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

BY Brae Canlen

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.

Ace

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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The return of a market

BY HBSDEALER Staff

San Diego Two relatively optimistic housing market forecasts factored heavily in an active day of seminars and award presentations at the ProDealer Conference held here last week.

In the conference’s kickoff presentation, Joshua Rosenbaum, director of the UBS Global Industrial Group, explained that only a matter of time stood between the current housing problems and a return to normalcy. “It really is a question of when, not if,” he said.

Of the six key macroeconomic factors — described as “pillars” — of the housing industry, five remain solid: GDP growth, interest rates, unemployment, inflation and non-residential construction spending. Housing starts, the sixth pillar, lags dramatically from 2006.

The question of “when” the return would come was addressed in detail at a later presentation on commodity pricing given by Paul Jannke, senior vp-wood and timber information for RISI. He pointed to research that predicts housing starts will remain weak until late 2008. Pointing to underlying demand created by population growth and household formation, Jannke described the overbuilding of 2003, 2004 and 2005 as a key cause of the dramatic decline in housing starts in 2007. The good news, said Jannke, is that 2009 should see starts jump back to the 1.7 million to 1.8 million level, following a 2008 housing start figure in excess of 1.5 million.

“With the weaknesses forecast in 2007 and 2008, we will have completely made up for the overbuilding” of the previous four years, he said.

If housing starts fall further to the 1 million level, as some expect, the silver lining would be a faster correction and a faster return to housing starts more in line with the underlying demand, he added.

The 11th ProDealer Conference held here at the Loews Coronado Bay Resort wasn’t all about forecasting and finance. A “Custom Builder Panel” on Thursday morning focused on the needs of custom builders and their expectations from pro dealers.

The best way to build a relationship with the custom builder is to do the research and bring solutions to the table, said David Payne, vp-Payne & Payne Builders. Sometimes, the solutions for builders address problems that they didn’t know they had, he said. “The smartest thing for a dealer is to find the time to talk to us to identify our faults, then provide solutions.”

And the panel agreed that when the relationship between the dealer and the builder loses the qualities of a partnership, the relationship is in jeopardy.

In addition, Basketball star Bill Walton, who rose to fame playing for the Boston Celtics and the Portland Trail Blazers, gave some advice on what to do “when the ball bounces the wrong way” during his Sept. 19 talk. He also reminisced about his days at Dixieline Lumber in San Diego, where the 15-year-old freckled redhead unloaded lumber as a part-time job.

Also at the conference, the annual ProDealer of the Year Awards Dinner recognized two companies that represent innovation and success in the LBM market — Kent, Ohio-based Carter Lumber and Fairfax, Calif-based Fairfax  Lumber & Hardware, the respective recipients of the ProDealer of the Year and Independent ProDealer of the Year awards.

The 11th Annual ProDealer Conference, sponsored by Home Channel News, kicked off with a City of Hope golf tournament. The first place team, winning with a score of 142, was Bruce Brushwood of Moulding & Millwork, Mark Donovan of Forest City Trading Group, Laura Dwyer of Dupont and Mike Fletcher of Moulding & Millwork.

The ProDealer Conference ran through Sept. 21.

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Toro names new member to board of directors

BY HBSDEALER Staff

Outdoor products company Toro has named Inge Thulin, vp-international operations for 3M, to its board of directors.

Thulin joined 3M in 1979 and served in various sales and marketing roles at its location in Stockholm, Sweden. He subsequently served as area vp for Europe, Asia and the Middle East and was named executive vp-international operations in 2003.

“As Toro’s revenue from non-U.S. markets continues to rise and we expand our manufacturing, design and distribution capabilities around the world, his perspectives will be invaluable in positioning the company for long-term growth and profitability,” said Michael Hoffman, chairman and CEO of Toro.

Thulin’s appointment brings the Toro board to 11 members.

Toro had sales of $1.8 billion in 2006 and is a leading provider of outdoor beautification products.

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