2017

Market Measure The Industry’s Annual Report

ooking at external factors alone, one might come to the conclusion that 2017 is shaping What We’ll Cover up into a booming year for the home L improvement retailing industry. 28 Industry Breakdown After all, this year has seen strong performance in the housing sector, lower unemployment, an energized stock market, a relaxation of lending 29 Chain Results restrictions and a consumer base with no shortage of home improvement ideas. So, why is it that the growth experienced by the 30 Cost of Doing Business Study industry so far this year has amounted to more of a pop than a boom? 32 Retail Store Performance Let’s start with the weather. This has been a particularly odd season for weather across most of the U.S. Some regions had particularly 34 Financial Profiles short winters followed by unusually wet springs and summers. Neither of these conditions favors home improvement projects. 36 Industry Year in Review In other areas of the country, short winters were followed by incredibly hot and dry spring and summer 38 Housing Market Outlook months where nary a plant would grow (if it were even planted to begin with). While it is not particularly unusual to see weather 40 Economic Outlook have a regional impact on home improvement activities, in 2017, there was hardly an area of the country that was immune to some kind of 42 Canadian Retail Report unfavorable weather conditions. In addition to an inhospitable visit from The information in this Market Measure was gathered by Mother Nature this year, there were other manmade Hardware Retailing staff from a variety of resources that obstacles holding industry growth in check. are attributed throughout.

24 HARDWARE RETAILING | December 2017 December 2017 | HARDWARE RETAILING 25 U.S. Home Improvement Sales (in billions)

Compound Annual Growth The primary culprit here was the double-edged The Results 2016-2021 = 4.37% 84% sword we are facing in the housing market. By our estimates, what this analysis amounts to With banks lending money to consumers again is that the home improvement retailing industry 5.6% 4.5% 4.7% 4.6% 4.1% 4.0% and with unemployment continuing to drop, is growing at a rate of about 4.5 percent in 2017, 500 you would think there would be a ready market a full 110 basis points slower than growth during $442.90 $425.90 for home sales. the previous year and slightly below our predictions. 400 $409.20 $391.20 of independent $373.60 However, the downside to these positive While a good bit of that can be attributed to $357.60 retailers surveyed factors is the increasing price of homes. unpredictable and temporary issues such as bad 300 by NRHA expect their According to a housing market forecast from weather, the other economic factors facing the e-commerce sales to the Home Buying Institute, the rising cost of industry may persist in the months to come. 200 homes in many areas is literally pricing some That being said, we are anticipating slightly increase in 2018. consumers out of the market. stronger growth in 2018 (4.7 percent), fueled in 100 “In recent years, home values in many part by the continued economic momentum we Source: NRHA 2017 State of cities have been rising rapidly, to the point are experiencing, as well as a modest uptick from Independents Conference Research 0 that they outpaced wage and income growth. building in areas heavily impacted by hurricanes. 2016 2017 2018 2019 2020 2021 This was mostly the result of an imbalance We also anticipate that consumers who choose Source: NRHA/Hardware Retailing between supply and demand. In many not to move may begin to tap more readily into their cities across the country, housing inventories home equity to engage in remodeling projects. are falling short of demand,” the forecast This slightly stronger sales trend should continue article states. through 2019, and then we are anticipating a period Rising prices in many markets have of slight cooling as we head into 2020. Home Improvement Product Sales Performance seemingly caused some potential homebuyers 5.3% to take a wait-and-see attitude on moving, The Wildcards (% growth rate) which negatively impacts home improvement There are a few factors to consider that make product sales. predicting the direction of any industry difficult. 2012-2016 2017 2018-2021 The final factor that might be restraining the First is the general unrest many consumers feel Home Depot’s industry from more positive momentum is a little about the socio-economic climate of the country. Consumer 5.2% 5.5% 4.4% tougher to get your arms around. Let’s just call it Uncertainty about the economic direction the overall sales a sort of consumer malaise. country, foreign affairs and even social issues can growth projections Professional 6.4% 3.4% 2.9% If you look at the retail industry in general, cause a general constriction on consumer spending. for 2017 at midyear. consumers seem to be stepping back a bit from These factors can have a mixed impact on spending on material goods. Home improvement the home improvement industry. On one hand, Total 5.5% 4.9% 4.0% has continued to be a bright spot for all retail consumers concerned over world events or Source: Home Depot Second-Quarter 2017 Financial Report sectors, but even in the hammer and nail set, economic direction may tighten spending, but they Source: Home Improvement Research Institute/HIS/Current Prices consumers are still not letting go of as much of may also spend money on improving their homes. their hard-earned dollars. That’s why 2018 and 2019 might prove to be the best years from growth in the industry if all other Home Improvement Retail Sales factors remain constant. The presidential election looming in 2020 could be enough to make consumers (% change year over year) We also anticipate sit on their wallets until all the ballots are counted. Another more immediate factor that could provide that consumers a headwind to industry growth is the direction of 4.5% 7.2% 5.5% 4.2% 5.7% 7.3% 5.0% 400 interest rates. There has been a general discussion who choose not to 350 $376.1 that interest rates will rise in the near future. $357.6 move may begin to How much and to what extent this could impact 300 $318.4 $331.6 $301.8 consumers’ willingness to buy remains to be seen. $281.5 tap more readily 250 Lowe’s overall The final wildcard is, as always, the weather. sales growth While we have seen a few years of unfavorable 200 into their home projections for weather conditions for home improvement product 150 equity to engage in sales, one might expect that we are “due” for a 2017 at midyear. 100 remodeling projects. weather cycle that could benefit the industry. 50 Of course, no one has ever gotten rich on their Source: Lowe’s Second-Quarter ability to predict the weather. 2017 Financial Report 0 2012 2013 2014 2015 2016 2017

26 HARDWARE RETAILING | December 2017 Source: U.S. Department of Census/Monthly Retail Sales Report NAICS 444 December 2017 | HARDWARE RETAILING 27 Industry Chain Breakdown Results

2017 2016-2021 2016-2021 Market Share Profile Home Improvement Sales by Type of Store Top Chains: Industry Share Top Chains: Combined Performance Sales by Month Outlets (in billions) Sales No. of Stores Net Sales (in billions) (as % of total (as % of total No. of Stores (in billions) industry) industry) Hardware Stores $45.4 Hardware Stores 19,810 January $23.9 Home Centers $222.8 Home Centers 9,790 2012 50.0% 14.7% 2012 $146.40 5,780 February $24.1 2016 Lumberyards $89.4 2016 Lumberyards 9,760 2013 50.2% 15% 2013 $154.80 5,885 March $31.5 TOTAL $357.6 TOTAL 39,360

April $33.8 Hardware Stores $48.2 Hardware Stores 19,850 2014* 49.4% 16.1% 2014* $159.40 6,308 Home Centers $232.8 Home Centers 9,790 May $38.6 2015 49.7% 16.4% 2015 $168.55 6,447 2017 Lumberyards $92.6 2017 Lumberyards 9,760 June $36.3 TOTAL $373.6 TOTAL 39,400 2016 51.3% 17.4% 2016 $183.60 6,846 July $32.6 Hardware Stores $48.9 Hardware Stores 19,750 2012-2016 2012-2016 August (p) $33.0 Home Centers $244.1 Home Centers 9,740 1.3% 2.7% Compound Annual 5.8% 4.3% Percentage Point Change Growth Rate 2018 Lumberyards $98.2 2018 Lumberyards 9,730 YTD $253.8 TOTAL $391.2 TOTAL 39,220 *For 2014, new chain stores were added and others were removed in a top chain re-evaluation process. Source: U.S. Department of Commerce/ NAICS 444/Not Seasonally Adjusted Hardware Stores $51.6 Hardware Stores 19,700 Home Centers $255.3 Home Centers 9,720 Top Chains: Individual Performance

Home Improvement 2019 Lumberyards $102.3 2019 Lumberyards 9,710 2016 Sales Stores in 2017 Stores at End of 2016 Sales Growth TOTAL $409.2 TOTAL 39,130 (in billions) (as of October 2017) 2017 vs. 2016 Home Depot $94.6 2,278 2,282 Hardware Stores $54.1 Hardware Stores 19,700 Atlanta January 8.6% Lowe’s Home Centers $265.3 Home Centers 9,700 $65.0 2,129 2,141 Mooresville, North Carolina February 4.2% 2020 Lumberyards $106.5 2020 Lumberyards 9,690 Inc. TOTAL $425.9 TOTAL 39,090 $10.7* 305 306 March 5.3% Eau Claire, Wisconsin Tractor Supply Hardware Stores $57.2 Hardware Stores 19,675 $6.8 1,595 1,665 April 4.4% Brentwood, Tennessee Home Centers $275.9 Home Centers 9,680 84 Lumber May 11.5% Lumberyards $109.8 Lumberyards 9,675 $2.9 249 256 2021 2021 Eighty Four, Pennsylvania TOTAL $442.9 TOTAL 39,030 6.1% Northern Tool + Equipment June $1.5** 97 99 Burnsville, Minnesota July 8.1% Hardware Stores 4.7% Hardware Stores -0.7% Carter Lumber Compound $1.2 145 147 Annual Home Centers 4.4% Percent Home Centers -1.1% Kent, Ohio August 9.8% Growth Lumberyards 4.2% Change Lumberyards -0.9% Sutherland Lumber Rate 2016-2021 $0.9** 48 49 TOTAL 4.4% TOTAL -0.8% Kansas City, Missouri YTD 7.3% 2016-2021 Sources: Company reports and Hardware Retailing surveys The above represent home improvement retail chain stores that carry at least two core categories and have sales of approximately $1 billion or more. Source: U.S. Department of Commerce/ * Source: 2017 STORES Hot 100 Retailers, National Retail Federation NAICS 444/Not Seasonally Adjusted Source: NRHA/Hardware Retailing Source: NRHA/Hardware Retailing **Source: Hardware Retailing estimates

28 HARDWARE RETAILING | December 2017 December 2017 | HARDWARE RETAILING 29 Cost of Doing Business Study

Hardware Home Lumberyards Another Strong Year Stores Centers for Independents

or nearly 100 years, the North American Retail Hardware Association (NRHA) has How to Use This Study F collected financial and operational data from 4.2% 2.7% 4.2% the independent home improvement industry’s Here are some pointers for using the Highest profit margin Home center profit margin Profit margin increased hardware stores, home centers and lumberyards. 2017 Cost of Doing Business Study effectively. The result of that research is the annual reported since the dipped, decreasing by 0.5 percentage points Cost of Doing Business Study, which assesses • Determine your expenses as a Profit study began, driven by 1.4 percentage points above 2016 to 4.2 percent. the performance of retailers who submit their percentage of sales and calculate your the highest average from 2016’s all-time high Average transaction size hit confidential financial reports to NRHA. balance sheet as a percentage of total Margin transaction size: $22. of 4.1 percent. $199 for typical stores. The study provides composite income statements, assets. Compare your numbers to balance sheets and averages for key performance the study results for both typical and ratios. Highlights from the 2017 study are presented high-profit stores. in the following three pages, revealing healthy growth for the sector. • Don’t look at percentages alone. This year’s study uses data from the 2016 fiscal Compare your real-dollar expenditures, 40.3% 27.9% 19.8% as well. year to offer information about the performance Total operating Total operating Total operating expenses of the industry’s retail operators, as well as expenses were up expenses for typical went down 6.7 percentage • Compare your numbers to stores of tools they can use to improve their businesses. slightly due to increases stores dropped for the points as lumberyards similar size. Don’t limit your comparison Total Operating Retailers throughout the industry use the study for in total payroll and fifth consecutive year. worked toward running to one type of store. Defining hardware benchmarking, goal setting and planning. The occupancy expenses. leaner operations. stores, home centers and lumber outlets Expense real-world numbers that study participants contribute is practical for statistical purposes, give an accurate picture of how home improvement but your store may have attributes of retailers of all sizes and store types are performing. more than one type. Retailers representing 989 independent home improvement stores participated in the 2017 study. • When your business’s performance The information is segmented by store type, as differs significantly from the study data, $188 $607 $712 well as by typical and high-profit store performance. determine the cause and develop a Hardware stores Sales per square foot Sales per square foot plan to bring your numbers in line with averaged $51 in product doubled year over year for increased from the prior Methodology high-profit stores. per square foot, typical stores, likely due to year, with $129 in inventory NRHA gathers the study’s data by mailing Sales Per resulting in $188 in the unusually high number stocked for every square paper questionnaires to a sampling of hardware • Although high profits have little to do Square Feet sales per square foot. of multistore respondents. foot of selling space. stores, home centers and lumberyards in the U.S. with size, sales growth is one of the Retailers can mail their information to NRHA or keys to profitability. upload it online. NRHA provides the analysis in the final report after extensively reviewing • When reviewing the numbers on the the data. Most of the figures in this report are following pages, note that this report medians, which are the middle numbers in the contains figures from a different sample $176,657 $84,303 $92,138 data when arranged from highest to lowest. The group of stores each year. Overall The average number of Gross margin per Gross margin per employee median represents the typical company’s results, figures can vary widely from year to employees per typical store employee increased went down more than without extremely high or low outliers skewing year based on the group of stores increased from 10 to 11, from the prior year. $4,000 from the year the data. To determine high-profit stores, NRHA participating. Year-to-year comparisons Sales Per and sales per employee hit Plus, employee counts prior, though staff counts ranked all participating companies based on net are helpful for illustrating general trends an all-time high of $176,657. went up from 16 to 22. increased by one person. profit before taxes. The high-profit companies in over time. Employee each segment are in the top 25 percent.

Source: 2017 Cost of Doing Business Study 30 HARDWARE RETAILING | December 2017 December 2017 | HARDWARE RETAILING 31 Retail Store Performance Hardware Stores

Median Sales Per Customer Key Business Indicators

Typical High-Profit $30 Typical High-Profit $30 50% 45.7% 43.9% 40.3% 40% 36.3% Financial Performance, $25 $23 30% $22 $21 22.2% 20.1% $22 20% by Store Type $20 $19 $21 $20 $20 10% $18 he following segmented data from the bottom-line performance of typical stores, 2017 Cost of Doing Business Study allows churning out net profits of 5.9 percent of sales $15 0% retailers to compare their operations’ compared to the others’ 2.7 percent. 2012 2013 2014 2015 2016 Gross Margin Total Total Operating T After Rebate Payroll Expense performance against businesses similar to theirs. At the same time, the top-performing group had NRHA divides the analyses into three categories: a cost of goods sold that was 1,000 basis points hardware stores, home centers and lumberyards. lower than that of the average sample stores. The complete study, with an even more detailed These metrics suggest that high-profit stores are Home Centers breakdown of the data, is available for free to more disciplined with cost management. NRHA members or for purchase by nonmembers. A major difference between the typical stores Median Sales Per Customer Key Business Indicators Visit nrha.org to become a member or to and top performers was driven by the volume Typical High-Profit Typical High-Profit purchase hard copies of the full 28-page report. of customers at the high-profit operations, $120 50% which experienced an average customer count of $105 41.5% Hardware Stores 82,958 compared to 57,942 at typical stores. $100 40% 37.0% Hardware stores that participated in the Typical stores saw inventory turns hit 4.2 percent, $96 30.0% 2017 study saw growing sales and profitability which was nearly a 10-year high, while high-profit $80 30% 27.9% and record performance in areas such as sales per home centers registered average inventory turns of 24.4% customer, gross margin after rebate and net profit 2.1 percent. $60 20% 17.3% $49 $51 per store. Typical stores also averaged $607 in sales per $45 $41 As an entire group, including high-profit, square foot versus $581 at high-profit stores. $40 10% typical, multistore and single-store operations, $41 $42 $36 $36 hardware stores experienced same-store Lumberyards $20 0% sales increases of 3.6 percent year over year. Lumberyards continued to drive profits as sales 2012 2013 2014 2015 2016 Gross Margin Total Total Operating Respondents seemed to be driving sales growth improved, according to the 2017 study. After Rebate Payroll Expense by simply selling more to customers. Same-store sales for lumberyards increased Employee productivity looked particularly 3.8 percent, for an average of nearly $5.8 million good, with average sales per employee of in sales. Lumberyards $176,657 and average transaction sizes of $22 per Higher margins and careful expense management customer—record highs. Top-performing stores helped high-profit stores yield particularly strong Median Sales Per Customer Key Business Indicators averaged $30 per transaction. results in this year’s study. This group netted Typical High-Profit Typical High-Profit Customer counts for the typical stores profits of 7 percent compared to a still healthy $250 50% participating in the study were 86,162, the best 4.2 percent at the typical lumberyard. $219 that performance indicator has looked since 2007. High-profit respondents’ sales of $4.8 million $199 40% High-profit stores’ average customer counts were slightly lower than the average stores. Top $200 $167 were lower at 75,236, suggesting that those performing stores’ higher net profits reflected more 30% businesses are succeeding at selling more product frugal management, shrewd buying and careful $152 26.5% $165 24.0% $150 $157 21.3% to top-tier customers. expense controls than at typical operations. 19.8% $141 20% High-profit operations saw average sales of Overall, lumberyards have driven labor costs 14.9% $244 per square foot, compared to $188 per down, resulting in the study’s lowest-ever recorded $100 $87 11.5% $105 10% square foot for an average store. payroll expense of 11.5 percent. Managing these numbers along with other expenses made an $76 Home Centers important difference for high performers versus $50 0% 2012 2013 2014 2015 2016 Gross Margin Total Total Operating Home centers generated their highest-ever average stores. Top performers also profited from After Rebate Payroll Expense sales per customer figures in this year’s study. margins that are a full 2.5 percent higher than their High-profit stores more than doubled the average counterparts. Source: North American Retail Hardware Association. Figures based on responses to the 2017 Cost of Doing Business Study.

32 HARDWARE RETAILING | December 2017 December 2017 | HARDWARE RETAILING 33 Financial Profiles

Financial Profile of Leading Publicly Held DIY Chains 2016 Profile of Top Four Distributors

Ace Hardware Operating and Productivity Profile Home Depot Lowe’s Cos. Do it Best Corp. Co. Orgill Inc. Corp.

Number of Stores (at end of 2016) 2,278 2,129 Number of Distribution Centers 20 8 12 7

Average Size of Selling Area (sq. ft.) 104,000 100,000 Current Number of Members 4,400 3,800 4,400** 6,225*

Total Sales $94.6 billion $65.0 billion Dollar Volume Most Recent Fiscal Year $5.1 billion $3.2 billion $2.07 billion $2.19 billion Total Asset Investment $43.0 billion $34.4 billion % Sales Out of Warehouse 81.0% 33.0% 70.0% 71.6% Total Inventory $12.5 billion $10.5 billion % Sales Out of Pool/Relay 0.0% 0.0% 0.0% 0.0%

Sales Per Square Foot $398.46 $305.24 % Sales Direct-Drop Ship 19.0% 67.0% 30.0% 29.4% Inventory Turnover 4.9x 4.1x % Sales in LBM N/A 22.0% 15.0% 9.0% Net Sales to Inventory 7.5x 6.2x Number of Employees 7,000** 1,450 2,350** 2,385 Total Sales Per Employee $232,993 $270,904 Avg. Number of SKUs in Warehouse 95,000 67,000 80,000 75,000 Average Size of Transaction $60.35 $68.82 Sales/Inventory Ratio for 2016 6.9 12.16 5.4 8.36 Gross Margin Return on Inventory 257.50% 214.80% 2016 Member Rebate Distributed $157.9 million $115.5 million $23.1 million N/A Income Statement Home Depot Lowe’s Cos. % Cash 38.0% 77.0% 92.0% N/A Net Sales 100.0% 100.0% % Stock 35.0% 23.0% 8.0% N/A Cost of Goods Sold 65.8% 65.4% % Other 27.0% 0.0% 0.0% N/A Gross Margin 34.2% 34.6% % Other 22.0% 0.0% 0.0% N/A

Total Operating Expenses 20.0% 23.3% Sources: Annual company reports *Number of stores served, since Orgill is not a cooperative and does not have members. Net Income (Before Taxes) 13.2% 8.0% **Approximate numbers.

Balance Sheet Home Depot Lowe’s Cos. Total Current Assets 41.3% 34.9% Profile of Wholesaling Merchandising Groups Cash 5.9% 1.6% PRO Group Inc. Distribution America Val-Test Group Receivables 4.7% 0.3% Current Number of Wholesale Members 79 10 65 Inventory 29.2% 30.4% Number of Member-Operated 150+ 11 68 Other 1.4% 2.6% Distribution Centers Fixed Assets 58.7% 65.1% Dollar Volume for 2016 Fiscal Year $5.25 billion N/A $720 million Total Assets 100.0% 100.0% Estimated Dollar Volume Calendar 2017 $5.25 billion N/A $680 million Current Liabilities 32.9% 34.7% Number of Retail Stores Served by Members 35,000 10,000 4,000 Long-Term Liabilities 57.0% 41.8% Number of Program Stores 800 2,000 200 Net Worth 10.1% 18.7%

Total Liabilities and Net Worth 100.0% 100.0% Number of Employees 17 10 7

Source: Annual company reports Source: Home Depot and Lowe’s annual reports

34 HARDWARE RETAILING | December 2017 December 2017 | HARDWARE RETAILING 35 Industry Year in Review August

●● True Value president and CEO John Hartmann addressed a Bloomberg story that the December (2016) February -based co-op was considering a potential sale. Hartmann told Hardware Retailing that their retailers ●● The National Labor Relations Board (NLRB) ●● 84 Lumber caused a stir with a politically “own the company and anything that would addressed a potential labor law violation by charged advertisement featuring immigration change that, they would have a say in.” Menards. The NLRB’s complaint alleged the and a wall during the Super Bowl. The ad big-box home improvement retailer violated directed viewers to the 84 Lumber website, ●● The company that owns T.J. Maxx and labor laws by classifying delivery drivers as which crashed from an overload of visitors. HomeGoods in the U.S. introduced independent contractors instead of employees. The full-length commercial garnered millions Homesense, a new big-box chain with its first of views on YouTube. ●● Walter Hachborn, former president and location in Massachusetts. Home Hardware Stores Ltd. co-founder, ●● Lowe’s announced another round of May died Dec. 17 at the age of 95. He helped staffing cuts at its corporate headquarters September grow Home Hardware into Canada’s largest and two support facilities, eliminating more ●● Lowe’s announced its $512 million purchase independent home improvement retailer. than 500 positions. of Texas distributor, Maintenance Supply ●● The Equifax data breach may affect small Headquarters, to grow its pro business. business owners differently than everyday ●● Lowe’s Canada announced plans to grow consumers, according to a class-action RONA the Canadian company and March ●● Hardware Distribution Warehouses Inc. lawsuit filed on behalf of about 28 million Ace Hardware Canada . Lowe’s also announced its purchase of a small business owners in the U.S. acquired licensing rights to the Ace brand ●● Home Depot agreed to pay $25 million for 670,000-square-foot facility in Marshall, in Canada. damages that financial institutions faced as Texas, to serve as the new corporate ●● Walmart announced plans for a new a result of the retailer’s September 2014 headquarters. The facility will also allow corporate headquarters in Bentonville, data breach. consolidation of its Houston and Arkansas. Amazon announced plans to build January Shreveport, Louisiana, distribution centers a second headquarters somewhere in the ●● The Sherwin-Williams Co. announced its to the new location. U.S. or Canada, with more than 200 cities ●● Co. announced 150 store $11.3 billion deal to buy The Valspar Corp. bidding for the business. closures to “enhance liquidity and stabilize would be delayed until June 2017. operating performance.” The company June ●● Central Network Retailing Group (CNRG), also confirmed its sale of to October bought McLendon Hardware, a company Stanley Black & Decker for $900 million. ●● Amazon announced it would acquire with seven stores in Washington state. the high-end grocery chain Whole Foods ●● Ace Hardware Corp. purchased the majority ●● United Hardware celebrated its Market for $13.7 billion, giving the ●● Lowe’s Canada announced plans to stake in e-commerce startup The Grommet. 60th anniversary at its January market. online retailer a network of more than consolidate Ace Canada operations so the 460 brick-and-mortar stores. ●● Walmart purchased Parcel, a delivery big-box retailer and cooperative would share ●● Walmart planned to eliminate about logistics startup that focuses on overnight Canadian distribution functions. Ace Canada 1,000 human resources, technology and ●● Do it Best Corp. was named the largest and same-day last-mile delivery. e-commerce jobs by month’s end. was set to close two distribution centers private company in Indiana by the and its main office in the country, planning Indianapolis Business Journal. The ranking ●● Sears Canada Inc. will liquidate its assets to move into the Lowe’s Canada office. is based on annual revenue. after its board rejected a business plan proposed by the company’s top executive. ●● Orgill Inc.’s Post Falls, Idaho, distribution April center began serving retailers in five states ●● Menards founder John Menard Jr. is the throughout the northwestern U.S. as well as wealthiest person in the state of Wisconsin, ●● Ace Hardware Corp. hired Grainger customers in western Canada. The company with a net worth of $9.9 billion, according executive Mark Spanswick to be president originally announced the new center in to Forbes’ list of the 400 richest people and general manager of Ace Wholesale August 2016. in America. Holdings LLC. He spent 27 years working for industrial supplier W.W. Grainger. At Ace, Spanswick leads the wholesale July November division, which is a compilation of the co-op’s two acquisitions it made with ●● Home Depot announced an agreement to ●● Westlake Ace Hardware announced it Emery-Waterhouse Co. and Jensen purchase Compact Power Equipment Inc., will acquire Buikema’s Ace Hardware, an Distribution Services in addition to a new a national provider of equipment rental and independently owned business that operates distribution arm created in 2015. maintenance services, for $265 million in cash. seven stores in the Chicago area.

36 HARDWARE RETAILING | December 2017 December 2017 | HARDWARE RETAILING 37 Housing Market Outlook

Checking the Foundation of the 2017 Housing Market A Q&A With George Ratiu

Solid demand and steadily Hardware Retailing (HR): What trends have you increasing home prices seen develop in the 2017 U.S. housing market? have been two of the George Ratiu (GR): This year, the housing market biggest housing headlines saw pretty solid demand, especially during the first in 2017. To learn more about half of the year. From the midpoint of the year on, housing trends this year there was an extremely tight inventory, both for and predictions going into new home sales and especially for existing homes. 2018, Hardware Retailing spoke with A lot of buyers are finding a very tight market, George Ratiu, director of quantitative and which prevents them from buying homes, and in the country. By our estimate, it would be a roughly a 6 percent price appreciation on the residential commercial research at the National Association turn, lowers sales. Just as importantly, we’ve seen a 10 percent decline in home prices. When you look side, which is significant because it far outpaces the of Realtors (NAR). He oversees a portfolio pickup in sale prices each month this year. at homeowners who are staring at a 10 percent loss trajectory of income growth. Obviously that impacts focused on macroeconomic trends, commercial in their homes, they’re looking at an immediate a lot of potential buyers. real estate and global investments. Overall, HR: New housing starts and existing home $26,000 loss for an average-priced house. I don’t When we look at the fact that interest Ratiu and his organization maintain a moderately sales are increasing slightly over 2016 levels. think any homeowner will be in a position to think rates are expected to increase, that impacts optimistic outlook for the 2018 housing market. What does that say about the housing market? about remodeling or building a new home given first-time buyers. I see tightness of inventory, GR: There’s sort of a domino effect at work here. that significant loss. For new home sales, I foresee a accelerating prices, strict mortgage underwriting Many homebuilders are not building enough new tremendous impact as well. I see a negative impact standards and availability of capital as the inventory, so first-time homebuyers are finding it for new home sales and the remodeling industry if major factors in residential and commercial real increasingly difficult to enter the housing market the tax reforms go forward as currently written. estate markets. due to higher prices and more competition. HR: What do 2017 U.S. housing trends HR: What should homeowners and retailers HR: In August, housing prices reached their say about the economy overall? be mindful of as we head into 2018? 66th consecutive month of gains. NAR said GR: Considering that before the recession, GR: Consumers have been feeling a lot more high prices have prevented many prospective it was the housing industry that put the economy optimistic about the market and have been homebuyers from entering the housing in recession, in a sense it’s been housing that spending a lot more freely. We see that in auto market. How might continually rising existing brought the economy back. With price sales and household appliance sales. I think home prices impact the housing market in the appreciation, homeowners’ wealth has also been going into 2018, as long as unemployment and long term? increasing, which has meant that homeowners wages remain on an upward trajectory, consumer GR: Rising prices are good and bad. They’re a have been a whole lot more optimistic and have optimism and spending are likely to grow. reflection of market dynamics. But when we been spending a lot more, which drives I think consumers should pay attention to tax look at price trajectory from the perspective the economy. In 2017, due to a slowing reform. There are significant changes proposed of a growing population, comprised mostly of housing market, we’re likely restraining some to the treatment of taxes for individuals and Generation X, millennials and Generation Z, rising level of economic growth. Going into 2018, corporations and any of those changes are likely home prices, mortgage prices and high student my expectation is that at the current rate, to impact their bottom lines. So consumers and debt, then accelerating home prices will harm the we’ll continue to see soft economic gains. retailers should pay attention to Congress and housing market in the long term because first-time make their voices heard. homebuyers simply won’t be able to afford it. HR: What growth and challenges have the For retailers, I think the outcome of tax reform residential and commercial real estate is likely going to alter a lot of business practices HR: How do you foresee tax reform impacting markets experienced this year? moving forward. If we’re seeing a decrease in the housing market? GR: The one common challenge that both residential wealth across the board, that’s likely going to GR: For homeowners, tax reform is a very important and commercial markets have experienced this year reduce the optimism and lead to lower spending, issue. As the proposal currently stands, it’s likely is a tightness of inventory. From there, the other which for retailers, means a reduction in sales in to have an impact on the prices of homes across common thread is price appreciation. We’ve seen the future.

38 HARDWARE RETAILING | December 2017 December 2017 | HARDWARE RETAILING 39 Economic Outlook

Hurricanes and Home Improvement A Q&A With Jack Kleinhenz

Jack Kleinhenz is chief I recently went to four different stores looking economist for the National for nylon paracord. I finally found a Retail Federation (NRF), the that, even though they didn’t carry what I needed, world’s largest retail trade the owner got online with me to find somewhere association. Formerly with that did. I asked him if I could pay him for his the Federal Reserve Bank help, and he said, “I just want you to come back in Cleveland, Kleinhenz is a sometime in the future.” contributing forecaster to The Wall Street Journal, CNBC, the Federal Reserve Bank of Chicago and HR: What do current economic indicators say the Federal Reserve Bank of Philadelphia. about the end of 2017, going into 2018? for example, in the Southwest compared to the What does that mean for consumers? Consumer spending Southeast. Some areas will continue to require a lot Hardware Retailing (HR): What trends are JK: Strong momentum in the second quarter carried of effort and “stick-to-itiveness” to be successful. impacting the home improvement retail sector? us through into the third quarter. The third quarter continues at a good Population growth has flatlined in some parts Jack Kleinhenz (JK): According to data from the is a bit of a surprise. I expected more of a speed of the U.S., which can affect small businesses, American Society of Interior Designers, single- bump from the hurricanes. We don’t know yet if sturdy rate, but it’s especially with aging populations. Sometimes that family and multifamily residential sectors it’s an overall loss or just delayed spending. not a breakout speed, can be good, with people staying in their homes, have show positive revenue trending gains We do know that the supply chains were impacted, but older people also delay improvements because since December 2016. Interior design firms are whether ports, factories or trucking. In general, largely because of fixed incomes and other expenses. Medical optimistic, which will have a positive impact on we believe that the economy should return to its consumers continue spending, taxes and utilities could delay projects that home improvement spending. pre-hurricane path and any loss of spending will be would happen if they were 10 or 15 years younger. Residential and nonresidential construction are made up going into 2018. to be very pragmatic But I think the home improvement industry is on the also clocking a monthly average of 12 percent and We saw the first vestiges of the impact of the front line of these aging-in-place developments. 3 percent respectively in the first eight months of hurricanes in the employment data. They couldn’t about their spending. On the other side of the coin, you have to ask, 2017. Residential construction spending includes get the surveys and collect the data from firms in “What’s going on with millennials?” There has been any spending related to existing homes, new Florida and Texas, so that causes a concern. On the some delayed purchasing, but now they’re getting homes, second homes and anything people will other side of the coin, the retail sector navigated Although wages have recently risen, they have back on track, buying homes, making improvements need to invest, repair, replace or update. This is a reasonably well through September. There was not kept pace with higher inflation activities like and spending wisely, which should be a positive very positive outlook for the home improvement a boost in spending on building supplies and health care, rent and medical services. Those development in a broader sense for the industry. sector, and the trend seems to be on the uptick. materials, but some sectors didn’t do so well because expenses have been outpacing inflation, and wages I regularly review a monthly report of retail people were displaced from the region. have barely been meeting inflation. HR: What will consumer optimism be in 2018? sales in the building materials sector, and it’s The momentum before the hurricanes was the Consumer spending continues at a good sturdy JK: What you should be asking is, “Does consumer coming in at a fairly nice rate, in excess of 5 to combination of rising incomes and employment. rate, but it’s not a breakout speed, largely because confidence translate to spending?” I haven’t seen 6 percent. With strengths in the housing market Reasonably, we’ll see a rebound into the fourth consumers continue to be very pragmatic about their that to be the case. and higher wages, people feel good about their quarter and into next year, but it will be a spending. It still bodes well for a good start in 2018. Consumers are asking, “Do I have a job, own wealth from home prices and the values of delayed response. am I making more money, what do my their investments, which all point in the direction Looking at GDP, a softer first quarter is possible, HR: How might the economy affect small retirement investments look like?” All of those of continued home investment, repair and with 2.3 to 2.5 percent growth. It remains to be businesses in 2018? seem to be on the right trajectory, which gives renovation projects. seen, but there is room to be optimistic. JK: Running small businesses will continue to be an them the ability to spend. Their willingness to The retail sector, in general, has been suffering The most recent consumer confidence index ongoing balancing act of having the right pricing and spend is a different issue. from a lack of pricing power. And if you’re a reading was a new cycle high. Some of that is due the product when the customer needs it. We’re different than we were before the convenience-style hardware store, you can’t rest to wage increases, which are up 2.9 percent year Small business optimism is also a function of Great Recession. We’re not taking out as much your business on price. So, it has to be about offering over year and are up 2.7 percent year over year for local demographics. It’s not all one monolithic credit, and banks have tightened up credit something else. the quarter. economy. We have much different spending paces, requirements for consumers.

40 HARDWARE RETAILING | December 2017 December 2017 | HARDWARE RETAILING 41 Canadian Retail Report Home Improvement Industry Sales Growth (in billions)

50 Canadian Retailers Face $49.10 $47.54

Challenges, Opportunities $46.00 Provided by Michael McLarney, Editor-in-Chief, Hardlines Inc. $44.62 $43.76 anada’s retail home improvement market and building materials (LBM) buying group, grew at a modest but healthy pace in offering an effective way for smaller businesses $42.19 C 2016, up 2.9 percent from the year before. to pool their purchasing power into larger Conditions helping this growth included Canada’s volumes. While affiliation with buying groups $40.42 red hot housing market, low interest rates and aging helps independent retailers stay competitive, the $40.01 housing stock—all factors driving renovation sales. groups nevertheless faced tough market conditions 40 And that modest growth has maintained itself in in 2016. Much of that came in the form of 2011 2012 2013 2014 2015 2016 2017* 2018* 2017 and is forecast to continue in 2018. competition from the industry’s top retail chains, Varying economic conditions, not to mention such as Home Depot Canada and Lowe’s Canada. *Forecasted numbers weather, impacted Canadian retailers through last In terms of sales volume, the largest group in year, while 2017 has proven to be steady, if not Canada is represented by the building center exceptional, for most regions. A few exceptions retailers within Home Hardware. Collectively, Market Share Top 10 Home Improvement Retailers persist: The Greater Toronto Area of Southwestern sales by LBM retailers in Home Hardware exceed by Store Format Ontario has seen healthy growth over the past two $4 billion. That group is followed closely by 2015 Sales 2016 Sales Percentage Rank Company years, and despite changes last summer to real Independent Lumber Dealers Co-operative, with in Millions in Millions of Change estate laws in British Columbia, that province’s collective retail sales by its members of $3.8 billion. Home Depot Lower Mainland around Vancouver also remains TIMBER MART and Castle follow, with estimated 1 $7,195 $7,700 7.0% Canada strong. As a result, the industry is forecast to grow sales of $2.8 billion and $2 billion respectively. by a slightly higher rate in 2017 of 3.5 percent. The other noteworthy groups in Canada are Sexton Group, Delroc Industries and Quebec-based 2 Lowe’s Canada $6,600 $6,900 4.5% Big-Box Format Makes Big Gains Groupe BMR and Pilon Ltée. Big boxes enjoyed the greatest sales growth Home Hardware 3 $5,865 $6,140 4.7% of all the retail formats, thanks both to strong Challenges to Retailers Stores incremental gains by Home Depot Canada and to The list of issues shared by retailers across the new stores built by Lowe’s Canada in 2016. While country is topped by the insurgence of internet 4 $5,435 $5,690 4.7% Lowe’s has built some new stores in 2017, the sales. Retailers are looking for ways to create Retail focus has been on converting some of its RONA an experience in their stores that ensures they Home and Garden big boxes to the Lowe’s banner. remain a destination for their local markets. 5 ILDC $2,650 $3,800 43.4% In fact, the market share of these big-box retailers Some are doing this through increased customer is now at a record high, accounting for more than service and better product knowledge, niches 45.1% Building Centers 6 TIMBER MART $2,840 $2,800 -1.4% one-quarter of all retail home improvement sales. within the store that are carefully tailored to local needs and a strong involvement in Industry Consolidation Continues 25.9% Big Boxes Castle Building community events and fundraising. 7 $1,875 $1,950 4.0% Along with Home Depot Canada and Lowe’s Finding—and keeping—good employees also Centres Canada, Home Hardware Stores Ltd. and Canadian looms large as a challenge everywhere. The sense 12.4% Canadian Tire** Tire Retail make up well over half of all sales by by many young people that retail is a job and not a 8 Sexton Group $1,885 $1,800 -4.5% hardware stores and building supply retailers in career choice makes staffing a big concern for many. 7.7% Store Format Canada. These “Top Four” retailers collectively And competition from other fields is just part of the grew their sales at a rate almost double the industry problem. In many instances, retailers will look to 9 Groupe BMR $1,200 $1,200 0.0% average last year, driving more consolidation at their competitors to poach good people. 4.7% Club Stores** the top and ensuring that the big players in this Finally, creating growth in a relatively stable Kent Building 10 $769 $784 2.0% industry continued to get bigger in 2016. marketplace puts the onus on retailers to look for 4.2% Mass Merchants Materials However, the majority of Canada’s home ways to steal market share. These conditions are improvement retailers are members of a lumber expected to persist into 2018. **Hardware and home improvement stores only Source: 2017 Hardlines Retail Report

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