Ace sees growth potential in central Indiana: Some skeptical of plans to open 30 hardware stores

June 20, 2005

Suburban Chicago-based Ace Hardware Corp. wants to expand upon a strategy of placing stores in residential areas by opening up to 30 new locations in the Indianapolis area.

The ambitious plan to grow its presence in and around the city from the 14 existing stores is part of Ace Hardware's larger strategy to target eight metropolitan regions thought to be ripe for expansion.

Big-box retailers such as Lowe's Home Improvement, Home Depot and Menards dominate much of the home-improvement turf. But smaller players such as Ace Hardware, True Value Co. and Do It Best Corp. in Fort Wayne have found a niche by touting better customer service and convenience.

Hardware sales are being propelled by a hot residential real estate market that has shown little signs of slowing in recent years. Home sales are again expected to hit a record this year, thanks to mortgage rates that have remained surprisingly low.

Ace Hardware has surveyed Indianapolis' demographics the past five months and is confident the city and surrounding communities can support an influx of new locations. The retailer expects to have at least a handful operating by the end of the year.

In the Chicago suburbs, there is one Ace Hardware for every 14,000 homes, and 70 percent of the population is within five miles of a store, said John Venhuizen, Ace Hardware's director of business development.

"The Chicago suburbs are a vision of what we would like Indianapolis to look like," he said. "High-density and very profitable. That's sort of the formula that makes things hum for us."

Ten years ago, Chicago-based Sears Roebuck & Co. had a similar plan to open hundreds of small hardware stores across the nation. Locally, Sears opened six stores-the location at Glendale Mall since has closed-before the corporation halted its plan amid financial struggles. Kmart bought the company in November.

Scott Gray, a partner at locally based The Linder Co., a commercial real estate broker with a retail bent, served as Sears' leasing representative. He deemed the Ace plan "very aggressive," although he declined to speculate whether it is feasible.

"It will take a number of years to implement that," he said. "I still think there's a niche for the convenience of the neighborhood hardware store."

Much like Ace Hardware and the other smaller chains, Sears wanted to locate hardware stores in residential areas and away from commercialized thoroughfares where the big boxes reign. But its message got lost in the process, Gray surmised, and consumers had difficulty deciphering whether the Sears name meant apparel or tools.

Sears has revamped many of its hardware stores across the country over the past 18 months, adding large appliance departments and changing store names to Sears Appliance and Hardware.

Gray said he has heard rumors that another Sears Hardware location in Indianapolis may be closing, he said.

A Sears spokesman declined to comment, or address Ace Hardware's expansion plans.

Venhuizen, meanwhile, is confident Ace Hardware can follow through on its expectations to open 20 to 30 stores in the metropolitan area. Founded in 1923, the company has never strayed from its mission to sell hardware products, he said.

Too many stores?

In addition to Indianapolis, Ace wants to open more stores in Baltimore, Cincinnati, Houston, Philadelphia, San Diego, Seattle, and in Orange County, Calif. Prospects through its traditional method of expanding-converting competitors such as Chicago-based True Value-are beginning to run thin, Venhuizen said. During the past six years alone, the company has converted 765 stores to the Ace Hardware name, he said.

Ace Hardware operates as a cooperative instead of a franchise, which Venhuizen believes is more appealing to potential store owners. As a cooperative, owners pay no franchise fee and have the autonomy and flexibility to run their stores the way they wish. The corporation conducts business from funds the owners pay to have products supplied. The money the company does not spend on supplies is returned in a dividend to owners, Venhuizen said.

There are roughly 4,800 independent Ace Hardware stores. Annual revenue from wholesale sales in 2003 was $3.1 billion. Revenue from all retail locations hit $13 billion.

In comparison, Do It Best, Indiana's largest privately owned company, according to IBJ statistics, operates 4,100 stores and had 2004 wholesale revenue of $2.9 billion.

True Value operates 6,200 stores and had annual revenue of $2.2 billion in 2002, the most recent figures available. Do It Best has 15 stores in the Indianapolis area; True Value has four.

Steve Fusek opened a True Value downtown at 350 E. New York St., in the former Osco Drug location, last June.

Pat Sullivan, who operates three Do It Best centers in Indianapolis, opened another in Brownsburg and has broken ground on an expansion at his store on Keystone Avenue.

And Jeff Cardwell, who operates AMI Do It Best on Madison Avenue, is contemplating another store on the south side that could open within a year.

But Cardwell is skeptical that the Indianapolis market can support up to 30 more stores from the same company.

"Home Depots are already competing with themselves," he said. "From all the national statistics I've seen, Indianapolis is already an over-stored market."

Market is booming

Moreover, the smaller, independent hardware stores all are shooting for the same market. Cardwell said he, too, is searching for a neighborhood location where he can build a niche as a "serviceoriented store" instead of being merely a retailer.

And Ace Hardware's strategy is to position its stores between homes and the bigbox retailers, or what Venhuizen referred to as "intercept locations."

Still, the home-improvement market is burgeoning, evident by more than $244 billion in sales last year. ABC's breakout TV hit "Extreme Makeover: Home Edition," consistently cracks the top 20 Nielsen ratings.

Sales from independent hardware stores also are on the rise, according to the Indianapolis-based North American Retail Hardware Association. This year's sales are expected to hit $29.9 billion, up from $28.8 billion a year ago.

"There clearly has proven to be a need for small hardware stores that can take care of customers' needs," said Chris Jensen, executive editor of the NRHA's Do It Yourself Retailing magazine. "They don't try to beat them at the pricing game, but they certainly can be price-competitive."
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