Supplies In Demand
How Tom Stemberg's quest for consumer convenience grew into one of the main Staples of the office-supply industry.
There's big money to be made selling paper clips and other low-priced office supplies. If you have any doubts, just ask Tom Stemberg, founder, chairman and CEO of the Westborough, Massachusetts-based office-supply company and superstore, Staples Inc. He'll reel off some incredible numbers in response.
Over the last 10 years, Staples has sold 5.3 billion paper clips, 3 million rulers, 10,000 miles of 3M transparent tape, 241.6 million pens and 240,500 gallons of correction fluid. Last year, the 557-store chain sold $3 billion worth of office supplies.
You'd think the 47-year-old Stemberg would be content to sit back and watch the money roll in, but he's as jittery today as he was when he opened his first store. Stemberg says insecurity goes with the terrain. "It's part of being an entrepreneur," he says. Yet he'd rather be perpetually worried than be doing anything else. "Since I was a teenager, I knew I didn't want to spend my life working a nine-to-five job for someone else. I fantasized about being on my own, calling the shots and controlling my own destiny."
It wouldn't happen immediately. It took Stemberg 13 years to find the idea that would put him on the right track. First, he mastered the supermarket business; then, he applied what he had learned to the office-supply industry.
After graduating from Harvard University in 1973 with an MBA, Stemberg entered the corporate training program of Star Market, a well-known grocery-store chain throughout Massachusetts. Seven years later, he became Star's vice president of sales and merchandising after launching the first line of generic foods sold in the United States.
Stemberg next took a job as senior vice president of sales and merchandising at the Connecticut-based First National Supermarket chain in 1982. One year later, he was promoted to president of the company's Edwards-Finast division. Motivated and inspired by competitor Leo Kahn, the founder of Heartland Food Warehouse and Heartland Drug Stores, Stemberg became the brains behind First National's chain of high-volume food megastores. "I didn't know it at the time," says Stemberg, "but everything I was doing was paving the way to opening Staples."
By the time Stemberg mastered the supermarket business, he had tired of corporate life and was ready to launch his own business. In 1985, Stemberg handed in his resignation.
But he still wasn't sure which business to start. The obvious choice was buying a supermarket chain, but he couldn't find one that offered the kind of growth prospects he was looking for. It was during the Fourth of July weekend in 1985 that Stemberg hit upon the concept of an office superstore. He was writing some letters in his West Hartford, Connecticut, home when the ribbon on his printer tore apart. He headed to the nearest business-supply store, only to discover that the store was closed for the entire weekend.
So began his quest for a ribbon. After finding that another store near his home was also closed, Stemberg headed for BJ's Wholesale Club, only to find that they didn't have the type of ribbon he needed. "It wasn't like I was looking for a big-ticket item," he explains. "It was just a simple printer ribbon that should have been easy to find."
It took a frustrating event like this to point out there was a glaring need in the marketplace. "Having been a frustrated customer myself, I knew how all customers must feel when they can't get something they need, when they need it," he says. "There was a need for a well-stocked office-supply store that was open seven days a week and didn't shut down on holidays."
That was only a small part of the void Stemberg was soon to fill. He wasted no time in hitting the pavement to comparison-shop for office products. "I discovered that not only were most stores poorly stocked, but consumers were paying way too much for office supplies," he says. "That was when I knew I had a big idea."
Stemberg proposed the question that would soon propel him to entrepreneurial superstardom: "What if I were to open a Toys `R' Us for office supplies?" He aggressively researched the idea, expanding upon the concept of starting an office-supply superstore based on everything he had learned in the supermarket business. He thought about who his customers would be and how he would serve them. "After observing customers' buying habits," he says, "I realized my customers represented all businesses, but especially small ones, many of which were homebased sole proprietorships."
As Stemberg saw it, all business owners shared some common problems. "First, they were paying way too much," he says. "Second, they had to go to too many places to find basic products: a wholesale club or supermarket to buy janitorial supplies and coffee; a stationery store for paper clips and envelopes; a computer-supply store for computer paper, printer ribbons and floppy disks; a business-machine dealer for copiers, calculators, toner and fax machines; and a copy shop for photocopies or to have stationery run off. It doesn't take an efficiency expert to know that this kind of buying makes no sense. My plan was to offer a `one-stop shopping' experience for customers. We were going to define a business not around who carries what stuff, but around what the small-business and homebased office needs. That is the crux of our business strategy."
Large-volume grocery-store technologies, like bar-code scanners and sophisticated, computerized inventory control, served as Stemberg's business models. "They're the best and most productive tools in the world," he says. He planned on structuring his office-supply business along the same lines as a high-volume supermarket. "A supermarket is a low-margin business," Stemberg explains. "The best chains make one or two percent after taxes. That means if you hope to make money, you must be disciplined and keep a tight rein on your costs."
Stemberg viewed every successful superstore as a business lesson. If Sam Walton could build Wal-Mart and Charles Lazarus could achieve similar results with Toys `R' Us, Stemberg figured he could do the same thing in the office-supply industry. "Before I opened my first store," he says, "I knew that, if I kept prices low and volume high, success would follow."
But it wasn't without grueling, hard work, sleepless nights and round-the-clock angst. Stemberg put together a tight business plan which raised $4.5 million in venture capital funds. His vision, combined with a passion for his business, led his backers to deem him a bankable risk with a brilliant and achievable idea.
His supermarket background taught him the importance of starting out with more money than you need. He knew he'd be eating cash during those critical start-up months. "One venture capitalist wanted to give me money on a hand-to-mouth basis," says Stemberg, meaning he would only have received funds when he needed them; the more he borrowed, the less he would own--and earnings would be diluted. "Thankfully, I was able to avoid that and get the money upfront. I'd be better off suffering more dilution and raising enough money to open several stores. No matter how smart you think you are, there is no way to anticipate all your needs. It's better to raise money on your timetable, when things are good, than on the investor's timetable, when things are bad."
Stemberg opened his first Staples store in May 1986 in Brighton, Massachusetts. "Chaos" is the word Stemberg uses to describe the readying of his first store. "Nothing went smoothly," he laughs. "It was a 24-hour-a-day, hopelessly draining experience, which can easily cause you to lose heart. We were drowning in merchandise. Everything had to be unpacked, sorted, priced and shelved."
But the true test of his endurance and ingenuity in opening that first store was in attracting customers. When the store finally opened, only a few customers trickled in. Looking back, however, Stemberg considers the experience a priceless entrepreneurial lesson.
"I learned that you have to live reality and dream the dream," he says. "As soon as I opened Staples, I realized we were going to have to work our butts off to keep this thing going. It certainly wasn't going to be an instant winner by itself. We were going to have to work every bit as hard on the marketing equation as we did to get the store open."
Just days after opening, he set the marketing wheels in motion. "We recognized we had a trial problem--getting people to try Staples--not a product problem," he says. "People who came in loved the store. Getting people into the store was the challenge."
Stemberg marketed Staples with a vengeance. He bought mailing lists and mass-mailed coupons to potential customers, offering incredible savings if they came in to check out the store.
By the time the second store opened six months later in Woburn, Massachusetts, Stemberg had his act together. It was a good thing, too, because soon-to-be archcompetitor Office Depot (now based in Del Rey Beach, Florida) opened its first store just a few months later. More than a dozen others followed close on its heels; in time, Staples would have more than 25 competitors, but today, only Staples, Office Depot and Office Max dominate the market. Stemberg calls it poetic justice. "It's kind of nice that three of the founding companies wound up being the survivors."
Stemberg finished his first year in business with sales of more than $7 million. In 1987, he opened six more stores. Over the next decade, he aggressively opened stores throughout the United States.
Even with optimistic planning, Stemberg's earning projections fell far short. "We projected sales of $116 million by our fifth year and estimated it would take an $8 million investment to get there," he says. In 1988, his third year in business, Staples' sales jumped to $119.8 million. In 1991, sales reached the $300 million mark. Yet that growth was fueled by several rounds of financing, the biggest of which amounted to $37 million, when Stemberg took Staples public in 1989.
Stemberg was primed for rapid growth. "As we grew, everything changed," he says. "The communication process became more complicated, and so did our financial needs. In short, it's a lot different running a dozen stores than it is one or two."
The game Stemberg played was "strategically power-building" his company, as he calls it. "Rather than waiting for things to happen, I tried to figure out where my challenges were going to be 10 months ahead, and then put the management team and processes in place to deal with them."
Stemberg always factored problems into the business equation, the biggest of which was finding good people. "Impressive credentials only tell part of the story," he says. "You never know how someone is going to work out until they're on the firing line, making decisions. When you're growing very aggressively, it's difficult hiring people who can jump right in, pick up the rhythm, and grow with you. Running a billion-dollar company is far different than running a multimillion-dollar company. Some people thrive on the pressure; others crumble under it."
Now that he's proven he can create a billion-dollar business, the trick, he says, is going on from here. "There's nothing mysterious about how I grew my business," Stemberg says. "One thing is certain: There were no accidents. Things just didn't happen by themselves. I made them happen." He cites old-fashioned optimism as one of the reasons for his success. "I have a knack for seeing opportunity where others see adversity," he adds. "When I left my job to find a business to run, I saw that period as a tremendous opportunity to find something unique. When I opened that first store and there were only a handful of customers, it was an opportunity to come up with a great marketing strategy."
There's more news that projects an optimistic outlook for the office-superstore landscape: It looks like Stemberg is forming an alliance with his greatest competitor. On September 4, 1996, plans were announced for a definitive merger agreement between Staples Inc. and Office Depot. If the union is approved, it would create a single company to be called "Staples, The Office Depot." At time of printing, the merger was not yet finalized, as the companies were waiting for shareholder and regulatory approval.
A philosophical Stemberg insists that perspective and outlook play major roles in shaping one's destiny. "No matter how big the company gets, I never forget what made me successful. I keep reminding myself that I, too, was once a frustrated customer," he says, recalling that printer ribbon he sought years ago. "Even though we're a big company, our goal is to push decisions down to the decentralized business units, and the decisionmakers closest to the customer. That's the only way we'll continue to do our job well."
It sounds simple, yet Stemberg knows it's a full-time obsession that keeps him up at night. Some entrepreneurs will never allow themselves to bask in the sun for very long, enjoying the fruits of their hard work. Tom Stemberg is one of them.
Bob Weinstein profiled Charles Schwab in the November issue of Business Start-Ups.