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.

By MSN Money Partner Jul 24, 2014 1:09PM
Credit: © Paul Sakuma/AP

Caption: Paper clips are seen on display for sale at a Staples store in Menlo Park, Calif.By Mark Maremont, The Wall Street Journal

Staples (SPLS) made the State of New York quite a promise: Buy your office supplies from us, and we'll sell you a bunch of things for a penny apiece. This unleashed a rush on the retailer as government offices and qualifying organizations across the state gobbled up the one-cent items.

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."


More from The Wall Street Journal


Tags: SPLS
280Comments
Jul 24, 2014 3:44PM
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should've set a qty limit.  Idiots.
Jul 24, 2014 4:54PM
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Ms. Ede ordered 5 keeping one (commercial shredders) and giving one to each of her children.  Didn't there use to be some presumption of limited personal use of government equipment?  How is it possible you buy for your children (even if it is one cent)?
Jul 24, 2014 4:50PM
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I'll bet you that these items will be re-sold and the profits pocketed by some greedy SOBs in that state.
Jul 24, 2014 4:03PM
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Evidently someone fell asleep on the "Staples" button...
Jul 24, 2014 3:33PM
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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?

Jul 24, 2014 5:04PM
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"I would have been more upset if it was the actual cost," she said. "For a penny, I'll throw it out."

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.


Jul 24, 2014 6:52PM
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"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. 

Jul 24, 2014 3:12PM
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and the CEO of Staples still got PAID!........what a country!!
Jul 24, 2014 4:01PM
Jul 24, 2014 6:40PM
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Isn't using the tax exempt status of a state purchasing agency for person use a crime? I work at a tax exempt company and we can't even buy a retiring employee a gift without taxing it as income on their paycheck. We even have to pay sales tax on the free(up to 8 pounds) turkeys we get at Christmas! Getting caught using my employers tax exempt status would get me fired on the spot.
Jul 24, 2014 3:38PM
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You can bet that the brain trust that thought up the promotion and the management that approved it without making sure the worst-case downside was covered off got a*s-fried or fired.

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.

Jul 24, 2014 3:46PM
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My company used a nice Midwestern discount office supply company - good products, good prices, good service, a lot of nice bonus items on orders.  Then they were taken over by Staples.  What a disaster.  As we began buying supplies elsewhere, two Staples salespeople marched into the office and threatened that if we don't order more, then they'll take us off the "preferred customer" list.   Uh - okay.  Do what you have to do.
Jul 24, 2014 3:47PM
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"The company offered 1-cent bargains to win a NY state contract, but pulled back as orders flooded in"

I like how everyone sees the greed of the consumers but no one says anything about the opening line. I feel Staples got what it deserved. It tried to undercut other companies that were so low also bidding for the contract they should  now deal with it. I feel bad for their employees that had nothing to do with Staples greed but the consumers were not the only ones in the wrong.
Jul 24, 2014 4:47PM
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As usual, people taking advantage of a situation instead of being smart about it. Staple was stupid, they should have put a limit on items...how can a company be that stupid.

A bunch of scoundrels !!
Jul 24, 2014 5:31PM
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Staples trying to do good and the State Agencies of NY showing it's true colors. Bunch of A Holes.
Jul 24, 2014 3:43PM
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Typical Big Government, order something you don't need and find someway to make taxpayers pay more for poor service.  I can't wait to see how these Government Agencies try to increase the fees and say it is because their costs have gone up, when they are now exposed to having some of their costs go down. 


Jul 24, 2014 4:02PM
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Any time you strike a deal with any governmental agency, you're going to lose. Bet a lot of folks got carpal tunnel pushing that Easy button so many times...
Jul 24, 2014 3:42PM
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That is what happens when you don't read your contract and have certain things spelled out - like what is excessive.
Jul 24, 2014 5:04PM
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Ms Sitone bought 24000 pens which she says will set them for life.  Shoot, my Bics dry out within 2 years if not used, so I'm sure the Gel writers and others will as well.  Paper towels will yellow or disintegrate (they'll make good rat homes).  Can you imagine the store room staff now accounting and trying to manage these items.  Stacked in the hallways for now - at homes after the celebrations on the spending spree ends.
Jul 24, 2014 4:59PM
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The Staples contract should have been written better -- penny products within the reasonable demand of the school system for three years.

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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