September 4, 2013, 3:52 PM

Small-box stores for the internet era

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The kiosks, along with tablets that a handful of associates carry around with them, are important, DeSanto says, because the store has only a small fraction, 4.5%, of the 150,000 items offered as of August. The store lacks the space to carry desks and other large products featured in traditional Staples stores, so store shoppers looking to buy those items have to consult with an employee or use a kiosk. Despite the smaller size, the retailer aims for the smaller-format stores to retain 95% of their sales. Sargent, in an August earnings call, said several of the eight omnichannel stores now open are meeting this goal, and some are exceeding their previous sales volume.

Better training is part of the way that Staples aims to retain sales, he says. For instance, the retailer now requires sales managers to undergo online and in-person training to become a Staples-certified expert in a specific area, such as Windows 8, the latest iteration of Microsoft Corp.'s PC operating system, to better help them sell, DeSanto says.

Better trained staff will lead to a better in-store experience, he says, which should lead to more sales. Industry-wide research supports the claim. A recent report by research firm CFI Group found that a one-point move in a 100-point satisfaction scale leads to a jump in revenue that ranges between 0.5% and 1.5%. And half of all specialty retail shoppers in a CFI survey said that their interactions with associates influenced whether they were satisfied with their trip to a store, as did sales promotions, return policies and loyalty programs.

Well-trained workers who help shoppers find what they're looking for is one way a retailer like Staples can differentiate itself from its online and offline competition, says Paula Rosenblum, managing partner of research and advisory firm Retail Systems Research LLC. "If I'm going to get up and schlep to a store, I want something more than just a kiosk when I get there," she says. "I want someone to help me. I want someone who can talk to me about what I'm looking for."

A broad selection of merchandise also increases shopper satisfaction, according to the CFI survey. And Staples has embarked on a rapid push to expand the number of SKUs it carries on the web—by the end of the year it aims to offer 300,000 SKUs online—largely by moving into new verticals, like medical supplies. Almost all of those SKUs are drop-shipped by suppliers to customers, eliminating the need for Staples to use or add additional storage space in its more than 30 fulfillment centers dedicated to e-commerce.

The idea is that Staples—through both its business-to-business division that serves large companies and government agencies, and the consumer-facing site—already sells to businesses like a doctor's office their pens, paper and other supplies. Why not also sell them the scrubs and tongue depressors, cleaning and break room supplies that they also need, says Masud, who, while at Amazon was tasked with expanding the retail giant's SKU count in categories such as mobile electronics.

"Staples already has contacts at large corporations and so it is trying to expand its reach," says Oliver Wintermantel, managing director at investment firm ISI Group LLC.

Many of those contacts are via Staples' B2B business. The retailer acquired Corporate Express N.V., which supplies office products to businesses and institutions, in 2008, and subsequently renamed it Staples Advantage. The retailer also owns Quill Corp., which it bought in 1998. Its B2B division generated significant sales—in the first half of 2013 the division accounted for $3.99 billion, roughly 35.8% of its total revenue. For the sake of comparison, Office Depot's B2B division generated $1.60 billion and OfficeMax's B2B division produced $1.77 billion for a total of $3.37 billion, or 16% less than Staples.

"Expanding its online offerings is easy to do," Wintermantel says. "Because office supplies is a shrinking category, Staples is looking to profit wherever it can."

But it is unclear how much revenue Staples can gain from products that sell infrequently, says Okamura, of Okamura Consulting. "There is a tendency for retailers to get a taste of the additional profits generated by long-tail items and fall in love with them," he says. But those items are "long-tail" because they don't produce a lot of sales. "So retailers have to avoid getting distracted by them and focus on what's at the heart of their business."

For Staples, online sales are at the heart of its business, which is why Staples is in a stronger position than either Office Depot and OfficeMax, Wintermantel says. However, selling office supplies these days is not easy, especially for, which targets consumers and small businesses. "The question we often ask is, 'Can you imagine a world without this retailer?'" he says. "You can buy the products you get from Staples at Wal-Mart, Costco, Walgreens or online. You don't need to make a special trip just for a pen or paper."

Still, Staples' North American retail division generated $5.19 billion online in the first half of the year, which shows that the category isn't doomed—at least not yet, says RSR's Rosenblum. "Generally it appears that there is room for one superstore per category," she says. "That's how we've seen things shake out with Barnes & Noble and Borders and Bed, Bath and Beyond and Linens 'n Things." Both Borders and Linens 'n Things declared bankruptcy in recent years.

But the key to Staples' success will lie in the results of its experiments—many of which stem from its e-commerce research center that it calls Velocity Lab. The lab, which houses 75 employees (about 50 of whom work there full-time, with the other 25 spaces for workers who commute in from Staples' Framingham, Mass. headquarters to collaborate on specific projects) aims to foster a collaborative environment where personnel with different skills—for instance, an engineer, marketer and designer—work together on projects.

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