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Humbled but hopeful, Handy hits road to reorganization

BY Ken Clark

Houston-based hardlines co-op Handy Hardware Wholesale submitted papers for their much-anticipated plan of reorganization March 6.

The 1,300-member regional co-op filed for Chapter 11 bankruptcy in January. Whether Handy can return to its place as a meaningful and profitable player in the hardware business remains to be seen. This much is certain: What was once $27 million in member equity in Class A and Class B shares has vanished.

"The fact that the dealers lost that investment is really bad — a disappointing situation," said Morrie Aaron, president of MCA Financial Group, Handy’s hired-gun financial advisory firm that specializes in restructuring. "But the mission of Handy will continue. And that is to be a low-cost no-frills supplier focused on a high level of customer service for its members."

According to Aaron, the judge will review the plan for about 30 days. The plan will be presented to creditors and members around April. At that point, current members will have a 30- to 45-day window to purchase shares — at a price of $3,000. Aaron said he expects the plan to be approved and confirmed by the court in late June.

Meanwhile, there is no shortage of competing distributors that see opportunity in Handy land. Handy member Virgil Cox, of Cox Hardware in Houston and currently a member of Handy’s board, said he has been approached by reps of numerous distributors since Handy’s financial woes struck.

"They wouldn’t be doing their job if they didn’t come out here," said Cox, who is currently a member of Handy’s board. "Nobody has come in talking trash. In my experience, they come in and say, ‘We just want you to know we’re here.’ "

Cox remains loyal, and others remain loyal, too. Handy’s VP merchandising Mickey Schulte said the co-op has lost about 40 members as a result of the bankruptcy-related problems. Membership dipped from 1,350 to 1,310. "We’re very pleased that they have stuck with us."

However, some of those members have shifted their purchases to other distributors. "We have had many members move SKUs to the competition," said Aaron. "But we will expect and hope that a lot of that will come back to Handy over time."

According to Handy’s stats, fill rates have risen from the low 80% range in early March to the high 80% range in late March. Schulte said the co-op is working toward a return to its traditional mid-90% level of fulfillment.

Cox said fill rates have been getting better. "They have a valuable mission that they perform. That is getting bread-and-butter items to us at a very low-landed cost."

Several Handy members, who asked for anonymity, told HCN they too would support the co-op, as long as it can continue to deliver.

"We’re still waiting the situation out," said an executive of a multi-unit dealer. "Depending on what they present to the dealers, that will determine the strength of the group as it goes forward."

One Texas dealer said his company felt a "moral obligation" to stay with Handy. "If they can continue to supply, we will continue to buy from them," the dealer said. "Why wouldn’t we?"

Some Handy members say they have reasons to stay, as long as the co-op can deliver low prices and good service. Handy says a new board will be constituted as part of the reorganization. A new CEO is being recruited. And in February, Handy Hardware hired J.R. Ferguson, a former senior distribution manager for Office Depot, as director of operations.

"We’re still members," said an executive of another retail company. "And as far as I know, they are going to be able to come out of Chapter 11 with this new credit line they’ve secured. They simply invested in assets to grow at the wrong time."

That brings the story to the Meridian, Miss., distribution center. At the groundbreaking in 2009, it was described as a $20 million, state-of the-art facility poised to push the company to new markets in the Southeast. But Handy incurred more than $30 million of debt in connection with the building and operation of the facility, due to operational challenges and the economic environment at the time of opening. It closed Dec. 31.

"We have had many members move SKUs to the competition. But we will expect and hope that a lot of that will come back to Handy over time."

— Morrie Aaron, president of MCA Financial Group

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Made in the USA questions answered

BY HBSDEALER Staff

We asked. You answered. Are your customers willing to pay more for Made-in-the-USA products? And other questions from the front lines of home improvement retailing.

There is no shortage of Made-in-the-USA stories across the country. They usually include a hard-working team of employees. A high-quality product. Happy customers. American ingenuity. Jobs. There are thousands of companies that follow this general story line.

This article is for them, but not exclusively. Any company looking for an edge in the competitive home improvement industry will benefit from a better understanding of Made-in-the-USA retailing.

On the following pages, HCN presents the results from its first-ever Made in the USA survey. The purpose is to expand the understanding of several key questions of Made in the USA and their impact on the industry. Nearly 1,000 industry professionals participated in the survey, and there are no two theories of the importance of domestic manufacturing that are exactly the same.

Among our findings:

  • A gap exists between retailers' understanding of consumer behavior and that of manufacturer's — particularly Made-in-the-USA manufacturers, which have a relatively inflated expectation of consumer willingness to pay more.
  • More companies than not say they are seeing their competitors promote themselves as Made in the USA — by a factor of about 2 to 1.
  • Almost half of all respondents (47.9%) — both retailer and manufacturer — believe the Federal Trade Commission's Made-in-the-USA standard is hard to follow.

Across hardware stores, signage on shelves and products attempt to boost sales with red, white and blue. The more the industry knows about Made in the USA, the better for business.

About the survey:

• The HCN "Made in USA" survey was conducted online from Feb. 14 to Feb. 27.

• The 969 completed responses break down as follows:

  • Retailer/distributor: 456 (47.6%);
  • Made-in-USA manufacturer: 241 (26.2%);
  • U.S./Global manufacturer: 170 (17.7%);
  • Other: 81 (8.5%).

• Readers were asked to agree or disagree with each of five statements about "Made in USA."

"Our customers are willing to pay more for products that are 'Made in the USA.' "

A Boston Consulting Group survey found that 80% of consumers said they would pay more for a Made-in-USA product than a product marked "Made in China." But does the industry see that happening in the trenches?

The short answer: maybe. "This greatly depends on the retail channel, demographic and target market," said David Tyler, director of marketing for Jore Corp., the Montana-based domestic manufacturer of power tool accessories. "If the cost of differential for USA goods is less than 20% than the import, USA products are viable in the marketplace."

The chart below shows the variation at the extreme ends of the issue. Made-in-USA manufacturers are more likely (16.7%) to agree strongly with the pay-more proposition than either U.S./ Global manufacturers (7.1%) or retailer/distributors (8.1%)

Indianapolis-based The Farnsworth Group has studied the question. The research company found that the behavior of homeowners and contractors often contradicts their confessed loyalty and preference to USA-made products.

"There is no question that the American consumer would certainly like to 'buy American,' if all things were equal," said Grant Farnsworth. "But the price-value trade-off remains as the primary factor of the selection process. The products have to provide the value the consumer is seeking."

"We are seeing more of our competitors promote their products as 'Made in the USA.' "

The case for domestic manufacturing continues to evolve. And one consideration putting wind in the sails of Made-in-USA products is support and service.

"Domestic manufacturing and distribution means we can react much more quickly to order-level increases by avoiding lengthy delays in the supply chain," said Scott Kirkendall, VP retail sales for Milwaukee-based Broan-NuTone, where 70% of U.S. sales come from U.S. facilities.

"We can eliminate the need for elevated safety stock inventory. We can minimize the impact of foreign currency fluctuations. And most importantly, we can reinforce customer confidence that we will deliver on our promises without excuses or interruptions."

Hence, the field's appeal extends beyond branding and marketing.

Meanwhile, some manufacturers are sensitive to competitors who seem to stretch their Made-in-USA credentials.

"Our major competitors are all overseas," said Jennifer Hanke of Oshkosh Designs, a Wisconsin-based maker of decorative flooring. "These competitors also promote that they have East Coast locations, which are basically their warehouses. So, the fact that they are sure to note that there is a U.S. location shows the significance [of Made-in-USA promotion]," she said.

"The Federal Trade Commission's Made-in-USA standard is clear and easy to follow."

The Federal Trade Commission (FTC) requires that a product advertised as Made in USA be "all or virtually all" made in the United States Is that clear? A good portion of the home improvement industry — 48% — doesn't think so.

[Note: A 44-page document called "Complying with the Made in USA standard" exists on the website of the FTC's Bureau of Consumer Protection.]

"We don't believe that there is clarity as to what constitutes 'Made in USA,' " said John Dwyer, VP sales and marketing for domestic manufacturer Johnson Level & Tool. "We see plenty of products in the marketplace with key components made outside the U.S. making the Made-in-USA claim. In the end, it only dilutes the importance of country of origin."

Another manufacturing company executive, who asked to remain anonymous, said the rules are, indeed, ambiguous. And running afoul of them could derail the marketing efforts of his small company. "One attorney told us, 'It's written so ambiguously that I'd have to refer you to another attorney to give you a better answer.' "

At Highwood USA, a manufacturer of Adirondack chairs and porch swings, spokeswoman Dominique de Bruin believes the rules are actually fairly clear. "However, that does not seem to prevent misuse of the 'Made in USA' label," she said.

"Our company intends to more aggressively promote the fact that our products are Made in the USA."

Across the home channel, the clear majority of companies say they are going to promote Made in USA more aggressively. (See chart)

Scott Kirkendall, VP retail for Broan-NuTone, pointed to statistics from Perception Research Services International, which reported that 80% of shoppers look for a Made-in-USA label, and 76% indicate they are more likely to buy a product with this label. He also pointed to a Unity Marketing report that showed the U.S. was ranked first by respondents in perceived manufacturing quality of luxury goods.

"It is essential that we are in alignment with the growing sentiment of both our customers and consumers who have a heightened awareness of the availability of Made-in-USA products," Kirkendall said.

At Melville, N.Y.-based Leviton, chief operating officer Daryoush Larizadeh said the company for years has supported the resurgence of manufacturing in the United States. As a result, nearly half of the company's electrical products are made in the USA. The company intends to get the word out in 2013.

"With U.S. consumers becoming decidedly more conscious about homegrown products, Leviton is embracing internal initiatives to better tell our Made-in-the-USA Story," said Larizadeh. The company intends to educate consumers, retailers and trade professionals "through a targeted messaging strategy, including packaging, signage and advertising that spans all the channels where Leviton has a presence."

At Ames True Temper, whose core products are long-handled tools and wheelbarrows, the "True American" line of axes, shovels and other tools will flex its USA marketing muscle in 2013, according to Karen Richwine, director of brand marketing.

"We will increase focus on this line by growing the breadth of the offering, as well as through displays, specials, promotions and social media," she said.

For some companies, the domestic marketing strategy drills down to the state level.

"Over the past year, we have aggressively began promoting that we are not only made in the USA, but also Wisconsin-based," said Jennifer Henke of Oshkosh Designs. "This is one of our larger marketing initiatives for 2013."

At Johnson Level & Tool, the company does not intend to make country of origin a big push — even though 80% of unit sales come from Made-in-USA product. VP John Dwyer explained: "In the tool business, end users care about durability, accuracy, past experience and value," he said. "If the product does not meet the criteria, then the country of origin will not move the decision-maker to purchase the product."

"Retailers can do a better job promoting Made-in-USA products."

So far, two of the biggest Made-in-USA stories of 2013 involve retailers. Walmart announced a $50 billion buy-American pledge, which will run over the course of the next 10 years. And closer to home improvement, 84 Lumber launched a "We Build American" initiative, aimed at encouraging builders and consumers to consider constructing homes with materials sourced in the United States.

An extreme case of retail promotion can be found in Hartville Hardware, where the Do it Best retailer built a show home inside the 305,000-sq.-ft. destination store, just to show what can be done if contractors and homeowners (see story, page 14) embrace USA-made products.

Still, the industry perception is that retailers can do more. And it's not just manufacturers who think so. More than 85% of retailers or distributors say they either strongly agree or agree with the statement: "Retailers can do a better job promoting Made-in-USA products."

At Peru, Ill.-based domestic manufacturer Maze Nails, president Roelif Love-land said many lumberyards, chain stores and other outlets can do more. "Let the consumer vote with their hard-earned dollars," he said. "But at least give the domestic products a chance."

Mark Yoder, national sales manager for Channellock, predicts sales rewards for those retailers who step up Made in USA.

"We've committed a large portion of our marketing program to our 'Fiercely Made in Meadville, Pa.,' campaign, which brings together our associates with the people who use our pliers," he said.

"We feel that for those retailers who are ready to commit time and resources to featuring U.S.-made products, a world of opportunity awaits."

 

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LBM guys take Wall Street

BY HBSDEALER Staff

For stock market advice, I always turn to my dad. He’s not a stockbroker. But he has watched almost every episode of "Wall Street Week" since the mid-1970s. Now that he’s retired, he sometimes watches the same episode of "Mad Money" twice in the same day. (The hands-down superiority of Louis Rukeyser over Jim Cramer will be discussed in a future editorial.)

Here’s what my dad said about newly public Boise Cascade: "I like companies with tangible products — like building materials."

Take that, Facebook! And chalk one up for old-fashioned building materials distribution.

Boise Cascade’s initial public offering was a shining success. Just look at the numbers.

Last month, the Boise, Idaho-based building material manufacturer and distributor offered shares of BCC on the New York Stock Exchange for $21 per share. They shot up 24.5% on the first day, and they’ve risen almost every day since, reaching a high of $34.54.

Facebook, as you remember, launched its own IPO back in May 2012. How did it go? Not very well. In fact, a trading curb kicked in to break the fall of the stock price. Lawsuits and finger pointing continue to this day, as the stock dwells well below its initial offering price.

[Note to Facebook fans who point out that FB’s market capitalization of $67.5 billion dwarfs BCC’s market capitalization of $1.16 billion: Remember Myspace.com?]

BCC wasn’t the only long-on-home building IPO in recent days. Home builder TRI Point went public and saw its shares jump 12% on its first day of trading on Jan. 31.

Maybe we’ve turned a corner from an economy of software and social media to an economy of tangible building products. I like to think so.

I also like to think that the Wall Street success of companies like BCC is a victory for LBM guys. They don’t deliver online user experiences; they deliver trucks full of lumber. Real estate to them isn’t a square inch on a home page — it’s a 30-acre yard near a railroad.

And it’s not just my dad who’s bullish on BCC. Analysts are near unanimous in their view that the timing is ideal for a building material company to go public. Anyone who makes, sells or distributes building products has to feel encouraged.

Wall Street seems to like the company, and its entire sector. It’s about time.

[email protected]

"Take that, Facebook. And chalk one up for old-fashioned building materials distribution."

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