2200 Kensington Court
Ace Hardware Corporation's mission is to be a total retail support company, providing its dealer-owners with merchandise and service at the lowest possible front-end cost. A strong board of directors, comprised of 11 dealer-owners and one non-Ace dealer-director, establishes guidelines for the professional Ace staff.
Ace Hardware Corporation is the second largest dealer-owned cooperative in the United States. The co-op pools buying and promotions for its 5,100 local hardware, home center, and lumber stores located in all fifty of the United States as well as in 65 foreign countries and territories. Ace's emphasis on service and modern retailing techniques has helped locally owned and operated Ace retail stores confront intense competition from such home improvement powerhouses as Home Depot and Builders Square. The co-op manufactures its own line of paints and also supplies other products under the Ace brand.
The 1920s-70s: Ace's Years as a Wholesale Buying Cooperative
The Ace Hardware organization was founded in the early 1920s, when Richard Hesse, Frank Burke, Oscar Fisher, E. Gunnard Linquist, and William Stauber united to form a purchasing and advertising partnership among their Chicago-area hardware stores. Their combined buying power enabled the store owners to negotiate lower prices on merchandise purchased from wholesalers. The partners adopted the Ace name in 1927, and incorporated the following year.
Within two years, Ace had evolved into a wholesaling organization, purchasing directly from manufacturers and storing merchandise in its own Chicago warehouse. This move further reduced costs by cutting out the 'middlemen' wholesalers, thereby giving Ace members the choice of a competitive edge (they could reduce retail prices) or fatter margins (They could maintain their prices and enjoy higher profits). Frank Burke served briefly as president of the organization, and was succeeded by Richard Hesse in 1930. Hesse served in that capacity for more than four decades, until the end of 1973.
For its first half-century of operation, Ace was essentially a conventional wholesale group, and its profits were shared by its shareholders. The group's low-cost purchasing and distribution methods quickly attracted new members and some franchisees. During its early years, use of the Ace name was recommended but optional; it would later become mandatory for new affiliates. President Hesse expanded services to associates, including a semi-annual dealer convention featuring products and promotions available through the wholesaler. Those meetings continued through the 1990s. By the mid-1930s, the organization had 41 dealer/members and sales of more than $650,000. Growth was so strong, in fact, that the expanding roster of affiliates necessitated doubling warehouse capacity during that decade.
The postwar era saw the dawn of America's 'do-it-yourself' (DIY) revolution. Industry analysts have attributed the spectacular growth of this market to several factors. First, the generally high cost of new homes drove consumers into widely available, but sometimes neglected, existing homes. The high charges exacted by repairmen and contractors impelled homeowners to attempt home repair and improvement projects on their own. Also, the emergence of new tools and products that were easy to use furthered the trend. Finally, some observers of the DIY movement have credited the more intangible, but undoubtedly strong, sense of satisfaction attained by consumers who completed a project themselves while saving money at the same time.
On the strength of growing DIY sales, Ace's nationwide revenues increased to $25 million by the end of the 1950s. The organization opened its first distribution centers beyond the bounds of Chicago in 1969. A California facility served the expanding West Coast membership, and an Atlanta warehouse promoted growth in the south. These were the first of 14 retail support centers that came into being across the country by 1994.
Before he retired in 1973, co-founder and long-time president Richard Hesse sold Ace to its member-dealers, thereby forming a dealer-owned hardware cooperative. Purchase of a minimum stake in Ace was required for membership, and dealers contributed a percentage of their co-op purchases to a national advertising fund. Under this new scheme, Ace's profits were returned to its dealer-owners through cash or stock rebates at year's end. The company opened its fourth distribution center in Toledo, Ohio, and moved its expanded corporate headquarters to Oak Brook, Illinois (a western suburb of Chicago) that same year. By 1976, when ownership of Ace had passed completely to its dealers, the organization's sales volume had reached $382 million. From that point on, Ace's board of directors was always made up of dealers.
The Growth of the DIY Movement in the 1970s and 1980s
Arthur Krausman succeeded Hesse as president in January 1974 and advanced to chairman of the board in 1980. During the ensuing years, Ace's member services expanded to include training and education, merchandising, computerized inventory control, insurance, and store layout. The continuous addition of new members during the 1970s necessitated the establishment of new warehouses and distribution centers. By the end of the decade, the organization had added five facilities in the Midwest and Southeast. This diffusion of distribution points helped save freight costs, since many manufacturers were willing to ship freight-paid within a given distance.
The company achieved national penetration in 1978, when it signed on members in the eastern United States. Ace's growth coincided with a six-fold increase in the DIY market, from just under $6 billion in 1970, to $35 billion in 1980, to more than $100 billion by the end of the 1980s. Traditional hardware stores, such as those owned by Ace members, soon found their competition growing too, as mass merchandisers like the 'category killer,' Home Depot, Inc., began to get in on the profitable DIY trend. Even supermarkets, discount stores, and drug stores began carrying profitable hardware lines during the decade.
While drugstores and grocery stores were overtaken by the chain store revolution in the 1970s, the hardware segment continued to be dominated by independents through the mid-1980s. By 1984, 85 percent of the 23,500 retail hardware stores in the United States were affiliated with co-ops. Those groups held the top share--48 percent--of annual hardware sales. Some observers credited this phenomenon to dealer-owned cooperatives (or 'voluntary chains,' as they were termed by the National Retail Hardware Association). Others credited the personalized service offered by independent retailers. In a 1980 interview with Hardware Age, Ace Chairman Krausman credited the success to flexibility, inventory depth, and advertising of independent operators.
By 1984, Ace's national advertising budget topped $10 million, most of which was spent on television spots. Ace capitalized on its members' reputation for having knowledgeable personnel with the slogan 'Ace is the place with the helpful hardware man.' This slogan was later modified to include the gender-neutral 'helpful hardware folks.' Television spots often featured celebrities, including singer Connie Stevens and actress Suzanne Somers in the 1970s and 1980s, and football commentator John Madden in the 1990s. The company continued to emphasize service in advertisements that showcased 'helpful' Ace dealers around the country through the middle of the decade. Ace sales more than doubled during the 1980s, from $801 million in 1983 to more than $2 billion in 1993.
Competing with the 'Big Boxes' in the 1990s
Following a trend that began in retail foods, Ace introduced a line of private label products in the early 1990s. Private label products enable retailers to offer their customers a consistently low-priced product while generating higher profit margins for themselves. One of Ace's first private label goods was paint, which it began manufacturing in 1984 in a state-of-the-art facility in Illinois (Ace paint had been manufactured by the Valspar Corp. beginning in the 1930s). Although paint is generally considered a low-growth commodity, it is a do-it-yourself mainstay. Low brand loyalty and high price sensitivity made it an ideal private label product. By the early 1990s, Ace's paint division was expanding faster than the rest of the paint industry, and had become the foundation of a private-label program of nearly 7,000 items. In 1991, the paint facility expanded, and in 1995, a second paint facility was acquired in Chicago Heights, Illinois. From 1988 to 1993, private label sales grew at an average annual rate of 12.9 percent, to $350 million. The group planned to transform its private label into a national brand through extensive promotions in the mid-1990s.
While Ace manufactured many of its own paints, the company also purchased some paints (particularly aerosols) from other producers, including Sherwin-Williams, DAP, and ITW Devcon. The company became involved in a product labeling suit with the Attorney General of the state of California for neglecting to warn consumers that several of Sherwin-Williams' paints contained toluene, a known carcinogen. Although Sherwin-Williams' settlement cost it more than $1 million, Ace was simply required to add appropriate warnings on its toluene-based paints.
In October 1994, the Ace officers and board of directors launched a strategic plan known as 'The New Age of Ace.' This plan was an acceleration of a previous strategic process called 'Ace 2000,' which focused on improving business for the co-op's top-line members. The board laid out four primary objectives to be achieved by the year 2000: improved retail performance, more efficient operations, international growth, and a faster pace for new store openings. A key aspect of Ace's plan involved incentives for dealers to meet certain standards or risk losing full retail support from the corporation. These requirements included relinquishing connections with any other buying organizations, making at least 80 percent of merchandise purchases through Ace (including and especially Ace paint), using Ace signage, and participating with vendors on special purchases. By late 1994, about 1,500 of Ace's 5,000 dealers did not comply with these minimum requirements. One Ace executive noted that this list of noncompliant retailers would gradually be reduced, as they either joined the majority of dealers or dropped from the organization.
As part of its plan to improve retail performance, Ace also announced that it would open its own stores in the Chicago area to test retail concepts, an objective it achieved in by 1995. The purpose of these stores was to fine-tune retailing practices for all Ace stores. A new store prototype called the 'solutions concept store' catered to the do-it-yourselfer, and was pioneered in 1999. Although the company assured its members that it was not planning to acquire or build a significant number of group-owned stores, this aspect of 'Ace 2000' disturbed some dealers, according to a December 1994 article in Do-It-Yourself Retailing. In fact, the strategic plan called for dealers themselves to generate nearly $500 million in new sales and open 1,000 new stores in underserved markets by the turn of the century. Ace planned to deploy consultants to help retailers identify potential new store sites.
Ace's strategic plan also called for improvements in its warehousing operation through technological advances and increased cooperation with vendors. Goals included vendor consolidation; enhanced electronic data interchange between vendors, warehouses, and retailers; and the expansion of vendor-managed inventory systems to control up to one-fourth of inventory.
The company planned to quadruple its international sales to $400 million by 2000, with a special focus on South America. The passage of the North American Free Trade Agreement (NAFTA) in 1994 prompted Ace to plan a paint plant in Texas. This was done in order to meet anticipated demand from the 70 Mexican Ace stores that were open by that time, and the 26 more that were expected to open. Sales overseas had increased by nearly one-third overall from 1992 to 1993, and by more than 60 percent in Mexico alone. Other areas of concentration included the Middle East, Eastern Europe, Latin America, and the Pacific Rim. According to Do-It-Yourself Retailing, Ace hoped to 'evolve from being only an exporter to becoming a true world trading company,' by offering international affiliates the services enjoyed by dealers in the United States. Licensing was seen to play an important role in the organization's overseas expansion.
The New Age of Ace: Changes in the Mid-1990s
The promulgation of the goals of Ace 2000 and The New Age of Ace exemplified two fundamental changes in the organization and the retail hardware industry. First, by the 1990s, Ace had clearly expanded its expectations of and responsibilities to its affiliates. Second, it demonstrated the organization's determination to survive and grow in the face of increasingly intense competition from what one industry journal called 'the big boxes'--mass home improvement merchants, such as Home Depot, Builders Square, and Lowe's.
As CEO Roger Peterson, who retired in May 1995, told Do-It-Yourself Retailing in December 1994, 'Such growth is necessary if Ace is to remain a major player in the hardware industry, capitalize on the Ace name and reputation, and establish footholds in markets before competition gains a strangle hold.' Between 1994 and 1999, wholesale sales at Ace increased more than 37 percent. By the late 1990s, however, the co-op felt itself increasingly challenged by the rollout of Home Depot's small-store format, Villager's Hardware, designed to capitalize on the 'convenience' hardware market in which Ace specialized.
The company responded with new initiatives and new ventures. In 1995, it established a subsidiary--National Hardlines Supply&mdashø sell to non-traditional retail customers, increase Ace's buying power, and continue to provide support to its dealers. In 1998, it debuted a new strategic plan called 'Encore Growth,' and, a year later, 'Vision 21.' Encore Growth developed programs to improve dealers' gross margins, while Vision 21 aimed to make Ace number one in the 'non-big box' sector by getting dealers to embrace the merchandising, marketing, and operational tactics employed by the co-op's best dealers. Vision 21 posited Ace's effectiveness as a co-op upon how well its employees supported dealers' efforts to sell what they bought from Ace profitably, not upon how much inventory moved out of its distribution centers yearly.
Also in 1998, Ace Hardware and the American Rental Association (ARA) formed a comprehensive buying group program called the Member Buying Alliance. The alliance relied upon Ace's National Hardlines Supply (NHS) to provide ARA members a source for commercial rental products and equipment. NHS also became the supplier in 1998 to the largest non-cooperative buying group for lumber and building materials in the United States. This buying group was formed through a merger of Ace's lumber, building materials, and millwork division, and Builders Marts of America.
In November 1999, Ace launched its first venture in cyberspace with its web site, OurHouse.com, which offered products for sale online and project-related information. In April 2000, Ace placed in-store kiosks in more than 1,000 stores, allowing customers immediate access to the web site. This stronger focus on project-oriented merchandising was a response to the growing market of female shoppers undertaking their own home improvement. Also that fall, Ace opened its first Store 21 in Washington state, a technology-intensive merchandising format designed to accommodate the customer and featured salespeople wearing radio headsets.
Still an ongoing problem at Ace was the sizable minority of dealers whose stores were not sufficiently computerized, whose inventory mix generated inconsistent profits, and whose retail presentation did not fit the homogeneous image Ace desired. Many smaller dealers felt that aligning themselves more closely with the co-op diluted their independence as entrepreneurs. By the company's 75th anniversary in 1999, according to an article in National Home Center News, only one fifth of the co-op's members shared information with Ace via computer. Furthermore, only about half its 5,100 stores were linked electronically to its buying group through its AceNet 2000 e-commerce system, which had been instituted in 1997.
Ace's board of directors spoke of a 'disconnect' between the buying group and members, citing programs that generated sales for Ace but didn't necessarily make dealers' stores more productive. To deal with this, a plan was promulgated to leverage the co-op's wholesale side while reducing costs on its retail side. The co-op hoped to take over management of the routine part of individual store operations centrally, checking in merchandise and handling accounts receivables. It also hoped to cultivate a retail chain image to make individual stores more competitive, and to develop programs for merchandising, operations and training. Once members became more profitable, the hope was that they would consider investing in their stores' expansion and opening more stores.
Principal Subsidiaries: Ace Hardware Canada Limited; National Hardlines Supply.
Principal Competitors: The Home Depot Inc.; Lowe's Companies Inc.; TruServ Corporation; Cotter & Company; ServiStar Coast to Coast Corporation; Hardware Wholesalers Inc.
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