Alan Courtney was a loyal member of TruServ Corp. for three years. He kept the shelves at his ABC ServiStar Home Center store in Alpena, Mich., stocked with TruServ products and looked forward to his annual patronage dividend, a sizeable rebate on purchases he had made through the Chicago-based hardware buying cooperative.
Then TruServ made him change the name of his store from ServiStar to True Value. Then they told him he wouldn’t be receiving his 1999 dividend and his TruServ stock would be devalued because of more than $100 million in accounting errors at headquarters.
The final straw: He checked TruServ’s wholesale prices against those of its archcompetitor and found Ace Hardware Corp. cheaper on 70 percent of his core products.
Courtney switched to Ace in April 2000. He says it was an emotionally draining decision because he had a close relationship with his TruServ sales reps. In the end, though, the choice was clear: “I had to look out for what was best for me.”
Now, thousands of other TruServ members are trying to look out for themselves, too–with good reason. The co-op’s auditor, PricewaterhouseCoopers, has said it has “substantial doubt” about TruServ’s ability to continue in business. If the co-op can’t nail down a new asset-backed lending agreement by Sept. 30, TruServ would be left with few options, including a restructuring.
“Their vendors are starting to really worry, and their dealers are starting to look elsewhere,” said Sid Doolittle, a partner with Chicago retail consulting firm McMillan/Doolittle. “It’s a pretty desperate situation.”
If TruServ can’t restructure its loans out of court, a trip through Chapter 11 could be a significant distraction for TruServ’s management as well as for the 7,535 True Value Hardware store owners who still count on the co-op for everything from hammers and paint to advertising and in-store signs.
TruServ’s executives are adamant it won’t come to that.
Three asset-based lenders including GE Capital Corp. have completed their due diligence of TruServ and have given preliminary indications about how much they will lend, said Pamela Forbes Lieberman, TruServ’s chief financial officer and chief operating officer.
“Bankruptcy is not part of the picture,” she said. “Prospective lenders are quite happy with what we showed them. We’re moving in the right direction.”
TruServ expects to have commitment letters as soon as late August or early September and is in negotiations with its current lenders in hopes of getting them to continue financing the co-op beyond Sept. 30. A new asset-backed loan agreement should be in place by the fourth quarter, Lieberman said.
If her top 10 initiatives pay off–including consolidating warehouses, reducing returned merchandise and dumping slow-moving products–TruServ should be able to post a small profit of $15 million to $20 million in 2002, she predicts.
Currently, cash flow from operations has improved, and TruServ has enough cash to pay its suppliers on time, she said.
Even if a new loan agreement comes through, there’s no question that TruServ is troubled.
For decades, TruServ’s predecessor, Cotter & Co., prospered as the leading buying co-op in the hardware business. But in 1997, with Ace nipping at its heels, Cotter made a bold move, acquiring ServiStar Coast to Coast Corp., a rival co-op that was the result of a previous combination of co-ops.
The strategy made sense: With more members and bigger sales, the new company–TruServ–would wield more clout with manufacturers. That should have meant bigger quantity discounts and priority deliveries, something TruServ’s independent owners desperately needed to compete with the larger, aggressive home improvement chains like Home Depot, Lowe’s and Menards.
Merger complications
But the merger didn’t go according to plan. TruServ, which had pledged to allow storeowners to keep their ServiStar and Coast to Coast names, soon found that maintaining three brands of products was far more inefficient than expected. The delay in moving to one name and a single computer system delayed the integration of the companies, driving up merger-related costs.
The biggest setback came last year when TruServ owned up to years of lax accounting practices. More than $100 million in accounting errors forced the co-op to post a $131 million loss for 1999 and wiped out the patronage dividend to members.
Just this year, TruServ was forced to restate three years of its financials because of a different set of accounting mistakes. TruServ Chief Executive Donald Hoye resigned in July, and a search for a new CEO has just gotten under way. TruServ Chairman Bill Blagg is filling that role on an acting basis.
While TruServ’s new managers were fighting to get a handle on the situation, debt levels soared. TruServ’s liabilities total more than $1 billion because its accountants reclassified its long-term debt to short-term after the co-op defaulted on its lending agreements in February. TruServ executives acknowledge the co-op is carrying too much debt and have hired an investment banker to sell a paint factory in Cary, Ill., to raise cash. Still, even if a buyer is found, the expected proceeds of between $100 million and $150 million would make only a dent in TruServ’s debt.
As TruServ’s problems have mounted, its membership has headed in the other direction. As recently as four years ago, the co-op had more than 10,000 members. That number has shrunk to 7,535, but TruServ still ranks as the industry’s largest co-op in number of members and sales. Last year, revenue declined 11 percent to $3.99 billion.
Meanwhile, second-place Ace has been growing, helped by defections of about 125 TruServ dealers annually since 1996. The co-op racked up $2.95 billion in sales last year, a 5 percent increase.
Do It Best Corp., the third largest co-op, has been adding 300 dealers annually for the past several years, bringing its membership to 4,300. Sales in fiscal 2001, ended June 30, fell 10 percent to $2.20 billion as lumber and other commodity prices dropped, but profit was up 3.6 percent to a record $86.9 million.
In contrast with TruServ, Ft. Wayne, Ind.-based Do It Best is debt-free, and its overhead is only 1.8 percent of sales, compared with about 7 percent for its competitors.
Members grow discouraged
TruServ has tried to halt the outflow of members by placing a moratorium on redemptions of its stock, which members are required to buy when they join. But after a 65-percent devaluation in the stock related to the accounting errors, that investment is easier to walk away from, members say.
Courtney, for example, lost $25,000 of the value of his stock but says he made that back in one year with Ace’s patronage dividend. Still, the remainder is a lot to lose for those who have been with TruServ for decades. Some longtime members have $500,000 or more tied up in TruServ stock, which doesn’t trade publicly. And with TruServ expecting to post an operating loss in 2001, there won’t be a patronage dividend this year either unless the paint factory sale goes through.
As the co-op’s problems mount, the options of TruServ loyalists dwindle.
Courtney was lucky because Ace was happy to have him–a competing Ace store in Alpena had gone out of business. But other TruServ members who are considering similar moves may not find the same open arms.
Competitors act selectively
Ace and Do It Best have policies against accepting new members located near existing member stores. Even if they wanted to pounce on the disarray at TruServ, they don’t have the infrastructure to absorb thousands of TruServ dealers, officials at both co-ops say.
Their warehouses and ordering systems would be overwhelmed, and customer service would suffer, just like what happened in the late 1990s when TruServ acquired ServiStar.
“We need to be very selective,” said David Heist, senior vice president of member services at Do It Best. “We would never bring on new members to the point it would affect service.”
Likewise, Ace has positioned itself to cherry-pick TruServ’s best members. “We know exactly who we want. We know where they are and how they fit,” said Ken Nichols, Ace vice president of retail operations.
Ace has allocated extra resources this year to cover the cost of helping TruServ members convert to its ordering systems and signage. And it’s picking the brains of converts like Courtney to figure out how to make the changeover less traumatic.
That may be good news for the True Value storeowners that Ace has on its wanted list, but it’s just another thing for the top brass at TruServ to worry about.
