During his President’s Address to Shareholders during Do it Best’s Virtual Fall Market, President and CEO Dan Starr outlined the growth strategy behind the co-op’s recent joint venture partnership with Nation’s Best Holdings, a Do it Best member based in Dallas, Texas.
“Our growth plans are intentional, strategic and fully supported by our board of directors. They guide everything that we do as a company, identifying where we’re headed and why. In fact, here’s our plan for the coming year. It connects our entire team to our philosophy, mission and goal to ensure that we are helping you grow. It guides us, and it helps us keep score on our progress,” Starr stated.
“Your co-op is committed to driving growth. Planned growth is fundamentally critical to everyone’s success. It’s the sign of health of any organization to have growing sales. But it’s also critical in light of the trend lines for independents in our industry. Our industry is healthy and strong. The Home Improvement Research Institute projects growth of about 9.1 percent this year and predicts it will finish at nearly $440 billion in sales. That’s the good news. But here’s the concerning part: Over the last 25 years— heck, look at just the last three years—the sheer number of independents has consistently declined, even as opportunity in the home improvement industry has risen. This isn’t just an issue affecting Do it Best—we’ve seen it across the entire industry,” he said.
Starr added, “This trend has been a principal focus for your fellow members who comprise our board of directors. And it’s important to stress that we expect the trend to accelerate—for a couple reasons. First, we continue to see consolidation within the industry at every level. From manufacturing to wholesaling to retailing. Added to that, we believe that the next 5 to 10 years will present a generational succession challenge. As many folks within our industry reach retirement age, a lack of succession will push them to consider a sale of their business. And we believe the number of aspiring sellers far exceeds interested buyers. But rather than view this as a risk, Do it Best and our board see it as an opportunity.”
He said, “One way we’re addressing those risks and turning them into profitable opportunities is with our joint venture with Nation’s Best. This Do it Best member is focused on long-term investment to drive growth through acquisition of strong players in our industry.”
Starr took members through what Nation’s Best has done so far. “Their acquisitions started at the end of September last year—a single Do it Best location in Broken Bow, Oklahoma. The Nation’s Best team took a look at it—a really strong business—with a strong management team in place. But they had no succession plan.
“The next acquisition was Groom and Sons’. It’s a three-store former Ace chain in the Dallas-Fort Worth market. It was not a competitive situation for any Do it Best members, as we don’t have a strong presence in this market…or at least we didn’t. So, Nation’s Best acquired those three Ace locations and then went and bought five more Orgill locations in the rural outlying area around Dallas-Fort Worth. None of this was Do it Best business. All that was additive. And none of it created competition for an existing member,” Starr pointed out.
Nation’s Best’s most recent acquisition was a single Do it Best location in the panhandle of Florida—a strong business, a unique business, great volume, but, again, no succession plan, according to Starr.
He stated, “What I love about these examples is it gives you a picture of how this strategy allows us to play both offense and defense. In the defense, there are two different Do it Best member locations without a succession plan: one in Oklahoma and one in Florida. And one way or another, these owners were going to retire, which put the business at risk. That problem had to be solved. And we didn’t really have a single solution until Nation’s Best. Broken Bow and the panhandle of Florida? Those are pretty different markets and very different businesses. But Nation’s Best evaluated both and found they were strong businesses. We were able to not only retain them in the Do it Best family, but run more of their purchasing through us—an important and strategic defensive objective. And even though they were already Do it Best members, new volume through the Florida store is up 20 percent and 109 percent in Oklahoma.”
Starr added, “As good as those results are, I think I like the offensive play even better and I think you will, too. The idea of going out and targeting strong businesses that are currently affiliated with Ace, or Orgill, or True Value, or LMC, taking market share in a thriving area like Dallas-Fort Worth is a tremendous benefit to all of us. All of that is additive volume—to the tune of more than $7.5 million just since they joined Do it Best in late spring.
“So, while it’s important to explain what the strategy is, it’s just as important to understand what it isn’t. It is not designed to compete with other members. It simply doesn’t make sense for us to go into an existing market where we have strong member representation. That doesn’t really do anything to address the issues we’ve already identified,” he said.
Starr added, “When Nation’s Best is interested in looking at a particular store, we have an opportunity to review and approve it. So, if we feel like they’re adding a store that’s really just going to compete against an existing member where they’re both going after the same customer, or we’re cannibalizing the business, the answer is no. We’re simply not going to do that. So, it’s an improvement from what we have right now in terms of the review process with growth-minded members encroaching into others’ markets.”
He stated, “To me, this just reinforces how well this strategy is aligned to support growth in the right way, and in the right circumstances. And with Nation’s Best, we’re doing it in a conservative way that not only preserves the member investment, but sets forth an expectation for an aggressive return on that member investment. And our board has been fully behind it and supportive of it.
“Nation’s Best, for as good as what they’re doing already, they’ve acquired 10 great stores in less than 12 months with more in the pipeline—but they’re only one part of the solution in addressing an enormous opportunity. Nation’s Best is addressing ‘this much’ of it and that’s all they can handle. There are…today…hundreds of great stores, home centers and yards in search of a buyer. The problem is just that big. It is much bigger than anything any one growth-minded member could possibly do on their own, no matter how aggressive they get, no matter how fast they run. One member is never going to be able to address the entirety of what we see as this great big opportunity,” Starr stated.
He addressed one negative perception that has been expressed from some members about using member money to help just one member grow. “I want to address that head on. I don’t know if this is going to comfort you or alarm you, but we’re using member money every year for growth. More than what we’re talking about with Nation’s Best. If you didn’t already know this, let me be the first to tell you. Do it Best invests millions of dollars, every single year, helping members grow. That’s nothing new. We are committed to funding growth-oriented programs for all our members through low- interest loans, preference share repurchases, inventory support, store improvements and dating. We’ve even highlighted those programs in a Geared Up for Growth insert in your rebate packet this year,” he pointed out.
“In total, those member growth investments amounted to more than $20 million last fiscal year alone. The loans will be paid back, of course, but most of the other elements are not. We only ask our members to commit to remain members for a period of time, with the expectation that the increased volume will pay for the incentives offered and all members will benefit from our growth,” Starr said.
“Not only are these good investment strategies, we need to do more routinely. Because what really helps the membership is to have broad growth—not just pockets of growth here and there—but mechanisms that support our members so that we have growth going on everywhere. And the most effective member growth we can have is really for the store owner who has one store, or two stores, or three stores. Getting a hundred of our members growing with a second or third location is the most effective way to build up our numbers. That’s really what we want to see,” he added.
In the case of Nation’s Best, the investment support that Do it Best Corp. provided has been $19 million, according to Starr. “That’s a lot of commitment to direct to one member. But in exchange for that, I want our members to know we are getting a lot more in return. We expect to get the additional volume for those stores that are added immediately. In addition, Do it Best gets repaid every dollar of that $19 million, and Do it Best receives an annual rate of return that is above typical member loan rates. On top of that, after we’re paid back in full plus interest, our members will have a 25 percent ownership stake in the appreciation in the value of the business. Fully paid back, higher rate of return, plus 25 percent of the growth—and all that has to be done before any other shareholder distribution from the company,” Starr said.
Starr spoke candidly about what would happen if the co-op did nothing. “None of us come to work just to see the total number of independents in this country decline, and us decline along with it. But as I said, it’s not that business is going away. It’s just getting more and more concentrated at every level. We see it for the pro dealer lumberyards. We certainly see it in the traditional hardware store area, where you’ve got Ace, through two wholly owned subsidiaries, operating almost 200 retail locations right now. Until about five years ago, Ace was operating zero retail locations. Now they’re close to 200. That tells you something about how quickly market conditions can change. And I don’t expect them to slow down one bit. Now their strategy, I believe, has been mostly defensive to retain the volume. So, they’ve gone out and they’ve bought Westlake and then Great Lakes Ace. And then they’ve added to that. While it’s not entirely Ace locations they’ve added, it’s clear their strategy is to hang on to as much of the volume as they had,” Starr said.
He added, “There’s a lot of power that can come from having that many retail locations. Orgill knows it. They similarly created CNRG, and they have gone out and bought retail locations in an effort to grow, currently with (113) stores. For Ace and Orgill, they continue to add more volume to fuel their growth. And they both do it in the form of wholly owned subsidiaries, which we could have done, too. But frankly, as we evaluated that with our board, we felt that that is just not really who we are. While we have a lot of expertise in retail execution, a wholesaler simultaneously running retail can be a dangerous thing. The problem is they’re conflicted in their business objectives. Too often, they’ll run retail in order to benefit wholesale volume. Running retail operations is difficult enough, but if you’re doing it mainly just to hold on to volume. Well, both common sense and the history of our industry tells you the results are disastrous.”
Starr stated, “Our vision for growth is to support many members who are solely dedicated to excellence and execution for profit, at retail and give them every incentive and every opportunity to do well. To find members who have a history of doing that and doing that well, and then provide unique ways to develop growth opportunities. That’s the reason why we did it the way we did.”
He concluded, “Our investment in Nation’s Best—as well as investments in many other growth-minded Do it Best members—are not only the right thing to do, these investments are a necessary thing to do to remain your first and best choice.”