3 Perspectives on Consolidation in the Independent Channel

In recent years, independent operators have expanded their businesses by way of acquisition, due to a number of factors, leading to consolidation in the industry. To gain insight on consolidation trends, Hardware Retailing consulted an expert in home improvement business transition and two retailers who have been at the forefront of mergers and acquisitions in their own operations.

Jim Mallory founded Mallory Paint Store in 2006, opening its first location in Woodinville, Washington. The operation has since grown to include 27 locations in Washington and Idaho, and Mallory’s next expansion goal is to reach 36 stores by 2026.

 

 

Gary Pittsford is the partner and chief valuation officer of Creative Planning Business Services and has been guiding retailers through the succession planning process and consulting on acquisitions and sales for more than 40 years.

 

 

Chris Miller started in the home improvement industry at the age of 15. He established Nation’s Best Holdings in January 2019, which has since grown to 51 stores in 15 states.

 

 

Hardware Retailing (HR): Within the industry, we’re seeing a lot of consolidation and merger and acquisition (M&A) activity. What is your perspective on this trend?
Jim Mallory (JM): I think large operations will continue to grow, using their significant cash flow to acquire more stores and improve operations at every location, which will lead to fewer independent retailers competing against each other because there will be fewer in the market.

The majority of independent home improvement retailers are between 60 and 80 years old and have done exceptionally well over the last couple of years. Many of our acquisitions come from owners wanting to retire who don’t have another option for their business. These owners’ children are growing up, seeing how hard everybody’s working and then going to school to pursue other interests. Sometimes they return to the business after working out in the world, but not always.

Gary Pittsford (GP): Consolidation is occurring at a rate unlike any other over the last 30 years. I estimate about 50% to 60% of independent home improvement operations are acquired by industry buyers, a stat that has risen over time and drastically in the past five years.

I attribute the rise in industry acquisitions to retailers who don’t have family or staff who are prepared to take over their business. In many cases, retailers don’t create a succession plan in enough time to prepare for retirement, and selling to an independent home improvement retail buyer is a more immediate solution.

Chris Miller (CM): There are still over 12,000 independently owned hardware stores and lumberyards in America, and I only see the consolidation of our industry continuing at an even faster pace over the next few years. Through acquisitions, we find expert associates in many different fields, and we use that experience and knowledge to improve the company. I still believe our model of keeping local brands intact and focusing on the development of our newly acquired associates is the most sustainable model out there.

HR: What changes have you noticed in the M&A market in recent years?
JM: We haven’t noticed much of a change since we began acquiring in 2008 and have kept a consistent acquisition strategy. We look for a healthy company culture, a strong profit margin and a similar product mix to what we carry in our other locations.

GP: Looking back 20 or 30 years ago, there weren’t a lot of buyers, and there definitely weren’t as many as there are now. It also wasn’t as common for an owner to have multiple stores. The technology available today makes it a lot easier to run multiple locations, and having more stores allows operators to create more efficiencies as the business functions on a larger scale.

CM: I think acquisition activity has subsided since 2021 due to buyers being more cautious in the face of economic uncertainty. Lumber deflation and the pandemic have also made it difficult to properly value businesses. Our acquisition strategy has stayed fairly consistent since our inception in 2019. We still want to partner with best-in-class hardware stores and lumberyards that have long-standing roots in their respective communities and are already the dominant player in their geographic regions. Having the right management in place before the acquisition is important in our decision-making process.

We want “business as usual” after a closing, and placing new management in stores causes disruption, or at least the perception of disruption. I would advise anyone thinking of selling to concentrate on putting the right people in the right places for at least a full year before seeking a buyer.

HR: What are some other trends you think will be prevalent in the future because of the consolidation happening now?
JM: The prevalence of consolidation in the industry will lead to multistore operations with better pricing as they take advantage of buying opportunities more readily because they can shift inventory between locations if needed. This sets up the independent retailer to become more relevant and compete with big-box stores and even grow their contractor customer base.

GP: To avoid competing against independent chains that may have better advertising and pricing, small business operators are acquiring stores in their markets when possible, leading to even more consolidation. Consolidation leads to shared technology, best practices, knowledge and more between an increased number of stores. It also often leads to more cash flow, which companies can reinvest in their business to further improve it. As more stores reach higher standards of operation, the industry becomes better as a whole.

CM: I think consolidation will create more financially powerful companies, and along with that, an increased focus on technology. With the big-boxes being the forerunners in the technology trend, we are forced to make significant investments in our technology platforms and offerings to compete and meet our customers’ needs.

HR: What is one thing you wish all retailers knew about the business transition or acquisition process?
JM: Acquisitions are not personal, they’re business. I think the first thing retailers have to understand is their business is usually not worth what they think it is. It’s hard when it’s your blood, sweat and tears going into an operation, but when you start looking at profit and assets, you can see what it’s really worth, and the strength of their crew.

GP: Retailers need to have a succession plan in place as early as possible, not just six months before they want to sell. Having some sort of succession plan in place early, like upon acquisition, and reevaluating every five years or so will set their business up for success if something unexpected happens.

CM: The acquisition process can be stressful and full of emotion. It is critical that you partner with the right business that truly cares about your people. From the owners to the cashiers, if we all are aligned on the philosophy of always doing the right thing, it will drastically reduce that stress and emotion knowing the business and its employees will always come first.