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10.22.98  
Supplies Attack: Upstart Ambushes the Office Superstores
An executive secretary finances an online challenge from her own pocket

 
  Jagemann
Last December, Paula Jagemann made a surprising discovery while showing her nieces and nephews how to use the Internet. A search under "office supplies," the children's father's business, revealed that Web sites run by the major office-supply superstores were barely more than marketing pitches for their stores. There was little, if anything, that a prospective customer could actually buy online.

A self-described "Internet geek," Jagemann saw a gap to be filled. "I decided to launch an online venture to get the ball rolling," she says. In August, 1998, she introduced Online Office Supplies Inc. (www.onlineofficesupplies.com).

Now, her virtual company is going head-to-head with the Big Three: OfficeMax, Office Depot, and Staples, which are venturing into online sales. By her own account, it's an uphill battle. Her publicly traded competitors have thousands of employees and market capitalizations between $2 billion and $8 billion, vs. $500,000 of Jagemann's own money and a staff of six. But she thinks she can make a go of it, anyway. "It's a matter of getting your name out there first," Jagemann tells Frontier Online. "Amazon.com was not the biggest bookseller out there."

WHO IS SHE? Paula Jagemann is an executive secretary and the head of investor relations for UUNet Technologies Inc., the Internet service provider that's now part of WorldCom. She is also a part-time college student -- and a multimillionaire. She got her start in the Internet world 10 years ago as an administrative assistant at UUNet when it was still private. After the company went public, the stock options that were part of her compensation package made her a wealthy woman before she was 28.

Jagemann took $500,000 from that windfall and plowed it into Online Office Supplies. Other investors include a relative and her current boss, WorldCom vice-chairman John Sidgmore. She expects 1998 sales to be between $2 million and $4 million. And that is not entirely out of the question: Analysts estimate annual office-supply sales are $120 billion, but less than 5% of the total is currently sold online.

What are her chances? Jagemann is betting that low overhead of her virtual store will make her agile enough to challenge the superstores, which she thinks are burdened by the enormous cost of maintaining brick-and-mortar facilities. To start out, Jagemann sees everyone from small offices to large corporations as her customers, but she is keenly interested in the large corporate market -- turf that the superstores guard jealously. Jagemann is not fazed. "They cannot be everywhere. And where they are not, we want to be," she says.

Jagemann uses United Stationers in Des Plaines, Ill., as her distributor, shipping her orders from the wholesaler's 41 warehouses around the country. United Stationers offers 30,000 office products and professes no desire to get into online retailing. Among its other customers, the Big Three buy a small part of inventory from United, too. For now, says Jagemann, United is giving her a break on pricing relative to her size, which allows her to compete with the superstores on top-selling office-supply products. Like the superstores, she waives the shipping charge for orders of more than $50, even though it's a much bigger hit to her startup company. "It is one of the things you sort of choke on as you go," Jagemann says.

VIRTUAL EDGE. Her big advantage includes the lack of sales taxes, which helps undercut her rivals on price. Since her presence is only on the Net, for now Jagemann doesn't have to levy taxes except in Virginia and Maryland, where she has office space. As for the posted prices, Jagemann's site claims that it beats OfficeMax and Office Depot by 10% to 40% for things like ring binders and binder clips. Sure enough, a dozen small binder clips is 23 cents at Online Office Supplies, vs. 49 cents at Office Depot and OfficeMax.

But the savings aren't universal. A quick search on Ticonderoga No. 2 lead pencils finds a dead heat, with both Office Depot and Online Office Supplies selling them for $1.89 a box. If you search on something higher-end -- say, calculators -- both companies offer a broad range of products with prices up to several hundred dollars. But onlineofficesupplies.com doesn't say who the manufacturers are, while Office Depot has an elaborate breakdown and lots of details about each product.

Jagemann says most times she offers competitive prices with commodity items but can offer a better discount with higher-end products and with noncommodity office gear. She says her customer service people are also authorized to work with clients who want better prices.

Industry analysts who follow the office-supply retailers wish Jagemann luck, but they're skeptical. The superstores already have a big edge with their vast resources, brand recognition, and developed warehouse distribution networks. "If you have the distribution, it is not that much more of an effort to build a site," says William A. Julian, vice-president for equity research at Lehman Brothers in New York.

And the big players aren't so foolish as to dismiss the little players in the market. Keith Butler, executive director of Officedepot.com, keeps an eye out for competitors like Jagemann and Bigtree.com, a San Francisco startup that sells primarily to small and midsize businesses. Butler says the big companies will win, because they have greater leverage with pricing and margins. For now, though, Butler says gaining market share from the "mom and pop" office suppliers is still a major concern.

That could give Jagemann time to gain a foothold, and she has a few innovative strategies in mind. For instance, Online Office Supplies will help potential customers get connected to the Internet. Since she still works for UUNet -- and Sidgmore is on her board of directors -- Jagemann can offer volume discounts for Internet connections through MCI. "I can sell dial-up, dedicated, and direct access to the Internet," says Jagemann, who began a mailing to promote this new service. "If I can help you come online, I have a new customer." With that kind of thinking, the Big Three might wind up looking more like the Big Four.

By Jeremy Quittner in New York
Jeremy_Quittner@businessweek.com


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