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Online Extra: Staples: Riding High on Small Biz


When Ron Sargent took over as CEO of Staples in early 2002, it looked as if the once red-hot growth company had hit the wall. Many experts were warning that the office-supply superstores were nearing saturation. But Sargent didn't buy the doom and gloom.

Instead, he refocused Staples (SPLS), putting more attention on small-business customers, while devoting less to chasing the casual consumers that Wal-Mart (WMT) has so effectively courted. At the same time, he looked far beyond the "big box" stores that made Staples famous. He targeted two areas: the office-supply delivery business and Europe, where big-box office-supply stores are still in their infancy.

The notoriously frugal CEO has also aggressively cut costs. His efforts have helped put Staples on the latest BusinessWeek 50 rankings of the top-performing companies in America at No. 39. In early March -- just after reporting record results for the fiscal year that ended Jan. 31 -- Sargent talked with BusinessWeek Boston Bureau Chief William C. Symonds about this turnaround and the lessons it offers for other companies. Edited excerpts of their conversation follow:

Q: Three years ago, Staples was squarely in the middle of the S&P 500. Now you're in the BW50. How did you manage such a dramatic turnaround?

A: I look at a couple of factors. First, we refocused the company around small-business customers, and that has changed virtually everything we do -- from what we sell in the store to the type of training we give our sales associates.

Q: So at a time when Wal-Mart is gaining even more share among consumers, you actually moved away from the casual buyer?

A: Yes. We realized we had probably gotten too close to the casual consumer -- the kind of consumer Wal-Mart focuses on. They might buy a computer from us, but the problem is that we didn't make much money on it. In fact, we found that while perhaps 65% of our sales came from small-business customers, they accounted for more than 90% of our profits.

So we refocused our company on small-business customers, and now more than 70% of our sales come from small business and "power users" [such as people who have home offices]. The broader lesson is that you have to know who your customer is and where you make your money.

Q: In a saturated retail market, you almost have to take market share to achieve good sales growth. You managed to increase your comparable-store sales [sales for stores open more than one year] 4% over the past year, far faster than your competition. How?

A: We've tried to make shopping for business supplies easier for our small-business customers. To do that, we have actually increased the number of people working in our stores and a given them a lot of intensive training. Small-business customers want knowledgeable help, they want you to be in stock, and they want fast checkout. And that all requires people.

Q: So even as you've cut costs, you've actually increased spending on people?

A: Absolutely. I said we're going to squeeze the daylights out of every imaginable cost except two: We are not going to cut back on marketing, and we are not going to cut back on in-store service. In fact, we're spending more in both of those areas.

Q: What's the payoff?

A: Our comparable-store sales were up 4%. That's much better than our competition -- [some of which] had negative comp-store sales growth. The reason is that we're getting more customers into the stores, and once they come, they're buying more.

Q: The delivery end -- in which you deliver office supplies directly to businesses -- has also been a key target. How have you increased share in that arena?

A: We built a better mousetrap by changing how our sales force is organized. Now we divide it into "hunters" and "farmers." The hunters go out and acquire new accounts, while the farmers service accounts. Most of our competitors still have the same person doing both jobs. But we realized they're different skill sets.

In many cases, the person who is good at acquiring an account doesn't have the patience to nurture and serve existing accounts. Moreover, once you have three or four accounts, you don't have the time for hunting anymore. So we segregate the two, and the result is that we are gaining a lot more customers among big companies.

Q: Many U.S. retailers have stumbled trying to venture overseas. But now you're charging into Europe,

where sales rose more than 50% in the past year. How do you see it?

A: To me, Europe feels like the U.S. market felt in the 1980s. We're already in 11 countries in Europe. And as soon as we're more profitable in Europe, I want to step on the gas. It's a great opportunity.

Q: Your operating-profit margins rose to 9.3% in your most recent quarter, up from 5.9% in 2002. How did you manage to achieve such a big increase in a business traditionally known for thin margins?

A: Part of it is that we're buying better, by working closely with our vendors to improve the supply chain. But we've also been very focused on looking for ways to save money throughout our business.

Take the plastic bags we use to bag the supplies that customers buy. Before, we might have asked two vendors to bid on this business. But then we held an online auction, in which we had vendors from all over the world bidding for this business. We got bids from 8 to 10 vendors and ended up saving $1 million.

Q: How else are you using technology?

A: Our e-commerce sales reached $2.1 billion in 2003, up more than 30%. And that business didn't even exist five years ago. Most of these customers used to order through our catalog and call our 800 number. But now they're doing it themselves, online. It saves us a lot of money, since it's cheaper if the customer inputs the order as opposed to calling us.

Q: What's the outlook for Staples?

A: We think we can continue to improve margins companywide. So in 2004, I'm predicting that our earnings per share will rise 20%, on 10% sales growth.

Q: That suggests you aren't very bullish on the economic recovery, since your sales actually grew 14% in the year ended Jan. 31.

A: It seems like employment levels are starting to come [back], but we don't see a big robust recovery in the next few months. So we have assumed a steady-state economic outlook. But if there is a stronger recovery, then our forecast of 10% sales growth might be light.


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