Ace Hardware Corporation

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Ace Hardware Corporation

2200 Kensington Court
Oak Brook, Illinois 60521
U.S.A.
(708) 990-6600
Fax: (708) 573-4894

Private Company
Incorporated: 1928
Employees: 3,900
Sales: $2.32 billion
SICs: 5072 Hardware

Ace Hardware Corporation is a dealer-owned cooperative that pools buying and promotions for more than 5,000 local hardware, home center, and lumber stores in all fifty of the United States as well as 57 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. In 1993 the retail support company surpassed $2 billion in sales, a 7.9 percent increase over the previous year.

The 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 evolved into a wholesaling organization, purchasing direct 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 over 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 quickly attracted new members and some franchisees. During its early years, use of the Ace name was recommended but optional; it would later be mandatory for new affiliates. President Hesse expanded services to associates, including a semiannual dealer convention featuring the 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. The expanding roster of affiliates necessitated a doubling of 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. 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. 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 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. Since then, Ace’s board of directors has been made up of dealers.

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 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 like 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 trend. Even supermarketers, discounters, 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, and those groups held the top share, 48 percent, of annual hardware sales. Some observers credited this phenomenon to dealer-owned co-operatives (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 flexibility, inventory depth, and advertising of independent operators with their success.

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 was later modified to 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.

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. (Until that time, 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. 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. A second paint manufacturing facility opened in 1995 in Chicago Heights, Illinois.

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,” an acceleration of a previous strategic process called “Ace 2000.” They 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. Ace hoped to increase its wholesale sales to $5 billion by the end of the 1990s. The vast majority of that growth, or $4.2 billion, was expected to come from existing dealers. 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 three of its own stores in the Chicago area to test retail concepts. Results would be shared with all Ace retailers. 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 ware-housing 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, 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 soon. Overseas sales had increased by nearly one-third overall from 1992 to 1993, and by more than 60 percent in Mexico alone. Other areas of concentration include 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 could play an important role in the organization’s overseas expansion.

The promulgation of the goals of Ace 2000 and The New Age of Ace exemplify 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,” or mass home improvement merchants. 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.”

Although Ace had clearly mapped out an independent future, the possibility of a coalition of hardware co-ops to compete with “the big boxes” had not been ruled out by Ace management. At a dealer forum in October 1993, Peterson acknowledged that he had met with leaders from the other leading home improvement cooperatives, including Cotter & Company, SERVISTAR, Hardware Wholesalers Inc., and Coast to Coast. He noted that while they consulted on issues including freight consolidation and insurance, joint purchasing and pricing agreements were, of course, off limits.