The Economics of Starting a Hardware Store

Starting a hardware store—a brick and mortar shop that sells, essentially, brick and mortar (and everything else you need to build a house, fix a leaky faucet, or paint the garage)—might seem daunting in this day and age.

Smaller hardware stores, like small businesses in every industry, face cutthroat competition, not just from other local businesses but big box stores like Home Depot, and e-commerce giants like Wal-Mart and Amazon.

But if you’ve got the expertise and passion for opening a hardware store, don’t get discouraged. You can actually control a number of factors to maximize your potential for success. Review the economics of starting a hardware store before you get started to see if you and your future business have a good shot at staying afloat.

What You Need to Know About the Business of Starting a Hardware Store

According to IBISWorld, there are nearly 20,000 hardware stores in the United States today, producing about $24 billion in revenue and employing just over 148,000 people.

Their analysis of the industry is in line with something you may have noticed if you’re interested in getting into the business: As the economy has improved over the last five years, the housing market has strengthened, leading to an increase in the number of home improvement projects that require trips to the hardware store.

Additionally, low mortgage rates have encouraged people to buy and renovate homes, putting countrywide brands like True Value and Ace Hardware in a good position to capitalize.

The report does note that hardware store growth is expected to slow a bit in the next five years, but the overall industry does have a positive outlook.  

Decide: Go It Alone or Join an Established Name?

There are lots of completely independent hardware stores around the country, catering to the ultra-local community. If you’ve identified a market where you feel you can think about starting a hardware store and become the near-exclusive provider for—and if you’re a control freak who wants to make 100% of the decisions about how your business operates—you might feel good about opening your own shop. Starting a hardware store on your own also requires less money.

There is, however, another option: starting a hardware store with a popular franchise, which provides you access to an established name, as well as a proven operational model and efficient supply chain. You can still be the owner of the store with plenty of latitude to make business decisions.

That’s the situation at Waverly Ace Hardware in Baltimore, Maryland, which is part of an independently run co-op within the fold of Ace Hardware stores.

According to Michael Marren, the assistant manager of one of the 11 Waverly Ace Hardware stores across Maryland, D.C., and northern Virginia, the relationship between the store and the parent company is helpful and fruitful.

“Our parent, A Few Cool Hardware Stores LLC, is based out of the District, and the name denotes the company philosophy rather well. We’re a small business, our leadership is independent and local—but we have the benefit of Ace’s logistical umbrella,” he tells Fundera.

For example, Marren says that his company offers “well above minimum wage” and “a robust benefits package,” which he notes is a distinct choice that makes employees happier.

It’s also nice when you’re starting a hardware store within an established franchise to have a supply chain and the logistics of running the store all ready for you to utilize, rather than figuring it out on your own.

What Your Business Plan Should Cover

Whether you go with a brand or strike out on your own, you should have a business plan that details how you’ll put your hardware store business in the best position to succeed.

Important things to cover include:

• Knowing your customer: What does your typical customer look like? Are they DIY landlords and contractors, or homeowners doing pet projects? Depending on who you’ll be catering to, the way your store is designed and the weight of your stock will change.

• What your finances look like: How much do you need to start up? Once you do get going, what is your break-even point? What do you expect your cash flow to be like on a monthly basis? If you’re joining an established brand, IBISWorld notes you need a minimum of $150,000 unencumbered cash available for investment in a True Hardware, while Ace requires between about $820,000 and $1.5 million—the total depends on how big your store will be and other factors.

• Your marketing plan: If you join a national brand, you’ll have access to all kinds of programs and events you can use to boost your profile. But you should also consider local, perhaps even offline (seriously!) marketing campaigns, loyalty programs for repeat customers, and a flexible national catalog program.

• Location: This one is a no-brainer. You’ll want somewhere with a lot of foot traffic that doesn’t cannibalize the business of other stores—or put you in a position to be cannibalized in return.

Identify Avenues for Success and Potential Pitfalls

As mentioned above, the hardware business is hardly a slam dunk. You’ll need to work hard to identify what works for your business in your location, and avoid the issues that have sunk similar ventures.

According to IBISWorld, the three most important factors for success are the ability to control stock on hand, an experienced workforce, and having a loyal customer base.

These are sentiments that Marren echoes when discussing why people come to his hardware store, as opposed to shopping online with Amazon or hitting a big box store.

“In my view, people come to us for interaction, information, personalization, and proximity. We’re closer, friendlier, and we’ll actually help you when you come in,” he says.

But even the friendliest store associates can’t do anything for customers if what the customers needs isn’t in stock.

“The first rule of customer service is having the thing that someone wants to buy,” says Marren. “Invest in inventory and POS [point of sale] software that can analyze stock and keep your inventory responsive.”

IBISWorld says that challenges to starting a smaller hardware store revolves around competition—mainly those larger retailers and home improvement stores. Marren agrees, noting that bigger stores have an economy of scale that gives them an edge.

So, if you can’t beat the bigger stores on price, you need to beat them with better, more helpful, happier employees. Keeping those employees happy (i.e., with the benefits package Marren described) will go a long way toward gaining the loyalty and quality effort you need to succeed.

Don’t Forget to Clear Away the Red Tape

Everyone’s favorite part of starting a business is obtaining the permits and opening bank accounts, right?

Maybe not, but it’s the same situation as ever when you’re starting a hardware store.

You’ll need to register your business with the secretary of state, obtain a tax identification number from the IRS, and open business bank accounts.

Establish revolving lines of credit with your hardware distributors as well as with your financiers, if you have them, whether they are traditional banks or online lenders.

Depending on where you’re setting up shop, you may need specific local, state, and city permits—and you might want to visit with an attorney or accountant familiar with local standards to make sure you’re in compliance.

Finally, get the right insurance: If you have employees (and it’s doubtful you’ll be running one of these stores all on your own), you need workers’ compensation insurance; a commercial insurance policy that covers the store inventory against loss or injury claims from customers.  

These steps formalize your business. You’re now in the hardware store game.

Be Open to Change

Your hardware store will hardly be a static entity. As the home ownership market changes, the seasons shift, or new challenges (and challengers) enter the scene, you’ll need to adapt your inventory, marketing campaigns, and staffing needs.

What should remain consistent is that you:

• Continue to maintain inventory levels so that you’re never out of stock at a crucial moment.
• Your commitment to keeping your staff informed and engaged is unwavering.
• Always look to growth within your niche rather than overextending yourself.

As Marren puts it: “We take a more ecological view of the market—we fit a niche. We’re not in the business of putting other local stores out of business.”

After all, since you’re starting a hardware store, you’re in the business of helping people improve their homes, and by extension, their lives. Conduct your business appropriately.

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from Fundera Ledger https://www.fundera.com/blog/starting-a-hardware-store