Programs in the spotlight: Top-to-bottom review leads to labor and merchandising pilots

LALA VAN CAMP, president, Union Hills Ace Hardware

Starting this month, Ace Hardware will launch a pilot in which it takes more than 11 of its members’ stores in Phoenix and Chicago, readjusts the layout and resets all the merchandise. It’s a grand experiment, one that’s been in the works for some time.

The same goes for a “labor optimization” pilot now underway in a dozen stores, with more to follow next year. “We are preparing to hit the ground running in 2008,” said John Venhuizen, vp-business development at Ace. Venhuizen is overseeing three different initiatives born from a McKinsey & Co. study conducted last year. The retail consulting firm looked at Ace from top to bottom and came up with a series of recommendations to help the co-op improve and stay competitive. After sifting through these recommendations, Ace executives and board members put the first two pilots in motion and are still studying the third idea, an installed services model.

Ace members tend to be skeptical of new programs, given the number that have come and gone over the years; Venhuizen is well aware of that. “Pilot and prove” is his mantra now, which explains the scope and the duration of both pilots. “We plan to ride this thing out for a year, so we feel comfortable with it,” he said.

ACE Hardware

With sales of $3.77 billion and 130 new stores coming on line this year, Ace continues to position itself as one of the premier names in home improvement. Couple this growth with major initiatives such as a Branching Out program (See story page 4) and Ace Rewards, and the net result is a company that is refining a formula for sales that it has sustained since the formation of the cooperative in 1963.

A 2007 highlight came from consumers, who endorsed the Ace brand by ranking the Chicago-based company No. 1 in service in the home improvement sector, according to research released by J.D. Power.

Yet 2007 has also produced controversy. A management-sponsored movement to alter the company’s structure as a member-owned cooperative was scrapped after a major $154 million accounting error surface earlier this month. (See cover story)

The spotlight is on Ace Hardware. On the following pages, we present an update on the company’s latest strategic moves and initiatives.

The merchandising test is being done in three waves, starting in September and ending in the first quarter of 2008. Because Ace no longer owns any corporate stores, it is “borrowing” members’ stores (new and existing) to test assortments, layout, adjacencies, signage and point-of-purchase materials. Members are being compensated, but for many it took a leap of faith to put their store into someone else’s hands.

Union Hills Ace Hardware is one of four Phoenix-area stores to participate in the program. (The other seven are in Chicago.) President Lala Van Camp admitted that, at one point, she got cold feet and backed out. But then she thought about the Walgreens that moved in across the street, and how that hurt her Christmas gift business last year. “This is something we need to do, as a co-op, to move forward,” she said.

A team from Ace came in this summer and remodeled the front of her store, giving it a power aisle and a front-to-back orientation. Houseplants were brought in along with a second paint line, Benjamin Moore. Van Camp drew the line at gutters and fencing—Phoenix has little rain and no deer—but had to compromise in the electrical department when Ace pulled $30 hard-to-find circuit breakers off the shelf.

“When I took the [sales history] reports home and looked them over, I saw lots of zeroes,” said Van Camp, who hopes that her customers will use Ace’s special order system for slow turning items.

2006 Net Income
$105.5 million
Up 5.1 percent
2006 Sales
$3.77 billion
Up 8.8 percent

Another aim of the merchandising pilot is to reduce redundancy and develop a leaner product assortment. Few dealers can argue with Venhuizen’s contention that Ace doesn’t need to carry 15 different skus of utility knives in its warehouse. But they do worry that a standard assortment won’t take local preferences into account, or that Ace will force them to accept its planograms.

“I know how to run a [hardware] store in Manhattan but not in Ohio,” said Paul Brickman, co-owner of H. Brinkman & Sons in New York City. “I’man independent businessman. I want Ace Hardware to be my supplier.”

Ace came up with an urban-specific merchandise mix last year and also increased its incentives for new inner-city locations. The “Branching Out” program now gives out grants of $190,000 for urban stores, and they can be as small as 5,000 square feet. (See related article on page 4.) “These markets are arguably our largest opportunity for growth in the country,” Venhuizen explained.

On the issue of supplier versus retail partner, Ace has made its intentions clear: it wants to be the latter. Ace’s labor optimization pilot puts the co-op right in the heart of a store’s operations, at the intersection of customer service, merchandise put-away, housekeeping and payroll expenses. Using outside consultants, Ace personnel observed, measured and quantified a number of everyday tasks performed by store personnel. Then the team came up with a set of best practices, which Ace has been testing in more than a dozen stores for the past six months.

A number of Ace dealers are doing both pilots at once. Union Hills Ace Hardware plans to join the labor optimization experiment in November. But Ace has already been training the staff how to greet customers, ask open-ended questions and put away orders by aisle, instead of department, making themselves more available for customers.

In keeping with the “pilot and prove” principle, Ace has been tracking the results all along. According to Venhuizen, employee productivity and top line sales have increased in the test stores while labor costs have gone down.

Results for the merchandising pilot are also being carefully measured, in terms of inventory turns, transaction counts, foot traffic and other metrics. Seasonal variations are being taken into account. “We’re looking for year-over-year increases,” Venhuizen said.

Ace has yet to embark on a test of its installed sales program. The co-op has been conducting consumer research about the demand for various services, along with attitudes toward Ace Hardware dealers as possible providers. But Ace hasn’t yet made a commitment to design or offer an installed sales program to its members. “We’ll decide to punt or pilot in 2008,” Venhuizen said.

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