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

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. In doing so, each participating store would achieve a more favorable price competitive position. As the distribution organizations have evolved, so have the benefits to the participants. In addition to cost advantages, members of networks should expect to receive benefits from store identity, store planning, remerchandising, inventory management, accounting, and advertising. The distribution programs fall into one of the three categories presented earlier. The top three national cooperative distributors are Ace Hardware Corporation, Do It Best Corporation, and TruServ Corporation. The three programs have approximately 4900, 4189, and 6300 participating stores respectively, but on an annual sales basis Ace Hardware is the number one cooperative on the market (Exhibit 5). Ace and TruServ both spend considerable amount of corporate monies on national advertising campaigns targeting the consumer. To capitalize on the advertising, members of the Ace and TruServ cooperatives are required to use the company name in the store front.

Current Market Trends Home improvement appears to be less a retail sector and more a movement. Consider this: When the ABC (television) program Home Improvement debuted in 1991, The Home Depot’s annual sales were about $3.8 billion and the company employed 21,500. When the show ended in 1999, the chain had annual sales of about $38.4 billion with 201,000 on the payroll 3. As the above quotation demonstrates, the retail hardware industry has been in a rapid growth phase for some time now; some analysts say it’s booming. But the growth has not been limited to the “big box” retailers like THD and LHI. This industry as a whole experienced a 5.7 percent increase in sales last year, 188 International Journal of Case Method Research & Application (2011) XXIII, 3 and the Home Improvement Research Institute forecasts a long-term growth rate of 3.3 percent annually through at least 2012. The record low interest rates and record high home starts that have characterized the early years of the 2000’s have contributed greatly to this growth. However, skeptics may think that when the home “bubble” bursts the retail hardware industry’s rapid growth will also diminish. There are opposing theories relating to that line of thinking. Market analysts believe that when rates increase to normal levels and new housing starts begin to decrease that the consumer will have even more incentive to perform home improvement. Whereas lower rates leading to cheaper borrowing made it easier for consumers to step-up in houses, with higher rates they may be encouraged to upgrade their current home instead of sell. When the consumers are ready to upgrade, the retail hardware industry will be ready to serve. The three different segments of the industry will be competing with earnest to capture as much of the continually growing market. Exhibit 6 details the current breakdown of market share for hardware stores, HIC, and LBMO and forecasts the share through 2012. There is little change in market share for any of the three segments. However, where change does appear to be trending is in the market share profile of the top 25 chains (Exhibit 7). Even with the impressive numbers posted by the top performers in the country, the industry remains fragmented but consolidation is occurring. With strong growth predicted in the industry, the future competitive landscape of the retail hardware industry is somewhat in question as each competitor strives to differentiate itself through service, selection, location, and exclusive lines of products.

ACE HARDWARE CORPORATION

History 4 Ace Hardware began in 1924 as a small chain of stores established by a group of Chicago-area retailers in an effort to increase their buying power and profits. This vision was shared by Richard Hesse, E. Gunnard Lindquist, Frank Burke and Oscar Fisher who decided to unite their stores and found the basis for Ace Hardware. By 1928, the venture had been incorporated as Ace Stores in honor of the World War II fighter pilots dubbed “aces” and included eleven additional retailers. Mr. Hesse became president the following year, and retained that position for the next 44 years. In the same year, Ace opened its first warehouse, a 25,000-square-foot building in Chicago. Three years later Ace Stores Inc. changed its name to Ace Hardware Corporation. Ace's growing member base – then 38 dealers – and its increasing buying power helped the company compete with mail order houses and chain stores by improving its merchandising and developing innovative displays and promotions for its customers. Using this model, by the end of 1949, Ace operations had expanded to 133 stores in seven states, with wholesale sales of $7.26 million. In 1953 , the Ace Perpetuation Fund was established with the purpose of ensuring that the corporate structure will continue after the passing of the last surviving owner. The Fund functioned by allowing dealers to buy stock in the company. The following decade was a period of expansion. Ace expanded into the South and West, opening the first distribution centers outside Chicago, located in Georgia and California, to support its extensive member growth. In the early 1970s the DIY market began to accelerate as inflation drove up plumber and electrician fees. As the market grew, large home center chains took market share from independent hardware stores such as those franchised through Ace. In response to this competitive environment, Ace and its members became a part of a growing trend in the hardware industry, cooperatives. Ace continued its growth strategy in 1979 by introducing the PACE computer system that utilizes retailer-operated minicomputers to order merchandise, track sales and analyze purchase results in an attempt to improve Profits, Analysis, Control and Efficiency. Moreover, 1985 constituted a milestone in Ace growth wherein a retailer ordering masking tape at a store in Michigan pushed Ace past the $1 billion wholesale sales level. In the same year, Ace started the Store of the Future Program, which allowed dealers to borrow up to $200,000 to upgrade their stores and conduct market analysis. Ace continued its dealer support with new customer focus programs such the ACENET in 1986, a computer network that allowed Ace dealers to check inventory, send and receive e-mail, make special purchase requests, and keep up with prices on commodity items such as lumber. In 2000 Ace launched its Vision 21 retailer-driven strategy that, “focuses on improving Ace retailers' sales and profits, streamline all processes within the corporation and at Ace retail stores, providing International Journal of Case Method Research & Application (2011) XXIII, 3 189 ultimate customer satisfaction and unifying the Ace Team.” 4 The Ace business model has been effective and in 2009, Ace surpassed $3 billion in hard line sales and $100 million in net profits for the first time. Right now, in its 85 th anniversary, Ace Hardware has more than 4,800 stores in 50 states and 72 countries, with an unwavering commitment to deliver quality, friendly and helpful hardware service to consumers.

Corporate Philosophy Ace business philosophy can be summarized in the words of Dave Hodnik, its current president and CEO: “For more than 80 years, Ace has taken pride in serving our customers with a commitment to excellence, and while growth is just as important to us as it ever was, it's not new to the company. Ace has changed in many ways since its founders united a handful of hardware stores under the Ace name 80 years ago. But with all these changes, today Ace remains your neighborhood hardware store, where customers are greeted by name, with a smile and can count on old-fashioned, helpful service. That won't change no matter how much Ace grows.” 4 This desire to be close to its customers and community has earned Ace Hardware a name in the local neighborhood. Moreover, Ace the customer focus is expanded into the community. In this sense, since 1991 the Ace Hardware Foundation is dedicated to improve people’s lives and support them when health care or disaster relief is needed. Ace promotes this philosophy in a nationwide and global program. Ace believes that this commitment to helping communities in which its member stores operates builds positive brand image. In turn, this positive brand image drives traffic through the stores insomuch as citizens will support the name they know gives back to their community. All member stores benefit from this national branding by taking the Ace Hardware name on their storefront, and subsequently, all Ace members contribute funds to a national advertising campaign. Through the consistent communication and execution of these campaigns, Ace Hardware can become the neighborhood hardware store of choice in every community, domestic and international.

Historical Financial Performance

Ace Hardware Corporation

Revenues % Growth Revenue per Year Employees ($ mil.) in Revenues Employee ($ mil.)

2001 2,436.00 49.6% 3,917 0.62 2002 2,742.50 12.6% 4,352 0.63 2003 2,907.30 6.0% 4,685 0.62 2004 3,120.40 7.3% 4,672 0.67 2005 3,181.80 2.0% 5,180 0.61 2006 2,945.20 -7.4% 5,513 0.53 2007 2,894.40 -1.7% 5,229 0.55 2008 3,029.10 4.7% 5,268 0.58 2009 5 3,159.32 4.3% - - Source: Hoovers

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The success of Ace Hardware can be highlighted by its outstanding financial figures, and industry standing: • Number one retail hardware cooperative • Total sales of $3.159 billion in 2009 • Net profits increase of 12.3% in 2009 • Dividends allocated in 2009 by an amount of $159.4 million • Net income of 100m in 2009 A historical analysis of Ace performance also shows that the company branding strategy throughout the last ten years has been effective. In fact, Ace revenues increased by over 29% between 2001 and 2009 with an annual average increase of 4.7% (8-year median). Investments have been made in retail technology and company-owned retail locations. These investments include innovative retail initiatives such as market tests in Ace owned stores that complement its growth strategy and focus on supporting Ace retailers. From a cash flow perspective, Ace has secured a revolving credit line from a group of banks that increases its long term debt capacity. However, Ace’s short-term obligations dominate its debt structure; its debt level has been continuously reduced between 2001 and 2003 as demonstrated by its debt to equity ratio.

Pricing Approach Ace’s price strategy can be summarized by the old adage “People don’t plan to fail, they fail to plan.” Ace’s active price strategies include price shopping the competition and price monitoring on a monthly basis. Going into more detail, Ace views price as the only marketing tool that directly generates income. It may also become a detriment to a store if the environment is not kept in perspective (competitors), if it lacks an action plan (category management) and fails to asses margin opportunities (where and what to adjust). Ace has employed an S4 Retail Solutions 6 strategy for years and had good results in sensitive and competitive items but a public perception of being high-priced persisted. However, many non-competitive categories have been found equal to or priced lower than the “big box” retailers. The following quote further describes the Ace pricing strategy. “Our mission has been to create a retail pricing strategy which reinforces the image of Ace to the customer while optimizing gross margins for the retailer. It is that ‘optimizing’ part that has bared the brunt of our research. In order to determine this we have studied our ‘high performing’ stores, perform customer trade-off analysis, conducted store audits, analyzed market baskets of sensitive, competitive, non-competitive, blind items and priced shopped numerous competitors.” 7

Distribution Approach Within the hardware store segment, Ace Hardware has the most widely recognized trademark in America and the most recognized slogan of “Ace . . . The Helpful Place.” This status presents challenges as consumers rely heavily on the advice and product choices they get at their neighborhood stores therefore requiring a continuous improvement in the level of service. A state-of-the-art distribution system backs up the extensive product line and gives access to over 65,000 products from fifteen distribution centers located throughout the country, assuring a solid corporate support system leading to the company’s success. These regional distribution centers have computerized ordering systems that give efficient access to products in every major hardware category. As in its other strategies, Ace develops innovative solutions in its distribution approach as well. A good example is that Ace has created a series of CD-ROM catalogs that have dramatically reduced the company's printing and distribution costs while expanding the capability of offline ordering. One version of the CD-ROM is designed for commercial/industrial customers enables them to order offline and print out a requisition that can be faxed to their local Ace commercial/industrial retailer. A key to the success of the new catalogs is an interface, developed by IHS Enterprise Solutions, that allows users to quickly search through more than 80,000 products and display the results in a variety of useful formats. Commitment to innovation is well received within the Ace membership as exemplified by the following quote. "Our stores are excited about this product because they can find what they need in much less time than was required with a paper catalog," said George Mantia, Product Manager for Ace Hardware 7. International Journal of Case Method Research & Application (2011) XXIII, 3 191

DO IT BEST CORPORATION

History 8 Do It Best (“DIB”) was founded on June 28, 1945 by Arnold Gerberding in Fort Wayne, Indiana. Gerberding attracted 90 other storeowners to form what was then known as Hardware Wholesalers, Inc (“HWI”). Each hardware store paid $1,000 to become a subscriber to the buying co-op. A co-op is designed so that its members may benefit from cost savings by purchasing in bulk. Members of co-ops are required to purchase a portion of their total goods from the wholesaler. HWI struggled along for the first few years in an attempt to keep costs as low as possible while developing innovative financing ideas to meet its growth needs. The company could not afford conventional debt and borrowed from its members to finance projects like warehouses and office space. In 1953, Gerberding initiated the industry’s first profit sharing plan, in part because the company could not afford a pension plan. Gerberding stepped down in 1967 as the leader of HWI and Don Wolf took the reigns. Wolf, who lacked a college education, started with the company in 1947 as a warehouse laborer and led the company for nearly 25 years. Wolf followed Gerberding’s lead on cutting costs and limited outside borrowing. The company reached $100 million in revenue in 1972 under Wolf’s leadership making it the third largest hardware and building supplies wholesaler in the United States. Wolf credited the success of the company to continuous cost-cutting efforts, an effective profit sharing program and the successful use of technology. The seventies were a time of tremendous growth for HWI with an average annual growth in revenues of 25%. The 1980s brought significant change and challenges to HWI with the advent of “big box” retailers and the emergence of discount retailers such as K-Mart and Wal-Mart into the hardware business. HWI still maintained significant growth levels and reached over $1 billion in revenue by 1990. In 1985, HWI introduced the Do-it center® concept which introduced bright aggressive colors for signage and changed the layout of the store to include end caps and power aisles. HWI established strict rules for establishing a Do-it center®. HWI changed its name to Do It Best Corp. on March 16, 1998 approximately four years after earning $1.6 billion in revenue.

Corporate Philosophy DIB’s primary concern is providing excellent service at a low price. DIB claims to differentiate itself from Ace and TruServ by using fewer employees to run the co-op. DIB’s sales-per-employee is over 150% higher than its competitors. In addition, DIB does not engage in national advertisement campaigns and leaves its members to decide the most effective uses of their individual advertising dollars. The company feels that its members know their own unique market better than it or an advertising agency. DIB realizes the importance of effective advertising and provides tips and advice as well as advertising tools to assist its members; particularly in the area of monthly circulars. The Adpak program allows users to create monthly circulars electronically and is available to members at mydoitbest.com. DIB’s competitors charge an average of 2% 9 of net revenues to fund the national advertising campaign. As opposed to Ace Hardware, DIB does not require that its members bear the “Do It Best” name. This illustrates a greater commitment to quality service and convenience as opposed to a focus on brand awareness. Convenience and strong customer service are two factors that DIB identifies as competitive advantages to the “big box” hardware stores. DIB members position themselves in convenient locations and their store layout is structured so that customers can get in and out in a few minutes. DIB estimated that the average visit to one of their member stores was seven minutes while the average visit to a big box retailer was approximately 40 minutes. DIB is aware of the difficulties associated with competing on price with competitors such as LHI and THD and as such, has focused on qualitative strengths such as convenience, service, and specialty product offerings.

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Historical Financial Performance:

Do It Best Corporation

Revenues ($ % Growth in Revenue per Year Employees mil.) Revenues Employee ($ mil.)

2001 1,705.20 4.7% 1,100 1.55 2002 1,620.10 -5.0% 1,100 1.47 2003 1,830.00 13.0% 1,100 1.66 2004 1,900.00 3.8% 1,250 1.52 2005 2,214.60 16.6% 1,300 1.70 2006 2,445.00 10.4% 1,307 1.87 2007 2,190.80 -10.4% 1,350 1.62 2008 2,308.00 5.3% 1,625 1.42 2009 2,333.80 1.1% 1,625 1.44 Source: Hoovers

As evidenced above, DIB increased revenues from 2001 to 2009 by nearly 37% and had an annual average increase of 4.4%. DIB considers the strong revenue per employee figures as a competitive advantage and relies on those compensation savings as a way to increase total refunds to its members. From a debt perspective, the company has been very conservative. DIB has maintained minimal amounts of debt and in 2009 paid down all outstanding long-term balances. The company’s debt to equity ratio has averaged less than 1% over fiscal years 2007-2009.

Pricing Approach DIB requires that its members purchase 65% of their products from the co-op. Requiring its members to purchase a substantial portion of the products from the co-op allows DIB to increase its buying power and command better prices. All members are entitled to a rebate program wherein annual profits are divvied amongst the members based on several factors including total purchases, product type of purchases, and the particular pricing plan its members have elected to use. According to the company’s audited financial statements, “At the end of each fiscal year, the Company is obligated to refund to its member- shareholders the gross profit on sales of merchandise to the member-shareholders, less all operating expenses. Refunds are required to be made to each member shareholder in the proportion of the gross profit on his purchases to the gross profit on purchases made by all member-shareholders, adjusted for participation in the Best Rewards  program.” 10 DIB’s most common pricing option is the Classic Pricing program. This program requires members to pay slightly higher prices on products throughout the year and receive a larger rebate check at the end of the year. Another program, Vision Pricing, provides members with lower costs throughout the year and consequently a lower rebate at the end of the year. DIB claims that average rebate earnings for the Classic and Vision pricing programs are 13.17% and 7.50%, respectively, of gross profit for total annual purchases. In addition to its rebate program, DIB also offers a stock investment plan where a portion of a members rebate is paid with cash and a portion in “preference stock”. See Exhibit 8 for a comparison summary of DIB’s and Ace Hardware’s cash to stock payouts and the vesting periods.

Distribution Approach The efficient distribution of over 68,000 products presents a significant challenge to DIB. DIB currently operates seven distribution centers strategically placed around the United States. DIB has made significant investments over the last 20 years to improve the quality and cost of its ordering and distribution process. DIB recently implemented the Advanced Warehouse Replenishment (AWR) system International Journal of Case Method Research & Application (2011) XXIII, 3 193 and the Warehouse Management System (WMS). AWR is an inventory forecasting system that has helped DIB consistently achieve fill rates (desired products in stock) above 97%. The company implemented a web-based ordering system to coincide with AWR and to give its members other options for ordering products. Making technological changes has often been difficult for the company, as it has had to accommodate the needs of all its members and take into consideration their technological capabilities and different communication protocols. In addition to web-based ordering, DIB provides a tool called Info-Deluxe, which is a communications software package that sends and receives data with the central communications center. The company also gives members the option of using a hand-held unit that tracks order needs by scanning barcodes and uploads the data through the phone lines. DIB batches similar products together based on department when shipping to its members.

THE BIG DECISION

Armed with the data Ralph had researched, he stood ready to make a decision concerning the future of his hardware store. Should he stay with Ace or switch to DIB? Are the savings enough to warrant the change? What if his store grew and his purchases increased dramatically? Which cooperative would be better then? Ace and DIB differ greatly with respect to its treatment of national advertising and brand image. How much value does the Ace brand carry when considering the future of the hardware retail industry? Ralph’s train of thought was suddenly disrupted by the store clock chiming midnight. Surprised by how quickly time had passed while pondering this decision, he locked up and called it a night.

EXHIBIT 1 NORTH GEORGIA ACE, INC. INCOME STATEMENT YEAR-ENDING 12/31/2009

(%) Industry* Income 1,026,768 Cost of Goods Sold 610,943 59.5% 65.5% Gross Profit 415,825 40.5% 34.5%

Expenses Advertising 6,533 0.6% 1.0% Depreciation 77,024 7.5% 0.3% Insurance 3,584 0.3% 1.3% Interest 66,322 6.5% 1.0% Other Expenses 47,285 4.6% 4.2% Outside Labor 0 0.0% 0.9% Payroll 132,750 12.9% 14.3% Rent 0 0.0% 3.4% Repairs & Maintenance 3,537 0.3% 0.5% Supplies 3,766 0.4% 0.6% Taxes & Licenses 8,833 0.9% 0.5% Utilities 26,185 2.6% 1.2% Total Expenses 375,819 36.6% 29.2% Income from Operations 40,006 3.9% 5.4% * Sample of 15 Hardware-Retail businesses

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EXHIBIT 2 FINANCIAL PROFILE OF HARDWARE STORES 2004 – 2008

2004 2005 2006 2007 2008 Operating Profile Average Size Selling Area (sq.ft.) 8,000 8,000 8,000 8,000 8,000 Total Sales $1,043,6 $1,081,4 $1,141,8 $1,135,8 $1,187,2 Total Asset Investment $521,828 $514,972 $543,743 $540,863 $546,979 Total Inventory $305,269 $302,803 $297,835 $283,499 $362,647

Productivity Profile Sales Per Sq Ft of Selling Area $127 $138 $127 $131 $148 Inventory Per Sq Ft of Selling Area $34 $34 $34 $35 $45 Net Sales to Total Assets 2.0x 2.1x 2.1x 2.1x 2.2x Net Sales to Total Inventory 3.4x 4.1x 3.8x 4.0x 3.3x Total Sales Per Employee $105,514 $113,447 $115,857 $118,923 $131,916 Average Size of Transaction $13 $13 $14 $14 $16

Profitability Profile Gross Margin 38.0% 38.2% 37.6% 38.3% 40.1% Net Profit (Pre Tax) to Net Sales 2.4% 2.6% 1.7% 2.5% 2.5% Gross Margin Return on Inventory $1.30 $1.57 $1.43 $1.53 $1.31 Return on Net Worth 7.2% 8.2% 5.4% 7.8% 8.7%

EXHIBIT 3 FINANCIAL PROFILE OF HOME IMPROVEMENT CENTERS 2004 – 2008

2004 2005 2006 2007 2008 Operating Profile Average Size Selling Area (sq.ft.) 11,750 11,000 12,000 13,850 12,000 Total Sales $3,261,1 $3,215,0 $3,580,6 $3,598,9 $4,004,9 Total Asset Investment $1,358,8 $1,286,0 $1,491,9 $1,499,5 $1,466,2 Total Inventory $642,724 $653,301 $608,705 $636,118 $788,845

Productivity Profile Sales Per Square Foot Selling Area $254 $299 $283 $264 $334 Inventory Per Sq Ft of Selling Area $52 $53 $46 $45 $66 Net Sales to Total Assets 2.4x 2.5x 2.4x 2.4x 2.7x Net Sales to Total Inventory 5.1x 5.8x 5.9x 5.8x 5.1x Total Sales Per Employee $166,915 $170,455 $178,901 $168,948 $205,380 Average Size of Transaction $41 $43 $46 $42 $44

Profitability Profile Gross Margin 27.9% 27.7% 28.6% 29.7% 30.2% Net Profit (Pre Tax) to Net Sales 1.9% 2.6% 2.2% 2.6% 2.6% Gross Margin Return on Inventory $1.42 $1.61 $1.69 $1.72 $1.53 Return on Net Worth 7.8% 11.0% 9.0% 9.9% 12.5%

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EXHIBIT 4 FINANCIAL PROFILE OF THE TOP TWO PUBLICLY HELD CHAINS – 2008

Home Depot Lowe's Operating Profile Number of Stores (at year end) 1,532 854 Average Size of Selling Area (sq.ft.) 108,000 111,000 Total Sales $58,247 million $26,491 million Total Asset Inventory $30,011 million $16,109 million Total Inventory $8,338 million $3,968 million Sales Per Square Foot $352 $279 Inventory Per Square Foot $50 $42 Net Sales to Inventory 7.0x 6.7x Total Sales Per Employee $207,000 $218,000 Average Size of Transaction $49 $58 Gross Margin Return on Inventory $2.18 $2.03

Income Statement Net Sales 100.0% 100.0% Cost of Goods Sold 68.9% 69.7% Gross Margin 31.1% 30.3% Expenses 21.0% 21.4% Net Income 10.1% 8.9%

Balance Sheet Total Current Assets 39.7% 34.6% Cash 7.3% 5.3% Receivables 3.6% 1.1% Inventory 27.8% 24.6% Other 1.1% 3.6% Fixed Assets 60.3% 65.4% Total Assets 100.0% 100.0% Current Liabilities 26.8% 22.2% Long-Term Liabilities 7.2% 26.3% Net Worth 66.0% 51.5% Total Liabilities and Net Worth 100.0% 100.0%

196 International Journal of Case Method Research & Application (2011) XXIII, 3

EXHIBIT 5 PROFILE OF WHOLESALING COOPERATIVES

Ace Hardware Do it Best TruServ Corp. Corp. Corp.

Number of Distribution Centers 15 7 12 Dollar Volume Most Recent Fiscal Year* $3.0 billion $2.4 billion $2.1 billion Dollar Volume Est. Calendar Year $3.1 billion $2.5 billion $2.0 billion Number of Member Stores 4,900 4,189 6,300 Number of Non-Member Accounts Served 40 0 0 %Sales Direct / Drop Ship 23 31 31 %Sales Out of Warehouse / Pool 77 69 69 %Sales in LBM Products 0 40 0 Avg. Number of SKUs 64,000 65,000 67,000 Number of Employees 5,066 1,625 3,100 Sales / Inventory Ratio 5.6 5.6 9.0 * FY 2008 for Ace and TruServ; FY June 2009 for Do It Best

EXHIBIT 6 ACTUAL AND FORECASTED SALES AND MARKET SHARE BY TYPE OF STORE, 2008-2013

Hardware Stores Home Centers Lumberyards Total Sales Share Sales Share Sales Share Sales Share 2008 $24.6 12.4% $120.1 60.8% $52.9 26.8% $197.6 100.0% 2009 $25.8 12.4% $126.1 60.5% $56.5 27.1% $208.4 100.0% 2010 $27.1 12.3% $132.5 60.3% $60.3 27.4% $219.9 100.0% 2011 $28.5 12.3% $140.5 60.8% $62.1 26.9% $231.1 100.0% 2012 $29.9 12.3% $148.8 61.3% $64.0 26.4% $242.7 100.0% 2013 $31.4 12.3% $157.4 61.8% $66.0 25.9% $254.8 100.0% Growth Rate 5.0% 5.6% 4.5% 5.2%

EXHIBIT 7 MARKET SHARE – TOP 25 HARDWARE, HOME CENTER, & LUMBERYARD CHAINS, 2004-2008

Sales Number of Stores (as % total of industry) 2004 42.0% 8.8% 2005 45.0% 8.9% 2006 50.0% 10.0% 2007 51.0% 10.5% 2008 53.0% 10.8% Total % Change 9.0% 2.0%

International Journal of Case Method Research & Application (2011) XXIII, 3 197

EXHIBIT 8 MEMBER REBATE CALCULATION SCHEDULE 9

North Georgia Ace Typical Purchases Warehouse $600,000 Promotional Warehouse $100,000 Drop Ship $300,000

Do It Best Ace Hardware Calculate Stock Investment* Warehouse 19.00% 15.00% Drop Shipment 5.00% 3.00% Variable Base** 1.00% - Member benefit*** $1,000 2.00% Total Stock Total Stock Calculate Rebate Warehouse 12.96% 4.44% Promotional Warehouse 4.79% - Drop Shipment 3.15% 1.00% Total Rebate Total Rebate Rebate Distribution Do It Best Year 1 - 5 6 7 - 10 11+ Stock 55% 25% 7.50% 0% Cash 45% 75% 92.50% 100%

Ace Hardware Year 1 - 7 8+ Stock 65% 0% Cash 35% 50% Notes**** 0% 50% * A member is vested in the promised stock according to the cumulative stock rebate distribution ** The DIB variable base is 1% of the sum of warehouse and promotional warehouse and phases out after year 10 *** The Ace Hardware member benefit is 2% of purchases with a $5,000 cap **** Notes mature in 5 Years

EXHIBIT 9 CONSOLIDATED BALANCE SHEETS FOR ACE HARDWARE CORP.

ACE HARDW ARE CORP CONSOLIDATED BALANCE SHEETS (Amounts in thousands) 2009 2008 2007 ASSETS Current assets Cash and cash equivalents 17,952 21,605 22,147 Short-term investments 24,442 20,347 17,158 Receivables, net* 311,338 342,452 364,498 Inventories 421,931 399,133 404,302 Other current assets 16,900 18,182 16,244 198 International Journal of Case Method Research & Application (2011) XXIII, 3

Assets of discontinued operations held for sale - 10,274 18,082 Total current assets 792,563 811,993 842,431 Property and equipment, net 309,574 284,032 285,345 Other assets 46,892 47,327 41,015 Total Assets 1,149,029 1,143,352 1,168,791 LIABILITIES Current liabilities Current maturities of long-term debt 5,901 5,647 7,151 Short-term borrowings 20,100 48,900 72,600 Accounts payable 387,529 385,750 406,471 Patronage dividends payable in cash 40,783 38,687 34,229 Patronage refund certificates payable 14,989 13,196 9,084 Accrued expenses 105,824 86,747 78,843 Liab. of discontinued operations held for sale - 6,799 3,739 Total current liabilities 575,126 585,726 612,117 Long-term debt 158,816 163,075 170,387 Patronage refund certificates payable 88,924 83,820 77,401 Other long-term liabilities 33,616 30,709 27,184 Total liabilities 856,482 863,330 887,089 SH AREHOLDERS' EQUITY Member dealers' equity Class A of $1,000 par value 3,455 3,617 3,693 Class B of $1,000 par value 6,499 6,499 6,499 Class C of $100 par value 282,112 269,612 260,224 Class C of $100 par value, for patronage div 27,975 26,053 23,284 Additional stock subscribed, net 184 243 303 Retained deficit (32,341) (31,080) (17,591) Contributed capital 13,485 13,485 13,485 Accumulated other comprehensive loss 512 703 587 292,547 289,132 290,484 Less Treasury stock, at cost (9,334) (9,110) (8,782) Total member dealers' equity 292,547 280,022 281,702 Total liabilities and member dealers' equity 1,149,029 1,143,352 1,168,791 * Less allowances for doubtful accounts of $4,143; $3,194; and $2,304 respectively

EXHIBIT 10 CONSOLIDATED STATEMENTS OF INCOME FOR ACE HARDWARE CORP.

ACE HARDWARE CORP CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands) 2009 2008 2007 Net sales 3,159,321 3,029,097 2,923,882 Cost of sales 2,850,421 2,742,201 2,641,840 Gross profit 308,900 286,896 282,042 Total operating expenses 197,602 182,876 183,773 Interest expense (19,838) (21,583) (23,100) Other income, net 9,549 10,055 12,409 Income taxes (922) 467 (3,418) International Journal of Case Method Research & Application (2011) XXIII, 3 199

Income from continuing operations 100,087 92,959 84,160

Discontinued Operation Loss from discontinued operation - (5,421) (11,091) Loss on disposal of continued operation 660 (5,447) Net Earnings 100,747 82,091 73,069 Patronage dividends 102,008 95,580 85,109

EXHIBIT 11 CONSOLIDATED BALANCE SHEETS FOR DO IT BEST CORP.

DO IT BEST CORP CONSOLIDATED BALANCE SHEETS (Amounts in thousands) 2009 2008 2007 ASSETS Current Assets Cash and cash equivalents 91,981 110,989 64,678 Receivables, net* 256,970 255,743 251,910 Marketable securities 1,572 1,586 1,705 Merchandise Inventories 189,642 194,856 199,655 Prepaid expenses and deferred charges 1,814 3,048 2,734 Deferred Income Taxes 1,712 869 172 Total current assets 543,691 567,091 520,854 Property and equipment, net 53,464 49,312 49,093 Deposits and deferred charges 726 655 666 Deferred income taxes 3,853 5,018 5,840 Other 448 448 448 Total Assets 602,182 622,524 576,901 LIABILITIES Current liabilities Current maturities of long-term debt 0 640 403 Accounts payable 335,448 367,189 335,590 Accrued expenses 30,735 30,173 24,909 Total current liabilities 366,183 398,002 360,902 Long-term debt, less current maturities 0 1,720 2,366 SHAREHOLDERS' EQUITY Common stock, voting 3,819 3,923 3,909 Common stock, non-voting 345 316 291 Preference stock 233,594 220,431 211,266 Accumulated other comprehensive income 937 951 1,023 Accumulated deficit (2,696) (2,819) (2,856) Total shareholders' equity 235,999 222,802 213,633 Total liabilities and shareholders equity 602,182 622,524 576,901 * Less allowances for doubtful accounts of $1,624; $1,677; and $1,744 respectively

200 International Journal of Case Method Research & Application (2011) XXIII, 3

EXHIBIT 12 CONSOLIDATED STATEMENTS OF INCOME FOR DO IT BEST CORP.

DO IT BEST CORP CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands) 2009 2008 2007 Net sales 2,333,806 2,308,020 2,109,597 Cost of sales 2,185,233 2,167,567 1,983,601 Gross profit 148,573 140,453 125,996 Operating expenses 41,662 36,949 33,251 Income from operations 106,911 103,504 92,745 Other income, net 2,447 2,987 3,517 Income before profit sharing and pension costs, 109,358 106,491 96,262 shareholders' refund, and income taxes Profit sharing and pension costs 10,671 10,356 8,309 Income before shareholders' refund and income 98,687 96,135 87,953 taxes

Shareholders' refund Cash 67,942 63,813 60,115 Preference stock 30,272 31,846 26,800 98,214 95,659 86,915

Income before income taxes 473 476 1,038 Federal and state income taxes 350 439 508 Net income 123 37 530

ENDNOTES

1. www.gainesville.org

2. As referenced through the National Retail Hardware Association / Home Center Institute.

3. biz.yahoo.com

4. www.acehardware.com ; www.hoovers.com

5. Complete 2009 data for Ace Hardware was not readily available at the time this study was created.