800 N.W. Chipman Road
It is our mission at Payless Cashways to be the building materials and home improvement supplier of first choice for the professional builder, remodel and repair contractor, institutional buyer, and project-oriented customer. Our team will leverage our merchandising expertise and vendor partnerships to provide professional quality assortments and superior customer service while growing revenue, earnings, and stockholder value.
During the 1990s and at the start of the new millennium, Payless Cashways, Inc. operated as a building materials and finishing products specialty retailer catering to the professional builder, contractor, institutional buyer, and do-it-yourself consumers. The firm's divisions sold thousands of products under the names Payless Cashways, Furrow, Lumberjack, Hugh M. Woods, Knox Lumber, Contractor Supply, PCI Builders Resource, and PCIBuildStreet.com. In 2000, the company operated 128 building materials stores and five PCI Builders Resource locations in 17 states in the Midwest, Southwest, Pacific Coast, and Rocky Mountain regions.
Financial hardships and a large debt load stemming from the 1988 leveraged buyout forced the firm to declare Chapter 11 bankruptcy in 1997. The company emerged the following year, but was unable to recover successfully. In 2001, Payless declared Chapter 11 bankruptcy for the last time and began liquidating its inventory.
Early History: 1930s-40s
The building supplies chain was founded in 1930 by Sanford "Sam" Furrow, who had by that time accumulated 25 years of experience in lumberyards throughout Iowa and South Dakota. With help from sons Sanford and Vernon and a colleague, John Evans, Furrow raised $10,000 to buy a defaulted lumberyard in Pocahontas, Iowa. Although the Great Depression seemed an unfavorable time to go into business, Sam Furrow asserted that he "could not have gotten into the lumber business in a big way if times had been good." Indeed, banks were so desperate to recover any amount of money on foreclosed mortgages that Furrow was able to negotiate low purchase prices on two other lumberyards in the Iowa towns of Early and Webster City by mid-1932, thereby giving each of his sons a business to manage.
Sam Furrow continued to work for the Fullerton Lumber Company, with which he had been employed since 1912, and he named his Pocahontas business Kiefer-Wolfe Lumber Company to conceal the fact of his ownership. When the Fullerton Lumber Company discovered Sam's duplicity in 1933, he quit and went to work at the renamed Pocahontas Lumber Store. The three-store chain carried small selections, focusing primarily on lumber, paint, and builder's hardware in one 80- to 100-square-foot room. Furrow's lumberyards earned steady profits during the 1930s by establishing comprehensive contracts with insurance companies, which repossessed and repaired numerous dilapidated farms during the Depression.
Sam Furrow soon began challenging established business practices in the regional building materials industry, first taking on the Lumber Trust. This amalgamation of businesses was linked by a mutually beneficial price-fixing agreement that helped everyone but the customer. Furrow launched his Webster County Lumber Store in Fort Dodge, Iowa, in 1937 by advertising "Live and Let Live Prices" that were set without regard to the Lumber Trust. Delighted customers flocked to the business, substantiating Furrow's notion that high sales volume, and not the highest margin the market would bear, was the key to success in his chosen field. He gradually increased merchandise selections at his yards, adding plaster board, ceiling tiles, insulation, and asphalt shingles; by the end of the decade, Furrow's stores were offering more than 200 products.
After World War II, John Evans and Sam Furrow split their partnership. Furrow kept all but the Fort Dodge and Webster City yards and, in 1947, he opened a new location in Iowa Falls, Iowa, to be managed by son Vern. There, Vern first experimented with the "cash-and-carry" policy that would later be applied chainwide. The change reflected shifts in the store's customer base and its terms. Before this time, most customers were professional contractors accustomed to making large orders on credit. After the war, however, many retail suppliers to construction outfits had trouble collecting on accounts receivable; rising lumberyard prices reflected those difficulties. At the same time, increasing numbers of laymen began to circumvent professional repairmen's high rates by tackling their own home repair and improvement projects. Low cash-and-carry prices, as well as more aggressive direct mail advertising, attracted this new class of do-it-yourselfers and bolstered the building suppliers' cash flow.
The loose-knit chain that would become Payless Cashways grew rather spontaneously during these early decades. The family members and long-time colleagues who opened new locations contributed to each new store's start-up costs and, therefore, were entitled to a share of the profits. This arrangement fostered decentralization and self-motivation among individual store managers, considered a major element of the chain's early success. In the 1950s, however, the Furrows instituted several changes that made the loose-knit lumberyards more of a modern retail chain.
Expansion Under a New Name: 1950s-70s
Having suffered a mild heart attack in 1950, Sam Furrow gradually turned the business over to his sons. In 1951, Vern and Sanford, Jr., established a wholesale company, Iowa Lumber and Supply, to pool purchasing and distribution for the stores and thereby achieve economies of scale. Relinquishing management of their lumberyards to take more active roles in the management of the chain, Sanford and Vernon assumed the roles of president and vice-president, respectively, at the new company, which had eight stores by 1954. Within a year, the Furrows brought all of the chain's accounting under one firm and unified advertising and promotion. Under the name Payless Cashways, the stores adopted a logo featuring a curved red arrow and Payless Pete, a caricature of a lumberjack. By the end of the decade, the chain had added stores in Minnesota, Illinois, and Arizona.
When patriarch Sam Furrow and son Sanford died within a year of each other late in the 1950s, Vernon was unexpectedly left to head the chain. The 52-year-old had hoped to retire several years earlier but was instead thrust into a leadership role. In spite of his initial reluctance, Vern led the company's expansion into New Mexico, Colorado, and Nebraska, before taking the company public as Payless Cashways, Inc. in 1969. Vernon was elected chairperson of the 16-store company, and Robert Lincoln, who had served as the company's first chainwide accountant, became president and treasurer. During its first year as a public entity, Payless recorded sales of $24 million and $.9 million in profits.
Four decades of active family management came to end in 1971, when Vernon Furrow retired. Robert Lincoln became chairperson, president, and chief executive officer. Flush with the infusion of funds from its initial public offering, Payless Cashways focused on growth in the 1970s, concentrating on establishing new stores, expanding and remodeling existing stores, and increasing each location's product line. The company also established its construction division, anticipating dramatic growth in that segment.
Moreover, a new tactic, dubbed invasion, established several stores in a single market for increased impact. Payless "attacked" Dallas and Kansas City, establishing four large-format suburban stores that featured 30,000-square-foot retail areas, 30,000-square-foot warehouses, and massive lumberyards on multiacre sites in each metropolitan area. Automotive and lawn-and-garden supplies were added to the stores' lines, which included more than 13,000 items by the end of the decade. The chain's physical growth was suspended only in 1974, which Time magazine called "the year the building stopped." Housing starts declined by more than half that year, and many construction firms failed as a result. By this time, however, Payless catered primarily to do-it-yourselfers, who used the building hiatus to fix up and remodel rather than purchase new homes. That year, the chain's sales and profits actually increased by 34 and 21 percent, respectively.
By the end of the 1970s, Payless boasted 68 stores in 14 states and nine distribution centers. Sites in Texas, Oregon, Missouri, Kansas, Oklahoma, California, and Indiana also were added under the name of Furrow's, due to trademark conflicts in several markets. In 1976, Lincoln abdicated the top position, citing "operational conflicts," and longtime employee Stan Covey was elected chairperson and chief executive officer. The following year, corporate headquarters were moved to Kansas City, Missouri, a more central location. The company's growth was in no way impeded by the management upheaval: sales increased from $24 million to $316.1 million between 1969 and 1979. Profits rose even faster, from less than $1 million to $14.5 million, over the same period. This growth coincided with a six-fold increase in the do-it-yourself market, from slightly less than $6 billion in 1970 to $35 billion in 1980. By 1981, Payless Cashways was the fifth largest chain in the industry, and its annual sales growth in the last half of the 1970s had doubled the industry average.
The 1980s brought the election of a new company president, former attorney and stockbroker David Stanley, who directed a shift from traditional rural markets to more urban and suburban markets in an effort to capture a bigger share of the still-fragmented do-it-yourself market. This change called for an alteration of Payless's store formula, distribution channels and methods, and corporate image. Smaller stores with a more locally targeted inventory would strive to supply "virtually all home building needs," as Stanley told Business Week in 1981. Payless's wholesale distribution arm controlled only about 17 percent of the chain's distribution, and managers ordered the remainder of their merchandise directly from vendors. Stanley challenged the persistent autonomy of Payless store managers by directing an increase in the chain's share of cooperative buying to capitalize on previously untapped economies of scale. Payless hoped to transform its corporate image along with its target audience by shifting its appeal from farmers, who had comprised 40 percent of the customer base, to white-collar persons engaged in building projects on the weekends.
One thing Stanley did not change, however, was the growth rate at Payless: the chain doubled in size from 1979 to 1984, adding 39 stores in 1984 alone, including 14 Prime Home Improvement Centers in Colorado and Nevada, as well as Somerville Lumber in Massachusetts. That year, while Payless topped the $1 billion sales mark, profits declined 9 percent from the previous year to $37.4 million. Daniel McConville, an analyst for Barron's, attributed the earnings decline to "indigestion."
Taking the Company Private: 1988
Later in the decade, a takeover attempt by Asher Edelman prompted yet another major change at Payless Cashways. In 1988, Stanley marshaled a unique group of investors, under the name PCI Acquisition, to take the company private. The assemblage included Payless executives, financial institutions, and such key suppliers as Masco, a major faucet vendor that contributed more than 20 percent of the $909 million needed for the leveraged buyout. Although highly irregular, the deal with Masco was not considered an infringement on competition because the supplier did not earn an unfair advantage over its rivals for its contribution.
Although the leveraged buyout saved Payless from takeover, it was not an unqualified success. The company did not have a single year of profitability during the five years it was private, as a recession in its core Midwest and Southwest markets, high debt from the buyout, and competition from up-and-coming "category killer" Home Depot, Inc. combined to slow sales growth, weaken margins, and depress operating earnings. With the help of a team of outside consultants, Stanley opted to sidestep competition with Home Depot and return Payless Cashways' focus to professional contractors, a customer group that was growing at a faster rate than do-it-yourselfers.
Stanley and his colleagues formulated a reorganization of everything from distribution and inventory systems to supplier relationships and strategic focus. The new Payless featured separate entrances for contractors, better credit terms than do-it-yourselfers, phone and fax ordering services, delivery, and even free coffee. Moreover, lawn mowers and outdoor furniture were dropped from the merchandise line and were replaced with high-quality--and high-margin--professional tools. In 1992, Payless opened eight Remote Contractor Sales Offices, which offered in-stock, high-demand products and next-day on-site delivery, opening 17 more such offices the following year to access underserved areas within 50 to 75 miles of existing stores.
In 1993, the company experimented with two new formats targeted at the professional homebuilder and remodeler: Home and Room Designs featured kitchen and bath finishing products, and Tool Site offered 6,500 professional tools. Although Payless was not alone in offering many of these services, none of its competitors courted the professional customer so steadfastly. From 1987 to 1993, the company's sales to professionals increased from 25 percent of total revenues to 45 percent, compared with around 20 percent for market leader Home Depot. Sales increased to $2.6 billion in 1993, but the chain remained unable to turn a profit.
Nevertheless, Stanley was able to sell 70 percent of Payless back to the public in 1993, raising $350 million in debt-reduction funds and thereby eliminating almost $80 million in annual interest expenses. Stanley projected the addition of 28 new stores by 1998, and Payless also took advantage of the North American Free Trade Agreement, announcing a joint venture with Grupo Industrial Alfa, S.A. de C.V. to establish 25 stores in Mexico by the turn of the century. The building supplies industry remained fragmented in the early 1990s--the top ten chains comprised only 12 percent of total annual sales--affording Payless Cashways an opportunity to establish a stable position among the leaders as market consolidation continued.
Financial Difficulties Leading to Bankruptcy: Late 1990s into the New Millennium
The late 1990s proved tumultuous for the firm, however, and it was never able to claim that stable position. In 1996, Payless sold its interest in Total Home de Mexico--the joint venture it had established with Grupo Industrial Alfa. Later that year, the firm announced a new "dual market" strategy in which both professional and do-it-yourself consumers were targeted. The new strategy was launched in Phoenix and added 13,000 new products to the store's line.
While sales and profits continued to fall, Stanley, along with Chief Operating Officer Susan Stanton, continued to push the new strategy. The company, however, was forced to declare Chapter 11 bankruptcy in 1997. Stanley stated in a July 1997 Kansas City Business Journal article, "I've admitted that I take responsibility, the management takes responsibility. But the reason we're where we are is because of more than $1 billion of debt from the LBO in '88. This company could no longer handle that debt. Period."
Investors as well as creditors grew weary of Stanley's and Stanton's aggressive approach and unwavering focus on the dual path strategy. Many blamed them for the company's financial problems and cited the costly marketing approach as a culprit in the firm's faltering bottom line. In 1998, the pair stepped down as Payless emerged from Chapter 11. Millard Barron was named president and CEO of the firm in June of that year.
Barron faced the difficult task of returning Payless to its former status as a leading retailer in the industry among fierce competition from the likes of Home Depot and Lowe's. Although the firm reported three consecutive quarters of earnings in 1998--the first time since 1994--Payless was still burdened by an increasing debt load.
Nevertheless, Barron forged ahead and began to overhaul the stores' merchandise and put the "dual path" strategy of serving both the professional and the do-it-yourself markets to rest. Instead, the company began to focus most of its efforts on professional builders, contractors, and institutional buyers.
Eyeing this new focus as key to securing financial gains, Payless began aggressively pursuing its new professional business strategy. In 2000, the company launched a new division entitled PCI Builders Resource, a wholesale outlet catering to professional builders. The firm also converted five Payless Cashways outlets to a Contractor Supply format and adopted a new name for its web site--PCIBuildStreet.com--that offered both the professional and do-it-yourselfer project information and tools, as well as online shopping options.
Despite these new directives, sales in 2000 fell by more than 17 percent while the company posted a $20.6 million loss in net income. A total of 22 stores were closed that year while Barron continued to restructure business operations in hopes of gaining control of the firm's mounting debt and liabilities.
Barron's efforts, however, proved futile. In 2001, the firm closed 42 stores by August after declaring Chapter 11 bankruptcy yet again in June. Never able to regain its edge in the highly competitive industry, Payless Cashways announced in September 2001 that Hilco Merchant Resources LLC, the Ozer Group, and the Nassi Group LLC had been appointed by the U.S. Bankruptcy Court to liquidate the final inventory for the company.
Principal Divisions: Payless Cashways; Furrow; Lumberjack; Hugh M. Woods; Knox Lumber; Contractor Supply; PCI Builders Resource; PCIBuildStreet.com.
Principal Competitors: The Home Depot, Inc.; Lowe's Companies Inc.; Menard Inc.
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