William J. Donoher
Missouri State University
SPLS
http J/www.staples.com
Headquartered just outside Boston, Massachusetts, in the town of Farmington, Staples, Inc. is
largest office supply retailer in the United States. The company's 2010 financials revealed d
pointing results with only a 1.1 percent increase in sales to $24.55 billion. Staples' stock pri
fell 7 percent during 2010, when most stocks were rising much higher. Despite dismal
Staples' CEO's pay package for 2010 increased 41 percent to $15.1 million. CEO Ron
received a base salary of $1.1 million plus a performance-based bonus of $2.4 million that was
percent more than the $1.3 million performance bonus he received the prior year. He also recei
in 2010 stock and option awards that totaled $11.1 million, up from $7.9 million the prior ye-.
Staples, Inc. perhaps needs a new executive compensation plan and a new strategic plan.
Staples' International segment operates in 24 countries, including Australia, China, Uniea
Kingdom, and Germany, although about 1,900 of Staples' 2,200 stores are located in Nufi
America. In recent quarters, Staples' North American stores have had better margins than tlrefo
International operations, but International stores have posted stronger revenue growth. Th
future for Staples may well be outside the United States since price competition within ftfo
United States is very intense, and many countries of the world have a much higher expectel
growth in GDP than the USA. Staples perhaps needs to assess where in the world are their com-
petitors not located, and take the high ground in those countries.
Like many retailers, Staples' fiscal year ends the end of January. Staples' quarterly net
income reportedApril 30,2011 dropped 28 percent from the prior quarter to $198.2 millim
while revenues dropped 3.8 percent to $6.17 billion. Staples has over $4 billion in goodwill a
its balance sheet which is not good. In addition to its retail outlets, Staples sells office producs
via the Internet and through its catalog and direct sales operations, including subsidiary Quill
Corporation. Staples also provides document management and copying services as well a
promotional products. It targets customers worldwide through its Corporate Express business-
Office supplies represent almost 50 percent of Staples' revenue, while business machinq
account for another 30 percent. The remaining revenue comes from computers and office furniture-
Staples pays a quarterly stock dividend, but at a relatively low payout ratio ofjust 29 percent. Sorc
analysts contend that Staples stores have a "museum" feel as the company has not adapted well to
the global shift to a paperless, ie digital, society.
The company faces intense competition from OfficeMax, Office Depot, Wal-Mart, KMart'
Target, Walgreens, and many other office supply retailers.
History
Founded in 1985 by Thomas G. Stemberg and Leo Kahn, Staples opened its first store in 1986
in Brighton, Massachusetts. In 1987, Staples c.
Measures of Central Tendency: Mean, Median and Mode
William J. DonoherMissouri State UniversitySPLShttp .docx
1. William J. Donoher
Missouri State University
SPLS
http J/www.staples.com
Headquartered just outside Boston, Massachusetts, in the town
of Farmington, Staples, Inc. is
largest office supply retailer in the United States. The
company's 2010 financials revealed d
pointing results with only a 1.1 percent increase in sales to
$24.55 billion. Staples' stock pri
fell 7 percent during 2010, when most stocks were rising much
higher. Despite dismal
Staples' CEO's pay package for 2010 increased 41 percent to
$15.1 million. CEO Ron
received a base salary of $1.1 million plus a performance-based
bonus of $2.4 million that was
percent more than the $1.3 million performance bonus he
received the prior year. He also recei
in 2010 stock and option awards that totaled $11.1 million, up
from $7.9 million the prior ye-.
Staples, Inc. perhaps needs a new executive compensation plan
and a new strategic plan.
Staples' International segment operates in 24 countries,
including Australia, China, Uniea
Kingdom, and Germany, although about 1,900 of Staples' 2,200
stores are located in Nufi
America. In recent quarters, Staples' North American stores
have had better margins than tlrefo
2. International operations, but International stores have posted
stronger revenue growth. Th
future for Staples may well be outside the United States since
price competition within ftfo
United States is very intense, and many countries of the world
have a much higher expectel
growth in GDP than the USA. Staples perhaps needs to assess
where in the world are their com-
petitors not located, and take the high ground in those countries.
Like many retailers, Staples' fiscal year ends the end of January.
Staples' quarterly net
income reportedApril 30,2011 dropped 28 percent from the
prior quarter to $198.2 millim
while revenues dropped 3.8 percent to $6.17 billion. Staples has
over $4 billion in goodwill a
its balance sheet which is not good. In addition to its retail
outlets, Staples sells office producs
via the Internet and through its catalog and direct sales
operations, including subsidiary Quill
Corporation. Staples also provides document management and
copying services as well a
promotional products. It targets customers worldwide through
its Corporate Express business-
Office supplies represent almost 50 percent of Staples' revenue,
while business machinq
account for another 30 percent. The remaining revenue comes
from computers and office furniture-
Staples pays a quarterly stock dividend, but at a relatively low
payout ratio ofjust 29 percent. Sorc
analysts contend that Staples stores have a "museum" feel as the
company has not adapted well to
the global shift to a paperless, ie digital, society.
The company faces intense competition from OfficeMax, Office
3. Depot, Wal-Mart, KMart'
Target, Walgreens, and many other office supply retailers.
History
Founded in 1985 by Thomas G. Stemberg and Leo Kahn, Staples
opened its first store in 1986
in Brighton, Massachusetts. In 1987, Staples constructed a
136,000-square-foot distribution and
processing center in Putnam, Connecticut. This facility was
intended to permit Staples stores
to carry less on-site inventory even as the company as a whole
offered a more comprehensive
selection. Goods could then be shipped to individual stores
rapidly as demand necessitated
Staples grew from its initial three stores to 16 by the middle of
1988, atd to 23 by the beginning
of 1989. The company then raised an additional $32 million in
capital for additional expan-
sion. The company soon introduced a new store format called
Staples Express, which featured
a smaller physical footprint and roughly half the typical
inventory of its regular stores. The new
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8. 68 WILLIAM J. DONOHER
EXHIBIT 1 continued
Cou ntry/State/Provi nce/Reg i onfferritory
Oregon
Pennsylvania
Rhode Island
South Carolina
South Dakota
Tennessee
Texas
Utah
Vermont
Virginia
Washington
WestVirginia
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Total United States
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lnternal lssues
Business Segments
Staples is organized around three business segments: 1) North
American Retail, 2) Nortt
American Delivery, and 3) International Operations. An
overview of each segment's activities
and subunits is provided in Exhibit 3. Financial information by
segment is presented in
17. Exhibit 4. Note that North American Delivery is the company's
most consistent segmetrt
over the past two years, overtaking North American Retail in
2009 as the largest of tlrc
three. Staples' International Operations segment delivered rapid
sales growth in 2009, but
contracted in 2010. Note that unit's profits as a percentage of
sales increased, largely due to
improved cost efficiencies in its supply chain.
Signihcant country-based units within the International
Operations segment include Stapler
China, a joint venture in India, and Corporate Express. Staples
China began as a joint venturt
and now operates on a multichannel platform in Beijing,
Shanghai, and Shenzhen/Guangzhou-
The unit operates 27 stores, two Staples UPS Express stores,
and two furniture stores, as well ru
a dedicated website. A contract business unit, similar in nature
to the company's Staples Contract
operation, serves larger businesses as well as various
governmental agencies. The company also
is rapidly expanding its presence in India, a $10 billion market,
through its partnership witfo
Pantaloon Retail Ltd., the largest retailer in India.
The Corporate Express unit, operating in the Netherlands, New
Zealand, and Australia"
is one of the more promising individual business units operated
by Staples. As the company
describes it, Corporate Express works with customers "on the
'little things' that matter to them,
allowing them to get on with running their business." The unit
has secured valuable contracts in
janitorial services recently, among other similar basic office
18. operations, and provides a range of
services including technology solutions, printing functions,
promotional marketing, furnifurq
facility and kitchen supplies, and even catering.
The role of Corporate Express also happens to fit nicely with
both the Staples Contract and
Quill units, housed within the North American Delivery
segment. Within the Delivery segment,
Staples Contract, the company's business-to-business products
and services operation, is the
fastest-growing component. This unit provides an ilrray of
customized services to medium-sized
and large companies, including interiors, technology, facility
solutions, print solutions, and pro
motional products. Quill (and its Quill.com website) serves
small to medium-sized businesses as
a direct-order and delivery business, and the unit enjoys a
significant presence serving the legal,
educational, and medical professions. Together, these service-
oriented units offer Staples the
EXHIBIT 3 Staples'Three Business Segments
1. North American Retail
. Retail store operations throughout the United States and
Canada
. Average store: 20,000 sq. f1.,7000-8000 products
. In-store kiosks offer access to Staples.com and full selection
of more than 30,000 products
' Copy & Print Centers
. UPS Ship Centers
19. . Staples EasyTech computer services
2. North American Delivery
. Staples Contract
. Staples Business Advantage: serves small- and medium-sized
businesses
. Staples National Advantage: serves large companies
. Staples Business Delivery: catalogs and Staples.com
. Quill: Direct marketing (catalogs and Quill.com) to small- and
medium-sized businesses
3. Intemational
. Asia/Pacific: China, Taiwan, India, Australia, New Zealand
. European Catalog
. European Contract
. European Retail
. South America
Source.' Staples.com.
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72 WILLIAM J. DONOHER
with major brands across a wide variety of different product
26. categories. The retail industry il
large has seen this trend emerge over the course of several
years, and its main attraction for thc
retailer typically is the higher margins resulting from more
favorable purchase contracts thatr
those obtainable from major brand manufacturers, as well as a
greater degree of control over
supply, design, and manufacturing. Staples has a number of
contra6tual agreements with various
manufacturers who supply the company with its store-branded
product line.
A key ingredient in Staples' management of its product lines,
distribution, and inventory
system is the company's website, Staples.com. While the
company is attempting to minimize
physical inventory accumulation at its stores, more than 30,000
products are available via
Staples.com. Product orders are processed and products are
typically shipped to a local store fu
customer pickup, free of charge. In the alternative, customers
caa choose to have their purchase
delivered directly to their place of business or home, and
Staples provides free delivery on
purchases exceeding $50.
The newest development in Staples' delivery system is its
purchase of a small fleet of
electric trucks in the fourth quarter of 2010. The trucks,
manufactured by Smith Electric
Vehicles, offer a 16,000-pound capacity and a lithium-ion
battery that can travel up to 100 miles
between charges. The manufacturer estimates that the trucks
will achieve a 75 percent reduction
in fuel costs compared to diesel vehicles, but the electric trucks
are more expensive. Investment
27. payback times thus are fairly lengthy. Staples plans to deploy
30 trucks in southern Califomia,
and an additional 11 in Ohio and Missouri.
The unifying theme of all of these aspects of the company's
operations is, of course, efficiency
and cost minimization. This has been Staples' primary focus
throughout its history and it enables
the company to offer lower prices to customers. But in a set of
incidents eerily reminiscent of
alleged problems at similar cost-based organizations, such as
Wal-Mart, Staples has been sued
for misclassifying employees as exempt under the Fair Labor
Standards Act, thus permitting the
company to avoid paying overtime. The initial claim in 2009
(more are in process) awarded close to
$2.5 million in damages. In a separate incident, another
employee was convicted of embezzlement
in a scheme in which fictitious vendor accounts were
established and paid, ultimately, to the account
of the employee. While the amounts in question are, for the
moment, fairly small for a company the
size of Staples, the bigger question posed is whether adequate
incentives and procedural safeguardq
including direct oversight, are in place and effective to
facilitate intemal control.
Marketing
Marketing has long been a part of Staples' success. The
company has successfully created and
embedded in popular culture various catch phrases such as
"Yeah, we've got that," and more
famously and recently, "That was easy." The latter phrase was
accompanied by development of
the ubiquitous "Easy Button," a hockey puck-sized device that,
when pushed, verbalizes the catch
28. phrase. Brand visibility also is enhanced via mechanisms such
as product placement in popular
shows, such as The Office, and various publicity vehicles, such
as the company's sponsorship of
the Staples Center in Los Angeles.
Beyond this kind of broad and thematic brand-building, the
company also seeks to tailor its
message to individual companies and customers. Its database
enables targeted ads and coupon
or discount offers. Store openings also are used as a vehicle to
capture attention, in conjunction
with which, Staples typically identifies businesses within a
given radius of the new store and
sends them advertisements and offers. The company also
utilizes a rewards program to build
loyalty and encourage volume purchases.
In early 2011, Staples revamped its international marketing
team to ensure brand consis-
tency across all of its channels and across all international
boundaries. Recognizing the problem
is an important step in its solution, but its existence also
suggests that the company is struggling
to integrate its now far-flung operations, many of which were
acquired rather than developed
organically, and to deliver a consistent theme and message
through its marketing efforts.
Finance
Staples' financial statements are provided in Exhibits 5 and 6.
Note that the company's debt has
remained relatively high, but long-term debt decreased from
2010 to 2011, when 20 percent of
the amount owed by the company was shifted into current
29. maturities. Still, the amount coming
due is less than annual net income. The company's cash flows
reveal two significant trends for
the year ended January 29,2011: a marked decrease in cash from
operations and a substantial
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36. 74 WILLIAM J. DONOHER
EXHIBIT 6 continued
Long-Term Debt
Other Liabilities
Deferred Long-Term Liability
Charges
Minority Interest
Negative Goodwill
Total Liabilities
Stockholders' Equity
Misc. Stocks Options Warrants
Redeemable Preferred Stock
Preferred Stock
Common Stock
Retained Earnings
Treasury Stock
Capital Surplus
Other Stockholders' Equity
Total Stockholders' Equity
Total Liabilities and SE
39. Management
Staples' top executives are listed in Exhibit 7. Atorganizational
chart for the company is also pro,
vided. (Circles 16 and 17, on the lower right side of the chart,
comprise North American Retail)
External lssues
The United States stock market dropped 512 points in one day
in August 2011 and S&P for
the first time ever downgraded the country's credit rating from
AAA to AA. Federal Reserve
economists predict U.S. growth of 3.1-3.3 percent in2OlI, and
some economists predict at least
3.8 percent growth in2012, but gross domestic product growth
actually slowed to 1.8 percent in
the first quarter of 2011. Forecasts for the unemployment rate
range from 8.3 to 9.2 percent by
the end of 2Ol7 and 7 .6 to 8.5 percent by the end of 2012.
Consumer confidence, and therefore
spending, remains speculative for the balance of 2011 and 2012
and may be adversely affected
by federal and state fiscal difficulties. With federal stimulus
money being depleted, states are
likely to face continuing severe cuts in spending. For the time
being, most states and Congress
appear unlikely to implement tax increases, which would further
limit disposable income. But
other factors, notably rising oil and commodities prices
worldwide, are expected to exert con-
tinuing pressure on consumer and business budgets for the
foreseeable future. Spending is likely
to be restrained, and consumers and businesses are likely to
remain very price sensitive.
Although the "paperless office" has yet to become the pervasive
40. reality predicted in popular
media, it is still true that more and more technological
innovations have been adopted to reduce
the consumption of paper and other traditional office supply
products. Record-keeping, in par-
ticular, is moving rapidly into the digital realm, and document
delivery is as well. But recent
figures suggest that traditional paper archival systems still
account for 60 percent of document
storage. Advances in mobile technologies, including devices
such as the NOOK, Kindle, iPad,
and iPhone are negatively impacting the offlce supply business.
Perhaps the most persistent trend that relates to paper usage in
particular, and indeed business
practice in general, is the increasing sensitivity to and interest
in environmental sustainability. All
of the office supply industry competitors have undertaken
various "green" initiatives in recent
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42. 76 WILLIAM J. DONOHER
EXHIBIT I Comparative Data for Office Supply lndustry
Competitors
Staples Office Depot OfficeMax
Revenue (billions)
Net Income (millions)
Total Assets (billions)
Total Debt (billions)
Store Count
Distribution Centers
Employees (approx., thousands)
$24.ss
881.95
13.91
6.97
2281
125
89
$11.63
44. ,1
I
Sources: Staples, Office Depot, OfficeMax -10Ks; Staples.com;
OfficeDepot.com; OfficeMax.com.
stores. Companies thus have made significant investments in
warehousing and fulfillment cen-
ters, permitting them to stockpile inventories in centralized
locations that can service regional
stores with products tailored to local demand. This trend has
been accelerating in recent years
as industry competitors have decreased store sizes, opting
instead to achieve flexibility in their
distribution systems.
Competitors
Comparative financial data and key statistics for rival firms in
this industry are presented in
Exhibit 8. Brief discussions of the history and operations of
Office Depot and OfficeMax follow.
Note that Staples is larger than Office Depot and OffrceMax
combined.
Office Depot
The second-largest office supply company, Office Depot opened
its first store in Boca Raton,
Florida, in 1986. Today the company boasts annual revenues of
nearly $12 billion and oper-
ates over 1,100 stores in the United States and Canada, with an
additional 400 stores overseas.
Office Depot followed much the same pattern of rapid
expansion that Staples had undertaken,
and briefly overtook Staples for the lead in the industry in 1989.
Both companies continued to
45. expand, Staples more rapidly. Most of Office Depot's efforts of
late have been in the interna-
tional arena and the continuing development of its online
presence.
Office Depot, like Staples, is organized into three divisions: 1)
North American Retail, 2)
North American Business
Solution
s, and 3) International. Its Retail division offers the
standard range of products, and most stores also offer copying
and printing services. The
company also offers PC support and a network installation
service. The Business
