy found his first acquisition close to home. NBI, located in a suburb of Denver, had recorded a loss of about $1 million on sales of $20 million.
When he sold his health-food market, Rysavy had only $300,000 to invest. But this was the roaring '80s, and he managed to leverage the balance of the $12.8-million price. He seemed not at all concerned that he had put almost every dollar of his net worth into a troubled company. "I came here from Czechoslovakia a few years earlier with no money at all," he says. "What would be the worst that could happen? I'd simply go back to having no money again."
When he took over NBI's office-products division, in 1988, Rysavy began implementing the plans he had been devising for the past year. He did what had worked so successfully in his small storefront in Boulder, analyzing NBI's customer base to identify the unprofitable orders. About one out of every four orders lost money because it was too small to warrant the attendant costs -- picking the items from the warehouse, packaging them, and processing the invoices. "I cut out all the revenues that lost money," Rysavy says. As he cleared the underbrush that had ensnared NBI, work proceeded on what would become the company's most critical competitive weapon in the years ahead. An engineer by training, Rysavy understood better than anyone in the industry the importance of developing a software system that could embrace every aspect of the business. But what hotshot programmer would come to a small office-supply company run by a Czech ÉmigrÉ? None, it appeared. Except maybe Pavel Bouska.
Bouska had recently come to America for the first time. He had stayed at Rysavy's 80-acre hideaway nestled 8,000 feet high in the Rocky Mountains above Boulder. Rysavy had showed him the office-supply storefront and shared his plans for the future. "He had only a few PCs at the time," says Bouska. "I was dubious. I was running a major software-development shop in Germany."
