Orchard’s “super hardware” strategy

Orchard Supply Hardware has gone through a lot of changes in its 80-year history, but the California chain — now numbering 89 units with $660.7 million in annual sales — has weathered them all. Changes in ownership, leadership, store design, color scheme and signage have come and gone. But the stores’ customers — known for their exceptional loyalty — have generally stuck with the chain. 


In March 2011, Orchard’s majority owner, Sears Holdings, announced that Orchard had hired Mark Baker as its new chief executive. Baker’s curriculum vitae — former head merchant for Home Depot and, more recently, president and COO of Scotts Miracle-Gro — has observers expecting big-league initiatives from the California company. Baker had only been on the job for a few weeks when he hired Steve Mahurin, the former chief merchandising officer at True Value and another former Home Depot executive, as his head merchant. 


Home Channel News caught up with Baker on Sept. 15, several days before Orchard (which has dropped the name “OSH”) opened its 89th store in south San Jose.


Home Channel News: You’ve been on the job for six months now. What have you done so far, and what are your plans for the Orchard chain? 


Mark Baker: We’ve raised comps for the first time in several years. We’ve opened up three stores with the new Orchard [design]. I look forward to the opportunity to revitalize this brand and weigh the prospects for growth for California, which could easily support 30 to 40 more stores. [But] you work on a couple stores at a time, to bring the energy back to the business. We’ll be going back and redoing several other stores over the next few months.


HCN: Have you picked which locations? 


Baker: The Bay Area, the LA area, and one local to San Jose. 


HCN: Orchard is not a big box, nor is it a small neighborhood hardware store. Where does it fit into the whole competitive landscape?


Baker: The big-box guys are saturated in North America. The neighborhood guys, the ones who belong to the cooperatives, there are some very good operators there, some I really admire, but on the whole they’re not growing. It’s a difficult [time] for a sole entrepreneur. Orchard is the only model that exists that’s a super hardware store. 


HCN: How is that an advantage? Are you offering a wider assortment?


Baker: Yes, although our [newer] stores are being merchandised with fewer SKUs. We’ll eliminate some categories, like screen doors and pet. We’ll significantly reduce our automotive section. But for the most part, it’s inventory [rationalization]. Instead of 50 hammers, we’ll have 22. 



HCN: You mean that hypothetically?


Baker: No, we actually did have 50 hammers.


HCN: What are you bringing in instead? 


Baker: We’re the local guy. We do very well within a three-mile radius, whether we’re close to a big box or not. We can adapt to the California consumer better than anyone else, whether they’re a mature neighborhood that wants bigger [replacement] trees or a relatively new suburb. We can adjust our merchandise very easily through our store managers. Take furnace filters. There are 80 different sets of furnace filters in our stores, depending on who built that neighborhood. We’ve recently made [that] change in our business, and [sales] have been terrific.



HCN: Is your merchandising staff set up in a traditional structure?


Baker: In a lot of regards it is. Steve Mahurin has recently joined me. He’s in the process of teaching the corporate line review process here at Orchard and starting to form line reviews. The idea is that we’re looking for better value from our suppliers and to consolidate suppliers — stronger, bigger, better — but also to learn about the California customer. Remember that the California customer is 20% of the whole U.S. population. Many of our suppliers are East Coast-based, our competitors are East Coast-based, so we’re really working hard on understanding the California timing, North and South, and getting the products to me in this market. It’s about marketing to the consumers in a different way. It’s not just about price. 


HCN: Is everything undergoing a line review? 


Baker: We have a calendar established for the first quarter of next year of which lines we’re going to be reviewing. In many cases there won’t be any changes; we’ll just cut the line. In some cases we’re consolidating suppliers, so we’ll work with the buyer on economies of scale, and the [better supplier] will win the business. In many cases we’ll be producing some assortments. 


HCN: How big is Mahurin’s buying staff?


Baker: He has four merchandise managers, and they each have about four or five people who report to them. He’s just putting in place a global sourcing team.


HCN: Are we talking about private-label goods? 


Baker: We already do some, but we’re really looking to work directly now with the sources and not a bunch of middlemen. We want to start building our relationships with those sources. 


HCN: Have you made any operational changes?



Baker: We’ve always received high marks from consumers for good service. In the last couple of weeks, we’ve converted all the stores into “zoned service.” Everybody is wearing a headset in the store, so we can deploy our resources to where the customers need help, whether it’s loading in the parking lot or more information on products.



HCN: You’ve been through recessions before. 



Baker: Yes, too many. 



HCN: Once this one is over, I understand that Orchard has some expansion plans for other states. 


Baker: Yes, but there’s so much opportunity in California. We’re not in San Diego or the south side of Los Angeles yet. There’s still some areas of the [San Francisco] Bay that we’re interested in. So that is the next 36 months. Then, after that, I want to be in markets that are strong garden markets. The Pacific Northwest comes to mind. But we don’t have any near-term plans for that.