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Rona on right track with focus on smaller stores, Lowe's says

Home and garden centre Lowe's has put in a bid for ownership of its currently Canadian-owned competitor, Rona, July 31, 2012.

Galit Rodan/The Globe and Mail

Lowe's intends to embrace rival Rona's blueprint for change – and improve on it – if the U.S. retail giant is successful in its $1.8-billion push to take over its Canadian retail competitor.

Doug Robinson, head of international operations at Lowe's Cos. Inc., said on Wednesday the U.S. merchant likes the direction Quebec-based Rona Inc. is taking in its bid to turn around its flagging business, focusing on smaller stores and closing big-box outlets that are unprofitable. Rona is counting on the strategy to fend off Lowe's unwanted acquisition proposal.

In the wake of Rona's board of directors – and the Quebec government – spurning Lowe's informal bid, Mr. Robinson offered an olive branch to Rona store owners and franchisees who fear losing control of their operations.

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"We respect and really value the owner-dealer heritage and we think we can build on those unique relationships," Mr. Robinson said in an interview. "This acquisition is not about … closing stores and creating efficiencies through scale.

"It's about an opportunity to grow."

In a standoff between the two retailers, Lowe's is pressing its rival's board to talk takeover with it while Rona executives refuse to address Lowe's advances.

As the Canadian retailer released its second-quarter results on Wednesday amid slowing sales and skittish consumers, it staked its future on a prototype store it launched in Edmonton as a better alternative than Lowe's acquisition proposal.

Now Mr. Robinson, who is spearheading Lowe's "expression of interest," is endorsing Rona's strategy and appealing to its board to change its mind for the sake of revving up business.

"I feel the [Rona] board has a fiduciary obligation to look at the rights and needs of all stakeholders and shareholders and look at things from a very balanced view," Mr. Robinson said. "I don't see that being done."

Rona's store of the future in Edmonton, one of its "proximity" outlets – so called because it is near residential areas – is key to the retailer's bet on rolling out smaller stores while shrinking or ditching some of its big-box outlets. Rona says its proximity format generates 50-per-cent higher customer spending than its superstores, helped by beefed up numbers of full-time staff who provide knowledgeable service.

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"The unique multiformat, multi-ownership business model we have been building … is perfectly suited [to] ongoing changes happening in our industry," chief executive Richard Dutton told analysts.

Mr. Robinson said Lowe's endorses Rona's business model of a mix of big-box and smaller stores.

He said he would go further, adding appliances to Rona's stores and stepping up its offerings of home decor items such as flooring and bathroom and lighting fixtures – all segments in which Lowe's is traditionally strong.

Lowe's will introduce some of its own smaller stores here, whether or not it succeeds in its Rona bid, he added. It operates different-sized stores in its Australian and Mexican divisions.

"The Lowe's strategy for expanding internationally is to adapt ourselves to local markets."

Amid the takeover talk, Rona reported that its second-quarter sales at stores open a year or more – a key retail measure – rose 1 per cent. But the company redefined how it measured the sales, including for the first time distribution sales that bolstered the results. Rona had previously posted seven consecutive quarters of same-store sales declines.

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It gained sales momentum earlier this year, "but starting at the end of May, we saw ... a rapid slowdown in same-store sales, where consumers became again very unstable," Mr. Dutton said.

Its second-quarter profit fell to $34.1-million or 28 cents a share, from $37-million or 28 cents a share a year earlier. Excluding unusual items, profit rose to $43.6-million or 36 cents a share from $37-million or 28 cents a share. Revenue rose 3.4 per cent to $1.42-billion.

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About the Author
Retailing Reporter

Marina Strauss covers retailing for The Globe and Mail's Report on Business. She follows a wide range of topics in the sector, from the fallout of foreign retailers invading Canada to how a merchant such as the Swedish Ikea gets its mojo. She has probed the rise and fall (and revival efforts) of Loblaw Cos., Hudson's Bay and others. More

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