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On the march in the Midwest

MENARDS IS COMING With big stores and bold moves, Menards...
GROWTH-MINDED Spreaders hang from the rafters of a merchandise-packed lawn-and-garden...

In Mansfield, Ohio, on what formerly was a quiet suburban street with modest ranch houses, there sits a sign of change to come.

The sign reads: “Menards is coming.”

Perched just half a mile from the nearest Lowe’s store and a mile from the nearest Home Depot, the sign also carries a cartoon picture of a hyperactive, grinning handyman sawing a two-by-four with gusto.

Menards expanded this year south into Missouri, further west into Nebraska, further east into Ohio, further north into Minnesota, bringing the total states in which it operates to 11. The $7.75 billion retail chain launched a new distribution center this year in Holiday City, Ohio, helping to feed expansion deeper into that state. Another distribution center is underway in Shelby, Iowa, to help shuttle products to the company’s westernmost stores and its new operations in Missouri.

The company implemented a new program selling groceries in some of its large format stores. Menards launched plans to open joint retail center and housing development projects, ostensibly to foster business among builders. To better track customer purchases, the company implemented a new data warehousing system.

Menards is not only privately held, but very private in all its business matters. The company declined to comment on a number of questions submitted by HCN, save to say, “Menards is a family owned company started in 1960, currently operating 230 stores in 11 Midwestern states.”

Unlike that hyperactive handyman announcing the company’s arrival to Mansfield, Menards’ actual expansion strategy has been methodical and level-headed. It so far has kept a strong hold on its home turf, as Lowe’s and Home Depot have been reluctant to challenge the upper-Midwestern stake.

But those times are changing, too.

Expansion

At 230 stores, Menards increased its store count by 20 compared with last year, or an increase of about 9.5 percent. That growth has been similar and steady in past years. Though not explosive, the company has made a name for itself as a lovable, lower-priced alternative to top competitors Home Depot and Lowe’s, experts say.

“People like Menards,” said Steve Spiwak, an economist and senior consultant with consumer research firm Retail Forward, speaking at a recent retail conference. “In a nutshell, Menards is a tough competitor. Their strategy going forward is to compete with these large format stores.”

Those super-sized stores are built at more than 200,000 square feet—some up to 250,000 square feet—with capacity to incorporate a wide range of furniture, food and some other non-DIY categories, he said.

“They’re seeing some success with that format,” Spiwak said.

“Fifteen to 20 [new stores per year] has been kind of the pace in the last few years,” added Nick McCoy, also a senior consultant at Retail Forward.

One of Menards major initiatives is expanding throughout Ohio, further east than the company has ever been, with stores planned or opened in the Ohio cities of Marion, Lancaster, Mansfield and Chillicothe. Essentially, they’re “slowly expanding through their Midwest territory,” McCoy said.

Home Depot and Lowe’s have not made the same expansion efforts into the upper Midwest area.

“They seem to have avoided going head-to-head [with Menards] in recent years,” Spiwak said. “Although that’s going to change.”

McCoy said that as Home Depot and Lowe’s expand more into the Midwest, the two biggest home improvement chains will have to confront the fact that Menards is “known for rock-bottom prices.”

“Home Depot and Lowe’s will emphasize more upscale products to be able to compete with Menards,” he predicted.

Diversification

As a response, Menards has tested several new concepts in the past year. Selling home furnishings was just one new step. Adding convenience groceries—milk, frozen pizza, soda—was another.

At store locations in Eau Claire, Wis. (the same location as the company’s headquarters); Saginaw Township, Mich.; Gary, Ind.; St. Cloud, Minn.; Grand Forks, N.D.; and Milwaukee, the company has added groceries to the stores’ inventories. Those stores employ “grocery specialists,” according to job listings posted by the retailer—“Prior experience in a grocery setting” is required.

A third retail concept, incorporating home building into the retail landscape, has expanded in the last year. In at least three sites—the Illinois cities of Yorktown and Urbana, and most recently in Warsaw, Ind.—Menards has implemented a combination retail store and subdivision model.

In Warsaw, a north central Indiana city with a population of approximately 12,500, the plan includes a 162,340-square-foot retail store and a 60-home subdivision, according to the local Warsaw Times-Union newspaper. The aim of the subdivision, Menards attorney Garrett Caffee told local officials, was to help encourage community growth, but also to sell building materials.

Distribution

Prior to 2007, the last time Menards opened a distribution center was in 1998 in Plano, Ill. But this year, the company launched two new combination manufacturing facility/distribution centers, in Holiday City, Ohio, and in Shelby, Iowa.

In addition to the stores mentioned by McCoy, Menards has opened and started construction on a cluster of stores directly inside that northeastern Ohio area. The company plans two new stores in the Toledo area alone—one store is under construction in the North Toledo area, while the company is seeking a building permit for a location in Oregon, Ohio, a suburb east of Toledo. The stores are slated to open in summer 2008, according to the Toledo Blade. There currently are five Home Depot stores and four Lowe’s stores in the Toledo metro area.

Shelby, Iowa, is a sleepy west-central town of just under 700 people—approximately the same number of people Menards employs at its finished distribution centers, according to some news reports. Shelby is just north of the company’s first Missouri store, in St. Joseph, Mo. A further new store is planned in Columbia, Mo., which is expected to launch in 2008 or 2009—the combined 250,000-square-foot store will include a 4-acre lumberyard, according to the Columbia Missourian.

Technology

In 2005, Menards opened its Online Collections, an e-commerce site focused on high-end items that in large part appeal to a different audience than the one shopping in Menards stores. Though it is still marked as a “new” feature of the company’s Web site, little has changed at Online Collections in the past year—consumers can still browse high-end fashion plumbing fixtures and Ottoman Empire-inspired rugs.

But aside from the visible e-commerce initiative, Menards recently opted to take a stronger behind-the-scenes look at its customer purchasing patterns, implementing a new data warehousing system with Dayton-based analytic technology company Teradata.

Generally, the data warehouse system can help Menards collect information about customer purchasing patterns, improving the company’s merchandising decisions.

Unlike its publicly held, NYSE-traded counterparts, Menards hasn’t been forced to offer running commentary on how the downturn in the United States housing market has affected its business.

But the numbers are clear: the Midwest has been hit very hard by the housing downturn. According to the National Association of Realtors, existing-home sales fell 2.2 percent in the Midwest in July compared with June, the biggest drop of any region in the country, and 5.6 percent compared with last year. And new home sales in July were down by 0.9 percent in the Midwest.

However, Lowe’s noted it recorded positive comparable-store numbers in the Ohio Valley in its most recent conference call, one of a handful of regional bright spots for the retailer. Home Depot also said the Ohio Valley posted positive comps in the second quarter.

Home improvement retailers are all feeling the uncertainty of the housing markets. In a sense, they’re all in this market together. And as Home Depot and Lowe’s set up shop in the upper Midwest, and as Menards crawls further south and east, it will be interesting to see what happens when finally green and blue and orange meet on an even larger scale.

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