Menards’ Takes Unusual Approach to Build Business
Everyone knows the housing market is slow. Both Home Depot and Lowe’s have offered it as the primary factor behind scaled-back forecasts for future quarters and adjustments to new store plans.
While many in the home improvement sector wait for some sign that the market is picking up, Menards seems intent on creating opportunities around its stores.
According to a piece on the Milwaukee Journal Sentinel website, Menards has in a few cases purchased land around new stores to develop residential subdivisions. The chain has developed residential areas in Warsaw, Ind. and Urbana, Ill. It has plans for another development near a store in Oak Creek, Wis.
Jamie Radabaugh, director of sales and leasing for the company’s property division, told the Journal Sentinel, “We are actively looking for new residential projects around our new and existing stores.”
By acquiring land for development around its stores, Menards is creating for itself a built-in customer base. It attracts local homebuilders and construction professionals looking to get in on the action and, once homes are complete, there are plenty of consumers for the chain’s stores. Menards currently operates roughly 240 stores in 11 states.
Scott Wright, a spokesperson for the North American Retail Hardware Association, believes Menards may be the only business in the DIY sector involved in developing housing projects.
“I certainly haven’t heard of anyone doing anything like that,” he said. “Especially in this economic climate.”
In Yorkville, Ill., Menards bought land for its new store and additional acreage to put up 164 single-family homes and 68 townhouse-style condominiums.
The chain put in utilities and other aspects of the infrastructure and sold 129 single-family lots to a local homebuilder, AMG Homes. As part of the deal, AMG agreed to buy virtually all of the materials it required from Menards.
Chad Gunderson, co-owner and chief executive officer of AMG, said, “We look at the contract as mutually beneficial.”
Menards’ Mr. Radabaugh said, “It only makes sense to tie our company’s main business with the residential development projects.”
Discussion Questions: What do you think of Menards’ practice of creating residential subdivisions around new store openings? The Milwaukee Journal Sentinel piece suggests that Menards can do this because it is privately run while Home Depot and Lowe’s cannot because they are publicly traded. Do you agree with this and does, at least in this case, being privately operated provide Menards with a competitive edge?
84 Lumber is more advanced than Menard’s. They sell insurance to builders and until recently, they offered construction loans, too, through Liberty Savings Bank, an affiliate. (It isn’t clear that they still do that, possibly due to the national home lending crisis.) 84 Lumber also supplies blueprinted new home designs to builders and manufactures numerous building components.
In addition to the great marketing mentioned above, Menards built their Yorkville store in the fastest growing county and area of Illinois. The county is also either first or third in growth in the entire U.S. depending on which time period you talk about. Menards is more than just a little known competitor of Home Depot and Lowe’s but a future force in the home improvement field in my opinion. They have very competitive prices and carry things that the other two don’t. Just this past weekend I was looking for accessories for slatwall that we just installed in our garage. I went to Home Depot and they asked what is slatwall? Lowe’s didn’t have a clue either but Menards had a complete selection and at very good prices, even though their local competition doesn’t carry them yet. Menards marketing goes beyond just their site selection and home building examples. Seems to be a very well run company with a bright future to me.
Menards, long overshadowed by Lowe’s and Home Depot, has been a solid retail operator in its markets, with a consistent focus on innovative product choice, merchandising and providing a memorable customer experience.
This latest strategy for creating a local customer base is to be commended. Given the collapse of most housing markets, they can leverage acquiring land at fire sale pricing for an even larger upside in the long term.
This strategy can be a great short term profit and business generator for a new store. But when you consider the total value of business that a store does 200 or 300 homes is not going to make a great deal of difference.
Home building and real estate development are very different business and this could become a major distraction.
I think someone in the family likes the land development and building business so they now have a division that is doing that.
Remember it is the the fast who eat the slow or the large who eat the small. In today’s world, it is the focused and the flexible who eat the unfocused and the inflexible.
Menards is pursuing a creative approach to expansion of its potential customer base. “Vertical integration” may not be the exact parallel for what Menards is doing, but it’s certainly making a market in potential customers (builders and eventual homeowners) for its stores.
Menards may not have the potential for real estate development around all of its stores, especially the more mature ones, but it’s at least a worthwhile experiment to measure the impact upon some stores in an otherwise tough DIY and housing market.
Ir would be interesting to see the math on this one. If Menards only breaks even on the land, they still have a great short term business bump for the location. If the builder builds on spec, this is a bonanza! If not, then the building will take longer and the sales will come slower. In any event Menards wins on this one!
I hope the houses sell a lot faster than they are in my area!
This is a very smart business model, and Menards should be commended. Not only have they created a Strategic Relationship with home builders, who have agreed to purchase their materials from Menards, but after the homes are built, they have a built-in customer base located within minutes of their stores. You can be certain that when the new homeowners take possession of their property, there are a large number of coupons and offers redeemable from the local Menards. Building a community to create customers for stores that are about to be built, you can’t get any more aggressive in marketing than this.
The fact that they are a private company absolutely has provided them the freedom, and the time to make this work for them. In today’s housing economic climate, no publicly traded company could get away with executing such a long-term, high-risk strategy. The ROI will be there, but it will take some time for the company to reap the benefits of its strategy. But when it does, the company should see strong results.
This is a great example of the kind of innovation that private companies can actually bring to the retail marketplace. Please keep this kind of content visible in RetailWire! If only public retail companies with more scale and resources, could do the same with focus on long term shareholder value instead of stock price next week!
Absurd! Menards needs to stick to its core competencies–retailing–not spending millions of dollars to build and sell homes just for the ability to sell the homeowners DIY products from their store.
Here is a better thought, build stores where there already are people. This will cost less, allow Menards to focus on their strengths, and minimize the risk (housing is a very risky business). There are many cities and states where there are no Menards.
As I read recently, the difference between this recession and the ones of the 80s and 90s is that those were problems of leverage, and this one is a problem of solvency–the cash has been pulled out of the economy and is sitting in a relatively few hands, so it’s not necessarily available for investment.
So I hope Menards is one of those places where the cash is sitting, because I think it’s going to need very deep pockets to make this strategy work.
As we speak, the US is sitting on a glut of new housing stock that Menard’s will only be adding to. How will the chain persuade consumers they’ll be able to afford these new houses when they couldn’t afford to stay in the houses they had before–will the chain subsidize the new buyers? Price the houses below cost? Look the other way when the credit scores come in, or structure the deals as lease-purchase?
When we know how the financials will work, then we can see if the strategy makes sense as a way to grow the retail side of the business.
The number of people involved is really small so it’s not about building a customer base around the store. It’s more about making a smart real estate move and simply developing or spinning off excess real estate. Nearly all well run real estate departments do this. Whether it’s spinning lots off to other retailers or selling excess land for residential development, it’s all about getting the most out of a real estate purchase.
Large retailers will use a shill to buy the real estate and occasionally can get a bargain on a large tract of land. Then if they are really smart, they can make all their money back selling off the excess.
“Buy land and wait” is a time-honored method of building wealth. At one time the land owned by McDonald’s around their restaurants was worth more than the restaurants.
Menards will simply need to ensure their Assortment is well tailored to new homes rather than old homes.
Brilliant. Supermarkets should surround themselves with hungry people, clothing stores should plop down in the middle of nudist colonies, and when fishermen can’t fish where the fish are, they dig a pond and stock it. Railroads used a version of Menard’s “new” business model in their early days by damming streams to create lakes as water sources for their steam engines, building sawmills along the tracks for wood supplies, and establishing towns and retail stores (“company stores”) around the lakes and mills that coincidentally required rail-delivered goods.
This is a very creative idea to build business and customer loyalty. Unless I missed it though, what will be done to help potential buyers of these homes qualify for reasonable loans or even help with down payments?
Maybe I am wrong, but the problem with the housing market today is not that there aren’t enough properties for sale, but aspiring homeowners can’t afford to get into them.
Menards also needs to partner with local, reputable lending institutions in this activity.