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Old Posted Jun 13, 2005, 8:54 AM
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Rona needs to retool in next 2 years to face U.S. rival Lowe's, analysts say
RITA TRICHUR Sun Jun 12,12:54 PM ET
TORONTO (CP) - Canadian home-improvement powerhouse Rona Inc. has just under two years to round out its retail portfolio and secure a vise-like grip on customer loyalty if it wants to avert a takeover by American Lowe's Cos. Inc., retail analysts say.


The Mooresville, N.C.-based retailer has confirmed it will open six to 10 stores in the Greater Toronto Area starting in 2007, laying the foundations for a cross-Canada presence that could eventually include acquisitions.

"It is unusual that Lowe's would announce at this time that they are coming in two years because it certainly gives the incumbents that much time to prepare," said Ed Strapagiel, executive vice-president of Kubas Consultants.

"There is some speculation that this is a calculated move to get Rona to sell out."

Rona, headquartered in Boucherville, Que., is Canada's largest operator of home improvement stores with 566 outlets of varying sizes that are a mix of big-box, home-centre, hardware and other specialized formats.

Lowe's Canada president Doug Robinson told investors last week that his company will focus immediately on organic growth but left the door open for acquisitions down the road.

Analysts warn Canada's $28-billion home improvement market is unlikely to escape the "rule of two" which has seen retail boil down to two power stores in each sector.

With interest rates set to begin an upward crawl during the second half of 2005, and the housing starts past their 2004 peak, the home renovation market is expected to cool off by 2007, just as Lowe's arrives, lending credibility to that aphorism.

That means the clock is ticking for Rona to sew up its home base by establishing geographic dominance in Ontario, Quebec and the West and to fortify its sales to avoid being swallowed up by the American retail giant, which is second only to Home Depot south of the border.

"In other words, offensively protect your turf," said John Williams, founder of the J.C. Williams Group Ltd. "They have to finish completing their geographic coverage of the Toronto market with big-box stores."

There are still plenty of smaller, regionally-based chains across Canada that could become available if the price is right, said Strapagiel.

On Friday, CanWel Building Materials Ltd. said it has put the Pro Hardware store brand up for sale, saying it wants to focus on its main business of distributing lumber and other products to retailers.

Pro Hardware is a brand used by more than 500 independent hardware and building supply outlets across Canada, who pay for the brand's marketing programs, private label products, advertising and electronic catalogue, sometimes adopting the Pro Hardware store name.

Strapagiel said this is not the time for Rona to expand into the U.S. market.

"It is kind of a risky proposition," he said, noting a failed attempt by electronics retailer Future Shop to move down south.

"It is hard to see what special capability or resources that Rona could bring to a U.S. chain acquisition."

The other key challenge for Rona is to secure customer loyalty by creating a superior shopping experience based on high-quality service, merchandise, marketing and special events, he said.

Much like Rona - and to a lesser extent, Home Depot - Lowe's actively caters to women's tastes with wide aisles, bright lights and a merchandise mix that includes "softer" home decor products.

"It is going to be a question of whose customer base is going to be the most vulnerable," Strapagiel said.

"Rona has already demonstrated that it can successfully compete against Home Depot, so Rona is no pushover."

Originally founded in 1939, Rona rang up $4 billion in annualized retail sales last year.

That success is largely attributed to consolidation that began during the 1990s - coinciding with the arrival of U.S.-based Home Depot Canada - that saw Rona shore up its domestic holdings by snapping up rivals like Reno-Depot, Lansing, Revy, Revelstoke and the Building Box.

Portfolio managers and other analysts have suggested that Lowe's entry would continue to put downward pressure on Rona's stock. But company spokesman Sylvain Morissette said Rona will continue with its strategic plan which to build a domestic presence through new store construction, strategic acquisitions, recruitment of affiliated dealers and developing new store concepts.

The company's objective is to grow annualized retail sales to $7 billion by the end of 2007 and it will open 15 to 20 new stores of varying sizes each year over the next three years to help realize that goal.

"Our same-store sales are the best in the market during the last years," Morissette said.

"We do not manage differently because somebody will announce something in the market."

Rona's strength lies in its diversified formats, he added, noting the current trend toward one-size-fits-all will eventually lead to a big-box saturation.

"You know, it is in two years," Morissette said. "There is a lot of things are changing in the market everyday."

Rona's shares (TSX:RON - news) closed Friday at $24.90, down 43 cents, on the Toronto Stock Exchange.
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