Elon Musk, Tesla Motors CEO, tells the Reuters Global Tech Summit that he'll talk to politicians who back local car dealers trying to keep Tesla from selling directly to consumers. Video
- Sopranos star James Gandolfini dies in Italy |
- Special Report: Syria's Islamists seize control as moderates dither
- End to Fed stimulus, China slowdown spark world sell-off
- Arizona killer who asked for speedy execution found dead in cell
- UPDATE 2-Storm Barry heads for Mexico Gulf coast oil installations
Analysis: Rona looks outside the big box for a turnaround
BOUCHERVILLE, Quebec |
BOUCHERVILLE, Quebec (Reuters) - Rona Inc, Canada's home-grown answer to Home Depot Inc and Lowe's Cos Inc, has built its turnaround plan around a bold theory: the golden age of the big box store is ending.
For years, Rona organized its business around cracking the big box market. Now, facing sluggish consumer confidence and smarting from falling sales at established stores, it is closing or splitting up 23 of its 79 biggest outlets.
Luc Rodier, Rona's executive vice president for retail, says the novelty and excitement of bigger formats has worn off for consumers, and the performance of Rona's smaller stores shows customers want to shop in smaller outlets, closer to home.
Under a strategic plan announced in February, Rona is opening more "satellite" and "proximity" outlets that run 5,000 to 35,000 square feet, rather than the 100,000 square feet-plus found at most big boxes.
"A nice 100,000 square feet at peak season, it's phenomenal. At low season, it's a big box," Rodier says. "It's a big building."
He says shoppers can get lost in such a big space, and that's a turn-off.
"I can put 60, 70 people on the floor and you'll say, there's nobody here - when we know that our customers are looking for expertise and service."
At stake is Rona's slender lead over Home Depot in Canada. According to its own data, last year it still held the largest share of the hardware and home improvement market at 19 percent, ahead of Home Depot's 16 percent.
To be sure, the notion that the big box store is losing favor with consumer is counterintuitive, and some analysts question the logic, especially as retailers such as Wal-Mart Stores Inc open more mega-stores in Canada.
That said, the fresh emphasis on smaller stores may be smart for Rona regardless of why the chain is making the move.
"It's just a function of Canada becoming increasingly saturated," says National Bank financial analyst Vishal Shreedhar. "You have to go into smaller markets where you need smaller stores, and sometimes you target pockets of markets, in which case you would need a smaller store."
Indeed, Shreedhar is not rejecting Rona's plan out of hand: "Rona is trying to target niches of the market in which it believes it can perform better."
BIG BOX AMBITIONS
The smaller-store strategy is a big change for Rona, which kicked off its transformation from modest Quebec hardware distributor to national retailer in the 1990s to compete as Home Depot and major competitors arrived in Canada.
The company was founded in 1939 by independent hardware stores in Quebec keen to ditch their powerful wholesalers, and quickly gathered more members. Many dealers were family-run businesses or small chains.
Its corporate offices in Boucherville, Quebec, near Montreal are dwarfed by a nearly kilometer-long warehouse, a legacy of the company's beginnings as a distributor.
By the early 1990s, Home Depot's orange boxes dotted the United States, and management concluded that Rona had to grow to survive. It teamed up with a group of dealers to open its first sprawling store in Laval, north of Montreal, in 1994, the year Home Depot arrived in Canada.
A string of acquisitions - Cashway, Western Canada's Revy Home Centres, Alberta's Totem - brought in Rona's first corporate stores, made it a national player, and took sales from C$707.1 million ($700 million) in 1997 to C$4.55 billion in 2006.
The timing was right: the economy was powering ahead, and Rona's customers were spending freely on home renovations. The stock consistently traded above C$20 from 2005 to late 2007. Then the recession hit.
Rona's sales in established stores, trending lower from the fourth quarter of 2007, rose in late 2009, thanks to a government home renovation tax credit. But same-store sales slumped again in 2010, as the tax credit expired.
Home Depot and Lowe's were, of course, also hit by the recession. Since neither company breaks out Canadian results, it is difficult to compare their recent results to Rona's. But in its last two reported quarters, Home Depot said same-store sales rose in Canada.
Home Depot has 180 locations in Canada, while Rona operates a network of nearly 800 outlets and supplies almost 1,500, most smaller than the average Home Depot. Lowe's, which did not enter the market until 2007, had 31 stores at the beginning of April.
In April, Rona's shares jumped after the chief financial officer of Lowe's said it was a "very interesting company," and that Lowe's was open to all options should Rona put itself up for sale. Since then, Rona has said repeatedly that it is not for sale.
BRIGHT SPOTS IN THE PROXIMITY?
Rodier says small dealers inspired Rona's strategic shift as the company's research showed that customers were picking stores close to home as the recession ended. With more, smaller locations, management reasoned, Rona could reach more of them.
"We took the decision to get out of the box in some markets," he says. "We said, okay, how can we get more sales, more volume out of a market like Toronto, but differently? Less fixed costs, closer to the customer."
Rona is holding on to some big box stores, especially in Quebec. But Rodier says people are no longer willing to drive long distances or sit in traffic to get to a superstore.
"In my mind, it's the right course of action. I think instead of focusing on expansion Rona needs to focus on profitability," says Canaccord Genuity analyst Derek Dley.
While Dley does not rule out the possibility that Rona has foreseen a broader trend, he mainly connects Rona's move out of the big box to tough competition from Home Depot and Lowe's.
"They were able to take advantage of better real estate locations than Rona was," he says. "These guys can just pay for better spots."
Rodier disagrees. He blames the economy, not real estate or other business decisions, for sales declines. The company's strategic plan strikes a similar note: it is called "New Realities, New Solutions".
Ed Strapagiel, executive vice president at Toronto market research firm KubasPrimedia, has not seen enough evidence to make sweeping conclusions one way or the other about big box stores. But he added: "Wal-Mart superstores are doing just fine by all accounts, and they're building more."
(Additional reporting by Dhanya Skariachan in New York; Editing by Frank McGurty; and Peter Galloway)
- Tweet this
- Share this
- Digg this