The World's Biggest Office-Supplies Superstore Sold Itself. How Did a Stationery Retail Giant Reach Its "Midlife Crisis"?

The paperless office and Amazon both turned into killers of Staples, the company once called a "category killer." And Staples is only the latest example of traditional retail in decline.

In late June came a deal that made a lot of people sigh.

Staples, the largest office-supplies retailer in the US and in the world, was finally sold to the private equity firm Sycamore Partners for $6.9 billion. The deal is expected to close as early as the end of this year.

Staples holds close to half the US office-supplies market. Most of the big corporate names you can think of are its customers, and in its most important market, North America (the US and Canada), it runs 1,529 stores. Revenue there last year was $18.25 billion.

Even so, buying Staples may be a big gamble for Sycamore Partners. The company that made its name selling paper, pens, paper clips and folders is finding it harder and harder to move, squeezed by the paperless office and by online shopping.

Like other American retailers stuck in the same mud, Staples closed 48 stores last year to save money, and may close as many as 70 this year. Over the past five years it has shut more than 350 stores, and it has been willing to sell off its businesses outside North America at knock-down prices.

The $6.9 billion price works out to $10.25 a share — half what the stock was worth at its peak of $25.25. Still, the day the sale was announced, Staples shares rose 1.5%. But Staples is unlikely ever to look the way it once did. It is one more microcosm of the decline of traditional retail.

"Why isn't there a superstore that sells nothing but office supplies?"

Every great business model starts with an idea almost nobody has had before, and Staples was no exception. The company began with a question from Tom Stemberg: why wasn't there a superstore devoted entirely to office supplies?

In 1985, Thomas Stemberg was a manager at the First National supermarket chain. Working overtime on the Fourth of July, he found that his printer ribbon had broken. Most stationery stores were shut for the holiday, and he couldn't buy a new one. The experience gave him the idea of building an office-supplies superstore.

— That, in Stemberg's own view, is the puffed-up version of how Staples was founded.

In fact, Stemberg had an unusual head for business and moved with great care. He graduated from Harvard Business School and joined the Chicago grocery chain Jewel, where he became vice president of sales at 27. He was already showing his commercial instincts there: he was the first to bring generic foods into American supermarkets (unlike ordinary branded goods, these were usually made by little-known manufacturers and sold on the promise of "the same quality for less"), and he learned how to run a warehouse supply chain.

In 1982, Stemberg became president of the eastern division of First National Supermarkets, then was fired for opposing the company's decision to sell off its warehouse division. He decided to do something on his own. He thought back to that Independence Day shift — would an office-supplies superstore be a good idea?

Before Staples, the American office-supplies market belonged to local stationery retailers, large and small. They would usually sell to big companies with big order volumes at 40% to 50% of list price, while small companies had almost no bargaining power at all. These shops also rarely carried a full range: putting together a complete set of office equipment often meant driving to several of them, and their limited hours turned buying office supplies into slow, tiring work.

The US economy at the time was shifting away from heavy industries such as manufacturing and mining and toward services.

Between 1980 and 1990, American services grew to about 23% of GNP, while factories (secondary-sector manufacturing) fell from 23% to 18%. Over that decade the country added 19 million jobs, three-quarters of them in services or retail. Carmakers and oil companies still topped the list of the most valuable companies, but the number of American industrial workers was shrinking.

That meant the modern office worker was on the rise, and that demand for office supplies was about to grow fast.

At the same time, a developed auto industry, new transport links and a genuinely national market — plus the high inflation of the 1970s and early 1980s (US inflation ran at 7.1% in the 1970s and 18% in the early 1980s, and the dollar went through eight crises in a row between October 1977 and November 1978) — left people hungry for goods that were both good and cheap. That is why a wave of big discount stores went up in small American towns in this period: Walmart's warehouse chain Sam's Club was founded in 1983, Costco was founded in 1983, and the Dutch warehouse brand Makro entered the US in the 1980s too.

But the company that gave Stemberg the most to think about was Toys "R" Us. This large American toy chain, called a pioneer of the "category killer," concentrated on a single category — toys — and on low prices and deep inventory. By then it had grown into the country's biggest toy retailer, with a market share of 25%.

Walter Salmon, Stemberg's mentor at Harvard Business School, once told him to try applying his distribution skills to a fast-growing, empty market that modern distribution channels were not serving well.

To Stemberg, office supplies looked like exactly that kind of chance. He spent $20,000 to hire Salmon's teaching assistant to size up the market for him. She came back and told him office supplies was a $45 billion market growing 15% a year.

"She lied," Stemberg wrote in an article for CNN. That number covered only the manufacturer level; at the retail level, the office-supplies market was already worth more than $100 billion.

Two venture investors became the key to getting Staples started

"Most entrepreneurs are very good analysts. Once they finally pull the trigger, no question, they'll run like hell. But before that, they calculate the risks very carefully, very cautiously," David Whitford, an editor at Fortune, once said.

Stemberg's years in supermarkets brought him enormous luck.

His old sworn enemy Leo Kahn became one of his partners. Kahn had turned his family's small grocery store into "America's first successful discount warehouse supermarket," Purity Supreme — and one of its biggest rivals had been Stemberg's former employer.

Leo Kahn won Staples the attention of a good deal of capital. Bain Capital was one of the investors brought in at the founding, and its co-founder Mitt Romney sat on the Staples board for the next 15 years, helping build the company's business model.

The venture fund of William Blair, ranked 14th among the "world's best investment banks," had backed not only Staples but many stationery manufacturers and wholesalers — an excellent advantage for Staples. It put together the deal with the stationery wholesaler United Stationers, which carried more than 100,000 different products and took in $5 billion a year, and which is still one of Staples' largest suppliers.

Another Staples investor, Bessemer Venture Partners, brought in Ampad, a large Springfield paper company that makes and sells more than 1,400 kinds of paper office products and is a giant among American paper-stationery makers.

In May 1986, Stemberg formally founded Staples. It was not a manufacturer and not a wholesaler but a retailer. By skipping layer after layer of distributors and buying straight from manufacturers and big wholesalers, Staples in its early years could sell at half what other stationery stores charged.

The company took its name from the humblest office supply of all, the staple. By May 1988 it had opened 16 stores in the Washington and Boston areas — regions thick with government offices and therefore with the highest concentration of office workers in the country, where Staples picked up plenty of big accounts.

Every time Staples opened a store, it also ran a campaign aimed at the businesses around it: phoning corporate purchasing managers directly, handing out coupons, mailing product catalogs, pulling those managers into the office superstore. This steady drumbeat built Staples an enormous base of corporate customers.

Staples dealt office-supplies middlemen a fatal blow. Many distributors went so far as to warn manufacturers that supplying Staples meant the end of their own relationship. The Harvard Coop, a well-known American store, was one of those that made trouble for Staples; it told its supplier McKesson to stop selling to the company. Staples responded by going to Harvard and running a deliberately provocative ad: "Why would people as smart as Harvard students pay $3.68 for a 79-cent pen?"

Three changes of slogan, three shifts of strategy

Less than three years in, Staples turned a profit in the first quarter of 1989 — though it wasn't making much money. Office Depot was close behind, and a second rival, OfficeMax, had appeared in 1988. Staples had to move faster. In April 1989, to raise more capital, it went public and took in $37 million; sales had reached $120 million.

In 1995, Staples launched the slogan "Yeah, we've got that" — meaning every office supply you needed could be found at Staples. The line ran for the next ten years, hammering on the breadth of the range, and the strategy worked: sales passed $3 billion in 1996, across 500 stores. Staples was the sixth company in American history to pass $3 billion in sales within ten years of founding, and it made the Fortune 500.

By 2005 the slogan had become "That Was Easy," and the emphasis shifted to an easier shopping trip. That reflected new conditions in a crowded office-products market.

Low prices and a wide range were no longer what set Staples apart, and customer loyalty was getting harder to hold.

"Customers give us high marks for cheap, plentiful products, but that isn't enough," said Shira Goodman, then Staples' vice president of marketing. "Our next step is to offer a better shopping experience."

Out of that came a run of funny ads: a king presses the Easy Button and a wall shoots up to keep invaders out; an office worker presses the Easy Button and ink cartridges rain from the sky.

The ads bought Staples a lot of goodwill, and threw in a bonus: the three-inch red plastic Easy Button in them slowly became famous on its own. In September 2005 Staples started selling the gadget for $5 — press it and a baritone voice says "That was easy." This supposedly stress-relieving office toy caught on fast; by early 2006 it had sold 1.5 million units. Staples even turned its customers into ad characters, putting them in Easy Button videos on YouTube.

Staples "That Was Easy" (new Chinese-language ad, 2014)

Between 2004 and 2005, Staples spent $160 million on advertising, and it did set the company apart. In 2004 it overtook Office Depot, founded at almost the same time. By 2005 its profit had grown 18%, past $800 million, far ahead of the $200 million-plus of second-place Office Depot.

In 2014 came "Make More Happen." The slogan sounded broad and generous but in fact addressed no particular problem, and Staples began to lose its way.

The blow from digital offices and e-commerce

Since the 2007 recession, asset productivity at American retail stores has been falling. With overall consumer spending down or flat, sales per square foot barely improved, and retailers' return on invested capital took heavy losses.

Changes in how information is consumed and passed around — mostly through mobile devices — cut many companies' demand for traditional office supplies. Paper products were the clearest case.

Between 2009 and 2011, American paper consumption fell 24%, and many other supplies tied to paper documents — folders, binders, paper clips, filing cabinets — were dragged down with it.

Weak sales in the core business held Staples' revenue growth to 1.5% in 2011. Walmart's same-store sales grew 2.6% that year, and Walmart is more than ten times Staples' size.

Staples had launched a copy-and-print business around 2005, but online printers such as Kinko's, Vistaprint and Mimeo had long since turned that service into a commodity. It later copied Best Buy's Geek Squad with EasyTech, a PC upgrade and repair service, but most of the work amounted to simple fixes or installing memory, and it did not bring in much business.

Meanwhile more and more general retailers moved into office supplies, with Target and Walmart both expanding their stationery aisles. The rise of Amazon created another fearsome problem for "category killers" like Staples. Stationery is a standardized product, even better suited to selling online than food, and Amazon broke Walmart category by category — books first, then toys, clothing, fresh food...

Because it turns inventory faster, puts less money into physical assets and converts cash more quickly, Amazon could price office supplies and stationery 19-23% below Staples.

Staples had in fact opened its own e-commerce business back in 1998. By 2014 online sales were already half of total revenue, and today this B2B platform, which sells itself as one-stop office procurement, has added furniture, restaurant equipment and other categories, offers more than 500,000 products and delivers next day in a number of cities.

Its own delivery fleet and free shipping to the door used to be a Staples trademark. Then Amazon rolled out free delivery and real-time pickup of its own, and that edge wore away. Staples had hoped to raise the output of its distribution centers with Kiva Systems, a company that built robotic arms for packing and shipping — but Amazon bought Kiva in 2012, and robot warehousing raised Amazon's own warehouse efficiency enormously.

Staples has made plenty of attempts to turn itself around.

Under "Make More Happen," for instance, it developed gadgets that had nothing to do with the office, looking for new growth. In its second-quarter results for 2014, break-room supplies, furniture and tech products made up 38% of Staples' North American revenue, and grew 3% — the fastest in three years.

Last April, Staples announced a partnership with the American co-working brand Workbar, hoping to turn weak stores into co-working space. The plan dragged into this year; the latest word is that before September, three Staples stores in Boston will run the pilot. Each carved-out co-working area will run 2,500 to 3,500 square feet, separated from the stationery floor by glass walls, with room to rent to 45 to 50 people. Workbar staff will arrange and supervise the leased space.

Staples also twice pinned its hopes on buying Office Depot and fighting Amazon together, and twice — in 1998 and in 2016 — the US Federal Trade Commission blocked the deal on antitrust grounds. Office Depot and OfficeMax did merge in 2013. Big companies, the FTC noted, like to buy in bulk, and generally buy their cartridges and ink somewhere other than ordinary consumers do. When large corporations and government agencies need sticky notes and pens by the case, Office Depot and Staples are their main options. Office Depot has not done much better; in its second-quarter results this year it said it would sell its store operations in South Korea, Australia and New Zealand to concentrate on North America.

Deutsche Bank analyst Michael Baker pointed out back in 2013 that Staples had a decent plan for its turnaround but should stay wary: "Overall market demand is weak, and the price wars online and offline are both still going."

What Staples once sold itself on — "bulk" and "cheap," and more than 2,000 giant office superstores around the world — became the weight around its neck.

Since 2011, annual sales have slid from $24.67 billion to $18.25 billion. Staples has closed more than 300 stores and cut its North American lease liabilities by $1 billion, but that is still nowhere near enough to offset its huge warehousing costs.

Individual shoppers have changed what they want from stationery, too. Take Itoya, the century-old Japanese stationery retailer. Instead of stocking more products to lift sales per square foot, it led with design, picking a tighter, more distinctive selection and giving each item more room on display. Itoya made the jump from stationery shop to the fashionable lifestyle store — at its flagship in Ginza, alongside small goods like pens, writing paper, postcards and sticky notes, there are sections for housewares and handicrafts.

Clearly a warehouse of a store like Staples has lost its pull with individual shoppers; its brick-and-mortar retail business shrank 17.3% between 2014 and 2016.

What the buyer, Sycamore Partners, cares about is the comparatively steady corporate business and the room to grow online sales. According to Reuters, Sycamore Partners will rebuild Staples around those two.

This stationery giant is only 31 years old. The violent changes in traditional retail over the past few years have brought Staples into its "midlife crisis" a little early.

Cover and body images from: St. George News, Digital Fllad, Mobile Marketing Watch