Feeling the pinch - TruServ - Brief Article

Home Channel News, June 18, 2001 by John Caulfield

After reeling from the shock of a huge loss in 1999, TruServ is attempting to regain its financial footing with a scaled-down operation that focuses on its members' growth

The merger may be completed. But the reverberations of the three-year-long ordeal of combining Cotter & Co. with ServiStar Coast to Coast continue to run through every facet of the organization now known as TruServ Corp.

The complexity of this merger and the simultaneous -- albeit failed -- attempts by the co-op to be all things to all dealers had disastrous consequences for TruServ. Its financial, operational and managerial shortcomings created a crisis of credibility within its member ship that has driven countless dealers into the waiting arms of other buying groups. That exodus appears to have reached levels that, if not reversed or at least stemmed, could threaten the viability of TruServ itself.

In response to this crisis, TruServ has embarked on what its management believes is a more practical business strategy that focuses on fewer, more efficient pro grams that will drive business to its members' stores. Those programs are being rationalized within the financial boundaries of a co-op saddled with more than half a billion dollars in debt and a revenue stream which -- as a result of the sell-off of certain assets and a downturn in business conditions -- could be $1.5 billion smaller this year alone.

At press time, TruServ was renegotiating the terms of its debt, which is critical to its financial integrity after the co-op defaulted on a covenant related to $200 million of that debt this spring. Its chief financial officer, Pamela Forbes Lieberman, has installed controllers in virtually every department to ensure that there isn't a repeat of the errors that led to a $130.8 million loss in 1999, a loss that will linger on the co-op's balance sheet for several years to come. With debt reduction, long term profitability and increasing member equity as cornerstones of TruServ's new foundation, the company disclosed on May 1 its intention to reduce its staffing "significantly" over the next sever al months; by June 30, its staff will be 4,284 people, or 5 percent lower than what it was on March 31. The closing of" one or two" more distribution centers is also a distinct possibility, Lieberman said.

Having already lopped off 10 of 24 DCs and reduced its administrative staff by more than half during the merger, TruServ can scale back its current operations only so much more without diluting supply-chain efficiencies it continues to work on improving (see page 29). TruServ needs more working capital, and the co-op is urging members, in the words of its president Don Hoye, to "step it up" in terms of their commitment to the buying group's various programs for product assortment and pricing, computerization, niche departments and customized marketing.

TruServ is caught in a kind of Catch 22 in that its financial health is pinned to members' participation in programs whose execution depends on the co-op's ability to fund them. Dealers' acceptance of the co-op's new clarion call, "Members First" - "the single most important initiative that this company is undertaking," according to Rob Liebgott, TruServ's senior vp-advertising, marketing, merchandising and sales -- may hinge on their collective amnesia about unfulfilled promises that have defined this merger until recently, and their willingness to trust in management's and the board's long-range vision of TruServ as a leaner, fiscally-responsible organization.

"I'm expecting the members to look at the programs for what we've done," said Hoye, who has scored points with dealers for accepting the brunt of the blame for the co-op's merger "mania," as it has come to be known internally. Lieberman added that TruServ needs to do a better job of "convincing members that it's their co-op. It can't be us or them; it has to be we."

COUNTING HEADS

How many dealers will constitute that "we," though, is a big question for TruServ. As of May 29, the co-op had 6,370 dealer-members operating 7,638 stores. That com pares to just under 9,200 members operating around 10,400 stores when Cotter and ServiStar/Coast to Coast first agreed to merge on Dec. 9, 1996. The merger wasn't solely responsible for that attrition, as all of the buying groups regularly weed out members. But more than a few existing TruServ members are concerned about this dealer drain. "The wild card is dealer retention," admits Bill Blagg, owner of Weakley-Watson True Value in Texas, and TruServ's chairman of the board. "It's still very much a problem, and a lot of our members have been disappointed by the loss."

"You want to stay put, but you don't want to be the last to leave, either," adds Michael Connelly, who operates four stores in the Fort Wayne, Ind., market.

Coakley's Carpet One Ace, in Canton, N.Y., is typical of member stores who have left TruServ in recent years. A Cotter and TruServ loyalist for 25 of its 100 years in business, Coakley's deserted TruServ for Ace Hardware in spring 2000. Its owner, Bill Coakley, explained that he made the switch -- for under $50,000, he said -- because TruServ's order fulfillment had eroded dramatically, "which cost us a lot of money and customers." Coakley also noticed "a slipping of integrity. It went from being the very best co-op to being confused about who owned the company. It became a management-run co-op instead of a dealer-run co-op." Coakley said he spoke with "at least 25 dealers in New England" who had switched from TruServ to other co-ops before making his decision. "Ace's people talked more realistically about the market and competing with big boxes. Every time I'd go to [TruServ's] markets, all I heard was that everything was wonderful and glorious."