Monday, February 4, 2008

Web revenue: That was easy!

By Christopher Calnan

Among all of New England's Internet expertise, a local retailer has quietly created a $5 billion web-based business selling decidedly nontechnology products: office supplies.

Staples Inc. in Framingham has built an e-commerce business second only to Amazon.com Inc. among U.S. retail websites -- a business that now represents about one-third of Staples' total revenue. And it has done so by focusing less on the latest web innovations and more on how to make buying online as simple as possible for busy office managers.

Its strategy is working. The company, scheduled to release its 2007 financial numbers next month, generated $5.2 billion in third-quarter revenue -- $1.7 billion of which came from its web-based and catalog-based sales. Its website processes 40,000 orders a day, with a typical transaction price of just under $200.

While most U.S. retailers generate 5 percent to 10 percent of revenue from online sales, according to experts, Staples' web and catalog business, known as its delivery division, represented 33 percent of total sales in its most recent quarter.

Taking back the web

In 2005, Staples switched its website platform from one developed by Microsoft Inc. to an IBM Corp. platform to make the website more scalable, according to delivery division senior vice president Pete Howard.

The website, launched in 1998, was initially hosted by a Baltimore-area company, but Staples brought its online operations home to Framingham in 2000 to be closer to the company's data center. The change appears to have had an immediate effect: From 2005 to 2006, Staples' online business surged 29 percent (from $3.8 billion to $4.9 billion) compared with a 13 percent increase at Office Depot Inc. during the same period, said Internet Retailer vice president of research Mark Brohan.

Based on revenue, three of the six largest U.S. retail websites are operated by big-box office-supply stores, according to Internet Retailer. Staples was second only to Amazon.com Inc., followed by Florida-based Office Depot, which reported $4.3 billion in web-based revenue.

During the last three fiscal years, Staples' delivery division sales have risen nearly 4 percentage points as a portion of Staples' total revenue, according to company filings.

Reams of revenue

Office supplies are ideal for online purchasing because buyers don't need to "touch" products as they do with items such as clothes or jewelry. Staples and other office-supply sellers have also automated the mundane tasks of reordering everything from paper clips to pencils -- a job that had previously been mostly manual, said Rob Garf, retail analyst for Boston's AMR Research Inc.

"At the end of the day, it comes down to convenience," Garf said.

Staples was founded in 1986 by Tom Stemberg, who is now managing general partner of Lexington venture capital firm Highland Capital Partners. The company has since grown to more than 2,000 stores, but its website has been a boon because it's been operated as a customer relationship management tool -- stressing ease of use, said Gene Alvarez, vice president of e-commerce for Gartner Research.

"It's technology that correlates with the products they sell, and the customers who are buying the products," he said.

Meanwhile, Staples has spent the past year introducing online features that many dot-coms would consider less than cutting edge. Last year, for example, Staples launched a product-review feature as well as a really simple syndication, or RSS, feed service to notify customers of sale items.

In October 2007, it upgraded an online automated-reorder feature that monitors a user's history to predict what they need. In December, Staples created an online contract-customer catalog with an animated page-flipping feature.

"Dot-com proponents say, 'Why do (an online catalog) when you've already got a website?'" Howard said. "It's just a different experience that some people like. We've been successful because of the care we've taken over the years to build the (website's) infrastructure."