September 4, 2013, 3:52 PM

Small-box stores for the internet era

When a retail chain faces shrinking demand for its products on top of growing web competition, it has little choice but to reinvent itself. Will Staples provide a survival roadmap for other big-box stores?

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Staples Inc. trails only Inc. in North American online sales, but the retail chain's boss is far from satisfied. "We've got a lot to do to improve the front end of our business," said Ron Sargent, the retailer's chairman and CEO, in May during its first-quarter earnings call with analysts. "I don't think our web site is nearly as good as some of the online competitors. And I think we've got to get a lot better at that."

And then there are the office supplies retailer's 2,191 stores—1,531 of which are in the United States. Its retail footprint is too large, Sargent said last year when he announced plans to reduce the retailer's floor space 15% over the next three years. Staples closed 48 stores last year, plans to close another 33 by the end of the year and relocate or downsize another 45 locations.

Plenty of retail chains are closing stores as they lose market share to online retailers. But Staples has a special problem: E-mail and the digitization of information is shrinking demand for core products like pens and paper. In fact, retail sales of office supplies in 2012 were 1.7% lower in absolute dollars than in 2003, and nearly 25% lower when accounting for inflation. The recent merger of two major competitors, Office Depot Inc. and OfficeMax Inc., only increases the pressure on Staples' management to come up with a new strategy.

And they have. It includes borrowing ideas from Amazon and working with Google Inc., shrinking physical stores and adding to its online catalog, and retraining employees to better serve customers whose smartphones give them ready access to Staples' online rivals. It's too early to say whether any or all of it will work. But by trying so many new things at once Staples can help other retail chains gauge the effectiveness of various web-oriented strategies while providing Internet-only retailers a glimpse of what other bricks-and-mortar rivals may implement in the years ahead.

Staples embarks on this strategy with plenty of e-commerce expertise: 42.2% of its 2012 revenue came from the web. But online sales fell 2.8% last year while the company's overall sales dipped 1.2%. That's created the urgency to transform Staples into what CEO Sargent, and others, calls an "omnichannel" retailer, one that, the theory goes, takes advantage of both its physical presence and online assets to provide better service than customers can get from web-only merchants.

The retailer is moving fast on several fronts. Last December it opened an e-commerce-focused research lab in Cambridge, Mass. In May Staples hired former and eBay Inc. executive Faisal Masud to fill a new role of executive vice president, global e-commerce, and put him on the company's executive committee. It then tasked him with driving growth in and putting the retailer's cross-channel strategy into place.

Then in June it opened its first two "omnichannel stores" that cut the retail chain's largest store formats—which are about 24,000 square feet—in half, while using web-connected kiosks and tablets to provide access to many products not on the stores' shelves. The retailer aims to have 45 omnichannel stores in place by the end of the year via a combination of renegotiating its leases and relocating to smaller locations.

Analysts give Staples credit for recognizing that stores need to shrink. "There is clearly too much retail square footage in the market considering the lack of growth in bricks-and-mortar in general," says Jim Okamura, managing director of Chicago-based retail consulting firm Okamura Consulting. "Retailers can either fight or embrace the shift in channel spend." Staples, he says, is attempting to do the latter.

Because testing is crucial to all of Staples' endeavors, Sargent and other Staples executives regularly assert that the retailer's revamp is a work in progress. It will keep what works and abandon what doesn't. That's particularly true when they talk about its omnichannel stores, one of which is located in a nondescript strip mall in Norwood, Mass., about 24 miles southeast of Boston.

The store, at first glance, doesn't appear markedly different from any other Staples stores. But subtle changes throughout demonstrate how the office supplies retailer is seeking to use the web to change the way shoppers use its stores.

When a shopper walks in, he sees a monitor overhead that highlights the retailer's buy online, pickup in-store program—it even features on the screen the names of shoppers whose items are ready for pickup—and directs shoppers to the counter where those items can be picked up. The program guarantees that items will be ready within two hours. "We'll see whether having the name on the screen makes a difference," says Mike DeSanto, senior vice president, sales and operations.

Other changes involve the retailer's use of the space. The store carries some 6,800 SKUs, about 85% of the roughly 8,000 SKUs in a typical Staples store, but it packs those items in tightly to allow room for spots where customers can gather.

To the right of the entryway, there's a business lounge that offers free informal meeting spaces shoppers can use; DeSanto says a local real estate agent uses it to meet with clients to sign contracts. The space features a self-service coffee machine, computers consumers can pay to use, outlets where shoppers can plug in laptops and chargers where they can plug in their phones or tablets. Next to the business center is the store's EasyTech and Copy & Print section where specially trained associates advise shoppers about its services.

Dotted throughout the store are six large kiosks, essentially large tablet computers—some of which let consumers buy from the retailer's tablet-optimized site, while others offer product information, such as an ink and toner finder that can identify the item a shopper needs based on his past Staples purchases. Each kiosk features a credit card reader so shoppers can complete purchases without having to interact with a cashier.

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