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How to Open a Hardware Store: The Complete Guide
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Although competition is fierce and profit margins are thin, hardware stores have enjoyed a small but steady 3.3 percent period of growth in the last five years. And these businesses continue to have special appeal to a certain type of entrepreneur, according to John Haka, longtime managing director of the Midwest Hardware Association.
“There are many independent hardware stores out there that are consistently profitable, but it’s a challenge,” Haka said. “Most of our people are not doing this to become tremendously wealthy. What motivates them is that they like to be helpful. They want to provide assistance to their customers and they like to be involved in their community. Many run multi-generational stores that have deep roots in their communities.”
If you’re that sort of entrepreneur — and operating your own shop sounds like a little piece of hardware heaven — this could be a good time to dive in, Haka said. Keep reading to understand ownership options, challenges you’ll face and the strategies most likely to make you successful.
Opening a hardware store: What you need to know
Big box stores like Lowe’s, Menard’s and Home Depot certainly sell a whole lot of hardware. In fact, Home Depot and Lowe’s dominate the hardware retail channel, and they’ll likely play a significant part in your daily operations if you open a hardware store. Take a look at running a smaller store — such as a traditional, independently owned, retail hardware store — or a branded franchise like Ace or True Value.
According to global industry market research firm IBISWorld’s April 2018 study, there are 20,306 hardware businesses operating in the United States, employing 154,900 people and generating $27 billion in revenue. Industry revenues are expected to keep growing over the next five years, although increasing competition, particularly from big box stores, could negatively impact profits.
Most of those independently owned stores, according to Haka, sign on with a wholesale supplier or buy a cooperative for supplies and support. Wholesale suppliers include Orgill Inc., HDW Inc., Reiss Wholesale Hardware, and others including, very recently, True Value Hardware. Until mid-May 2018, True Value and Ace Hardware were the two largest buying cooperatives in the country. Because, however, True Value recently sold 70 percent of its stock to a private equity firm, it will now serve as a wholesale supplier to any store, regardless of affiliation — something very new for the industry.
Cooperative store owners buy shares to become members and benefit from the group’s more powerful purchasing power. They receive yearly rebates after buying inventory from the cooperation. These cooperatives include Ace, the largest with more than 5,000 member stores, United Hardware and Do it Best. Along with True Value, those four are responsible for 70.8 percent of the industry’s revenue. In addition to providing member stores with greater purchasing power and a consequent competitive edge, buyer cooperatives offer an established brand, proven business model and ready-made supply chain.
Charlie’s Hardware in the small town of Mosinee, Wis., is one of those family owned, independent stores with deep roots in its community. One of six hardware stores in Mosinee when Charles and Agnes Kyhos founded it in 1957, Charlie’s is now the only one in town — although there are plenty of competitors, including big box stores in nearby towns. Charlie’s, though, has thrived as a member of the Do it Best cooperative.
“Their buying power allows us to be a lot more competitive, price-wise,” said third-generation owner and general manager Jeff Kyhos. Jeff and his wife Pamela bought the store from his father Chuck, who bought the store from his father.
“They also have a lot of infrastructure to assist members with store design, advertising, and a lot of other things we don’t have time for because we’re busy with day-to-day operations. And most of it is no charge,” Kyhos said.
When Kyhos bought the 12,000-square-foot store in 2009, he wasn’t particularly worried about the big box stores a few miles away.
“We can compete with them, usually,” Kyhos said. “We just have to be price competitive and provide services the others don’t. But today, Amazon and other big, online retailers are creating additional challenges for us on top of what we already had.”
That means Kyhos has to be highly strategic to make sure his family store continues to prosper.
How much does to cost to open a hardware store
Before assessing the challenges you’ll face as a hardware store owner, consider how much it costs to purchase one. The answer depends not so much on the market as the cost of inventory, which remains more or less the same, Haka said. Whether you purchase your inventory from a wholesale supplier or as a member of a buyer’s cooperative, the actual cost of the inventory should be similar, he said.
Buying from a wholesaler means you can control how much you spend after inventory on other things, such as fixtures, equipment (including computer systems), and so forth. Buying into the established operating procedure of a cooperative like ACE could mean paying more for those and other items.
According to Haka, inventory typically costs from $50 to $60 per square foot. That means a 10,000-foot store (the industry average is 9,500 feet) would cost $500,000 to $600,000 for inventory alone.
“The actual startup cost for a store that size would probably be more like three-quarters of a million or a million dollars,” Haka said. “By the time you buy a computer system, add fixtures and equipment and all the other things you need to get a store up and running. And that doesn’t include buying real estate. It’s assuming rental rather than purchase.”
It’s important to remember, however, that hardware stores come in all sizes and some are often considerably smaller than the industry average. In fact, it’s possible to run a profitable hardware business in a 1,500-foot store, Haka said. And a store that size would obviously cost significantly less to open.
If you decide to buy into a franchise, costs can vary, depending on the size of the store and whether or not it’s a rental, new construction or a conversion. Ace, for example, asks for an initial investment of $272,500 to $1.06 million for leased stores; $344,500 to $1.6 million for new construction; and $30,500 to $821,500 for conversions. Plus, there’s a long list of other, potential fees.
It’s worth noting that although Ace and other cooperatives are often called franchises, they don’t really fit the definition of the term, according to Haka. In other words, they don’t operate on the classic McDonald’s model, in which franchisees agree to run a cookie-cutter operation and return a certain amount of revenues or profits to the parent company. Ace cooperative members pay for the right to use Ace branding and operating systems, but they remain entirely independent as owners, he said.
“The typical franchise model doesn’t exist in the independent hardware industry,” Haka said. “You’ll be able to run your business your own way.”
You might also consider buying an established hardware store instead of starting up a brand- new business. That could be a smart decision because succession — finding someone in the family eager to keep the business going — has become a problem for many store owners, Haka said.
“The next generation does see how hard mom and/or dad had to work, how challenging the business is, and that some financial risk is involved — and often don’t find that appealing,” he said. “This business is not for everybody. Sometimes we see hardware stores go away simply because no one in the family was interested in carrying it on and no one outside the family was interested in purchasing it.”
That means store owners hoping to sell might be motivated to offer favorable terms — and possibly even assist with financing. Regardless, Haka said, most people will have to take out some sort of loan for the startup. You can learn more about franchise financing here.
Most likely, you’ll need a traditional small business loan given the size of the investment. And business lines of credit might — from your lender and your wholesale supplier — be another solution to cover inventory purchases. You’ll also have to factor in expenses such as commercial insurance and workers compensation if you have employees.
Challenges and success strategies
The challenges of operating a hardware store begin the moment you open your doors. Although you can definitely run a profitable business, Haka said, hardware stores typically aren’t as profitable as other types of business. “Though that’s probably true of retail in general,” he said.
Haka recalls a 1990s-era training video for hardware store owners called “Our Three Pennies of Profit.”
“The basic message was that only about 3 percent of each dollar a store might have on the top line would fall through to the bottom line as profit,” Haka said. “And those three cents have probably become more like two cents or one-and-a-half cents today.”
In other words, hardware stores are businesses with thin margins, so owners must keep expenses under control. That means, among other things, making sure inventory is maintained at just the right levels.
“Growing up in the business I know inventory is a big deal,” Kyhos said. “It’s the largest overhead you have and you have to stay on top of it. We’ve been computerized for a long time, but when I came back I insisted we should use automatic ordering.
“Our system combines inventory tracking with sales. That way, it knows when an item gets down to three on the shelf and automatically orders it back up to five, keeping it in stock. Now we’re looking into a system that will identify months with fast and slow sales and adjust inventory to reflect that.”
Kyhos also considers his e-commerce site — provided by Do it Best — and social media marketing essential. “People can’t compete. Software is so much faster and more efficient,” he said.
Making sure stores have items available for sale is one way hardware store owners can cope with increasingly intense competition. It’s important you have what your customers need on hand, but it’s even more important to make sure they prefer to shop at your store —for convenience, personal service, expert information or a pleasant shopping experience.
“I can go to a lot of different places and buy a hammer,” Haka said. “You have to be able to convince me I’m better off coming to your store to purchase those things. Whether it’s for convenience, or knowledge you can provide, or friendly, personal service. All those things contribute to a pleasant shopping experience and help create loyal customers. Successful hardware stores find a way to deliver that experience consistently.”
Kyhos agrees that an enjoyable shopping experience is key. To that end, Charlie’s provides free coffee always, free popcorn Fridays and Saturdays, and even a well-stocked jukebox in the paint department that customers can use for free. He also updated the lighting and made other upgrades to give the store an enjoyable shopping environment. Kyhos has gone well beyond window dressing, however, to make sure Charlie’s can hang in as competitive pressure increases.
Well before the IBISWorld recommendation that hardware stores should diversify products and explore market niches, Kyhos added sporting goods, outdoor power equipment and large appliances to his inventory. He also added master plumbers, small-engine mechanics and a veteran appliance serviceman to his staff.
“I think that’s what has really kept us in the game,” he said. “When business is down, those are the departments that pick us back up again. It’s so important to find those niches.”
One of the hallmarks of the hardware store shopping experience is the confidence customers have that someone in the store will be able to help them buy precisely what they need for a project or repair — and even advise them on how to use it properly. That means store owners must find some way to keep such key employees happy.
“I think a lot of business owners make a mistake by not investing in keeping their employees happy. Having seasoned, loyal employees is extremely valuable, whether they’re experts in their department or cashiers. When customers walk in the store and the (employee) knows them by name, that’s worth a lot,” Kyhos said.
Kyhos is a big advocate for keeping his staff happy and has created incentive programs so that “when the stores does well, they do, too. We have cookouts on a regular basis. We bring in donuts. We do different things to keep them happy at work. Because it is a big deal. You’re only as good as your team.”
Haka agrees about the value of keeping key employees invested and involved, but he also keeps a wary eye on those thin profit margins.
“Motivating staff and keeping people happy isn’t entirely about the baseline hourly wage,” he said, noting that stores do need to retain good talent to remain competitive. “There are lots of things a store owner can do over and above salary and benefits to keep employees satisfied.
“If you have one person in your store who’s the guru of plumbing, you can offer that person a work environment where they feel appreciated. Whether it’s a flexible schedule or involvement in deciding what the store sells, owners should try to make those key employees feel a valued part of the team. I think the stores that have learned how to do that are also the ones that are most successful.”
The bottom line
Starting a hardware store in today’s day and age — going up against the Home Depots and Amazons of the world — might seem risky. The key to making it work is knowing your product, being smart about inventory, keeping your prices competitive and offering expert advice, which big box stores often don’t. Most important, look at it as labor of love and not a way to make a quick buck.