North Georgia Ace: a Co-Op Decision in the Retail Hardware Industry

International Journal of Case Method Research & Application (2011) XXIII, 3 © 2011 WACRA®. All rights reserved ISSN 1554-7752 NORTH GEORGIA ACE: A CO-OP DECISION IN THE RETAIL HARDWARE INDUSTRY Kip Pirkle University of Georgia ATHENS, GEORGIA, U.S.A. Abstract The owner of a retail hardware business is considering switching his cooperative affiliation after several successful years with Ace Hardware. The store has experienced superior returns relative to the average hardware store, yet the value of the Ace affiliation must be examined. "Big box" retailers continue to capture market share based upon economies of scale, lower prices, and one-stop shopping. Even though this retail store is currently earning strong profits, future planning must take into account extensive changes in the structure of the industry. KEY WORDS: Hardware cooperatives, hardware franchises, buying cooperatives, franchise comparison, big box hardware retailers, do-it-yourself home improvements A CRUCIAL DECISION Ralph Jones folded his arms as he leaned back in his chair to reflect on this morning’s meeting with Henry Smith, a Do It Best representative. Henry had requested the meeting with Ralph that day to discuss a profitable opportunity for North Georgia Ace Hardware store located in Gainesville, Georgia. The opportunity was in fact nothing more than a recruiting call. Henry proposed that Ralph leave the Ace Hardware purchasing and distribution cooperative network and join the Do It Best cooperative (“co-op”) at a significant savings. Ralph readily admits that the retail hardware industry has experienced significant change since “big box” retailers like The Home Depot and Lowe’s found great success. With the evolving industry, Ralph knew that any cost advantage would help him achieve better price competitiveness, but at what sacrifice? North Georgia Ace was not an underperforming store. His store was selling at over 40% margins, a full 5% higher than comparable hardware stores in the region. Could joining the Do It Best co-op noticeably impact the store’s performance? This question wore on his mind as he further analyzed the situation. GAINESVILLE, GEORGIA Gainesville, Georgia: Located on the shores of Lake Lanier and at the foothills of the Blue Ridge Mountains, this City of Excellence is the economic center of Northeast Georgia as well as home to more than 25,000 people 1. 186 International Journal of Case Method Research & Application (2011) XXIII, 3 Gainesville, Georgia is a lakeside township in the northeast portion of the state, positioned just over 50 miles northeast of the state’s major metropolitan area, Atlanta. As the seat of Hall County, Gainesville has convenient access to an interstate highway that makes the Atlanta market more readily available, making it an attractive place to live for people looking to escape the hectic city life while keeping the benefits of a large city close by. Because of that idea, the population of Hall County exceeds 145,000, providing a large base for businesses to pull from. The retail environment in the city and county is healthy, and with regards to the retail hardware competitive environment, there are many options available to consumers. North Georgia Ace is located approximately eight miles southeast of the Gainesville town center with the local competition being spread through out the city. Including North Georgia Ace, there are five hardware stores within a twelve mile radius of the town center. Additionally, there are two feed supply stores that also carry hardware. The growth of the city and county has also enticed The Home Depot and Lowe’s Home Improvement to open operations there as well. The closest Do It Best cooperative hardware store is located nearly 23 miles north of Gainesville in Cleveland, Georgia. North Georgia Ace has been open for four years and has recently begun experiencing profitable operations. Its 2003 Income Statement results are detailed in Exhibit 1. The hardware store is still servicing debt acquired during its initial startup making the interest expense much higher than comparable stores. Other typical expenses associated with operating a hardware store are provided as a percentage of income. THE RETAIL HARDWARE & HOME IMPROVEMENT MARKET 2 The retail hardware industry has been around as long as man has needed the ability to provide and maintain shelter for individual, customer, and family alike. Evolving with the monetary system of developed cultures, the industry has moved from the barter system associated with yesteryear to a hugely profitable industry generating billions of dollars of sales per year for the United States. Popular opinion defines the retail hardware industry as an important part of the U.S. economy to which it contributes nearly $220 billion in sales annually. It is impossible to effectively discuss the industry without subdividing it by a number of degrees. At the highest level, industry participants can be categorized as being hardware stores, home improvement centers, or lumber and building material outlets based on breadth of product offering and square footage of selling space. The hardware store segment is further divided by its distribution method, the most popular being cooperative, wholesale buying and merchandising groups, and buying and delivery systems. Hardware Stores North Georgia Ace falls into the category of a hardware store. These retail establishments are typically small town businesses, individually owned by local entrepreneurs. The term “Mom & Pop” is quite relevant when describing the stereotypical hardware store as the stores garner much of their appeal through the personal customer service provided. Much of the customer base of a hardware store is comprised of homeowners tinkering about their property making minor and sometimes major improvements. The do-it-yourselfer relies heavily on the retail hardware industry for advice and guidance when embarking on home projects, and the degree of personal interaction and customization of advice utilized by hardware stores has long been used a benchmark by the national chains. The DIY movement has been fueled by TV networks and Internet websites that offer instruction and creative ideas. According to the National Retail Hardware Association’s 2009 Industry Annual Report, the average hardware store was roughly 8,000 square feet with approximately $1.18 million in sales for 2007. Exhibit 2 illustrates how the hardware store has progressed since 2003 in a number of key operating, productivity, and profitability measures. Important measures of retail sales performance are the sales generated per square foot of selling space and sales per employee. By these measures, the average hardware store achieved $148 per square foot and $131,916 per employee in the year 2007. Home Improvement Centers Home Improvement Centers (“HIC”) are much larger than a hardware store and carry a proportionately greater number of products under a single roof, many of which have a wide assortment of lumber and outside lawn and garden products available to the customer. While the HIC market is widely International Journal of Case Method Research & Application (2011) XXIII, 3 187 dominated by national chains like The Home Depot (“THD”), Lowe’s Home Improvement (“LHI”), and Menard’s, some privately owned “Mom & Pop” stores exist that have outgrown the hardware store classification. The typical HIC not only services the homeowner but also derives much of its sales from the professional builder and contractor. The individually owned HIC are most like beefed up hardware stores with square footage in the range of 20,000 to 30,000, while the dominant publicly held chains of THD and LHI both have a nationwide offering of stores that easily exceed 55,000 square feet with a growing number of newer stores that have expanded beyond 100,000 square feet of retail space. The emergence of these 55,000 to 100,000 square foot warehouses brought “big-box” retailing to the hardware industry. The average privately held HIC can have annual sales of approximately $4 million, with sales reaching $334 per square foot and $205,380 per employee. However, the publicly held HIC have annual sales that can eclipse $100 million in a single store and the top performer THD achieved 2002 sales per square foot and sales per employee of $352 and $207,000 respectively. Exhibit 3 details the five year trends of the average privately held HIC, and Exhibit 4 shows the 2007 results for THD and LHI. The availability of financial information for Menard’s is limited due to its status as a privately held, regional “big box” competitor. Lumber and Building Material Outlets The typical customer of a Lumber and Building Material Outlets (“LBMO”) in the past was almost exclusively a professional builder or contractor. The DIY revolution challenged these somewhat isolated businesses to reach out and appeal to the individual consumer. Though the lumberyard format is rich with established corporations both public and private (i.e. 84 Lumber, Lanoga, Stock Building Supply) the competitiveness of this format remains unclear in the retail hardware industry as it relates to North Georgia Ace. Arguably this format has and will remain quite profitable; however, its reach into the core hardware business is limited. When a LBMO decides to expand its basic hardware offering it is on such a limited basis that the typical hardware store rarely would include such a location as a viable competitor. However, the HIC locations must be observant of the LBMO locations because of the HIC reliance on lumber sales for profit contributions. The role and market share of the LBMO will be clarified during the discussion of recent market trends. Distribution Methods As stated earlier, the competitive hardware store is typically a member of a distribution program. These distribution programs were conceptualized in an effort to reduce acquisition costs for participating businesses. Early in the 20 th century hardware stores realized that if they combined orders to achieve greater quantity orders that per unit cost would be reduced.

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