Hardware co-ops like their chances against big chains

NAPERVILLE, Ill. -- In 1948, Clarence Buikema opened a 3,000- square-foot hardware store in this town 30 miles west of Chicago and made a home for his family in the upstairs apartment. Competitors in the area, which was then mainly rural, were few and far between.

It was a start so quaintly at odds with the hardware business today that Kyle Buikema, his grandson, laughs as he recounts it. The prairie here has fast-forwarded into wall-to-wall suburbia. And Buikema, who oversees what has become a chain of five home-and- garden miniwarehouses that are as much as 10 times as large as the original shop, spends his days dodging commercial crossfire his grandfather could never have imagined.

No Buikema store is more than a few minutes' drive from several of the airplane-hangar-size home centers built in recent years by mega- retailers like Home Depot Inc. And Sears, Roebuck & Co. has been expanding its chain of hardware stores in the area, grabbing many customers who might otherwise choose the cozier Buikema stores over, say, a Home Depot. The Buikemas, though, are not commercial Davids in need of divine intervention to combat the hardware Goliaths. Like thousands of other dealers, they belong to a giant cooperative -- Ace Hardware Inc., in the Buikema case -- that puts many weapons of modern business at their fingertips. Dealer casualties are mounting as megastores march across the land, and the member-owned co-ops are far from united, battling among themselves for turf as the pressure mounts. But small hardware stores are not being crushed as easily as many independent toy stores and bookstores have been by giants like Toys "R" Us and Barnes & Noble. And many larger hardware dealers like the Buikemas are thriving. "The co-ops can keep members that are willing to listen to them from going under," said John Caulfield, editor of National Home Center News, a New York-based trade publication. It is a market worth fighting over. Americans spend $145 billion to $300 billion annually on home improvement, depending on which products and services are being tallied. The big co-ops include Ace; Cotter & Co., whose members operate under the True Value name; the Servistar Coast to Coast Corp. and Hardware Wholesalers Inc. Cotter, based in Chicago, merged with Servistar, of Butler, Pa., on July 1. The joint company -- the Truserv Corp. of Chicago -- supplies more than 10,000 stores with annual sales at the wholesale level approaching $5 billion. Ace, which serves 5,100 stores and is based just north of here in Oak Brook, had revenue last year of $2.7 billion. Hardware Wholesalers, based in Fort Wayne, Ind., had revenue of $1.6 billion from supplying 3,300 stores, including many Do-it Centers. The co-ops have such purchasing power that they can often squeeze manufacturers for even better prices and delivery schedules than most home center chains can. They do research on store design and promotion that store owners could never perform on their own. In some cases, they manufacture exclusive lines of paint, tools or other products. They help members with everything from insurance coverage and national advertising to employee training. Co-op members typically pay several thousand dollars to join and thousands more annually for various services. Any co-op income that is not reinvested is typically paid out annually to members. Co-ops are most prominent in agriculture, where some, like Ocean Spray Cranberries and Land O'Lakes Inc., reach all the way from the field to the grocery shelves. But co-ops also may be found in everything from housing and health services to banking, where they are known as credit unions. Benjamin Franklin set up the first American co-op in 1752, an insurance venture. Recently, the movement has expanded rapidly in franchising, with owners of Burger King stores, or similar ventures, banding together to purchase supplies and services. What stands out in the hardware industry, though, is not new co- ops, but the scramble among old ones -- many of which date from the early 1900s -- to prove their mettle against the likes of Home Depot Inc., the Kmart Corp.'s Builders Square stores and the privately owned Menards Inc. The co-ops, criticized by some members for being slow to respond to new threats, are moving more aggressively to help members define and defend their turf. The battle is especially intense in the Midwest, where Home Depot and the Lowes Cos, the industry leaders, are just revving up their expansion. "The co-ops have had a chance to see what was coming," said Kenneth Stone, a professor at Iowa State University, who has studied the response of small business to retailing giants ever since Wal- Mart Stores Inc. began expanding rapidly in the early 1980s. "What happens in the Midwest will be a good reflection of the strength of the co-op business model." Not that there is just one model. Although local hardware stores from separate co-ops often help one another out and the co-ops themselves have occasionally joined together to, say, buy insurance, there are also intense rivalries and differing strategies. In February, in a rare membership raid, Ace dealers received a mailing inviting them to consider switching to Truserv "if you want to build your future on a more solid foundation, not merely survive." The pitch included the promise of subsidies from a $40 million pool set aside for current Cotter and Servistar members to use in upgrading stores. Truserv would not say how many Ace dealers responded. Ace's own recruiting efforts helped it expand its store count by 9 percent last year. About 100 potential new members, mostly from other co-ops, attended Ace's annual convention in St. Louis in April. "The rivalry is the nastiest it has ever been," said Jim Robisch, a consultant with the Farnsworth Group, an Indianapolis firm that works with the hardware co-ops and many independent store owners. (The simplest way to court members is to offer lower costs. Dan Miller switched his store on the outskirts of Pittsburgh from Servistar to Ace last year after he found that Ace charged 13 percent less for a basket of his best-selling items. Ace also offered three times as much advertising support at the same price, he said. In recent years, Ace has also cut inventory costs for hundreds of stores by moving from weekly to twice-weekly deliveries. Most of Ace's recent initiatives grew out of a thorough review of the business by the Boston Consulting Group. One focus has been on the development of six basic retail models varying by store size, by whether it has ancillary businesses like equipment rental and by the type of market it serves. More than 1,300 Ace stores have moved toward the models through renovation and changes in merchandise, and more than 1,000 more will do so this year. Ace cannot force members to follow its lead, but it is looking far more closely at its market share in each region. If members in weak areas refuse to upgrade or expand, Ace will recruit new members. Ace also has a program, still in the planning stages, to sell Ace franchises, with the first deal expected as early as this fall. Cotter and Servistar have also tried to help members improve operations, but after trailing Ace's growth for several years, they decided the best strategy was to merge. Among the earliest benefits will be a 16 percent drop in paint costs for Servistar stores, which will now get their paint from a more efficient Cotter factory. A near-unanimous vote in favor of the merger was "a reflection of how scared dealers are," said Paul Pentz, Servistar's chief executive, who will be Truserv's president and chief operating officer. "They know there has to be greater wholesale efficiency to survive," Pentz said. The most feared of the giants is Home Depot, which earned nearly $1 billion on sales of more than $19 billion last year. Home Depot, based in Atlanta, has surged into what local residents call Chicagoland since late 1993 with 19 stores, each well over 100,000 square feet. Growth here and in other Midwestern cities is the centerpiece of Home Depot's nationwide drive to expand from just over 500 stores to about 1,000 by the year 2000. "If we can have 22 stores in Atlanta, I don't see why we can't have at least 50 in Chicago," said Andrew McKenna, head of Home Depot's Midwest division, based just north of here in Schaumburg. Home Depot's strongest rival here is Menards, based in Eau Claire, Wis., one of the fastest-growing hardware chains in the nation. Anticipating Home Depot's thrust, Menards has planted 30 stores in northern Illinois since 1991. But analysts and co-op executives say the most direct threat to independents here and in many other regions is probably Sears, which began its push into freestanding hardware and paint stores in nearby Buffalo Grove, in 1983. Its national strategy is to expand from 165 stores in 19 states to 500 by 2000. Some growth will be under the Orchard Supply Hardware name, reflecting last fall's acquisition of that 65-store California chain. Orchard stores average 40,000 square feet, twice the size of the latest Sears hardware stores, but the company has already converted all 10 Sears hardware stores in the Columbus, Ohio, area to an Orchard format in a market test that has independent dealers worried. "I'll be taking a bus trip to Columbus this summer to look it over," Buikema said. Sears is seen as a threat because it combines exclusive well-known brands, like Craftsman tools, with considerably smaller spaces than the "big boxes" of giants like Home Depot. That could attract more of the convenience-minded customers with short shopping lists, who account for the bulk of co-op members' sales. "We're the 7-Elevens of the industry, the kings of the $20 sale," said Rick Cole, whose family owns three Ace stores in San Francisco. In the end, according to virtually everyone involved in the hardware wars, co-op-backed independents that put a heavy emphasis on customer service probably stand a much better chance of not only surviving but prospering than do many midsize home center chains, several of which -- like Rickel and Handy Andy -- have already gone bankrupt. Ace executives cite their experience in Atlanta, where the number of Ace stores dropped from 90 to 60 as Home Depot grew but Ace's market share actually crept up slightly as the remaining Ace stores modernized and emphasized service. "We figure that consumers will prefer the big box about a third of the time, the small store a third of the time and the rest is up for grabs," said David Hodnik, Ace's chief executive.

Copyright 1997
Provided by ProQuest Information and Learning Company. All rights Reserved.