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CANADA’S RONA TACKLES U.S. HARDWARE MARKET

By Jennifer Hopfinger

CANADIAN HOME IMPROVEMENT retailer Rona Inc. is heading south, with plans to open stores in the U.S. this year. Though the company declined to reveal specific plans and store counts, CEO Robert Dutton has been quoted as saying that Rona plans to acquire small regional chains and independent hardware stores in the eastern U.S. as growth opportunities in Canada slow down.

Rona, which began as a group of small Québec hardware stores, has grown into Canada’s leading retailer-distributor of hardware, home renovation and gardening products. It boasts about 560 franchise, affiliate and corporate stores, generating about C$5 billion ($4.2 billion) in annual sales. In Québec it boasts a market share of about 43 percent, and in Canada overall it claims roughly 15 percent.

Rona continues to bulk up on the home front, buying smaller Canadian retailers while building about 20 new stores annually. The company’s goal is to generate annual sales of C$7 billion by the end of this year. The acquisitions account for much of Rona’s sales growth, but the company has also seen sales rise in its existing stores.

The stores come in three formats: big boxes (anywhere from 75,000 to 170,000 square feet), midsize stores (about 40,000 square feet, plus an additional 10,000-20,000 square feet for attached lumberyards and garden centers) and small specialty shops. This allows Rona to serve markets of varying sizes and customers of diverse types and to anchor open-air and power centers.

Though south of the border Rona will be entering a market dominated by Home Depot and Lowe’s, opportunities abound, observers say. (Home Depot posts some $82 billion in sales annually, Lowe’s about $43 billion.) The U.S. market is still highly fragmented, with independent retailers making up 60 percent of sales volume in the sector. “There is room for consolidation in the U.S., and Rona is very experienced at that,” said Ed Strapagiel, executive vice president of Kubas Consultants, a Toronto-based consulting firm.

“Canada’s economy is about the size of Texas, but the U.S. is 10 times as large,” he said. “As a result, retail in the U.S. is much more regionalized, and regional chains can dominate certain areas.”

Moving to the U.S. is a logical step, suggests John Williams, founder of J.C. Williams Group, a Toronto-based retail consultant firm. “Rona has more or less saturated the eastern and central parts of Canada, and there are limited opportunities in western Canada because of population,” Williams said. “So obviously, they have to look at the U.S. market to grow.”

That said, the current state of the U.S. housing market presents challenges, some say. “The decline in the housing market has been more severe in the U.S. than in Canada,” Strapagiel said. “Rona is going to have to be cautious and move slowly.”

Some analysts say the housing drop may have bottomed out, or at least that it will do so shortly. “Will the housing market be bad forever? Of course, not,” said Howard Davidowitz, chairman of New York City-based Davidowitz & Associates, a retail consulting and investment banking firm. “There are cycles in every segment. Retailers should take a long-term perspective.”

And that is just what Rona is doing. The record for Canadian retailers entering the U.S. is mixed, however. Many have failed. Among the roadkill: hard-goods retailer Canadian Tire, fashion retailers La Senza and Le Chateau, and coffee chain Second Cup. Of course, there have been some terrific success stories as well, including Canadian National Railway, financial services firm Manulife and Canada’s largest convenience store chain, Couche-Tard.

But success in Canada does not always translate into success in the U.S. “Rona may be able to dominate Canada, but it’s going to be another ball game in the U.S.,” Williams said. “Rona is going from the minors to the majors.”

Strapagiel agrees. “Many retail sectors in Canada tend to have oligopolies, where there are two or three strong competitors that operate in a state of tentatively peaceful coexistence,” he said. “In the U.S. the number of competitors multiplies, and their coexistence is not quite so peaceful.”

But Rona is not without experience against these U.S. competitors back home. Home Depot entered Canada in 1994 and currently operates about 140 giant warehouse stores in 10 Canadian provinces. Home Depot Canada is the second-largest home improvement retailer in Canada after Rona. Lowe’s announced plans to open in Canada back in 2005. It will start with six to 10 stores this year and has an eventual goal of up to 100 stores across the country.

This invasion of its home turf has left Rona little option but to expand into the U.S., says Davidowitz. “Rona can’t stand still in the face of this threat from Lowe’s,” he said. “They have to expand somewhere. Moving into foreign countries isn’t easy, but the U.S. and Canada are neighbors who speak the same language, which helps.”

And Rona has some competitive advantages that give it a solid shot at success, he adds. “Rona is a unique home improvement retailer in that they have diverse operations,” Davidowitz said. “They are both a retailer and a distributor, and they have different store formats. Because they have the ability to go smaller in terms of store size — and they’re comfortable doing that, because they’ve already done so successfully in Canada — my guess is that they’ll target smaller communities in a few carefully selected markets. That could be their niche.”

Davidowitz is not alone in that assessment. “Unlike Home Depot and Lowe’s, Rona has a portfolio of banners that include big boxes and corner hardware stores,” said Strapagiel. “Some retailers have one concept, but Rona has many cards to play. If the big-box business goes soft, Rona can focus elsewhere. That’s a real competitive edge.”

Smaller stores offer better service and more-convenient locations, which could drive traffic to Rona, says Fred Miller, president of Germantown, Tenn.-based Consumer Specialists. “Rona could fill a different need in the marketplace,” Miller said. “In our studies we’ve found there is enormous cross-shopping in home improvement.”