Payless sees rainbow after past storms

Home Channel News, Nov 6, 2000 by John Caulfield

Dealer leverages its assets to generate more sales from better-defined customer base

KANSAS CITY, MO. -- The road between blue and green is being paved with gold at Payless Cashways.

"Blue" is the color that Payless officials have designated for the conventional retail outlets, which the company has been operating for decades, that have catered to both DIYers and pros with diminishing success. "Green" are the five PCI Builders Resources yards that Payless opened last month -- in Cincinnati; Lake Dallas, and Duncanville, Texas; Denver; and Kansas City, Mo. -- to sell to home builders almost exclusively. And "gold" represents the chain's existing stores that have been extensively remodeled and remerchandised to appeal to the company's predominant target customer: the project-oriented homeowner, the repair-and-remodeling tradesman and the property management buyer.

By the end of November, the conclusion of its fiscal year, Payless will have converted 37 of its 155 stores to its "gold" standard. Another four stores operate as pared-down Contractor Supply facilities, whose products and services are organized around remodeler customers.

By the end of next year, another 40 stores are scheduled for conversion, with the remainder of the chain's stores getting this makeover by the end of 2002, according to Millard Barron, Payless' president and CEO.

Last month, the company disclosed its intention to close 22 stores that Barron said were performing below the $10 million in annual sales that Payless' stores average "and weren't contributing to ROI," he said. Two of those stores are being converted to the company's "gold" format. To cover the costs related to the closings, Payless will take a charge of between $13 million and $15 million against fourth-quarter earnings.

The closings are expected to help Payless reach its goal of reducing its debt by $60 million this year. More pointedly, the closings, remodelings and yard openings are creating a new Payless that can better leverage all of its assets -- including its distribution and manufacturing -- more efficiently and profitably.

"If you were starting a company from scratch, would you develop a company like ours? Probably not," said Barron. "But Payless has been built, corporately, to be a much larger organization, and we're trying to move the company, directionally, to a different point."

Connecting the dots

Barron and his management team are making dramatic changes at Payless Cashways against the backdrop of a company -- celebrating its 70th anniversary this year -- which has been through bankruptcy and hasn't reported positive net income for a full year since 1994.

Before 1998, when Barron came onto the scene, Payless had tried a variety of experiments to boost sales and reduce costs, with fitful results. These included its ill fated -- but, in retrospect, far-sighted -- attempt to develop a decor-oriented store; and its disastrous decision to have one manager run two, sometimes three stores.

In 1996, the company field-tested its "Dual Path" strategy in five Phoenix stores, which was its first real attempt to sell DIYers and pros out of different stores in the same market. Dual Path, by the reckoning of current management, didn't work. But the DNA of Payless' current business strategy -- which Barron referred to as "pruning the tree" -- can be traced to it.

For example, four of the 22 retail stores that Payless is closing are in Phoenix. But the company will still serve that market with a pro-oriented retail store on the city's northwest side, a DC on its southwest side and a door and trim company (which Payless acquired in January 1996 to support the Dual Path initiative) that supplies multiple stores in several western states. The consolidation scenario is occurring in other markets, including Memphis, Barron said.

Payless' strategic blueprint now calls for an adept coordination of its different operational assets so the company can present itself more convincingly to different customer groups as a full-service enterprise which can meet their needs.

Payless' operational infrastructure includes a 400-person outside sales force that is delineated by specific customer segments; a 650,000-square-foot distribution center in Sedalia, Mo., and four smaller DCs plus a reload center; door plants in Dallas, Indianapolis and Phoenix; and truss, wall panel and stair plants in Cincinnati and Denver. The retailer also has alliances with a door company in Kansas City and a truss company in Iowa. On the commercial side, Payless recently struck a partnership with Maytag to be able to offer major appliances to property management accounts.

About a month ago Payless launched what David Krumbholz, its senior vp-store operations, called its "concrete initiative," where it is working with a supplier in Las Vegas to be able to offer through its stores all things related to concrete construction -- including rebar, shearing, tilt-up wall building, chemicals and equipment -- to its industrial/commercial accounts. "This is exportable to other markets," he said confidently.