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Rona building on high-margin private labels

House brands offset broader slowdown

RETAILING REPORTER

Amid weak results and a softening economy, home improvement retailer Rona Inc. is making headway in one area - its private-label products - by focusing on more upscale lines and ditching its lowest-priced house brands.

Rona is catering to a customer who wants sturdy and stylish products at a competitive price, said Michael Brossard, senior vice-president of marketing at the retailer. These customers no longer opt for the rock-bottom priced private label if they can buy a higher quality house brand at just a slightly higher price, he said.

The strategy seems to be paying off. Despite an overall 5.2-per-cent drop in Rona's same-store sales in the first quarter, sales of private labels jumped 10 per cent, the company reported yesterday.

And while the number of purchases fell 6 per cent in the quarter, the price of each purchase rose 1 per cent, it said.

"We're hanging on to our loyal customers, and attracting the [home improvement] project people - those who are purchasing more," Mr. Brossard said in an interview. "They're purchasing higher-quality products too."

The private labels are still priced between 5 and 10 per cent lower than their national-brand equivalents, he said. Customers are familiar with the national brands and feel they're getting a good deal with the private labels, he said.

For the retailer, private labels can generate profit margins that are twice as high as national brands, said Michael McLarney, editor of trade publication Hardlines. The products are sourced directly from the supplier, with lower production, distribution and marketing costs.

And house brands tend to draw customers back to the stores because the products aren't carried elsewhere.

Rivals Home Depot, Canadian Tire Corp. and Lowe's - the latest big-box newcomer to Canada - also have strong house brands.

About one-third of Canadian Tire's sales are private labels, compared with 17 per cent at Rona. And Canadian Tire is introducing more premium house brands, such as its Yardworks lawn and garden line and its Mastercraft Maximum tools, said spokeswoman Lisa Gibson. It's focusing more on "bringing innovation and quality" to its private labels.

The move to higher-end private labels is a gamble at a time when consumers are increasingly looking for bargains. But Mr. Brossard said that customers are not as drawn to the lowest-priced private labels as they once were.

In the past year or so, Rona has put a push on its higher-end house brands, expanding in an array of categories from fancy faucets to tools and eco-cleaners, Mr. Brossard said.

The chain is also training store staff to tout the lines and their benefits to customer, he said.

The initiatives come as Canadian consumers are experiencing a "strong drop" of confidence in the country's economic growth prospects, Robert Dutton, chief executive officer of Rona Inc. said.

Housing starts declined in the first quarter of this year, consumers are spending less on home renovations and, even in booming Alberta, there has been "a temporary slowdown in the demand for building materials," he said.

The poor business conditions were compounded by poor weather, which sent Rona's first-quarter profit plunging to $1-million or 1 cent a share from $9-million or 8 cents a year earlier.

Sales rose to $911.5-million from $878.5-million.

The company's shares fell to the lowest point since November of 2003.

RONA (RON)

Close: $12.95 down 50¢

Rona Inc.

Q1 2008 2007
Profit $1-million$9-million
EPS 1 cent8 cents
Revenue $911.5-million$878.5-million

Source: Company reports

© The Globe and Mail

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