The founder and former CEO of Staples explores strategies for finding success in a recession.
Topic: Managing and Thriving in a Down Market
Stemberg: I’m Tom Stemberg. I’m the Managing General Partner of the Highland Consumer Fund.
Question: Where are the biggest opportunities in today's economy?
Stemberg: Without question, a lot of entrepreneurial ideas come out of challenging times. I always say that entrepreneurs are folks who turn adversity into opportunity. A good example of that is right now, in the retail space, and I tend to invest in the retail space, you can finally afford to open units in Manhattan again. Over the past decade, rents were so absurd that unless you had ridiculous price points at obscene gross margins, you couldn’t possibly afford to pay the rent. Well, that’s changed very dramatically over the last 12 months. And that unbalance, I think, a good thing. And we will see lots of great ideas spawned out of this downturn. Engineers who get laid off from big companies are going to start new companies. And those kinds of companies are going to change things, going into the future, be that in communications, be that in energy, and be that in lots of other areas.
Question: How should companies approach branding in a down market?
Stemberg: First of all, obviously, those entities, which are positioned as value brands, will do better than those who are perceived as high price or having frills to it. So to be clear, you want to be there. But having said that, what you don’t want to do is begin to move away from your fundamental brand position, just kind of a temporary fix during a downtime. So what we’ve seen lots of people do is during these times, say, well, you know, I’m brand X and I’m going to create something called kind of brand X and where they use to sell brand X to full price retailers and also kind of brand X to Wal-Mart and COSCO. And then, what happens is the full price… full service retails… I’m not going to do business with these guys anymore. And next thing you know, they basically destroy their entire brand equity. And that’s happened too often. So you had to be very careful in sticking to what your brand stands for in the consumer’s mind.
Question: What is the story behind generic brands?
Stemberg: Well, the generic brands were an outgrowth of the Jimmy Carter stagflation years, where the economy was declining and we can buy net with a high double digit, almost 20% interest rates. Fortunately, we don’t face that today. The… The inflation was running rapid and I got to be very clear with you that I did not invent generic brands, I copied them. A company in France called [Tagfur] had created something called [IB], which were so-called free products, free from advertising, free from expensive marketing, just the fundamentals. My boss at Jewel, a gentleman named Don Perkins, saw this in Europe and brought it back to his company and say, guys, you got to try this. And some of the divisions, the bigger divisions, didn’t want to run with the idea because they worry it would cannibalize their private label at lower margins, etcetera. I was the head of marketing at Star Market in Boston, where we had a very high quality reputation but a high price reputation and I said, this is a big idea that if we entrepreneurially move forward this, we could change our price perception overnight. Therefore, we copied it, we branded it No Name brands ‘cause a great low cost restaurant in Boston called the No Name and we figured… we live of that, we called it No Name brands. And it turned out to be an overnight success. And we didn’t have to advertise it ‘cause we hold the news media, climbing all over it. And the prices are so dramatically low, it took care of itself and was a very interesting venture that overtime kind of, you know, saw its time come and go.
Question: Is this a good time to explore international opportunities?
Stemberg: Well, I think there’s a couple of things that I’d say. As I reflect back on my Staples career, and gosh there’s lots of things I’m incredibly proud of having done, including giving a leadership position on the Internet, one I’m less proud of is how we approach international because frankly, we approach international too soon. Canada was… worked out well and that was early and it’s close enough that worked out great. If you go through the historical profit and loss statements, not today but how they use to be 10 years ago or so and 15 years ago in Germany, in England, it is not a pretty picture. It’s extremely hard to take any kind of people intensive business from United States over to Europe. And, you know, for all our economic problems, I argue there’s a worst than ours. I mean, with their pension obligations and the union structures, I think, actually, the more problems that we do. We got plenty of problems. So that the notion you somehow find growth and prosperity in Europe and its easy or that England is easy ‘cause they speak the same language, it is just not true. And… I had a colleague at Staples named [Java] Saloso, with a great line, he quoted Churchchill and saying, in England, in the US, where 2 countries divided by a common language. And the example, in England when they refer to [IB] that means revenue is a good thing. We talked about turn over of the head of state is a bad thing.
Question: Is this a good time for companies to acquire?
Stemberg: I think the first thing I would advice any Chief Executive entering these times and… I think, interestingly, in this time around, you didn’t have to advice the CEOs. The good ones, people like Christine Day at lululemon or Tommy Folliard at CarMax or Phil Francis at PetSmart, didn’t have to be told. They, on their own, realize that they had to prepare their companies for what could be a calamity situation. You just didn’t know how bad it was going to get. And adversely every case, they plan for scenarios that turned out to be far worse than at least we’ve seen to date. Having done that… and first and foremost, of insured survival. That’s your first job. Once you’ve gotten to that point… And now, you see sort of that’s settle and, I’m an optimist so I think that that’s more or less has settled, then you now have to become opportunistic very quickly. And you always have to turn it a 180 degrees. And I see these companies now poison themselves to grow. But, you know, Christine Day was in New York on behalf of lululemon about a week ago. And that’s a very, very exciting company. And she came in, just basically said to the landlords, you know, “Gentlemen, if you follow the following guidelines we have for new leases going forward, we are now prepared to look at opportunities. But if you still have some of these crazy run ideas that came about at the beginning of the century, at the end of the last one, just hold on to your property and we’ll just walk by those for lease signs.”