Big interview

0

 

Big Interview: The Big Easy, with Ron Sargent
This month’s Big Interview subject requires little introduction. Since assuming the CEO mantle in 2002, Ron Sargent has overseen Staples’ rise to the pinnacle of the OP industry with passion, humility and an unswerving focus. Written by Steve Hilleard

 

His latest masterstroke, the acquisition of Corporate Express, propelled the company into the Fortune 100 and even further ahead of the chasing Power Channel pack. With annual sales of approximately $27 billion (if all goes to plan), Staples is still a few billion dollars short of Sargent’s stated 30×10 vision – revenues of $30 billion by 2010. But who would bet against him achieving that goal?

 

OPI caught up with Sargent early last month to discuss Staples’ recent international progress and, of course, the small matter of a $7.7 billion integration.

 

He was as unpretentious and welcoming as ever but warns that unless vendors have been giving industry leader Staples the best possible terms historically, the Corporate Express integration, for suppliers at least, will be anything but easy.
OPI: Let’s start with the economy and its impact on your recent Q2 results [which are discussed elsewhere in this issue].
Ron Sargent (RS): I think the economy is certainly having an impact on Staples and the entire industry. This is probably the most challenging economic period we have been through in the history of our company. During the last recession we reported seven quarters of negative same store sales in North America and our recent Q2 represented our fifth quarter of negative comps.

 

I am hoping this recession will only last another two quarters but it seems worse and the consumer is a
lot more impacted this time. Where the last recession seemed to be more of an employment slowdown, this one is a consumer slowdown and they represent about 70
percent of the GDP of the North American economy.
OPI: To what extent do you think that, during a downturn, you risk losing market share to the more non-traditional discounters like Wal-Mart and Amazon?

 

RS: We have a lot of data available to us and we don’t feel like we’re losing share at all. When you look at our position as the No. 2 internet retailer after Amazon, it was no surprise that they decided to get into office supplies but I think they’re going to find it a little more difficult than they fully appreciate. Maybe we should start a book business!
And of course Wal-Mart has always been a great competitor but we have many different competitors such as the discounters and warehouse clubs, the consumer electronic companies, even the printing shops. We try to monitor how we are doing versus them and I think even in a recession, we’re gaining share – not against every competitor in every category, but we’re gaining share in general.
OPI: Should industry leaders and economists have predicted this slowdown?

 

RS: Well every five to six years there is going to be a recession and that recession is going to last 12-20 months so I don’t think it was a huge surprise, particularly given the over-extension of credit.
OPI: So how do you go about managing a $27 billion business like Staples through such a period?

 

RS: Although the recession has affected our top line, I think we have done a pretty good job in managing the bottom line in this soft sales environment. But we are not going to mortgage our future by cutting costs to the point where we alienate our customers.

 

I think it is very important to continue to invest in your business, in good times and bad times. I also think it is important to make sure that you are continuing to provide great service to your customers because they will remember great service. As you know, it is very easy to lose customers but very hard to get them back. So we are going to focus on investing for the future and I think that will bode very well for us in 2009 just like it did during the last recession in 2001.
OPI: It occurs to me, as I review your earnings announcements, that considerably less emphasis is now placed on new store openings. Is that an indication of a maturing retail environment?

 

RS: Well, with a base of 2,200 stores, an individual store opening is not terribly significant to the total. That said, for the last six years we have been opening about 100 stores a year and will continue to do that. Even in North America there are large cities where we have no retail presence. For example, by the end of 2008 we will have opened our first stores in five new markets – Minneapolis, Houston, Kansas City, Austin and San Antonio. So store growth is an important part of our strategy but it is really a rather steady approach.
OPI: Your recent acquisition of Corporate Express certainly underpinned another key growth target, and that’s your international operations. What are the current highs and lows of your overseas business?

 

RS: Europe continues to make steady progress but I worry a bit about the economic malaise in North America beginning to affect Europe. But despite that, we are making good steps forward particularly in our catalogue and delivery business. Retail has been choppy in terms of the top line. In Q1 we reported large positive same store sales growth yet in our last quarter we had negative comps. I think we have an opportunity to improve profitability in every part of our business, both retail and delivery. It’s all about executing better. I think it’s about buying better and taking advantage of the supply chain opportunities that exist in Europe. Our goal is to get to 7.5 percent operating profit and right now in Europe we’re probably a little over 4 percent. Our biggest structural challenge in Europe is how to reduce rental costs, particularly in the UK. I always tell people: "If I am ever reincarnated I want to come back as a UK landlord!"
OPI: (laughs) I believe you’ve just returned from China. How is that market performing?

 

RS: We’re having great success in China which continues to grow very rapidly, doubling every year. We were in the $200 million range last year and expect that growth to continue.
OPI: Most of it still in delivery?

 

RS: Yes, I would say 90+ percent from delivery because I think it is a better channel for the Chinese marketplace at this time. However we are experimenting with retail and have probably 30 small stores in China at this point.
OPI: This time last year you announced a joint venture with UPS to open Staples UPS Express stores in China. How is that progressing?

 

RS: (pauses) It’s early days. We have joint stores in both Beijing and Shanghai and right now we are still in test mode. I think it is working out very well for UPS and it’s working out fairly well for Staples but we need to sell more office supplies out of those stores.
OPI: What’s the potential number of those stores you could open right across China?

 

RS: It’s too early to know, but in China there are over 150 cities with a population of more than half a million people so it represents a vast opportunity for our business. Steve, do you remember me telling you a few years ago that I thought China would be a billion dollar business in the next five years? People thought I was crazy but the reality is that we have a great shot at being a billion dollar business in that timeframe.
OPI: Do you have a similar projection for India?

 

RS: Not yet because it’s early days, but India is probably better than we imagined in terms of the growth rate. Our local partners, The Future Group, have been really helpful in terms of hiring, leadership, direction, real estate, etc. India’s a great opportunity but we couldn’t afford to be arrogant and assume that we could just go into a market and be successful.
OPI: South America is an area where you have been active now for quite some years but your expansion out of Argentina and Brazil has still not happened?

 

RS: Right. Argentina is doing very well and obviously Brazil is a huge market so we think there is a lot of opportunity there. But we basically tell people in Staples that you have to earn your right to grow and to that extent we are not yet ready to step on the gas.
OPI: What about Russia – is that market on your radar yet?

 

RS: With the Corporate Express acquisition we operate in five continents today and have just two more to go – Africa and Antarctica! But I don’t think it would be a good idea to be too precise about what specific countries are next on our radar screen because a lot of the time we’ll enter a country and our competitors will be right behind us! I would rather
keep people on their toes.
OPI: So let’s move on to Corporate Express. I’m intrigued to know the history behind the deal. At what point did you sit down with the Board and say: "It’s time we made a move for Corporate Express"?

 

RS: Well, when discussing the bad side of the world economy it occurred to us that there were also some positives. Credit markets had dried up, potential industry acquirers were dealing with internal issues, and importantly the valuations of the entire office supplies industry went on sale. So we used this period to look at an acquisition and ask "what company gives us the best fit, at the best price, and also the best upside opportunity- And as we screened various companies it became very clear that Corporate Express was the one that allowed us to do that.
OPI: Not Lyreco?

 

RS: Well, obviously Lyreco’s a terrific company that we respect and one we’ve had a relationship with for a long time. But if you look at all the criteria – best fit, best price and best upside opportunity – it led us to Corporate Express. We used to be 60 percent retail and 40 percent delivery, now we’re 40 percent retail and 60 percent delivery. Before Corporate Express, 14 percent of our business came from outside North America and now that is 24 percent. That’s a significant transformation of Staples.
OPI: Have you ever made an offer to acquire Lyreco?

 

RS: I don’t want to get into private conversations. We’ve always thought Lyreco was and remains a terrific company.
OPI: Did their response – the Lyreco/Corporate Express merger idea – come as a surprise?

 

RS: Well, having done our scenario planning, I can tell you that it was not unexpected. However I was disappointed to hear about it from a reporter in Paris.
OPI: So you expected Eric [Bigeard] to pick up the phone and tell you?

 

RS: I have had a long relationship with Eric and with Peter [Ventress] as well. We obviously talked regularly throughout the transaction so I was a little disappointed
not to hear it from somebody who I was close to but instead via a leak.
OPI: Well with that all behind you, now comes the execution of the integration. What are your priorities?

 

RS: We’ve forecast total synergies building from $200-$300 million over the next few years but the priority is the US. If you look at it, Corporate Express fits us like a hand in a glove. We didn’t operate a contract business in Europe yet that’s all they did. And likewise in Canada, we didn’t operate a contract business but that’s all they did. We had no presence in Australia and New Zealand and they have a great business there. And then you look at the United States and you’ll see significant overlap so we felt that the biggest synergy gains would come from combining the two businesses in the US. So we have created an Integration Steering Committee, composed of both Staples people as well as Corporate Express people, and we have created a dozen integration teams specialising in various disciplines such as IS, finance, HR, contract etc. Now that their work has been underway for a few months it was time for a similar integration process to begin in Europe and that project, headed up by Peter Ventress, kicked off in September.
OPI: One of your primary competitors has been widely
criticised for allowing newly acquired revenues to leak away following some recent purchases. How will you make sure you don’t emulate that particular company’s experience?

 

RS: I think it is very important to do great due diligence.
As we studied Corporate Express very carefully we paid attention to its people – how its sales people are paid versus ours for example – and we saw a good fit. In terms of where the ownership of the customer is, I think Corporate Express is also much like Staples. The company is the customer contact rather than the sales person. So I think to answer your question, it is partly doing your homework and I think it is partly making sure that once the acquisition takes place, that you treat people with respect, you find homes for them, you share your vision of where you’re going with the company, and you get them to buy into all those things. Those are the things that we have spent a lot of time and energy on and I think the successful blending of the two sales forces so far has been seamless, which is a credit to the talents of Jay Mutschler and Jay Baitler.
OPI: In your recent analyst presentation you predicted synergies of up to $300 million over the next few years. You also outlined the five key target areas for the first year – vendor pricing, vendor terms, scale, own brand, and procurement. It sounds to me like the vendor community is again going to suffer through this process.

 

RS: We are of course comparing the terms that have previously been enjoyed by both companies. I will be very disappointed if we discover that Staples was buying worse than Corporate Express. In those cases, we will obviously ask that supplier to make it right, not only immediately but also historically.
OPI: Ouch.

 

RS: But more importantly, I think our vendors have an important strategic decision to make. Our combined business gives them access to international markets, access to thousands of distribution points, and probably their biggest opportunity right now is growing their business with us. We’ve had a long history of growing the top line and I think that’s going to continue, even accelerate as we come out of this recession. The suppliers who can paint the future with us will, I think, be well rewarded by doing so.
OPI: Many vendors have publicly warned that their margins are likely to be adversely affected by the integration. So you think they’re looking at it from completely the wrong angle?

 

RS: Well yes, I think they are looking at a glass half empty rather than seeing this as an opportunity to grow their business, grow their brand, and cement a relationship with us going forward. We are a Fortune 100 company, with approaching $30 billion in sales, operating in 27 countries on five continents. Because of that size, we can create categories and opportunities for our vendors.
OPI: As we’re talking about vendors, let’s deviate for a moment and talk about your private label ambitions. Some of the analysts who track your stock believe that an over-expansion of your private label programme could alienate vendors. When we last interviewed you, your plan was to get to 20 percent and then test your customers. Are you at that level yet and, if so, are you testing your customers?

 

RS: We ended last year at 22 percent but if you combine that with Corporate Express’ penetration rate of 25 percent, we’re probably going to be in the low to mid-20s. We have spent some time with customers and I think we’ve been very clear that customers should have a choice. We want customers to be able to buy a Staples brand when they’re looking for a lower price and great quality and great value, but we also want to make sure they have access to every national brand. Having said that, we feel that the Staples brand can evolve into a national brand at some point and I don’t think vendors who have great brands or are working closely with us have anything to be concerned about. But I think those vendors that don’t innovate or don’t continue to build their brand face the risk that customers will choose our own brand over their brand.
OPI: For you to create a broad national brand implies that you could be taking on the entire vendor community. Do you think that’s realistic or even, indeed, strategically sensible?

 

RS: I think we have been very clear with our inner-supplier community that we will not be selling only the Staples brand in our stores and I don’t foresee any scenario where that would happen. But, by the same token, if customers are voting with their wallets, we’ll certainly try to sell them the Staples brand.
OPI: Just how harmonious are relations with your vendors when we read reports of suppliers issuing lawsuits against Staples claiming patent and trademark infringement?

 

RS: I think if you talk to the vast majority of companies that sell products to Staples they would say that the Staples team has treated them well, respectfully, honourably and do what they say they’re going to do. I can’t speak for every single small vendor who has an axe to grind about a particular product.
OPI: Let’s get back to Corporate Express. Do you intend to keep the name?

 

RS: I think ultimately, no, as we’ll be building a global brand. We thought that this would be a contentious issue but in reality it is not at all. Jay Mutschler and Peter Ventress both felt that, given the power of the Staples brand, they would much rather be going to market with Staples as the global brand than to have multiple brands. But we won’t make that change overnight.
OPI: Do you foresee any customer resistance to a name change?

 

RS: We’re going to do this integration very carefully and very well and we’re going to do it in a way that’s not going to disrupt customers. But we have already begun the process. We are already answering the phone "Corporate Express, a Staples company" and next year’s catalogue will be co-branded Corporate Express and Staples. Assuming the customer is getting great value and great service, I don’t think the name change is going to be an issue.
OPI: And do you anticipate that Corporate Express Australia will remain partly listed in Sydney?

 

RS: Corporate Express Australia is an excellent company, well run by Grant Harrod and his team. Frankly, because it is stand-alone and doing very well, it is not a priority in terms of the integration. At some point we will look at that issue, but we have not even begun to make a decision about future investments in Corporate Express Australia.
OPI: To what extent has this substantial transaction impacted your financial strength and your ability to make any future opportunistic acquisitions?

 

RS: We borrowed $3 billion to buy Corporate Express. The great news is that we still maintain an investment grade credit rating but you know, having said that, I would like our balance sheet to be more conservative than it is today and we’re working hard to pay down our debt. I think we’ll continue to look at opportunities that make sense for our shareholders but we’ve announced that we have stopped our stock repurchases because we really want to get our balance sheet back in the same shape it was a year ago. For the next year we’re going to be heavily focused on integration and paying the mortgage!
OPI: How about the relationship with Lyreco. Where does that currently stand?

 

RS: I’ve had several conversations with Eric over the last couple of months and told him that I don’t want to do anything that would disrupt Lyreco customers and we’re working hard to make sure that doesn’t happen. But you know, going forward, our focus is on building Staples. The partnership will end when we are in a competitive situation and of course we will be competitors going forward.
OPI: He must be bidding for Corporate Express contracts all the time?

 

RS: I think it’s a small competitive set in any market.
OPI: So just how long does Eric have before he needs to make alternative arrangements in the US?

 

RS: We are currently working hard to transition with minimal disruption to both companies’ customers and should be completed over the next several months.
OPI: I would like to switch gear now and talk about some of your rivals. Office Depot and Staples were neck and neck in terms of sales for quite some time but recently you’ve launched in front by some considerable margin. Does it surprise you that pulling away has been relatively "easy"?

 

RS: When I became CEO five or six years ago I said "Let’s focus more on customers than we do on competitors" and frankly that has made all the difference in the company. We give customers what they want. We want to make their shopping experience easy. We want to continue to grow and I think we’ve done that by opening 100 stores per year, by investing in our contract business, by investing in our international business and, most recently, with the acquisition of Corporate Express. And let’s remember that we have lots of competitors, not just the office superstore industry. We compete with the Wal-Marts and the Targets, the Costcos and Sam’s Clubs, and the consumer electronics retailers. We will be most successful if we just focus on the customer and satisfy their needs. After that, frankly, sales take care of themselves.
OPI: One area where you have fewer large competitors is the contract side of the business, particularly government and State contracts that have been the source of much attention recently in relation to Office Depot’s dealings. Can you reassure your shareholders that you have no similar skeletons hiding in the cupboard with regard to State contracts?

 

RS: Well obviously we don’t do everything perfectly but that’s one area, particularly in light of the recent controversies, that we monitor very carefully and ensure we have robust systems in place. Our relationship with State governments is well under control and we’re doing what we are supposed to be doing in regard to those contracts.
OPI: Is there an upside for you as these controversies continue to rage?

 

RS: We always compete aggressively in every category, with every customer, and we’ll continue to do that.
OPI: Some of your primary competitors have seen their share prices battered this past year. Are you surprised at the patience of their Boards?

 

RS: A Board’s job is to look after the interests of the shareholders and to create shareholder value. All I can say is that I’m sure those Boards are doing it in the best way they know how.
OPI: (Smiles) Some industry pundits are once again talking about a possible superstore merger, this time between Office Depot and OfficeMax. Do you see that as a possibility or do you see it facing the same FTC issues that scuppered your merger with Depot all those years ago?

 

RS: I’m not sure. We’re talking about different companies, at a different time, with different people involved. The FTC may look at it more favourably than they did 10 years ago. But think there are plenty of markets where Office Depot and OfficeMax dominate with little or no Staples presence so my guess is that would be something that the FTC might look at as well.
OPI: Do you see that potential combination happening?

 

RS: You’re asking me to speculate on something that I have no idea about. Do I think it will happen? My guess is no. Is it possible that it could happen? I think yes, it’s possible.
OPI: As the industry continues to consolidate at the top end, how do you see the future for independent dealers?

 

RS: You know it’s interesting. I’ve been in this industry now for 20 years and when I joined the industry, there were probably 15,000 or so small independent dealers and now I think there’s probably close to 5,000. I think the good news for the independent dealer community is that the 5,000 that remain tend to be very well run and provide great service to the customers. I think not only will they survive, but also I think many of them will thrive. For example, here in Boston, one of the most successful independent dealers in the industry, WB Mason, continues to do very well.
OPI: (laughs) That’s an understatement Ron! It’s apparently growing sales by over $100 million a year.

 

RS: (Grins) Like I said, doing very well… I think independent dealers need to have a reason for being. They’ve got to have an increasing focus on technology, especially e-commerce functionality. They must focus on service. And I think they must be part of a dealer group to buy competitively. In my mind there’s no reason why many of them wouldn’t continue to survive and/or thrive.
OPI: Changing subjects – it would be remiss of me not to talk about the environment and sustainability. Does it irk you a little bit that Depot is, rightly or wrongly, regarded by many as the leader in our industry?

 

RS: We’ve got a pretty darn good track record of environmental accomplishments and initiatives. We were first in our industry to create a paper procurement policy. We are probably the largest recycler of ink jet cartridges in the world. The US EPA [Environmental Protection Agency] listed us as one of the largest top five retail purchasers of green power and you know we certainly have a lot of products that are eco-friendly – about 3,000 at my last count. So, I think Staples is doing a pretty good job with the environment and also Corporate Express has been one of the leaders in environmental efforts. But I think the bigger point is that each company in our industry is working hard on becoming a better steward of the environment and you know, sometimes it doesn’t actually matter who’s first. I think this is an important issue for all of us in our industry and I applaud what others are doing because I think it’s the right thing for all of us.
OPI: Nice answer. You could have been a politician! Speaking of politics, what’s your predicted outcome for the up-and-coming US elections and, depending on who wins, the ramifications for the economy and global stability?

 

RS: Had he been chosen as McCain’s Vice Presidential choice I would have voted for Mitt Romney. Mitt was one of the founding directors of our company and was a great Board member for 15 years and continues to be a great friend of the company. I am encouraged about the election. I think change is going to be good for the economy, good for business and consumer confidence globally, and I think it will be good for the perception of America outside of the country too.
OPI: So does that mean you will have enough confidence to consider replacing the Toyota Camry next year?

 

RS: I hadn’t thought about it in those global terms of consumer confidence but I am still driving the Camry every day! It currently has 194,000 miles on it – in its 16th year – and it just continues to go. So my guess is the Camry and I will be together for some period ahead. I can’t sell it – it’s becoming a bit of an icon in the Staples parking lot!