Orchard Supply Hardware Stores Corporation Business Information, Profile, and History

Company Perspectives:

Since 1931, Orchard Supply Hardware has maintained its strategy of providing a broad merchandise selection, outstanding service, convenient, well organized stores and fair everyday pricing, encouraging its customers to perceive Orchard as the primary destination for their "fix-it" needs. Orchard strives to offer the same quality, service and convenience of a "mom and pop" operation and a greater depth of products in its core product categories than other large warehouse facilities and home center chains.

History of Orchard Supply Hardware Stores Corporation

A leading home improvement retailer in California, Orchard Supply Stores Corporation operates a chain of hardware stores through its operating subsidiary, Orchard Supply Hardware Corporation. During the mid-1990s, the Orchard Supply chain comprised 60 stores, all located in California. Designed to attract customers seeking to complete the small tasks associated with repairing and maintaining a home, the company's stores occupied a niche in the highly competitive California home improvement market that positioned Orchard Supply as an alternative to the warehouse retail concept most prevalent during the 1990s. Featuring garden and nursery products and houseware merchandise, Orchard Supply stores attracted equal numbers of male and female customers, a rarity in the home improvement industry. In 1993, the company entered the southern California market, and as it laid plans for expansion during the late 1990s, many of the new stores established were expected to be situated in southern California.

Early History

A world of difference separated the Orchard Supply of the 1990s from its origins. The modern version of the company was a sprawling, ever-expanding 60-unit retail chain with 45,000-square-foot stores stocking more than 45,000 products, a retailer engaged in one of the most fiercely competitive industries in U.S. business. Its origins were entirely dissimilar. The company was established in 1931 as a supply cooperative for farmers residing in the Santa Clara area, its formation occurring as the cooperative movement in the United States was in full swing. The company remained a farmer's cooperative for the next two decades, then began selling general hardware merchandise during the 1950s, a retail category that would predicate the company's business for the next half century and beyond.

Throughout much of its history, Orchard Supply operated as a modestly sized enterprise, a hardware store indistinguishable from the thousands of other hardware stores scattered throughout the country. For decades, the company confined its operating territory to the northern California area, restricting itself to its home territory and operating as the quintessential "mom-and-pop" business. In comparison with the frenetic growth that would characterize the company during the 1990s, Orchard Supply pursued a serene and staid approach to business during its formative decades.

Ownership Changes During the 1980s

By the late 1970s, after shedding the cooperative vestiges of its past and moving into the retail sale of general hardware goods, Orchard Supply comprised seven stores, all located in the upper reaches of California. The company was supported by these seven stores when W.R. Grace & Co. purchased Orchard Supply from its original owners in 1979. During the next seven years, the size of the retail chain more than doubled, as expansion picked up pace under the aegis of an owner with deeper financial pockets. Orchard Supply was a 19-store company by July 1986, when Santa Monica-based Wickes Companies, Inc. acquired the retailer from W.R. Grace & Co. The transaction was completed six months before the arrival of the individual that would lead Orchard Supply toward accelerated growth and prominence in the home improvement industry. Under the guiding hand of Maynard Jenkins, Orchard Supply wrested free from its sleepy origins, ending a half century of measured growth to embark on a future that would position the company as an industry leader a decade later.

Born in Orange, California during the early years of World War II, Jenkins grew up in nearby Huntington Beach and attended Orange Coast College. Jenkins's roots in southern California would stand as a symbolic indication of what the future would hold for Orchard Supply, but before Jenkins and Orchard Supply were introduced to each other, the southern California native spent his early professional career as a J.C. Penney management trainee. Jenkins later jumped ship to a competitor, spending time working for Sears, Roebuck & Co. before settling down at the Gemco division of Lucky Stores. Jenkins spent 15 years at Gemco learning the retail trade and then was hired as president and chief operating officer of a 107-unit chain of drug stores operated by Seattle-based Pay 'N Save Stores in 1985. After a year at the dominant Pacific Northwest retail chain, Jenkins switched employers once again, joining Orchard Supply shortly after Wickes Companies acquired the 19-unit hardware retailer from W.R. Grace & Co.

By the time Jenkins joined Orchard Supply, the chain had added two stores, increasing to a 21-store company. This was the starting point of the Jenkins era, a tenure that ten years after his arrival would witness the expansion of the Orchard Supply chain to 60 stores. Before this expansion occurred, Orchard Supply underwent several more ownership changes, as the company was tossed from parent company to parent company, led to private ownership and then toward public ownership.

Late 1980s: Maynard Jenkins Spurs Growth

Exactly two years after Jenkins's arrival Wickes Companies was purchased by Blackstone Capital Partners and Wasserstein Perella Partners, a transaction that also gave Orchard Supply new owners. As far as Orchard Supply was concerned, the relationship lasted less than a year. In June 1989, Jenkins and other Orchard Supply management sought to restore the retailer's independence, enlisting the help of a limited partnership organized by the Los Angeles-based investment firm of Freeman, Spogli & Co. The result was a $134 million leveraged buyout that returned Orchard Supply to private ownership.

Coming off of $255 million in sales in 1988, Orchard Supply generated $280 million in sales during the year of the leveraged buyout. The financial increase was not an anomaly during the first years of Jenkins's influence over the fortunes of Orchard Supply. Between 1987 and the beginning of the 1990s--the first three years of the Jenkins era--Orchard Supply had added ten stores and had posted consecutive record sales and earnings levels. By the beginning of the 1990s, Jenkins was sitting atop a 33-unit chain as president and chief executive officer, ready to lead the company toward expansion.

Although Orchard Supply was a nearly 60-year-old business as it entered the 1990s, longevity gave no retail competitor an edge during the decade ahead. In addition to the sweeping changes that had revolutionized the home improvement retail industry and dramatically altered the formula for success, the industry had become one of the most hotly contested businesses in the country. Led by Atlanta-based Home Depot, Inc. and Fullerton, California-based HomeClub, Inc., the retail home improvement industry was dominated by massive warehouse stores and discount pricing, two of the determinative characteristics of success that prevailed as the 1990s began.

Despite its promise as a rising contender, Orchard Supply adopted neither of these characteristics. The retail chain emphasized merchandise selection and customer service over pricing. It eschewed the vast floor spaces used by its most intimidating rivals, opting instead to stock twice the number of products in half the square footage typical of industry stalwarts Home Depot and HomeClub. Instead of attempting to attract the classic "do-it-yourself" customers who remodeled their own kitchens and bathrooms, Orchard Supply targeted the "fix-it" shopper, or those customers concerned with completing the smaller tasks associated with repairing and maintaining a home. "Our customers are more likely to repair a leaky faucet than to build a deck," Jenkins explained early on during the 1990s. "Orchard is a hardware store, not a home center."

By operating as such, Orchard Supply distinguished itself from its larger competition and the scores of competitors smaller than the San Jose-based company. Occupying the middle tier of home improvement retailing, Orchard Supply was positioned midway between independent hardware stores and the much larger warehouse home centers, giving the company a viable market niche that would serve as its foundation in the future. As it headed toward this future, the company generated roughly half of its sales from female customers, a rare phenomenon in the home improvement industry. This exception from the norm was also attributed to the differences between Orchard Supply Stores and the larger, more impersonal warehouse stores. Typically, home center stores derived their greatest percentage of sales from lumber and building materials, whereas Orchard Supply relied on plumbing products, housewares, and the 10,000-square-foot nursery that adjoined each unit to generate the bulk of its sales.

It was this successful and unique retailing formula that Jenkins sought to expand throughout California during the 1990s. At the beginning of the decade, all Orchard Supply stores--typically 40,000-square-foot locations with 10,000-square-foot nurseries--were located within 300 miles of the company's 282,000-square-foot distribution center in San Jose, a territory that embraced northern and central California. As Jenkins charted the company's expansion in 1990, he intended to restrict such expansion to California, an area he referred to as "the world's seventh largest market," and to open between two and five stores per year during the ensuing five years. Jenkins was envisioning a 50-unit Orchard Supply chain by 1995.

As the company set forth, the expansion projections announced by Jenkins in 1990 were met nearly precisely. By 1992, Orchard Supply's distribution center in San Jose had become too small to service the company's pressing need to keep its stores' shelves fully stocked. A new, 350,000-square-foot warehouse was established in Tracey, California, giving the company a massive warehouse that was situated equidistant from its expanding chain of stores in central and northern California. By 1993, the company operated more than 40 stores, yet the need to expand further still prodded Jenkins and the rest of Orchard Supply management. To fund this expansion, the company needed cash, so in April 1993 Orchard Supply became a publicly traded company, completing an initial public offering of 3.8 million shares of common stock at $14 per share.

The cash raised from the conversion to public ownership would be desperately needed as Orchard Supply picked up the pace of its expansion and came head to toe with the industry's largest and most successful home improvement chains. Sales for fiscal 1993 climbed to $365 million, continuing the company's impressive string of annual revenue gains, and net income rose to $33,000 after wallowing in the red for two years, but before the year's financial results were announced in January 1994, Jenkins completed a deal that greatly overshadowed the importance of the encouraging financial figures. Although Jenkins regarded the transaction as "a low-risk situation," the contracts signed at the end of 1993 paved the way for Orchard Supply's entry into the most lucrative home improvement market in the United States.

1993 Entrance into Southern California

In December 1993, Orchard Supply acquired seven former Builders Emporium stores, paying a hefty $20 million for the properties. For Jenkins, the price was worth it because six of the stores were located in the Los Angeles area and another near Santa Barbara, giving the company entry into the southern California market for the first time. As Builders Emporium stores, each unit had generated $10 million in sales annually, a volume the stores were expected to realize once they were converted to the Orchard Supply format. The acquisition, according to Jenkins, enabled Orchard Supply to achieve "critical mass," providing the momentum to propel the company into the mid-1990s and toward accelerated growth.

Ranging between 29,000 square feet and 71,000 square feet, the former Builders Emporium locations were converted into Orchard Supply stores during the first few months of 1994. Meanwhile, Jenkins began laying out ambitious expansion plans for the coming years. Looking ahead, he anticipated opening either 14 or 15 stores in 1994 and then ten stores per year from 1995 forward, as he sought to turn what industry observers were hailing as the high-service alternative to warehouse stores into one of the massive chains vying for supremacy in the fiercely competitive market. By the end of 1994, 14 new stores had been added to the Orchard Supply chain, lifting sales for the year to $441.6 million and net income to more than $1 million.

The pace of expansion ebbed considerably in 1995, when five Orchard Supply stores were added to the chain, but the company's financial growth picked up the slack, rising robustly as stores were added to the lucrative southern California market. Net income in 1995 (the company's 1996 fiscal year) soared from $1.1 million to $10.4 million, and sales increased 21 percent, reaching $532.4 million. To maintain this rate of growth, further expansion was needed, as was the money required to fund the establishment of new stores, so in March 1996 the company sold $11 million shares of stock, providing it with the resources to continue dotting the California map with Orchard Supply stores.

With the money raised through the March 1996 stock offering, Orchard Supply planned to open between five and ten new stores in 1996 and another five to ten stores annually for the next several years, nearly all of which were expected to be located in southern California. To support this growth, plans for the establishment in 1997 of a second distribution facility, also in southern California, were under way as the company headed toward the late 1990s. By April 1996, Orchard Supply was a 60-unit chain, nearly three times the size of the company Jenkins inherited a decade earlier. As Jenkins surveyed the road ahead from this point in the company's history, his confidence was high yet not overly optimistic. "Looking forward," Jenkins remarked in April 1996, "we do not anticipate our sales and earnings increases will maintain as rapid a pace as last year. We do, however, feel that the company is well-positioned for growth."

Principal Subsidiaries: Orchard Supply Hardware Corporation.