For Staples CEO Tom Stemberg, spying on the competition--and on his own company--isn't just a good benchmarking tactic. It's crucial to his business's growth

Tom Stemberg, CEO and Chairman of office-supply superstores Staples, is a retail junkie. Every week the founder of the $5.2-billion chain keeps tabs on the industry by dropping by at least one of his competitors' stores and one of his own. He even makes a point of observing retailers with whom he doesn't compete. "I've never visited a store where I didn't learn something," Stemberg says. The key, he says, is how you look at things.

For Stemberg and Staples, that kind of competitive intelligence is more than just a grassroots approach to benchmarking. It's critical to constantly stimulate his company's growth and innovation. Staff writer Stephanie Gruner met with Stemberg to learn how he mystery shops.

Inc. : What's your secret for getting the most out of competitor-store visits?

Stemberg: When you go to a competitor's store, it's always tempting to say how dumpy it is, how small it is, and so forth. [Wal-Mart founder] Sam Walton would never tolerate that. When you came back from visiting the competition, he would force you to focus on what they did better than you did.

There's a great story about Sam Walton. He went into a store in Tennessee and the place was god-awful. The produce smelled, and it was just a disaster. And his associates were kidding each other, saying, "I wonder what Sam is going to say now." And Sam looked at the back of the store and saw this cigarette rack and said, "You know, that's the finest cigarette merchandising I've seen in a year." We try to have that same discipline.

When you visit the competition, you've got to see what they do better than you and learn from them. You must never have the hubris to take your competition for granted, because that can come back and hurt you.

Back in 1987 one of the founders of Office Depot was dying. It was very tragic. Some venture capitalist was trying to buy the company very cheaply and put in a new CEO. Some of the incumbent investors, many of whom we knew, said to us, "Why don't you just come in and buy this?" At that time we could have bought Office Depot for $12 million or $14 million. And so to get an assessment of how the company was doing--we hadn't been there in a while--we sent two people down. They rented a convertible and drove around for two days to all the stores, and they reported back that essentially there was no sense in buying those guys because they would be gone by the end of the year: they were so bad, the service was no good, nothing was right. Well, of course, Office Depot has gone on to become the biggest company in the industry, and we are still playing catch-up with them 10 years later.

Inc. : What do you look for when you visit a store?

Stemberg: Before I walk into the store, I'm looking for what kind of visibility the store has. How easy was it to find? If it was hard for me to find, it probably was hard for most other people to find. Then you walk in the way a customer would walk in. You don't announce yourself. The first thing I look for is how long it takes for somebody to come over and ask if they can help me. You look for out-of-stock items, you look for how things are displayed, you look for things the customer can understand, you look for price tickets that are inaccurate. How easy is it to figure out where things are? Do I get an impression the prices are low here or that they are not? Are the prices well communicated? Do people know the answers to your questions? I also want to see how I'm going to be treated as a customer. I walk into the store, and somebody comes and says, "Can I help you?" I ask a question: "Gee, do you have Flexgrip pens?" Do they take me to the pens and show them to me and make sure I buy one? Or do they say, "Aisle 7"? It makes a big difference. I'm looking for everything that the customer would think is better. You try to see exactly what the customer sees. I carry a little pad and I write my notes. Then I E-mail them around to our management team.

Inc. : Is it true you've used family and friends as mystery shoppers?

Stemberg: I sent my mother-in-law as a customer down in South Florida to Office Depot. She would buy products from the store and return things. We just wanted to see exactly how everything worked, how quickly they delivered things, how the billing was done, how quickly they picked up a return, and how many orders were in the truck when it went by her house.

Inc. : How would she know that?

Stemberg: She asked the driver. You want to know how the delivery business is doing. You multiply the number of trucks by the number of deliveries per order by average order price and you've got revenue, right? It's not that hard to figure out.

Inc. : Are there risks associated with copying competitors?

Stemberg: Absolutely. We've laughed from time to time because when you copy at retail, you copy mistakes as well as things that go right. I will never forget: we tried portraits and picture frames early on, and this did not work for us. But Office World decided they were going to make a real statement in picture frames. Now they have a 40-foot section of picture frames. So they copied some dumb things, too. You have to be careful what you do.

Inc. : What's the downside to focusing on competitors?

Stemberg: We focus on them disproportionately. One of my great fears always is that our people will measure competitors' stores purely by how we do things and try to rationalize why we do things better, smarter, whatever, and stop the learning experience. One of the things you can do when you're focused on your competition is lose sight of the customer. I think that's a mistake, because lots of times I find retailers overly focused on one another and ignoring what the customer wants and therefore losing the market to some new entrant who truly focuses on the customer. A great example in retailing today: one would suspect that Barnes and Noble spends all its time looking at Borders and that Borders spends all its time looking at Barnes and Noble, when both of them should pay attention to Amazon.com.

Inc. : Whom do you copy outside your industry?

Stemberg: Certainly the Price Club. Costco. You can learn something new at Costco every day. They are terrific merchants. They have really pioneered taking the relationship with their basic customer and broadening it. They are now moving into insurance services and credit-card services. If you're a small business, they will provide you with a cheap credit-card clearing rate through a third party. It's really neat stuff. We learned a lot from Costco.

Inc. : What specifically have you learned from them?

Stemberg: Actually, membership. We had membership in the early days. You had a card to get value at our store. We didn't charge you for a card the way the wholesale clubs did. We gave it to you free. We gave you better prices when you used it, and the benefit of it was that we knew who the customers were. That is one thing clearly copied from Costco. The second was going to larger pack sizes. We saw the efficiency of that, and we learned that from Costco.

Inc. : What else have you learned from businesses outside your industry?

Stemberg: I always shop new kinds of retail stores just to see what the shopping experience is like. I have been impressed and amazed at some shopping experiences and blown away by how bad others are. In recent times I have gone to the new Toys "R" Us prototype store, which I like a lot. I learned a lot in terms of visual-display techniques. I like the Toys "R" Us pull-ticket system. When you buy, for example, a video game, they actually control the number of pull tickets they put out there to the number of games they have in stock. So if they run out of pull tickets, they are out of games, in theory. We have not yet made it work--and we've been trying for years.

Inc. : How do you make sure that you're learning more about the companies' strengths than what meets the eye?

Stemberg: I recently went down to visit Mobil Corp. and learned a lot from them. Mobil gas stations were the first ones to have the self-service tanks where you stick your credit card in and help yourself. And now they have come up with this thing called Mobil Speed Pass. You go up to the gas pump, you wave the pass, boom, you start pumping. It takes two minutes per fill up. I love that thing. So I wanted to understand how they came up with it, what competitive advantage they derived from it. In that case, I didn't observe what they were doing--I met with individuals in the corporation. It was a tremendous learning experience.

Inc. : You're also known for visiting your own stores. What is the value of doing that?

Stemberg: I spend at least one day a week in our stores. We've got 740 stores, and I've seen about 690 of them. I want to see what the customer sees. As you get bigger and start to feel success, you tend to get isolated from what the customer sees. Sometimes you start to rationalize customer complaints away. You don't know if they're a problem or not. And you go into the stores and talk to your associates, and you find out amazing things.

For example, we sit here in the office and we hear that we're approving more people for credit than ever before, private-label credit is growing a tremendous amount --isn't it great? Then you go down to Sumter, S.C., and talk to a store manager whose church couldn't get approved for credit and you listen to the stories of what this poor church went through trying to get credit. And your whole attitude about your credit offering changes 180 degrees. By visiting I learned that what we were doing in some cases in the credit-approval process was extremely onerous. In fact, it was driving away business. But again, you learn that only if you are out in the stores.

Inc. : How do you remain anonymous when you're visiting your own stores?

Stemberg: This week I was in Pittsburgh and Youngstown, Ohio. It was a very pleasant shopping experience. Those were pretty well-run stores, the stock was very, very good, the customer engagement was terrific. When I walked into the next store, in New Kensington, Pa., three people approached me. It was too good to be true. I said, "I've got a funny feeling you were waiting for me." The manager there said, "Well, I guess we were. We heard you were coming." I said, "I guess the guy in Youngstown must have called you." He said, "Yeah, he did, but he didn't have to--the word was out last night when you got to Uniontown."