Ace Hardware thinks outside the big boxes

OAK BROOK, Ill. — Every time he gets on an airplane wearing his gray Ace Hardware work shirt, Ray Griffith hears expressions of concern.

Fellow passengers always want to know if the cooperative is managing to get by in the face of competition from ever-proliferating home-improvement superstores. It's a question Ace's chief executive finds almost embarrassing, he says, because the retailer-owned company is doing so well.

"All our vital signs are very positive," Griffith said in an interview at Ace Hardware headquarters west of Chicago. "And people seem to be almost amazed at that."

A focus on convenience and knowledgeable service has enabled the 4,600-store chain to stake out a modest but healthy share of the huge hardware market, providing the impetus for the biggest new-store expansion in its history.

The 83-year-old chain just concluded its best sales year since 1998, with wholesale sales up 6.5 percent to $3.4 billion and a record bottom line exceeding $104 million, based on preliminary figures. Its stores, about two-thirds owned by independent dealers, racked up almost $12 billion in retail sales.

While mega-retailers Home Depot and Lowe's are expected to report about $140 billion in 2006 sales between them next month, Ace appears to have outperformed the two leviathans in same-store sales growth for the fourth year in the past five.

Big enough in its own right to make periodic appearances in the Fortune 500, privately held Ace nonetheless embraces a David-versus-Goliath role as protector of the small hardware-store owner.

"We come to work every day on behalf of the entrepreneur," Griffith said. "We have a chip on our shoulder about the big boxes, and we like that. We like being the underdog. America loves the underdog."

Ace has been looking out for individual entrepreneurs since its founding in 1924, when four Chicago-area hardware store owners united to increase buying power and profits.

Dealers own their individual stores and shares in the parent organization, which distributes its profit to them in the form of sizeable annual dividends.

Ace is not the place for the lowest prices or the biggest assortment of home-improvement goods; the big boxes have it beaten in those categories. But analyst Howard Davidowitz says it nonetheless is doing "tremendous" business by emphasizing convenience and by continuing to upgrade the esthetics of the stores.

"It's not a question of price, or they're out of business a long time ago," said Davidowitz, chairman of Davidowitz & Associates, a New York-based retail consulting and investment banking firm. "It's a question of convenience and service.

In short, Ace is acting increasingly like a retailer these days, not just a supplier of inventory for its stores.

"Home Depot and Lowe's have caused us to be more aggressive with our retail approach," Griffith said, adding that smaller cooperative True Value isn't a major consideration. "We're using the scientific side of retailing, and we're working harder to reduce costs and gain efficiencies."

Consumers might like nostalgia of the cozy mom-and-pop stores of the past, but they don't spend much money in old-fashioned hardware stores, according to Ace, whose core customer is the 34- to 56-year-old homeowner.

"We think we have a great upside in simply ... offering the consumer a different kind of value and a different kind of helpfulness that the big boxes simply can't or don't want to do," Griffith said. "That has proven to be very effective for us and rewarding for both our existing retailers and investors as well."