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Payless Cashways, Inc.

Payless Cashways, Inc.

800 N.W. Chipman Road
Suite 5900
Lees Summit, Missouri 64064-8001
U.S.A.
Telephone: (816) 347-6000
Fax: (816) 347-6046
Web site: http://www.payless.cashways.com

Public Company
Incorporated: 1988
Employees: 8,100
Sales: $1.4 billion (2000)
Stock Exchanges: OTC
Ticker Symbol: PCSH
NAIC: 44411 Home Centers; 44413 Hardware Stores; 44412 Paint and Wallpaper Stores

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 firms 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 Sams 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 builders hardware in one 80- to 100-square-foot room. Furrows 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 Furrows 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, Furrows 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 chain wide. The change reflected shifts in the stores 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 repairmens 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 stores 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 chains 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 chains 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 companys 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 companys first chain-wide 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 locations 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 chains 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 chains 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 Furrows, 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 companys 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 sixfold 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.

Company Perspectives

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.

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 Paylesss 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. Paylesss wholesale distribution arm controlled only about 17 percent of the chains 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 chains 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 Barrons, 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-qualityand high-marginprofessional 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 un-derserved 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 companys 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.

Key Dates:

1930:
Sam Furrow and John Evans buy a lumberyard in Pocahontas, Iowa.
1937:
Furrow opens the Webster County Lumber store to compete with the Lumber Trust.
1947:
A new location in Iowa Falls is established and run by Vern Furrow.
1951:
Sons Vern and Sanford, Jr., establish a wholesale company, Iowa Lumber and Supply.
1955:
The stores accounting and advertising procedures become unified under the name Payless Cashways.
1969:
The firm goes public; sales reach $24 million.
1971:
Vern Furrow retires ending four decades of active family management.
1974:
Sales and profits increase despite a downturn in the housing industry.
1981:
Payless Cashways operates as the fifth largest chain in the industry.
1984:
Sales exceed $1 billion.
1988:
David Stanley and a group of investors take the company private to thwart takeover attempts by Asher Edelman.
1993:
Payless Cashways goes public once again.
1996:
The firm begins a dual marketing approach, catering to both the professional and the do-it-yourself consumer.
1997:
The firm files for Chapter 11 bankruptcy, blaming debt related to the leveraged buyout of 1988.
1998:
Stanley and Susan Stanton resign and Millard Barron is named president and CEO; the firm emerges from Chapter 11 bankruptcy.
2000:
PCI Builders Resource, a wholesale materials and manufacturing company, is created as a new division.
2001:
After declaring Chapter 11 bankruptcy again in June, Payless begins liquidating its inventory.

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 1990sthe 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 Mexicothe 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 stores 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, Ive admitted that I take responsibility, the management takes responsibility. But the reason were 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 Stanleys and Stantons aggressive approach and unwavering focus on the dual path strategy. Many blamed them for the companys financial problems and cited the costly marketing approach as a culprit in the firms 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 Lowes. Although the firm reported three consecutive quarters of earnings in 1998the first time since 1994Payless 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 sitePCIBuildStreet.comthat 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 firms mounting debt and liabilities.

Barrons 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.; Lowes Companies Inc.; Menard Inc.

Further Reading

Cianci, Gary, Supplier Sources Fund Payless Cashways LBO, Chain Store Age Executive, November 1988, p. 94.

Furrow, Virginia Sugg, Aged in Wood: The Story of Payless Cashways, Inc., Kansas City: Payless Cashways, Inc., 1984.

Gross, Lisa, Do It Yourself, Forbes, October 11, 1982, pp. 102-03.

Haller, Karl, Warehouse Stores Lead Home Improvement Push, Chain Store Age Executive, August 1993, pp. 25A-27A.

Hollar, Katie, Payless Cashways Prepares for Liquidation, Business Journal Serving Metropolitan Kansas City, August 31, 2001, p. 6.

Johnson, Walter E., Payless Sets Sights on Future, Do-It-Yourself Retailing, August 1999, p. 286.

Lambert, Cheryl Ann, Payless Cashways Restructures Somerville, Sells Mexican Interest, Chiltons Hardware Age, January 1996, p. 16.

, Payless Discusses Slow Sales, Redefines Target Customers, Home Improvement Market, July 1996, p. 13.

, Payless Tests Growth Strategy Despite Weak 96, Home Improvement Market, February 1997, p. 14.

McConville, Daniel J., Lumbering Giant: Payless Cashways Squaring Away Acquisitions, Barrons, January 14, 1985, pp. 22, 24, 31, 45.

Palmeri, Christopher, Remodeling Your Business, Forbes, August 16, 1993, p. 43.

Payless Cashways Emerges from Chapter 11 Bankruptcy, Do-It- Yours elf Retailing, January 1998, p. 17.

Payless: Zeroing in on Suburbia, Business Week, September 7, 1981, pp. 104-05.

Pike, Helen, Think Profit, Computerworld, April 3, 1989, pp. 18-24.

Trollinger, Amy, Payless Cashways CEO Predicts Turnaround Year, Kansas City Business Journal, April 23, 1999, p. 3.

, Payless Discontent Has Ripple Effect, Kansas City Business Journal, September 5, 1997, p. 1.

Trollinger, Amy, and Jim Davis, Stanley and Stanton Hold Firm to Dual Path, Kansas City Business Journal, July 25, 1997, p. 1.

April Dougal Gasbarre
update: Christina M. Stansell

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Payless Cashways, Inc.

Payless Cashways, Inc.

Two Pershing Square
2300 Main, P.O. Box 419466
Kansas City, Missouri 64141-0466
U.S.A.
(816) 234-6000
Fax: (816) 234-6361

Public Company
Incorporated:
1988
Employees: 18,000
Sales: $2.5 billion
Stock Exchanges: New York
SICs: 5211 Lumber and Other Building Materials; 5251
Hardware Stores; 5231 Paint, Glass, and Wallpaper Stores

Payless Cashways, Inc. ranks fourth among the United States building supply retailers, after Home Depot, Inc., Lowes Companies, Inc., and Sherwin-Williams Co. The chains 197 stores operate in 26 states under the names Payless Cashways, Furrow Lumberjack, Hugh M. Woods, Somerville Lumber, and Knox Lumber. Seven decades in the building supply industry have seen Pay lesss customer base shift from professional tradesmen to lay do-it-yourselfers and back again. By 1993, professional customers comprised almost 50 percent of sales. Payless Cashways went public in 1993, after five years under private ownership. While the companys sales increased steadily in the early 1990s, its losses mounted to over $86 million in the first three years of the decade. The sale of 70 percent of its shares raised revenues for debt retirement and a reorganization that CEO David Stanley hoped would return Payless Cashways to profitability.

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 Sams 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 builders hardware in one 80- to 100-square-foot room. Furrows 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 Furrows 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, Furrows stores were offering over 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 stores 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 repairmens 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 stores startup costs and were therefore entitled to a share of the profits. This arrangement fostered decentralization and self-motivation among individual store managers, considered a major element of the chains early success. However, in the 1950s, the Furrows instituted several changes that made the loose-knit lumberyards more of a modern retail chain.

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 the chains 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 lead the companys 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 companys first chain wide 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 locations 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 over 13,000 items by the end of the decade. The chains 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. However, by this time, 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 chains 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 were also added under the name of Furrows, 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 companys 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 sixfold increase in the do-it-yourself market, from just under $6 billion in 1970 to $35 billion in 1980. By 1981, Payless Cash-ways 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 Pay lesss 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. Paylesss wholesale distribution arm only controlled about 17 percent of the chains distribution, while 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 chains 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 nine percent from the previous year to $37.4 million. Daniel McConville, an analyst for Barrons, attributed the earnings decline to indigestion.

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 over 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 didnt 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 mid- 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-qualityand high-marginprofessional 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 home builder and remodeler: Home and Room Designs featured kitchen and bath finishing products, and Tool Site offered 6,500 professional tools. While 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 companys sales to professionals increased from 25 percent of total revenues to 45 percent, compared to 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.

Principal Subsidiaries

Somerville Lumber & Supply Co. Inc.

Further Reading

Cianci, Gary, Supplier Sources Fund Payless Cashways LBO, Chain Store Age Executive, November 1988, p. 94.

Furrow, Virginia Sugg, Aged in Wood: The Story of Payless Cashways, Inc., Kansas City: Payless Cashways, Inc., 1984.

Gross, Lisa, Do It Yourself, Forbes, October 11, 1982, pp. 102-103.

Haller, Karl, Warehouse Stores Lead Home Improvement Push, Chain Store Age Executive, August 1993, pp. 25A-27A.

McConville, Daniel J., Lumbering Giant: Payless Cashways Squaring Away Acquisitions, Barrons, January 14, 1985, pp. 22, 24, 31,45.

Palmeri, Christopher, Remodeling Your Business, Forbes, August 16, 1993, p. 43.

Payless: Zeroing in on Suburbia, Business Week, September 7, 1981, pp. 104-105.

Pike, Helen, Think Profit, Computerworld, April 3, 1989, pp. 18-24.

April Dougal Gasbarre

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