1.6 Retailer or Purchaser Coöperatives | Ace Hardware

Another form of coöperation consists of independent retailers working together through a coöperative arrangement to help each other and leverage their numbers. A good illustration is Ace Hardware. Ace began as a wholesale group in the 1920s. A number of Chicago hardware retailers banded together to pool their purchasing power and to buy directly from manufacturers, in order to avoid having to go through a middleman for hardware merchandise to sell.¹²⁹ The group formally incorporated their business as “Ace Stores” in 1928 and opened a warehouse in 1929. Membership expanded to 41 retailers by 1934. By 1969, they had opened distribution centers in Georgia and California, expanding operations to the South and West.¹³⁰

Originally, Ace Stores operated as a conventional wholesale group. When the co-founder and long-term president Richard Hesse retired in 1973, he sold the enterprise to its member-dealers to create a dealer-owned hardware coöperative, which is its current corporate structure.¹³¹

Today, Ace Hardware consists of hardware stores that are part of the coöperative in a franchise-like model with Ace Hardware providing shared capabilities and brand recognition.¹³² Member-retailers fall under one of two programs for Ace Hardware support: “Ace Branded” stores or “Individually Branded” stores.¹³³ The former account for 91% of the national network, operating under the Ace brand and entitled to all services and benefits (including marketing). “Individually Branded” stores represent about 9% of the national domestic network for Ace Hardware. They rely on Ace’s product assortment and product pricing, but do not participate in marketing programs (usually, they can leverage their brand name recognition in their local communities). Ace also now has a separate legal entity (AWH) to sell to non-member retailers, formed in 2014.¹³⁴

As a matter of corporate finance, Ace Hardware divides its membership structure into Class A and Class C stocks—each Class A stock is $1,000 per share and Class C stock is $100 per share—with Class A stockholders having voting rights.¹³⁵ In order to be a member of Ace Hardware, a retailer must purchase stock, and based on that, they will receive patronage distributions that are based on the volume of merchandise they have purchased. Stock is sold only to approved retailers of hardware who apply for membership. Initial membership requires buying one share of Class A stock plus 40 shares of Class C stock, so a total investment of $5,ooo. For each additional store location, members require an additional 50 shares of Class C stock, but no additional Class A stock (as a way to limit dilution of voting parity between retailers within the coöperative).

As of year-end 2018, Ace Hardware reported $5.7 billion in annual revenues, with net income of $128 million.¹³⁶ Ace Hardware had a total store count of 5,253.¹³⁷ At this point, according to Ace, about three quarters of American homes and businesses are “located within 15 minutes of speedy-sized Ace stores.”¹³⁸

Research suggests that, at a general level, many members of purchasing coöperatives find them to be a compelling strategy to manage supply chain costs, often resulting in “2 to 5 percent cost savings.”¹³⁹ The competitive advantage of a coöperative as against other purchasing structures is that “a true purchasing cooperative can provide a monetary return to its members in the form of patronage dividends.”¹⁴⁰ For Ace Hardware, the purchasing coöperative means that the member stores are its only shareholders, which gives them an advantage over “big box” retailers such as Lowe’s and Home Depot.¹⁴¹ Also, there tends to be high satisfaction among members. At Ace, apparently, the overall satisfaction of affiliates has been high: more than 90% surveyed “expressed strong pride in Ace” and 80% of retailers rated overall satisfaction as 8 or higher out of 10.¹⁴²