We anticipate that close to three-quarters of Canadian home improvement and hardware dealers have ended 2011 with flat or negative growth (and, yes, most of them are in the latter category). And 2012 looks to be only moderately better. Housing starts are forecast to dip in 2012. Reno spending should be a bit more positive, affected as it is by sales of existing homes. In 2012, resales are expected to move up 4.6%.

Growth, then, will have to come from stealing market share.

But which retail formats will fare best? According to our 2011 Home Improvement Market Report, each retail format fared differently coming out of the recession of 2008, and each will face its own challenges in the coming year. Hardware stores can expect some growth in 2012, especially after seeing their collective sales drop by almost 10% in 2010. Some recovery will occur as consumers look to local markets as the “shop local” movement gains momentum, and as ageing consumers place more value on the convenience that smaller stores offer.

Building centres will make modest gains in 2012, though not as aggressive as the 3.1% gains made in 2010.

The retailers best positioned to grow are the big chains. And considering that the big boxes were most adversely affected by the slowdown of the recession and the two years that followed, they are expected to make the most significant gains in 2012.

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RONA had a tough first quarter. Sales were down 4.0%, while same-store sales were down a whopping 12.6%. But guess what? The entire industry had a terrible first quarter. It’s just that RONA has had to bare all because it’s a public company. But don’t kid yourself: dealers across the country are experiencing similar negative results.

It does not take a proverbial rocket scientist to understand why. The first quarter of last year was a strong one, driven by the spillover of consumer activity around the Jan. 31 deadline for the Home Renovation Tax Credit. That economic incentive was coupled with a cold winter that drove seasonal sales, followed by a spring came early. Canada had weathered the economic downturn better than any other country in the Western World. Consumers felt good – almost cocky about their good fortune.

But somewhere around the middle of July 2010, someone pulled the plug on that recovery. Overnight, the economy – and this industry especially – skidded into a decline that has continued to this day. In fact, for most dealers, 2011 is only just starting, and even now consumers lack the confidence to spend.

So RONA’s poor results are nothing if not a bellwether of the industry at large. RONA anticipated these results by laying off dozens of people in operations, merchandising (including one buyer) and at corporate stores. A powerful message to shareholders, and certainly a dramatic one. But more concerning is the imminent departure of CFO Claude Guevin, announced right before the quarterly results were released. Keeping Guevin around for even a bit longer would have sent a more reassuring message to those shareholders – and to the industry at large.

Besides, RONA is not alone. Canadian Tire announced its results on Thursday. How bad were they? Not terrible, by any means, but inventory levels were too high as products for spring just didn’t sell. Regardless, the company chose this week to buy Forzani Group and its 500 Sport Chek stores coast-to-coast. A defiant shot across the bow of Bay St. analysts if there ever was one. Home Depot Canada, which pertinaciously passed over Gino DiGioacchino for the top job in favour of an American, let its top merchant go a few short weeks later. More cuts were made a few days later as new president Bill Lennie continued to clean house, appointing Jeff Kinnaird to replace DiGioacchino.

In the U.S., conditions remain ceaselessly dismal, as housing starts hit new lows and foreclosures continue to suppress existing home sales. But at least down there, dealers are getting used to it. For Canadian dealers, spoiled by a glimmer of hope in the first half of last year, it’s time to get re-oriented to a new kind of retail, one that’s light years away from the double-digit increases that marked so much of the first half of the past decade.

Dealers – both large and small – have to face the new economy and the new consumer with an unflinching eye on gradual, long-term growth, rather than looking for dramatic quick fixes that shore them up from quarter to quarter.

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TIM-BR MART’s $50 million bid to purchase CanWel Hardware, which is being financed through HSBC.

Insiders suggest that the cost of inventory from both the London, Ont., and Victoriaville, Que., distribution centres would be around $25 million. That’s down from a high of a decade ago of $20-$25 million in each DC. If payables are to come out of the cost of the inventory, that would driving the cost of inventory down under $20 million. Based on that, the total cost to buy CanWel would be closer to $70 million.

Although TIM-BR MART has no history of running distribution businesses, both Rob Downs, promoted to president of CanWel Hardware just prior to the takeover announcement, and Andrew Allen, general manager of CanWel Hardware, are with the company and are expected to add valuable expertise.

Futura Holdings, through its CanWel Building Materials business, closed the purchase of 90% of Sodisco-Howden Group at the end of 2004 in a deal worth $64.3 million.

The two key real estate assets of the deal are the 350,000-sq.ft. London distribution centre and Victoriaville, which has more than 300,000 sq.ft. In its heyday, London generated about $150 million and Victoriaville used to generate another $200 million in sales and direct shipments. Add in LBM sales through Chalifour in Quebec.

Sales by Sodisco-Howden 2004 were $485.4 million. If total sales by CanWel — Hardware and Building Materials — were worth only $650 million at the time of the CanWel-Broadleaf merger earlier this year (down from $1.083 billion at the end of 2004), then the Hardware Division’s sales are estimated to be at least one-half of what they were in 2004 – or about $240 million.

Can TIM-BR MART generate sales from its own dealers to grow CanWel Hardware? Total retail sales by TIM-BR MART dealers are nearly $4 billion; subtract $1 billion for the strictly commercial and GSD operations that have virtually no hardware sales, then the remaining dealers would have at least 10-15% of their sales from hardware, or at least $300 million. In wholesale terms, that would amount to about $195 million.

If all those hardware sales were ordered through the CanWel warehouse, TIM-BR MART would be well on its way to getting its hardware wholesale business to critical mass, especially considering that it does not have to generate a profit for shareholders (as CanWel Hardware did), because it is dealer-owned.

Add in the fact that the purchase of CanWel Hardware is part of a strategy to help TIM-BR MART increase sales through the front end of their operations. Tim Urquhart, president and CEO of TIM-BR MARTS Ltd., said last month that the deal will increase the ability of his dealer members to strengthen their hardlines assortments.

There is still, however, a great deal of uncertainty around how independents will align themselves, especially in light of RONA’s acquisition of TruServ Canada. One major CanWel customer, Castle Building Centres, has already said it will look elsewhere for options, and new competitors like U.S.-based Orgill are making overtures in this market.

Where will the rest of CanWel’s business come from? TIM-BR MART already sits at the negotiating table with retail competitors within the Spancan buying group. ILDC is the main member, which includes Sexton Group, La Coop fédérée and Federated Cooperatives (the latter two are also direct members of Spancan). Whether they will see a future being supplied by CanWel Hardware has yet to be determined. With the support of Spancan members and loyalty of its own members, TIM-BR MART could potentially make CanWel Hardware work.

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