ROANOKE TIMES
Copyright (c) 1996, Roanoke Times
DATE: Sunday, August 25, 1996 TAG: 9608230106
SECTION: BUSINESS PAGE: 1 EDITION: METRO
DATELINE: CHICAGO
SOURCE: DAVID YOUNG KNIGHT-RIDDER/TRIBUNE
Everett ``Gus'' Gustafson recalls a time when his True Value hardware store in Princeton, Ill., stocked lots of bicycles, toys, sporting goods and a couple of chamber pots.
``When we started, we used to sell as many as eight thunder mugs a year,'' said the veteran of a half-century in the hardware business.
The arrival of mass merchandisers such as Wal-Mart Stores Inc. in the 1970s took away most of those lines. Now Gustafson is apprehensively scanning the horizon for the arrival of the ``big boxes'' - home centers of 100,000 square feet that will dwarf his store. Like most of the nation's 21,400 other hardware store owners, Gustafson, 78, and his two sons are rapidly modernizing with things like computers, longer hours and improved marketing techniques to fight what has developed into a three-way battle for the market they once dominated.
Independents, small chains and cooperatives are not only trying to protect their turf from giant home-center chains such as Home Depot Inc. and Lowe's Cos., but also must fend off the growing national hardware chain being assembled by Illinois-based Sears, Roebuck and Co. They are also battling among themselves. Rival national cooperatives include Ace Hardware Corp. of Oak Brook, Ill.; Cotter & Co. of Chicago, which does business under the True Value name; and Hardware Wholesalers Inc. of Fort Wayne, Ind.
The conventional wisdom of industry executives and analysts is that regional home-center chains, such as Hechinger Co., will be squeezed out by the giants. The shakeout is expected to result in fewer but better local hardware stores. Already, the number of hardware stores has declined about 3 percent since the late 1980s, according to the National Retail Hardware Association in Indianapolis.
The biggest threat to local stores, however, may be Sears' fast-growing hardware chain.
``What Sears is able to do is capitalize on their strong Craftsman [tools] label and reputation,'' said Donald Spindel, an analyst with A.G. Edwards & Sons Inc. in St. Louis. ``They have identified a niche.''
In the near term, the intense competition is good news for the typical homeowner. To lure and keep customers, stores are likely to hold down prices, especially on hundreds of more popular items, such as light bulbs and tape measures.
And while the big chains and big boxes have big advantages - a wider selection of goods and economies of scale that allow them to charge less - the little guys are fighting back.
For big projects, such as a backyard deck, people go to home centers, and ``when they want a lawn mower, they go to Sears,'' said Edward Lanctot, retired executive and a founder of Cotter & Co. But ``people buy nuts and bolts in their local hardware store,'' he said.
``Do you really want to drive 10 miles to a big box and spend two hours shopping for a couple of items?'' asked Lanctot, in what has become an article of faith for the local store owners.
One way the little guys are waging war is by banding together to become bigger themselves.
Des Plaines, Ill.-based Distribution America, a marketing and buying group of 28 regional hardware wholesalers begun in 1991, has grown into a $2.5 billion-a-year operation with 6,000 affiliated stores operating under such names as Century, Trustworthy and Golden Rule, said Ronald Pink, its president.
Unfortunately for independent store owners, however, the co-ops have taken to raiding each other's membership rosters.
That caused Daniel Cotter, president and chief executive of the firm founded by his father, John, in 1947, to take out a recent advertisement in trade publications urging the co-ops to quit plundering each other's customer bases and concentrate on fighting the big boxes.
The most successful raider thus far appears to be Ace, which expects to pass Cotter's True Value in sales this year.
At the end of 1995, the two chains were in a dead heat, with Cotter claiming $2.437 billion in sales to Ace's $2.436 billion. But over the last decade Ace has been growing faster - 141 percent since 1985, versus 43 percent for True Value.
``Barring the unexpected, we expect to pass Cotter this year,'' said Bill Loftus, senior vice president of retail operations and marketing for Ace.
``Wait until the end of the year to see what the numbers are,'' replied Cotter.
Cotter noted that his company's 1995 sales were reduced by $155 million when it sold its V&S variety stores and its General Manufacturing Power equipment manufacturing division in suburban Chicago. Over the last two years, Cotter also dropped 385 marginally performing stores that did not buy at least $50,000 a year in inventory from the co-op; this also lowered sales, he said.
And Cotter still leads Ace in another numbers game: It had 5,693 stores nationally at the end of last year, 686 more than Ace, though Ace is growing faster in outlets, too.
In recent years, the home-center chains have added millions of square feet of retailing space, including stores by Builder's Square, a subsidiary of Troy, Mich.-based Kmart Corp.; Atlanta-based Home Depot, the current darling of the analysts; and by Menards, a tight-lipped chain based in Eau Claire, Wis. Lowe's confines itself to smaller cities.
But many of the rivals are now paying more attention to Sears, which started its strategic turnaround in 1993, creating a chain of stand-alone hardware stores in metropolitan areas and dealer stores selling hardware in rural areas. It now has 108 hardware stores in 14 markets and plans to add 175 by the end of 1997. It also plans to increase the number of dealerships, now at 375, to 900 by the end of 2000.
But just being big doesn't ensure success. Although Home Depot and Lowe's have grown to the point that they are Nos.1 and 2 in the industry with 1995 sales of $15.4 billion and $7 billion, respectively, at least five midsize chains have wound up in bankruptcy.
``We have seen a lot of failures,'' said Spindel of A.G. Edwards. Builder's Square is struggling, as is Hechinger, based in Landover, Md., and HomeBase, based in Fullerton, Calif.
To survive, the co-ops have borrowed some pages from the operating manuals of the big boxes. They are expanding store hours and stressing customer service as a way to differentiate themselves from the impersonality of the big stores. They also are computerizing and have upgraded their distribution systems to the point that they now haul each others' goods when truck space is available.
Possibly most important, the co-ops have paid attention to the cash register.
They put in low-interest financing plans for their members to tap to modernize and expand. ``We found the independent businessman was having increasingly more trouble finding financing for expansion or relocation,'' said Cotter.
Cotter also established a program of pinpoint pricing on 1,100 items to compete with the home centers.
``You have to be priced right on the A items - hammers, 25-foot tape measures and light bulbs,'' he said. ``Everyone knows the price of light bulbs.''
LENGTH: Long : 126 linesby CNB