John Caulfield, Contributing Editor
 vol. ix, 17 April 28, 2003

* Rona seeks synergies from Réno-Dépôt takeover * TIM-BR Mart Ontario grows its commercial division * Home Depot slows Expo expansion * Lowe's commits to phase out wood from endangered forests * TruServ in U.S. makes online sales available to commercial customers

"Even if you're on the right track, you'll get run over if you just sit there." — Will Rogers (1879-1935)
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Montreal, QC Rona Inc. reaffirmed its position as the key consolidator in the Canadian home improvement marketplace with its announced acquisition of Réno-Dépôt Inc. last week. Rona will pay Réno-Dépôt's parent, Kingfisher plc in the U.K., $350 million in cash, which includes $257 million for the company's assets and operations, plus another $93 million for Réno-Dépôt's operational real estate.

The deal includes all 20 of Réno-Dépôt's big box stores, 14 of which are located in Québec and six in Ontario that operate under the Building Box name. Réno-Dépôt represents about 2.1 million sq.ft. of retail area and employs approximately 4,300 people. In 2002, it had sales of $846.6 million and operating profits (EBITDA) of $57.6 million. The deal will give Rona 61 large surface stores, and put its top line sales almost at par with Home Depot Canada's, which were an estimated $3.9 billion in 2002. The Réno-Dépôt takeover will give Rona about 12.5% of the market in Canada, including about one-third of the Quebec market. Kingfisher will use the sale proceeds to reduce its debt. Excluded from the sale is a portfolio of real estate for future retail development in Canada that has a current book value of around $36 million. Kingfisher intends to sell this off over time. The transaction, subject to customary conditions and approval by the Competition Bureau, is expected to close by late Summer 2003. The two companies will continue to operate as separate entities until that time. However, Rona will develop an integration team right away to evaluate synergies between buying teams and within the various operations of the two companies. Within days of the anticipated Summer-end closing, Rona will unveil an integration plan that will include a distillation of best practices from both companies. The team will also evaluate the dual banners. "There is a lot of awareness of both companies in the Quebec market and every year they are listed in the top five most admired companies in the province," says Sylvain Morissette, director of communications for Rona. "So that means the two names are really important for consumers and for the people of Quebec," he adds. Rona has already committed about $60 million to advertising, flyers and promotion this year and has about $100 million left in its war chest following the initial share offering it floated last Fall. This deal, however, has been funded by a syndicate of financial institutions - Bank of Montreal, Royal Bank of Canada, National Bank of Montreal, Bank of Nova Scotia and Desjardins - with bridge loans and credit lines totaling $700 million. To keep from depleting its cash reserves, RONA is reviewing the possibility of a new stock offering, depending on favorability of market conditions in the months ahead. In the meantime, cash flow from Réno-Dépôt's operations will go into a holding account for Rona, effective March 29, although profits and sales won't be tacked onto Rona's books until the deal closes. Rona will pay Kingfisher interest charges on the purchase price during that period. The company expects this cash flow to total about $25 million after interest payments and taxes. Speaking with analysts last week when the deal was announced, Rona president and CEO Robert Dutton pointed out some of the distinctions between the two companies. Réno-Dépôt maintains a traditional big box format, with emphasis on lots of selection, maintaining a SKU base of around 60,000, versus about 45,000 for the likes of Rona or a Home Depot. Réno-Dépôt is also considered stronger in contractor sales, with about 25% of sales going to pros, and puts more emphasis on construction. Rona, on the other hand, is strong in lawn and garden and seasonal, while its décor business is a core category for it. One of the synergies Dutton anticipates is the ability to develop Rona's private-label programs in the new stores. He also expects the existing distribution facilities in Boucherville to handle added capacity from the Réno-Dépôt stores. In fact, a lot of the logistics of that process will include simply cross-docking through the Rona warehouse or direct shipments to the Réno-Dépôt stores. The benefits of the deal are many for Rona, Dutton adds: it will increase the retailer's buying power and provide an influx of experienced personnel and best practices to Rona's rapidly growing store network. It will also beef up its presence in the all-important Ontario market, and reinforce the company's presence in the major urban areas of the Quebec-Windsor corridor. Rona expects to save about $35 million (pre-tax) through synergies realized on the merger of the two operations, with half of that saving being realized over the next 12 months. Rona has filed a long-form application with the Competition Bureau, and is confident the company will be able to hold on to all of Réno-Dépôt's stores, even the ones that are distinctly overlapping. Redundancies occur in Scarborough, in Toronto's east end, where a Building Box and Rona Home & Garden are right around the corner from each other. A Rona l'Entrepôt competes agains Réno-Dépôt in Sherbrooke, QC, and stores in St. Hubert and St. Bruno also overlap. Dutton says he expects sales growth from both the Rona and Réno-Dépôt operations to increase by about 5% in 2003.
Mississauga, ON TIM-BR Mart Ontario recorded double-digit growth of its buying group purchases in 2002, thanks in part to the expansion of its commercial sales division. Purchases through the group by all members were up 11% in 2002, while Commercial Independent Dealers, TIM-BR Mart's commercial arm, had an increase of 9%, accounting for close to $100 million of the group's total of $350 million in purchases. Top line sales by all members from both divisions were well in excess of $600 million, says Don Nash, president of TIM-BR Mart Ontario. CID was started five years ago within the TIM-BR Mart Ontario offices (then known under its corporate name, Homecare Building Centres). Starting with 20 window, door and siding companies, CID has grown to include gypsum specialty dealers and building oriented lumber suppliers. "We've slowly been able to pick players off, says Nash, "and give them our buying power in Ontario - and nationally - through Matreco. We've been able to offer great comparable programs." Nash says other synergies exist between the two divisions, in addition to the increased buying power. The technology driving the TIM-BR Mart website can be applied to the CID website, and existing credit card rates for TIM-BR Mart dealers can be applied to the CID members. CID now numbers 40 members, a dozen of them having joined within the past two years. Except for two who came over from the group's retail side when CID was young, all the commercial members represent incremental growth over and above TIM-BR Mart's existing membership. Nash says TIM-BR Mart Ontario purchases have already grown by 5% for the first quarter, despite the cold weather that has delayed construction throughout the province.
Atlanta, GA In 2003, Home Depot intends to spend a bit more than it did last year, accelerate the rollout of several in-store merchandising and display programs, and consolidate the retail and distribution operations of Georgia Lighting into two other divisions. These and other tidbits about the world's largest home improvement retailer could be gleaned from Home Depot's 10-k filing with the Securities and Exchange Commission, which provides details about the company's financial and operational performance in fiscal 2002, but also offers a glimpse of its plans for the year ahead. While Home Depot intends to open 206 stores this year, only two - in Phoenix, AR and Cleveland, OH - will be Expo Design Centers. However, Expo will get beefed up a bit as the chain consolidates five Georgia Lighting showrooms into Expo's operations. Georgia Lighting's distribution will be consolidated into the chain's Your "other" Warehouse division, which is currently handling Depot's special order business in plumbing and bath. What else is in store? Home Depot's total capital expenditures, which were reduced by 20.5% to US$2.7 billion in 2002, will rise to US$4 billion in 2003, much of that being earmarked for in-store remodeling and technology. Six Landscape Supply outlets will open in Texas and Georgia in 2003, bringing the total for that division to nine units. The chain will also open two more urban neighborhood stores in 2003, reportedly in Boston, St. Petersburg, FL or in Toronto. And while some building products suppliers continue to question whether Home Depot's Pro Initiative is actually increasing its penetration with contractor customers, the chain's commitment to this program remains unquestioned: it will expanding into another 204 outlets this year, in addition to the 1,135 stores that carried it at the end of 2002.
Vancouver, BC The sale of certified wood products remains a controversial and confusing proposition for retailers. During the recent Certification Watch Conference held here, one panel addressed the issue from the customer's perspective. Among the six speakers from three major corporations was Mark Buckley, vice-president of environmental affairs at Staples Inc. He reaffirmed Staples' commitments as outlined in its environmental procurement policy made public last November. "The goal is to increase the number of post-consumer content products and to use only paper made from post-consumer fiber for all of our internal operations," he said. Discussing the wood procurement policy of Lowe's Cos., Michael Chenard, that retailer's director of environmental affairs, declared Lowe's commitment to "phase out purchases of wood products from endangered forests … and give preference to wood products from independently certified, well-managed forests." Though not represented on the panel, Home Depot had introduced a new, undefined concept of "endangered regions" and a 2002 target date to end lumber sourcing from them. Home Depot adopted a list of the "most vulnerable forest eco-regions," defined by the World Wildlife Federation as regions from which the retailer would not secure lumber unless certified by the Forest Stewardship Council. The list includes a lot of tropical forests, yet the company claims that 94% of its wood comes from North America. A Home Depot policy review emphasizes the promotion of FSC products. "We sell more FSC certified wood than any other retailer in America and, at the same time, we have transitioned more vendors to FSC certified wood than any other retailer in America," the company said. About 4% of Home Depot's annual sales of wood products are derived from certified forests.
Canadian Tire 33.65 26.80 30.22
Canfor 11.70 6.83 8.39
Costco 41.86 27.00 33.05
Goodfellow 13.99 9.88 10.25
Home Depot 49.50 20.10 27.47
Hudson's Bay 14.95 5.87 9.06
Lowe's Cos. 49.99 32.50 44.42
Rona Inc. 6.10 11.75 15.60
Sears Canada 25.10 13.60 15.23
Sodisco-Howden 1.94 1.06 1.38
Taiga Forest 7.00 5.85 6.77
Wal-Mart 59.30 43.72 55.00
West Fraser 39.45 26.27 31.50
Boucherville, QC Rona has announced its commitment to add between five and eight more big boxes over the next 18 months. The stores will be in Ontario and the Western provinces. However, the first location identified will be in Kingston, about two and a half hours east of Toronto, where construction is just beginning. One more opening is slated for this year, most likely in Alberta. Seattle, WAHome Depot plans to open a 91,000-sq.ft. warehouse in Woodland, WA, just north of the Oregon border. It has already opened a distribution centre in Olympia. Home Depot has 23 stores in Washington, 14 of them in the Seattle area. Toronto, ON Home Depot Canada has partnered with the Clean Air Foundation to launch "Mow Down Pollution," a program for customers to exchange old two-stroke lawnmowers and trimmers for rebates of between $10 and $100 toward the purchase of a new, environmentally friendly mower or trimmer. The program will run until May 4 at all 90 Home Depot Canada locations. In the past, it was only run out of two Home Depot locations over one weekend. Chicago, IL TruServ Corp. has introduced online ordering capability for its commercial and industrial members, under a program called "Pick and Pack." The program will be available to the entire TruServ membership during the summer of 2003. Members can place as many orders as they want each day until noon Central Standard Time. The items are then shipped directly to members or to their customers that evening. The member and their customer will receive an e-mail that confirms the shipment and contains a UPS tracking number, as well. More than 17,000 items are available, including hand and power tools and electrical and plumbing supplies, plus new offerings of about 1,200 SKUs of safety related products. Federal Way, WA Weyerhaeuser Co. had a first-quarter loss of US$54 million, which includes after-tax charges of $11 million, compared with net earnings of US$30 million for the same period a year earlier. Sales increased to US$4.61 billion, compared with US$3.99 billion in 1Q 2002. Montreal, QC Tembec Inc. had consolidated gross sales for the second quarter of $857.8 million, up from $848.7 million in the same period last year. The company generated net earnings of $34.2 million, compared with a restated net loss of $63.0 million. EBITDA totaled $12.5 million, down from EBITDA of $50.0 million a year ago. During the quarter, the Forest Products Group generated negative EBITDA of $10.8 million on sales of $236.1 million. This compares to negative EBITDA of $7.2 million on sales of $232.3 million in the prior quarter. Oak Brook, IL Ace Hardware is raising money to support the families of military personnel engaged in the Iraqi war through sales of "patriotic" products available on Ace's website. Ace will contribute the money to the American Red Cross Armed Forces Emergency Services with matching funds from the specially identified products. Montreal, QC Globe Electric has signed a long-term contract with UPS Supply Chain Services Group to manage the distribution of Globe's products across Canada. Under the deal, UPS SCS will operate and manage all core logistic functions within Globe's Canadian supply chain, including warehousing and distribution. Three warehouse operations will be consolidated into a single distribution centre in Oakville, ON. Chicago, IL Kmart Corp. has received court approval to go ahead with its reorganization plan, and expects to emerge from bankruptcy within the next 10 days. U.S. Bankruptcy Judge Susan Pierson Sonderby signed the confirmation order after negotiations last week cleared away scores of objections to the plan from creditors, competitors and others.
London, UK Kingfisher plc, which bought out the majority interest in Castorama last year, is putting in a bid for the small parcel of shares it does not own. The offer will be made sometime in May, and the buyout is worth about €41 million. Last week, Kingfisher announced the sale of its Canadian division, Réno-Dépôt, for C$350 million. London, UK Wolseley plc has made a conditional offer for Pinault Bois & Materiaux for a cash consideration of £390 million, including net debt acquired. With about 300 locations, PBM is the second largest LBM distributor in France with more than 8% of the French market share and sales of £897 million. The offer, which is recommended by PBM's parent company, Pinault-Printemps-Redoute, is to be submitted to PBM's workers' councils by April 30, 2003. The acquisition will be financed from Wolseley's existing resources.
Dale Heiydt has been appointed vice-president and general manager for Eureka and Beam in Canada. He will report to Michael Piraino at Eureka, with dotted line reporting to John Coughlan, president of Beam Industries. Heiydt served as vice-president marketing and sales for Beam Canada for the past six years. Before that, he was with Hagemeyer Electronics in Toronto and he owned Sandale Solutions, a consulting firm focused on distribution growth strategies. Prior to that, he spent 22 years with Sears Canada … Heiydt replaces Richard Chapman, who recently became general manager for the Eureka Brand Group at its corporate headquarters in Bloomington, IL. (519-653-8880) Charles (Chuck) McCormick, formerly with Ceratec Inc., started with IKO Industries Ltd., effective today, as sales representative for New Brunswick and Newfoundland. He reports to Art Stanfield, director of sales - Eastern Canada. (905-457-5321) At Maytag Corp., Thomas A. Briatico, president of Maytag's Dixie-Narco vending business unit, has been promoted to president, Hoover floor care business unit. Briatico succeeds Keith G. Minton, who will retire effective May 1, 2003 … Douglas C. Huffer, vice-president sales and marketing - vending at Dixie-Narco, replaces Briatco as president of Dixie-Narco. (641-787-8185)
Retail sales rose 1.5% in February to $26.5 billion in February, says Stats Canada. This marks a slightly greater increase than the 0.9% rise recorded in January. A strong rebound in auto sales and increased gasoline service station sales drove the February gain. However, excluding sales by these retailers, retail sales declined 0.3% in February. The Consumer Price Index increased 4.3% in March, slightly less than the 4.6% advance recorded in February, says Stats Canada. This slowdown is explained in large part by a weaker increase in gasoline prices. Despite a decrease in housing starts in March compared with February, the underlying housing market remains strong thanks to employment growth, increasing incomes and low mortgage rates, says CMHC. Actual starts for the first quarter of 2003 exceeded last year's first quarter by 6.1%. Wholesale trade in March continued on a strong pace with an increase of 11.8%, or $28 million, compared with March 2002. According to the Canadian Institute of Plumbing and Heating, overall year-to-date sales are ahead of 1Q 2002 by 7.2%, or $49 million. British Columbia was strongest, up 20%. The West, which comprises Saskatchewan, Manitoba, and Thunder Bay, increased 12.7%; and Quebec showed gained a healthy 15.0%. Ontario, on the other hand, showed a decrease of 0.5%, and Atlantic Canada was down 1.0%. For the first quarter, HVAC/R was up an estimated 12%, hydronics was up 12%, plumbing increased 11.6%, PVF gained 12% and waterworks was up 17.5%.

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