The retailer-owned company is holding its own against the big-box superstores. Don't worry: Ace Hardware just fine

OAK BROOK, Ill. - Every time he gets on an airplane wearing his gray Ace Hardware work shirt, Ray Griffith hears expressions of concern.

Fellow passengers always want to know if the venerable cooperative is managing to get by in the face of competition from ever-proliferating home-improvement superstores. It's a question that Griffith, Ace's chief executive officer, says he finds almost embarrassing - because the retailer-owned company is doing so well.

"All our vital signs are very positive," Griffith said in an interview at Ace Hardware Corp. headquarters west of Chicago. "And people seem to be almost amazed at that."

There is no need to worry about Ace. A focus on convenience and knowledgeable service has enabled the 4,600-store chain to stake out a modest but healthy share of the huge hardware market, providing the impetus for the biggest new-store expansion in its history.

The 83-year-old chain just concluded its best sales year since 1998, with wholesale sales up 6.5 percent to $3.4 billion and a record bottom line exceeding $104 million, based on preliminary figures. Its stores, about two-thirds of which are owned by independent dealers, racked up almost $12 billion in retail sales.

While mega-retailers the Home Depot Inc. and Lowe's Cos. Inc. are expected to report about $140 billion in 2006 sales between them next month, Ace appears to have outperformed the two leviathans in same-store sales growth for the fourth year in the last five.

In addition, Home Depot is under fire for spotty customer service and sluggish sales in its warehouselike stores, along with a lagging stock price, which led to the abrupt resignation this month of CEO Bob Nardelli.

Big enough in its own right to make periodic appearances in the Fortune 500, privately held Ace nonetheless embraces a David-vs.-Goliath role as protector of the small-hardware-store owner.

"We come to work every day on behalf of the entrepreneur," Griffith said. "We have a chip on our shoulder about the big boxes, and we like that. We like being the underdog. America loves the underdog."

Ace has been looking out for individual entrepreneurs since its founding in 1924, when four Chicago-area hardware-store owners united to increase buying power and profit.

Dealers own their individual stores and shares in the parent organization, which distributes its profit to them in the form of sizable annual dividends. They stock their stores from Ace's 15 warehouses across the country, although they also can buy elsewhere, and Ace provides them with group buying power, distribution and marketing support, and a powerful brand name.

Ace is not the place for the lowest prices or the biggest assortment of home-improvement goods; the big boxes have it beaten in those categories. But analyst Howard Davidowitz said it was nonetheless doing "tremendous" business by emphasizing convenience and by continuing to upgrade the aesthetics of the stores.

"It's not a question of price, or they're out of business a long time ago," said Davidowitz, chairman of Davidowitz & Associates Inc., a New York-based retail consulting and investment-banking firm. "It's a question of convenience and service.

"Their stores are bright, organized, and have the key [product] categories," he said. "They have carved out a niche, and it works."

Ace patterns itself after Walgreen Co., the fast-expanding drugstore chain that aims to own every corner in counting on convenience in the battle against its own giant nemesis, Wal-Mart Stores Inc.

The hardware cooperative is not growing quite as rapidly, but it is opening a new store about every other day - 188 in 2006, 180 planned in 2007. Already, 50 percent of the U.S. population is within three miles of an Ace store. "The opportunity," Griffith said, "is the other 50 percent."

Old stores have been remodeled, and new ones are larger at an average 14,000 square feet, still puny compared with a 120,000-square-foot superstore, but up from 8,000 to 10,000 previously.

Lighting is brighter, aisles are wider, ceilings are higher, and the mix of merchandise has changed as Ace has encouraged its retailers to cater to a new breed of home-improvement shopper, one that now includes 40 percent women in its stores and a declining percentage of do-it-yourselfers.

Much of its trademark red has been removed from store decor, replaced by softer colors such as beige, with women in mind. And the high-end Benjamin Moore line and many new colors have been added to its paint section, reflecting that 90 percent of paint colors are picked by women.

Even its longtime slogan has changed to "Ace is the place for the helpful hardware folks," not man, because of the clientele's shift in sex.

Ace is changing the way it advertises, trying a guerrilla-marketing campaign, because consumers are harder to reach through traditional advertising. It is sponsoring a contest called Dream Ace, with the winner being set up in his or her own $1 million store.

"We think we have a great upside in simply filling in the marketplace around the big boxes and offering the consumer a different kind of value and a different kind of helpfulness that the big boxes simply can't or don't want to do," Griffith said. "That has proven to be very effective for us and rewarding for both our existing retailers and investors as well."