Attention Harry and Harriet Homeowner!
Stiff competition is coming for the Hechinger Co.'s "world's most unusual lumberyards," which have dominated the local do-it-yourself market for years.
This week, Channel Home Centers, a subsidiary of the nation's biggest home-center operator, is moving into Hechinger's back yard.
Hoping to make substantial inroads into Hechinger's large share of the market, Channel plans to open two stores in Northern Virginia this week. Harry and Harriett Homeowner, the cartoon characters who people Hechinger's advertisements, will face off against "Dr. Wally," a home-improvement expert who gives consumers advice on a toll-free hot-line.
At the same time, Scott's Home and Garden Centers is seeking to revitalize its 17 Virginia and Maryland stores, touting its "warehouse discounts" in the hopes of maintaining its self-proclaimed image as "the do-it-yourselfer's best friend."
"Hechinger is going to find that its lock on the market is being tampered with," says Eliot H. Benson, director of research at Ferris & Co. "This will require Hechinger to be more aggressive and promote more heavily."
For consumers, Benson adds, this competition "will be beneficial right off the bat, as all stores cater more to consumers with lower prices and better value than they have been providing."
Hechinger has already started a campaign promising it will not be undersold. In an effort to shed its high-priced image, Hechinger now guarantees that it will beat any competitor's advertised price by 5 percent.
The competition in Washington is part of the intense battle among do-it-yourself supermarkets that is being fought up and down the entire East Coast.
Hechinger launched the war two years ago when it declared it would invade Channel's territory by opening stores in Pennsylvania. To date, Hechinger has established seven stores in that state, including four around Philadelphia, and it plans to open a total of 15 stores in the Philadelphia area alone.
Hechinger is not just moving north. It has also opened five new stores in North Carolina, putting it in direct competition with Lowe's, which was ranked as the fourth largest home-center retail chain by National Home Center News, a trade newspaper for the home-improvement industry.
By the publication's account, Hechinger, with its 37 stores, is the nation's eighth largest home-center chain. Channel ranks seventh on the list, but is a subsidiary of W. R. Grace & Co., which owns five other home-improvement chains, making it the largest operator in the industry.
Hechinger hopes to climb to a higher ranking through expansion plans that call for creating seven to eight new stores a year. Four store openings are slated for the next three months, including one in Sterling, Va., next weekend.
"Our intention is to move into the rest of the Eastern territory--into New York, Connecticut and the New England states," as well into the South says the company's president, John W. Hechinger.
Even so, Channel's move to the Washington area represents the first time a large chain has challenged Hechinger on its home ground. As a result, analysts caution that Hechinger may be confronted with stiffer competition than it has seen in its moves north and south.
The challenge will not be on any small scale, notes Channel President and Chief Executive Officer Leon Berger. In addition to the first two stores in Northern Virginia, Channel plans to open two Maryland outlets--one in New Carrollton, the other in Forestville--by the end of September. A fifth store is slated to be opened in Rockville sometime next year.
What's more, says Berger, "we are currently negotiating for five more locations in the Washington area. Others will follow. We put no limit at this point. . . . We plan to make ourselves as attractive as possible to consumers and hope our acceptance will be strong and quick so we can move into Baltimore."
The Washington area is a "rational extension of our trading area," Berger says, noting that the company's 95 stores serve suburban areas from New Hampshire to Maryland.
"Our purpose is not to do anything to anybody, but just to carve out our market share," he says. "The demographics in Washington indicate we should do well.. . . The median income is high and the employment situation is probably better than anywhere else in the country. Numbers suggest that the area will support another home center of our type in the market."
Channel was founded 75 years ago as a lumberyard and for 60 years operated as a wholesale lumber and millwork dealer. In 1969, Channel set up its first do-it-yourself supermarket in New Jersey.
Later, Channel sold stock to the public to obtain more capital and in 1977 became a subsidiary of W. R. Grace, the conglomerate that operates six home-improvement chains, including Handy Dan in the Midwest and Handy City in the South.
With capital from Grace, Channel has expanded from 33 stores in 1977 to 99 by the end of this year.
Grace does not report sales or profits for Channel alone. But, according to National Home Center News, revenues totaled $260 million last year, slightly above Hechinger's 1982 sales of $241 million. This year, Grace officials predict Channel's revenues will climb about 15 percent to $300 million.
In many respects, Channel's operations are very similar to Hechinger's, offering "just about anything you would need to renovate your home or decorate your home from a structural point of view," says Berger.
Channel operates somewhat smaller stores than Hechinger. Channel's model store has about 43,000 square feet of space, compared to Hechinger's 60,000 square feet of inside display space and 20,000 feet of outside space. Where Hechinger carries 40,000 different items in its full-size stores, Channel carries an average of 25,000 to 30,000 items. For the Washington stores, managers say the selection will be much broader than the typical Channel store, with 35,000 different lines.
Absent from these merchandise lines are the small appliances and plants that Hechinger carries. But Channel officials boast they will carry some items not normally sold at Hechinger, including lumber sold in two-foot lengths. "Consumers won't have to buy a 10-foot board to do a small project," says Barry Lewis, manager of the Alexandria store.
Prices are fairly comparable between the two chains, according to a price survey by National Home Center News. The survey, conducted last year, shows that Channel was cheaper than Hechinger 11 out of 20 times, while Hechinger beat Channel's prices nine out 20 times.
To capture customers, Channel will try to better that ratio--especially at the beginning, analysts say. "We will offer lower prices," says Berger. "But we don't expect Hechinger to sit there and take it either."
Although their lower prices will be important, "I don't believe that will make us a better company than anybody else," says Lewis. Instead, he predicts Washington consumers will come to Channel stores for their service, which Lewis and other company officials say is the key to Channel's success.
Part of Channel's service program is "Dr. Wally, Home-Doctor," through which consumers can call "Wally Barnett" (or two other home-repair experts) on a toll-free telephone number during store hours to seek advice on everything from repairing a leaky roof or faucet to installing a new thermostat or hanging wallpaper. "Always having someone to answer the questions you inevitably have during the middle of a do-it-yourself project" is an important plus, says a Grace company official.
Additionally, Lewis boasts, his stores and others will be offering nine one-hour-a-week classes to give consumers a variety of home-improvement tips, such as how to install plumbing, make electrical repairs and lay insulation.
In the fight between Channel and Hechinger, the smaller Scott's stores will not be ignored.
"We know that Hechinger and Channel are going to go after each other and we're going to let them do their thing," says Scott's President and Chief Executive Officer Earl R. Halterman Jr.
After doubling the company's advertising budget this year, Halterman has launched a massive advertising campaign in newspapers and, for the first time, on television to make Scott's name more familiar.
"We're a small public corporation that's had some unfortunate difficulties--a lot not necessarily of our own making," says Halterman. Confident that the company has now overcome its 10-year string of bad luck, Halterman believes that Scott's is ready to become a strong contender in the area's do-it-yourself market.
If recent earnings are any indication, Scott's is becoming a healthier competitor. Last week, the parent company, Scotts Seaboard Corp., reported record earnings for the three months ending July 30 of $1 million, which is more than 12 times the $80,000 profit the company posted for the same quarter in 1982. About half of the recent earnings were attributed to a one-time $378,000 tax credit and a $230,000 profit from the sale of its wholesale lumber subsidiary, Seaboard Plywood and Lumber Corp. Yet even without those one-time earnings, company officials note that the company's pre-tax profits for the last quarter were up nearly tenfold, from $64,000 to $625,000.
With the sale of the millwork subsidiary, Halterman says Scott's can now turn its attention to the retailing business, "so we can regain the ground we've lost over the years to Hechinger."
Had it not been for its difficulties, Halterman said, "we certainly would have been equal or very close to Hechinger today."
The trouble began when Scott's, founded in 1961, was acquired in 1972 by a real-estate development firm, North American Development Corp. Scott's counted on its new parent to provide funds to expand its operations. "We had picked out 12 to 14 new sites and were ready to go forward," said Jim F. Iampieri, Scott's vice president and controller.
But trouble hit NADC when the Nixon administration slashed federal housing funds. The cutbacks devastated NADC, which was heavily involved in low-income, government housing in New England. The company filed for bankruptcy in 1978.
"That really stifled the growth of Scott's," said Halterman. "We not only couldn't open any stores but we had to close a couple of stores" and spend all of the company's time on bankruptcy reorganization instead of expansion, he said.
Just as it was about to get out of the doldrums, Scott's decided to buy the ailing Frank's Hardware chain. But turning the new stores into profitable ones that fit Scott's mold proved more difficult than the company expected, especially as it tried to get rid of overstocked, unpopular goods. The recession only made matters worse.
With earnings now on the rise, Halterman is confident that the long-awaited turnaround is on the horizon. He is getting ready to launch an all-out drive to gain a larger share of the market.
Although he notes that his firm lacks the same financial resources as his competitors, Halterman plans to set up two to three new stores a year, all in the Washington-Baltimore area. Halterman says the company also is considering expanding its merchandise lines by selling more unfinished furniture and perhaps more lawn and garden supplies and drapery goods--all in an effort to draw more women into their stores.
Halterman concedes that his 17-store chain has a long way to go before it can match Channel or Hechinger. For one thing, the stores stock only about 10,000 different items--one-quarter the number of either of the big chains.
"We don't have quite the selection of our competitors," Halterman acknowledges. Nor, he adds, "are we quite as fancy. But we always try to stay very competitive with our pricing."
Halterman says that Scott's can do that because its overhead is lower, especially considering that its advertising budget is far smaller than Hechinger's. This year, Hechinger is spending about $11 million on advertising, according to John Hechinger.
The lower overhead does make Scott's one of the cheapest do-it-yourself stores in town, Ferris' Benson says. "It doesn't have any big share of the market, but there is no question that it has probably the lowest prices in town. Unless it is on sale at Hechinger--and even when it is on sale--prices at Scott are usually a lot less."
John Hechinger disagrees, however, contending that, item-for-item, his stores match--and frequently better--the prices of his competitors.
"The fact is we are not high-priced," Hechinger argues, disputing the financial analysts and industry experts who rank Hechinger as one of the highest priced chains around.
"We have no sawdust on the floor and no dust on the shelves and the floors shine like a Dutch kitchen. All the paint cans are neatly lined up with the labels and handles all facing forward. That, unfortunately, gives us a high-priced image," he says.
Hechinger appears unconcerned--at least publicly--about the increased competition the company is facing.
"We have met Channel through our invasion of the North and we have found that we so out-assort them that people welcome our coming," he said. As proof, he said that for the company's first year of operation near Philadelphia, sales volume per store "was equal to the same volume of the stores in Washington, where we've been for 72 years." Hechinger's market share in Philadelphia is already 10 percent--half of the 20 percent share Hechinger has here, he added.
Even so, Hechinger said, "should there be any attempt to do any lowering of prices to attract our business to Channel's new enterprise . . . we will continue our policy of beating their prices by 5 percent."
The policy, begun last year on an experimental basis in Hechinger's new store in Lancaster, Pa., was implemented on a store-wide basis a few weeks ago--just in time for Channel's arrival in Washington.
Under the new pricing plan, if a customer brings in any competitor's advertisement showing lower prices than Hechinger, the company will sell the same exact product--as long as it is in stock--for 5 percent below the competitor's price.
Hechinger is confident that this policy will not reduce the company's profit margin, saying that the number of times this policy was invoked in Lancaster was so small "that the number of rebates amounted to no consequence whatsoever."
Such pricing policies and the company's geographic expansion have not affected Hechinger profits. Net earnings for the quarter ended April 30 were up 21 percent to $2.4 million (17 cents per share) from $2 million (15 cents) in last year's quarter. Annual earnings for 1982 were up 37 percent to $11.7 million (85 cents) from $8.6 million (62 cents) the year earlier. The company had a 5-for-4 stock split in September 1982 and a 3-for-2 stock split in January of this year.
Hechinger stock, which the National Association of Securities Dealers began quoting last week in its National Market System listing, closed Friday at 24 1/4, down 1/2.
Financial analysts who closely follow the firm say Hechinger is bound to feel some profit squeeze. Nonetheless, as Kenneth Gassman of Wheat, First Securities Inc. in Richmond notes: "Hechinger's has 40,000 items, of which about 150 are price sensitive, such as two-by-fours, that consumers can competitively price. If Hechinger really gets into a severe price competiton, they can price to meet or beat comeptition and still not substantially hurt their profit margin, because there will be 39,850 other items on which they can adjust the margins."
Gassman believes that there is plenty of room for both Hechinger and Channel in the Washington area. "The key to operating a successful home center in Washington is location, not prices. Proximity counts because people don't like to get into their cars, drive miles and miles for six two-by-fours and a pound of nails."
Because Channel is positioning itself between Hechinger's and Scott's stores--and not across from them, all should be able to survive--at least for a while, Gassman says.
Yet, notes Scott's Halterman, "we anticipate other competition. We wouldn't be surprised to see more of Lowe's here," he says, noting Lowe's already has some outlets in the area.
"If in the next five years you get one or two more chains in Washington, without a population increase, then you could get some sales and profits squeeze," he predicts.