Topping the Charts

What a difference a year makes. During Ace Hardware’s dark hours last summer—when it was discovered that an accounting error translated in to a $152 million discrepancy in the books and some hard feelings among Ace retailers—many questioned what would follow.

Time has provided some answers:

Despite a sales decline of 2.7 percent in its most recent quarter, Ace finished the period with net income of $33.4 million, up 11.7 percent.

Ace was ranked No. 1 in customer satisfaction for the second straight year by J.D. Power and Associates based on merchandise, price, sales staff, sales/promotions and store facility. 

By all appearances, much of the disquiet in the ranks has died down, and the defections have been kept to a minimum.

And, for the first time, Ace Hardware took the top spot on Home Channel News’ 2008 Top 150 Distributor Scoreboard.

Bill Griffin, owner of Griffin Ace Hardware, a chain of stores in Southern California, described the turn of events this way: “It was a shock to all of us when it happened, but to Ace’s credit, they dove in with both feet and hired the right people to address the problem and get it rectified. The way I look at it, we got our money a little earlier than we should have, and we’ll have to wait a little longer for the rest. But most of the dealers I talk to are optimistic.”

With some newly elected board members in place, Ace does appear poised to weather not only its own difficulties but the poor economy as well. As new chairman of the board David Ziegler points out, it’s the hardware store’s concentration on home repair and small projects that has helped it compete against the big-box retailer during the housing slump.

“Between the high gas prices and the housing bubble bursting, there are a lot of families that are staying a round their homes more and doing minor projects and upgrades,” Ziegler said. “Our rural stores are certainly benefiting from the fact that customers want to drive as little as possible for their hardware needs.”

Ace International has been a boost to the overall enterprise, driven by increased sales to existing stores in the Middle East, sales to new stores in the Caribbean and sales growth from foreign-to-foreign wholesale operations. Year-to-date, Ace International has shown a 20.1 percent sales increase over the same period last year—on top of five straight years of double-digit growth.

On the home front, new store growth is declining—from 186 in 2006, to 140 in 2007, to a projected 100 to 104 by the end of this year. According to Ken Nichols, senior vp-retail operations, the slowdown has been caused not by a lack of new investors, but by existing store owners who are more hesitant to expand in the current economy. New investors have risen from about 30 percent of store openings to close to 50 percent this year.

“Existing retailers have been hunkering down, playing it close to the vest,” Nichols said. “Yet we’re still not as impacted as Depot or Lowe’s. Our stores can still make money on everyday projects.”

Ace’s market development team has identified 25 hot spots where the co-op would like to “put more feet on the ground,” most of them in major metro areas. The team spends time in these areas, looking at the competition, the economic landscape and potential locations for new Ace stores. Some of the hottest spots are Seattle, Houston, Detroit, San Francisco and Phoenix.

Yet all has not been roses for Ace management over the past year. The co-op announced last month it was downsizing its LBM business leading some dealers to question the move. Ace says the restructuring of the LBM division was to create greater efficiency and a more organized overall structure.

In June, the co-op received its first-ever challenge to a proposed slate of new board members. A group called Concerned Ace Owners—angered by the accounting error and what they criticized as an unresponsive management team—had put up its own slate of candidates for the three open seats. The upstart group lost by a 2-to-1 margin, but this indicated that one in three Ace owners was frustrated with the status quo, a statistic that caught Ziegler’s attention as he assumed his position in June.

“As the incoming chairman, I decided this was something I needed to personally understand better,” said Ziegler, who followed up the June stockholder’s meeting with phone calls, store visits and by attending six “town hall” meetings in different U.S. cities. “I think Ace had over 1,000 retailers attending [the town hall meetings], and they were very successful in providing clarity. It appears that the vast majority of retailers now are ready to move this company forward, rather than dwell on the happenings of the past year.”

Randy Bever, owner of Bever’s Ace Hardware in Gentry, Ark., thanks the Concerned Ace Owners for challenging the status quo and making Ace corporate more accountable to members. “They’re communicating a lot better, a lot more openly, and I think that level has increased as a result of the board elections,” he said.

Cris Henkle, who—along with her husband John—owns Henkle’s Ace Hardware in Webb City, Mo., attended the town hall meeting in Kansas City, Mo., last month. She also believes the election challenge lit a fire under Ace executives.

On the other hand, Henkle believes the membership has moved beyond brooding over the sins of the past—at least to a large extent. “It seems like the questions people were asking at the meeting were more about practical issues—fills through the warehouse, marketing and advertising, computer systems,” she said. “People weren’t dwelling on it. They seem ready to move ahead.”