ACE Hardware Accesses The Threat of Home Depot

Case Type: business competition, competitive response.
Consulting Firm: FTI Consulting first round job interview.
Industry Coverage: retail.

Case Interview Question #00478: ACE Hardware Corporation is a hardware retailers’ cooperative based in the Chicago suburb of Oak Brook, Illinois, United States. ACE Hardware Corporation does over $3 billion in retail hardware sales annually, with more than 4,400 stores (as of May 2011) and nearly 100,000 employees (as of the 4th quarter of 2008).

The Home Depot (NYSE: HD) is an American retailer of home improvement and construction products and services. Headquartered in Atlanta, Georgia, United States, it operates more than 2,200 big-box format retail stores across the U.S., Canada, Mexico and China.

For this case, the CEO of ACE Hardware Corporation has hired FTI Consulting to help improve his company’s overall profitability. Additionally, the CEO has heard something about a new competitor Home Depot that has recently entered the hardware market. He wants FTI Consulting to also determine what kind of a threat Home Depot would pose to ACE Hardware. How would you approach this case?

Possible Answer:

This is a difficult business competition case. It is unclear to the candidate whether ACE Hardware’s profitability issues are related to the competitive threat of Home Depot. The idea is to stump the candidates to see if they can figure out what is really going on here. Most interviewees will look at the two firms’ cost structures, which look almost identical at first. However, only when they consider the price differences does the answer become clear.

Most of the discussion below will revolve around understanding the market environment, customers, and the cost structures of both firms.

1. Market Environment & Growth

• The hardware market is growing at 2% per year in the U.S. and has done so for many years.
• The client ACE Hardware’s revenues have been flat for the past several years.

2. Client Company

• The client ACE Hardware’s stores are 2/3 the size of Home Depot’s stores.
• The stores are located all over the U.S., and mostly on the main street of small cities.
• The store’s strategy has been to stock the many hardware needs of its customers. This has traditionally been small items like hammers, screws, tape measures, etc.
• The average transaction in the stores is $15.

3. Competitor Home Depot

• Home Depot has entered the business of hardware retailing only recently.
• Home Depot stores are quite large, in fact 50% larger than our client’s stores.
• Home Depot stocks many, many items, but they seem to stock much more home improvement items like sinks, bathtubs, cabinets, etc.
• The average transaction at the Home Depot Store is $60.

4. Cost Structure

Note to Interviewer: The key to this case is that the cost structures for the two firms look the same, but each firm has different prices. Let the candidate struggle to determine this. Don’t provide any assistance.

The cost structures of the two firms as a percentage of their sales are identical:

However, Home Depot’s average prices for hardwares are only 70% of our client ACE Hardware’s. If we adjust the data for this fact, the cost structures as a percentage of client’s sales look like this:

Since Home Depot’s prices are 70% of our client’s, each of their cost components must also be 70% of client’s, thus multiply each cost percentage by 70%. From the data table, it seems Home Depot has much higher profit margin than our client (33.5% vs. 5%), in addition to their price advantage. Therefore, it poses a significant threat to our client ACE Hardware’s business.