Extreme Makeover: Co-op Edition

Ace Hardware is taking steps to convert from the member-owned cooperative it has been since 1973 to a for-profit corporation, the company confirmed in late August.

The conversion—which would require approval by the majority of Ace’s 4,700 dealer-members—would end the patronage dividends that return profits to store owners but would keep the retailers as owners and stockholders of the company. Oak Brook, Ill.-based Ace hopes to have the conversion complete by the beginning of 2008.

In a statement dated Aug. 23 on Ace’s extranet site for members, president and CEO Ray Griffith said Ace’s board of directors and senior management team have been considering the conversion for some time as part of our efforts to boost Ace’s competitiveness and ensure our long-term success.

“We believe that becoming a traditional corporation is the best path for our retailers and the company for a number of reasons,” Griffith said.

Ace hopes to have shareholders vote in late December on the plan, which—if approved—would become effective Jan. 1. Ace management is also expected to discuss the matter more thoroughly with members at the fall market in Denver Sept. 27 to Oct. 1.

Selling the proposal to the membership is far from a done deal. Generally, those in favor of a corporate overhaul are those who believe a modern, centralized retail operation is the answer to the competitive pressures facing hardware stores. Opposition will likely come from dealer owners who prefer calling their own shots.

Griffith outlined the plan to about 250 Ace retailers at a meeting in Schaumburg, Ill., in August and plans to hold similar meetings with members in 32 other cities in the coming months. One retailer who attended the Schaumburg meeting but preferred to remain anonymous, called the meeting “premature,” saying that—because of the pending SEC filing—Griffith was unable to share any information on how the conversion would affect individual dealers.

“Ray was very coy about what he said. When someone asked a question, he would look over at his lawyers and then say, ‘I can’t answer that,’” the dealer said. “He did say he wanted to align the corporate structure with the dealer base, but he couldn’t tell us what that really means to us.”

In an interview with the Associated Press, Griffith said the conversion would “provide the corporation and the board of directors better tools to compete against the publicly funded competition that we compete against—Home Depot, Lowe’s and the like. It would unlock the value of the stock.”

He further explained that Ace is preparing a filing with the Securities and Exchange Commission, saying that members would be “encouraged to read the final proxy statement-prospectus, which would provide details about the proposed conversion.”

Several Ace dealers contacted by HCN appear willing to hear Ace management out.

“The greatest problem right now is the rumors, lies and slander caused by the quiet period forced on Ace management by the SEC’s request for changes to the S-4 filing,” said Mitch James, part owner of James Lumber & Ace Hardware in Poulsbo, Wash. “In general, I’m very open-minded to the proposal.”

James said a corporate makeover would be a welcome change for the membership. “Every consultant and accountant that has reviewed our company operation has said the same thing: ‘Your Ace stock is a dead asset. You have to get rid of it or find a way to get value out of it,’” he said.

“Ray Griffith, as long as I’ve known him at Ace, has talked about trying to find a way to make the value of our stock investment grow, to make the Ace brand worth something tangible. On the surface of it, this is a way to make that happen.”

Converting to a corporation could also help fund Ace’s “Branching Out” program, which added 188 stores to the fold last year and is expected to tack on another 130 by the end of 2007. Through this program, Ace offers grants of $195,000 to help individuals opening their first store and $215,000 for current store owners to open additional locations.

To those members who have taken the “if it ain’t broke, don’t fix it” attitude toward the conversion, James said, “Have you looked out your window? Thirty years ago we didn’t have the big-box competition we have today. If we are to survive we must be willing to consider change when it serves us well.”

Frank McManus, owner of Shallowford Ace Hardware in Marietta, Ga., is one of many Ace retailers who are waiting to hear more details about the conversion and what it would mean to them. “I’ve heard this is being considered, and my position on this is, Ace is a good company, and if they’re considering it, I’ll keep an open mind about it,” he said.

Andy Carlson, owner of Ace Hardware–Alameda Station in downtown Denver, also expressed confidence in both Ace management and the overall co-op membership. “I don’t think the members will vote for something that’s bad for the whole,” he said. “Ace has done me very well, and if they think it’s a good thing and have enough clout to get it through, I’m all for it.

“It might have a short-term impact on me, but I’m not going to lose any sleep over it.”