ACE proves it's in the right place


Published: Wednesday, January 17, 2007 at 6:01 a.m.
Last Modified: Wednesday, January 17, 2007 at 12:00 a.m.

OAK BROOK, Ill. — Every time he gets on an airplane wearing his gray Ace Hardware work shirt, Ray Griffith hears expressions of concern.

Fellow passengers always want to know if the venerable cooperative is managing to get by OK in the face of competition from ever-proliferating home improvement superstores. It's a question Ace's chief executive finds almost embarrassing, he says, because the retailer-owned company is doing so well.

"All our vital signs are very positive," Griffith said in an interview at Ace Hardware Corp. headquarters west of Chicago. "And people seem to be almost amazed at that."

There's no need to worry about Ace. A focus on convenience and knowledgeable service has enabled the 4,600-store chain to stake out a modest but healthy share of the huge hardware market, providing the impetus for the biggest new-store expansion in its history.

The 83-year-old chain just concluded its best sales year since 1998, with wholesale sales up 6.5 percent to $3.4 billion and a record bottom line exceeding $104 million, based on preliminary figures. Its stores, about two-thirds owned by independent dealers, racked up almost $12 billion in retail sales.

While mega-retailers Home Depot Inc. and Lowe's Cos. are expected to report about $140 billion in 2006 sales between them next month, Ace appears to have outperformed the two leviathans in same-store sales growth for the fourth year in the last five.

In addition, Home Depot is under fire for spotty customer service and sluggish sales in its warehouse-like stores, along with a lagging stock price, which led to the abrupt resignation this month of CEO Bob Nardelli.

Big enough in its own right to make periodic appearances in the Fortune 500, privately held Ace nonetheless embraces a David-versus-Goliath role as protector of the small hardware-store owner.

"We come to work every day on behalf of the entrepreneur," Griffith said. "We have a chip on our shoulder about the big boxes, and we like that. We like being the underdog. America loves the underdog."

Ace has been looking out for individual entrepreneurs since its founding in 1924, when four Chicago-area hardware store owners united to increase buying power and profits.

Dealers own their individual stores and shares in the parent organization, which distributes its profit to them in the form of sizable annual dividends. They stock their stores from Ace's 15 warehouses across the country, although they also can buy elsewhere, and Ace provides them with group buying power, distribution and marketing support and a powerful brand name.

Ace is not the place for the lowest prices or the biggest assortment of home improvement goods; the big boxes have it beaten in those categories. But analyst Howard Davidowitz says it is nonetheless is doing "tremendous" business by emphasizing convenience and by continuing to upgrade the esthetics of the stores.

"It's not a question of price or they're out of business a long time ago," said Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm. "It's a question of convenience and service.

"Their stores are bright, organized and have the key (product) categories," he said. "They have carved out a niche, and it works."

Ace patterns itself after Walgreen Co., the fast-expanding drugstore chain that aims to own every corner in counting on convenience in the battle against its own giant nemesis, Wal-Mart Stores Inc.

The hardware cooperative isn't growing quite as rapidly, but it is opening a new store about every other day — 188 in 2006, 180 planned in 2007. Already, 50 percent of the U.S. population is within three miles of an Ace store. "The opportunity," said Griffith, "is the other 50 percent."

Shoppers should notice differences. Old stores have been remodeled and new ones are larger at an average 14,000 square feet, still puny compared with a 120,000-square-foot superstore but up from 8,000- 10,000 previously.

Lighting is brighter, aisles are wider, ceilings are higher and the mix of merchandise has changed as Ace encourages its retailers to cater to a new breed of home improvement shopper, one that now includes 40 percent women in its stores and a declining percentage of do-it-yourselfers.

Much of its trademark red has been removed from store decor, replaced by softer colors such as beige with women in mind. And the high-end Benjamin Moore line and many new colors have been added to its paint section, reflecting that 90 percent of paint colors are picked by women.

Even its longtime slogan has changed to "Ace is the place for the helpful hardware folks," not man, because of the clientele's gender shift.

Ace is changing the way it advertises, trying a guerrilla marketing campaign because consumers are harder to reach through traditional advertising. It is currently sponsoring a contest called Dream Ace, with the winner being set up in his or her own $1 million store.

In short, Ace is acting increasingly like a retailer these days, not just a supplier of inventory for its stores.

"Home Depot and Lowe's have caused us to be more aggressive with our retail approach," Griffith said, adding that smaller cooperative True Value isn't a major consideration. "We're using the scientific side of retailing and we're working harder to reduce costs and gain efficiencies."

If the changes sound like they're taking the cooperative's independently owned outlets further away from the cozy mom-and-pop stores of the past, they are. Consumers might like nostalgia but they don't spend much money in old-fashioned hardware stores, according to Ace, whose core customer is the 34- to 56-year-old homeowner.

With the big boxes reporting weak sales amid a housing-sector slowdown, gloating might be in order. But Griffith won't bite, calling Home Depot and Lowe's "amazing" world-class organizations that his company has a lot to learn from.

"We think we have a great upside in simply filling in the marketplace around the big boxes and offering the consumer a different kind of value and a different kind of helpfulness that the big boxes simply can't or don't want to do," he said. "That has proven to be very effective for us and rewarding for both our existing retailers and investors as well."

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