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Crowded house: is a $60 million market big enough to support the growing field of home improvement stores?

THE LITTLE ROCK-North Little Rock market has become a destination of choice for retailing chains specializing in home improvements and building materials.

Home Quarters Warehouse of Virginia Beach, Va., and Lowe's Cos. of Wilkesboro, N.C., are preparing to enter the Pulaski County market confident they will win over customers.

The newcomers and expanding players will have to take a slice of the estimated $60 million pie from someone else to make a go of it.

And unless the market undergoes heretofore-unheard-of growth, industry observers are expecting a competitive shakeout during the next few years.

Home Quarters and Lowe's have not even started construction on their projects on either side of the Arkansas River. However, industry observers are predicting their entry will force someone -- or several someones -- to drop out of the market or endure a negative cash flow.

The only question in their minds is whether any existing players will bid adieu to the market or if any of the new entrants will bow out after an unsuccessful attempt to carve out a profitable niche.

"If you add up everybody's dreams and desires of what they're going to do here, there's not that many people or dollars to go around," says Bob Watkins, president and chief executive officer of Kaufman Lumber Co. in Little Rock.

In terms of sales volume, Kaufman is the third largest player in Pulaski TABULAR DATA OMITTED County behind Springdale-based National Home Centers Inc. and North Little Rock's OneSource Home & Building Centers.

(Neither Danny Funderburg, vice president of National Home Centers, nor Gene Pfeifer, president of OneSource, were available to comment for this article.)

The real dogfight should be over walk-in traffic from residential customers when Home Quarters and Lowe's make their presence felt.

Competitive forces are in motion for a real-life example of the old retailing one-liner: How can a company afford to sell goods below cost and yet stay in business?


Volume-driven sales are the fuel that feeds mass merchandisers like National Home Centers, Home Quarters and Lowe's.

But even a huge sales volume doesn't matter if the key equation used to measure the success of any business adds up to a negative number (revenue minus cost equals profit or loss).

"The only number that counts is the net |income~, the very bottom line," Watkins says. "If you didn't make any money, you wasted time and money."

Watkins is already numbering his enterprise among the survivors. He welcomes an escalation of competition with an open cash register.

"I'm glad some more competition is coming on," Watkins says. "We think it's good. The reason I say that is the best years we've ever had are the three years following when a new player comes in.

"I've seen a lot of people come and go in the 26 years since I've been here. I don't know if you could call it a cycle, although it does seem cyclical."

The procession of building material and home improvement players to exit the Little Rock-North Little Rock market includes big names like the Pennsylvania-based 84 Lumber Co. and Lowe's.

Lowe's blamed its exodus from the market five years ago on poor location. Lowe's was on Asher Avenue in west Little Rock, about two miles west of University Avenue.

Kaufman Lumber has made money at its Asher location, about a mile east of University, since it was founded almost 40 years ago.

The departure of Payless Cashways from the market is linked with a leveraged buyout attempt by the competing Sutherland Lumber Co., a Kansas City, Mo.-based chain.

Payless closed its Pulaski County operations as part of a corporate scale-down to pay the freight of fending off Sutherland.

Crate Deals, a related Sutherland enterprise, was one of the more recent players to vacate Little Rock-North Little Rock. There are Sutherlands ringing the metropolitan market in Jacksonville, Conway and Benton.

A similar tactic of competing on the outskirts of the metro area is employed by Ridout Lumber, which has facilities in Searcy and Benton.

Long-Bell, a division of International Paper Co., was a giant in the state that helped carry IP lumber from the tree to the mill and on to contractors for houses built on land owned by the parent company.

Planters Lumber Co., a former subsidiary of Winrock Development Co., was part of a bigger picture arrangement, too. Planters is listed as a price war casualty following National Home Centers' entry into the Pulaski County market.

Other companies that have gone to that great lumberyard in the sky are Moore Building Supplies, West End Lumber, Save-A-Dollar Building Supplies, Cash Lumber Co., Monarch Mill and Adam's Wholesale.

Entering With a Bang

Before setting up shop in Pulaski County, National Home Centers set a new tone in competition. The company hired aggressive recruiters to entice employees to leave competing lumber companies.

Head-hunters went so far as to go into Kaufman and OneSource stores and pass out cards soliciting job applicants.

How were such bold tactics countered?

In the case of Kaufman, employee retention is accomplished through the company's pay scale and profit-sharing program, which can go as high as 10 percent of an employee's annual salary.

"I work people as hard as anyone, but we try to make the pay fit the duties," Watkins says. "In 35 years, we've never had a layoff, and we won't. We're stable."

Watkins bought the business in 1974 and sold it in 1989 to Bell Equities. The enterprise, once owned by entrepreneur Melvyn Bell, is now controlled by his ex-wife, Darlene.

The industry norm for lumberyards is to turn a profit that averages 3 percent of total sales. Local companies can survive and even thrive despite the thin operating margins prompted by intense competition.

"As far as price wars go, it depends on your cash position, and we're in good shape," Watkins says. "We've got $4 million worth of inventory, and it's all paid for."

Key variables for smaller operations are carrying little debt, or none at all, and maintaining a home-field advantage with an established customer base and name recognition to ward off the big boys.

The debt-service burden associated with the overhead of a new facility is not lost on National Home Centers.

That issue is a driving force behind the company's efforts to rezone 17.7 acres on state Highway 10 where National Home Centers would develop a 184,000-SF facility. The savings in land costs afforded by the would-be site vs. a site already zoned for commercial development are substantial.

While expansion-minded companies like National Home Centers move to become a national concern like Home Depot, the Kaufman philosophy is that bigger is not necessarily better.

"Our attitude is we hate lunch hours, vacations and football games," Watkins says. "We're not smarter than anyone, but we think we can work harder."

The mounting competition will determine who the smartest and most hard-working firms are.
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Title Annotation:Little Rock, Arkansas
Author:Waldon, George
Publication:Arkansas Business
Article Type:Industry Overview
Date:May 17, 1993
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