Hardware heats up

When Home Channel News’s list of Top 500 home improvement retailers was published in June, the data was sobering. Overall sales were down for the first time since the list originated in 1975, with pro dealers being off 14.6 percent and large home centers basically flat.

But there were a few bright spots, including the performance of hardware stores, which showed a 2.4 percent gain in 2007 sales among the Top 50, and a 7.9 percent gain among all U.S. hardware retailers, according to the Department of Commerce.

Among the Top 50, only about half of which were included in the HCN Top 500, 23 reported growth in 2007, 14 said that sales were flat, and only 13 reported a decline. Total sales at all U.S hardware stores rose from $19.4 billion in 2006 to $20.9 billion, of which the Top 50 accounted for about $3 billion.

And as we take a look at HCN’s second annual list of the Top 50 hardware retailers, let’s consider the reasons that these companies have been able to weather one of the toughest economic storms in recent memory better than most—and in some cases, even thrive.

Most industry sources agree that hardware stores have an advantage over large home centers in a down housing market because they cater to the small project. While Americans may not be buying as many new houses or making as many major home improvements—the things that drive big boxes and LBM—the little jobs still need to be done.

“The sink or toilet or electrical repair—there’s always something going wrong in the home,” said Jess Ruf, owner of California Do it Center and Patio World, a group of nine stores that average around 40,000 square feet. “Project stores are going to suffer a lot. When business is good for them, it’s good, but when it’s bad, it’s terrible. We’re anti-cyclical. Our business will actually increase in a bad economy.”

According to a recent Global Insight market forecast, prepared for the Home Improvement Research Institute, sales of home improvement products are expected to decline 3.1 percent in 2008. However, as a percentage of total spending on residential construction materials, home improvement products have grown from 62 percent in 2006, to 69 percent in 2007, and are expected to reach 76 percent in 2008.

“We are not tied to people building big houses and additions,” said Dan Gust, who owns Ace stores in the Colorado towns of Longmont and Johnstown. “People are still fixing the toilet and little DIY stuff that we excel at.” He also pointed out that there’s a sense of familiarity people have with the local hardware store, adding, “They come into the store looking for Steve or Larry, and that’s a connection they don’t have to the big box. If they have money, they’d rather spend it here. It’s a comfort level.”

Ron Beal, president and CEO of Orgill, agrees that, in hard times especially, the hardware store benefits from being small and more closely tied to the community. This gives it the “entrepreneurial ability” to react to local conditions quickly, something Beal heard time and time again as he spoke to Orgill retailers at the Memphis, Tenn.-based distributor’s recent fall market.

For example, several rural customers mentioned that the spike in gas prices had people shopping closer to home, which was helping their business. “And many were looking at new niches, such as tool rentals, to take advantage of the increased traffic, and keep the customers coming back,” Beal said.

Lyle Heidemann, president and CEO of True Value, agrees that the hardware store’s fate is not as influenced by the economy because it’s tied to maintenance and repair more than the housing market. They don’t benefit as much in the up cycles, but they also don’t suffer as much when the economy slows.

He also said that in a down market, it’s important to resist the urge to cut back on spending both in regard to inventory and advertising. When the consumer comes in looking for those highly identifiable commodity items, you better have them in stock or they’ll take their business elsewhere. The other tendency is to slash advertising dollars, another tactical error, according to Heidemann. “A store that has been running 12 circulars a year shouldn’t suddenly cut that to six,” he said. “It’s more important than ever to communicate with the consumer and get them to shop your store.”

Through this down cycle, independent hardware stores need to maintain a high level of customer service, Heidemann said. It’s what people have come to not only appreciate—but to expect—from the local hardware store versus the large home center. “You have to win and own the customer’s loyalty, which I think the small box has a better chance of doing than the big box,” he added.

Brian Richards, a long-time executive with Westlake Ace Hardware, just opened two Nuts & Bolts Hardware stores in the Kansas City, Mo., area—both following the Destination True Value format. He agrees that now is not the time to cut down on style, staffing or service.

“The economy being down makes it more important to win customers over by executing great service with the right amount of knowledgeable associates,” he said. “The hardware store is still about service, and no one in our markets is giving that kind of service, plus enhancing the normal hardware mix to get closer to the big-box offering along with larger hardware footprints.”

Hardware retailers do remain worried about what the current economic crisis is doing to pricing—and whether increases at retail will cut into their business. At the Ace Hardware fall market in St. Louis recently, CEO Ray Griffith referred to “escalating costs for raw materials and rising fuel and food prices, coupled with declining home values and increased debt,” all of which are leading to price increases at the retail level.

“Make no mistake about this we still expect sluggish growth in the fourth quarter, but we do look forward to some stabiliazation and a slight rebound in 2009,” he told the group of Ace retailers.

Paul Giunta, who co-owns Shore True Value in Somers Point, N.J., said one of the toughest issues facing hardware stores is keeping up with price changes. What used to be 50 to 60 price changes a week that would take him half an hour to put into the system on a Saturday morning has turned into 2,000-plus changes that take four to five hours to input.

“With the economic crisis, everything has gone up—from a loaf of bread at the market to a box of nails at the local hardware store,” Giunta said. “All the co-ops are in the same boat because it’s being passed on from the manufacturers, and keeping up with it is quite a project.”

Bob Taylor, president and CEO of Do it Best, recently told HCN that his corporate team in Fort Wayne, Ind., is working daily to negotiate with vendors to mitigate some of the impact of inflation on pricing. He believes it’s crucial for members to pursue niche opportunities such as sports and leisure, pet supplies and green products to bring in new business.

“For our members, and for all independents in our industry, managing cash flow effectively has never been more important,” Taylor said. “Those that do it well will come out of this stronger and better positioned to grow in the future.”