How Staples' penny sale blew up in its face
The company offered 1-cent bargains to win a NY state contract, but pulled back as orders flooded in. 'People were going hog wild,' says a school district official.
A Brooklyn charity benefiting disabled people ordered 240,000 boxes of facial tissue and 48,000 rolls of paper towels, according to documents obtained in a public-records request. Rome, N.Y., wanted 100,000 CD-Rs. A State Department of Motor Vehicles office ordered 8,000 rolls of packaging tape.
"We ordered things we didn't even need," said Nancy Sitone, manager of office services at United Cerebral Palsy Association of Greater Suffolk Inc. "I have some products up the yin-yang."
Staples was named New York's official office-supplies vendor in May 2013. Besides state agencies, those able to order under the contract include city halls, schools, police departments and many charities.
To win the three-year contract, Staples agreed to sell 219 popular items at a penny apiece. It hoped to turn a profit from thousands of other items that weren't on sale.
The one-cent bargains ranged from a 12-pack of chalk with a list price of $1.01 to an $1,100 paper shredder, and included products such as a high-capacity computer flash drive and a 72-pack of C batteries.
Enter the law of supply and demand.
"People were going hog wild," said Ken Morton, purchasing manager for the Kenmore Town of Tonawanda school district near Buffalo. "It was like a gold rush."
His district in the contract's first few months paid $254.69 for penny goods with a list-price value of $596,000, documents show. "When an invoice comes in for a truckload that says $27, you're scratching your head in disbelief," said Mr. Morton.
Office supply stores long have offered penny pricing on items that aren't expected to be big sellers, said Jay Baitler, a retired Staples executive who until 2012 oversaw big commercial contracts.
But "to have it abused in this fashion is something I'm unaware of in my 40-plus years in this business," he said. He is critical of customers buying things they didn't need, but he also said, "I'm surprised Staples didn't put a stop to it sooner."
Staples delivered penny items with a list-price value of $22.3 million in the contract's first few months, for which it was paid $9,300, documents provided by the state show. (List prices in office supplies typically are inflated; discounts from list prices are the norm.)
Staples declined to comment on its pricing strategy.
Ms. Sitone of the Cerebral Palsy Association says she thought at first the penny pricing was a mistake, but when she found out otherwise "it was a free-for-all." The agency ordered "a thousand of everything."
Ms. Sitone got $74,000 in one-cent items, now stored in a trailer, for less than $70, including, she says, 200 cans of Dust-Off that nobody wants, and enough pens -- 24,000 -- that "we'll be set for life."
Before signing the contract, seemingly incredulous state officials asked Staples to confirm "your company offered one cent ($0.01)" prices on many items and that Staples could fulfill orders at the offered prices for three years.
"We are committed to the pricing at the highest levels of Staples," a company executive replied in an email.
Two months into the contract, a senior Staples official complained in an email to John Traylor, a state official, about "excessive orders," citing as an example the request for 240,000 boxes of Kleenex, or 5,000 cases at a penny per 48-box case.
"This order alone exceeds the capacity of 10 tractor trailers [and] has a retail value of $399,500," the executive wrote.
Arguing that demand was unreasonably above estimates, Staples never delivered the truckloads of tissues or many other orders, and blocked some items from sale.
The state "is still in active negotiations to resolve this disagreement," a spokeswoman for New York's Office of General Services said. "Staples did not ask for a limitation in ordering quantities," she said, "and OGS would not have accepted such a limitation had it been made."
Staples is "in full compliance" with the contract, a spokeswoman said.
The state spokeswoman said 56 of the penny items recently were still available. She said the state isn't aware of any supplies being resold for a profit.
Aside from the penny items, Staples collected $8.8 million for regular-priced goods in the contract's first few months.
The Monroe-Woodbury school district, about 50 miles north of Manhattan, was the top bargain hunter, taking delivery of $677,000 of penny items at list prices during the contract's first few months, paying $299.15. The numbers come from spreadsheets provided by the state in response to a Freedom of Information Law request.
Sheri Patterson, finance officer at Monroe Woodbury High School, said boxes were "stacked in hallways . . . we didn't have any place to keep" them.
There were surprises. Ms. Patterson thought a penny paid for a roll of paper towels—instead, it was for a 24-roll pack. The school received 53 packs, records show. "We were just wondering whose idea this was," said Ms. Patterson, "and if they still had their job."
Staples declined to comment on personnel matters.
The No. 1 item purchased by Attica Correctional Facility, the famous maximum-security prison, was Premium #1 Paper Clips -- a half million of them. The clips came with a list price of $3,750. The prison paid $5.
"They were cheap," a prison spokeswoman said. Could they be used to jimmy jail doors? "Inmates are prohibited from having paper clips," she said.
A coveted penny item was a 64GB SanDisk flash drive, a large "thumb drive" to store or transfer data. It listed for $249.99 but recently was priced at $54.99 on Staples.com.
Customers ordered 128,978 of them in the contract's first few months, documents show, compared with anticipated annual demand for 33. Staples delivered 1,080 in that period. Had it delivered all those ordered, it would have sold drives with a current retail value of $7.1 million for $1,290.
The state estimated there would be just 41 takers annually for the 18-sheet commercial shredders, recently priced at $599.99 on Staples.com but available under the contract for a penny.
New York customers ordered more than 6,000 in the first few months. Staples delivered 154 in that period, each costing a penny.
Five went to the home of Mary Ede, a purchasing employee with the Kenmore-Tonawanda schools who was allowed to order for her personal use. She said she gave a shredder to each of her four adult children, and kept one. Hers has since broken.
"I would have been more upset if it was the actual cost," she said. "For a penny, I'll throw it out."
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Was it ethical?
Was it moral?
What is going on in this country? We buy stuff we don't need because it is cheap?
So you bought something you probably don't really need and are now just putting it in a landfill. Nice.
In other news, the government agencies bought so much product for a penny that they are paying more in extra storage costs than the actual costs of the products. Kidding--but a funny thought.
"Five went to the home of Mary Ede, a purchasing employee with the Kenmore-Tonawanda schools who was allowed to order for her personal use. She said she gave a shredder to each of her four adult children, and kept one. Hers has since broken."
The tax practitioner side of me notes that it doesn't sound like Mary Ede was allowed to order these shredders as a service achievement award. Even if she was, the value of them far exceeds the exclusion limit. Thus, it sounds like the school district for which Mary Ede works should report the fair market value of these shredders as income on her W-2, subject to both income tax and FICA tax. (Even though they were purchased for a penny, the fair market value is the taxable amount.) If the recent listing of $599.99 on staples.com is an accurate assessment of fair market value, Mary Ede should be considered as having received supplemental compensation with a net pay of $2,999.94. After grossing that up for FICA and the supplemental compensation income tax rates, the gross taxable income will be higher than that. Now, will this be properly reflected on her W-2? I highly doubt it.
Meanwhile, Staples' stock has lost 40% of its value in a year and they may not survive. Anyway, I 'm sure CEO Sargent (pd almost $11mm in 2013) has a golden parachute worth tens of millions if he gets fired or the company goes BK.
However, the state should return the goods that will not be used within a three year time period. That would be the state acting ethically, as that would be what a reasonable person would expect.
I agree with another poster, Mary Ede's manager should be fired. Mary Ede should return the products if she has any reasonable ethical code -- the deal for for the school system, not personal use.
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