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Home improvement retailers are going to find it difficult to implement bold strategies this coming year. Why? Because nobody can agree on what's going to happen. Some retailers see flat sales, others see growth, and the economists are no more guaranteed than the Farmers' Almanac. The good news is that any way you slice it, no one sees a really bad year ahead.

The economic outlook for Canada in 2001 is a now familiar story--the New Economy is propping us up. In the US, one third of the rise in real GDP over the past three years has been investment in machinery and equipment related to new technologies. Among other benefits, the increase in productivity brought about by these upgrades, estimated last year at over 5%, reduces overall labor costs. Meanwhile, things aren't as bright on the old side of town. The traditional economy, centered on primary industries like forestry, is already in a recession, and the slump in lumber prices is a glaring indicator. Escalating energy prices are going to add layers of cost to everything, from production level to store level.

The weak Canadian dollar has helped exports but made imports painfully expensive, and someone has to foot those costs. Retailers are in a bind here--can they take even lower margins and continue to grow, or can the added costs be passed on to the consumer?

Predictions on housing starts range from strong to weak, making it difficult to know how categories reliant on construction will do in the coming year. And while many are calling for a small recession, experts like the Scotiabank Group claim that the Canadian economy will continue to grow at a slower, but still respectable 4% in 2001, well over a percentage point above the combined pace of the other G7 nations.

What does it all mean? Probably the same as it did last year. Commodities will be weak, renovations will be strong, and weather permitting, seasonal products will do well. Successful retailers will rely less on forecasts and more on inventory management and smart buying to get ahead.

The Lumber and Building Materials category can expect commodities to recover only slightly. Predictions on the building materials side are better, however, and some observers are saying housing starts will be stimulated by dropping interest rates. Retailers will use aggressive strategies like leveraged buying and attention to costs to save margins, teamed with tight inventory management to cut losses.

Everyone knows that in the lumber and building materials category, commodities took a beating in 2000. Building materials fared better, though, and it looks like 2001 will be more of the same.

Lumber prices hit a seven-year low in 2000--bad enough that many Ontario home centres sold 20% more volume and wound up even in dollar sales. Retailers nationwide tell a similar story. Gypsum, insulation and roofing products were also flat as capacity exceeded demand by as much as 20%. Insulation did well in Quebec, but shingle sales were poor, perhaps owing to the number of new roofs in place thanks to the ice storm of several years ago.

With most commodities trading at 30% to 40% deflation in 2000, gross margin dollars were down. It's been a buyers market. But according to Tom Smith of Tim-BR-Marts in Atlantic Canada, 2000 was good from a tonnage standpoint. The beginning and end of the year were strong with a dip in the summer, he says. In Newfoundland, LBM sales were solid all year. He credits a strong marketing program for AWARD members and close relationships with key contractors and business partners for the good numbers.

As for 2001, commodity prices are not expected to bounce back in a hurry. With a year of practice under their belts, retailers are meeting this persistent problem head-on. Says Smith: "We have been able to mitigate that effect by really strong buying programs and negotiations in 2000. We changed our strategy in 2000 to securing agreements with our partners in most of the key building materials categories, going a long way to securing our margins for the year."

Home Depot's Dan Kiatipis takes a similar stance: "To counter some of those problems, the best we could do in 2000 was use our enormous buying power to leverage our costs. At the end of the day, you try to get gross margin dollars, whether you got it in low units or high gross margin."

Inventory management is one of the critical strategies in riding out the low prices. Kiatipis calls it "maintaining a smarter box," and at Home Depot it has meant going from 16' racks to 12' racks.

Tim-BR-Mart members are being advised to play it conservative, according to Smith. "We are going to be very cautious in taking big positions in inventory in 2001," he says. "We are advising our member dealers to work with their buying groups and to be careful they don't extend themselves on inventory, especially in the first part of this year."

Commodity prices notwithstanding, the outlook is not all gloomy. On the building supply side, some growth is predicted for the coming year. Atlantic Canada is expected to see growth in the 2% to 4% range, according to Tim-BR-Mart's Smith. Kiatipis says the people at Home Depot are guessing there will be about 5% recovery in prices. As for Quebec, Hubert Robitaille of Reno Depot sees the construction and renovation markets looking good in Quebec, with an aging population upgrading their homes with maintenance-free products.

"Price inflation in any products that contain petroleum oil; new and/or higher supplier delivery charges and handling fees; continued consolidation of the supplier base; member retailers beginning to identify new retail trends like installed sales; and a flurry of Internet business to business opportunities."

Economic and political forces, as well as slow lumber sales and declining building permits are some of the factors identified by dealers as influencing Hardware and Tools sales this year. Although some retailers are predicting flat sales in the category, others are expecting increases between 3% to 10%. Promotions and staff training are identified as key elements to selling the category. Sourcing for better prices is another competitive tool retailers will be using.

Hardware and Tools is a category that will continue to benefit from proper merchandising this year. That means more promos, demos and staff training to clinch the sale.

Home Depot's tool sales were up 10% in 2000 over 1999, with another 5 to 10% increase expected this year. Al Janmohamed of Home Depot points to proper handling of the category at aisle level as critical: "What I think really helped us last year were the demos. We were not doing enough demos but in 2000 we did more. And that helped improve the product knowledge for our associates which has been the key thing. The other big thing is to get the customer buying the right tool. You get a lot of customers coming in saying they want to spend $29.95 but they actually need a $50 tool to get the job done properly. That's been the key to our success."

The need for knowledgeable staff can't be overstated in the Hardware and Tools category. Revy conducts the biannual Tool Tune-up, bringing vendors and staff together at an off-site location to exchange the latest product information.

Promotions are another key element that Ken Friedman of Home Hardware identifies for the category in 2001. Home Hardware is planning new promotions to bump up sales in the category this year.

Good sourcing has also made the difference, says Friedman. "Some other good things that are happening this year is we've had some key decreases on some products through good sourcing that will hopefully give our dealers a competitive edge and better margins." Finding new sources for hand tools and accessories will continue to be a priority at Home Hardware.

Also, Home Hardware's conversion of Beaver Lumber stores will mean Beaver gets maximum exposure from increased advertising, which is bound to increase sales, says Friedman.

Both Sodisco Howden and Irly Distributors are looking to new opportunities for increased sales. Sodisco Howden picked up new business with the acquisition of the Smith Barregar and CN Webber accounts, while Irly is actively looking at several stores this year. For these businesses, politics and economics will make the difference.

"The one thing that might affect the hardware and tools sector is construction," says Sodisco Howden's Bill Hart. "A number of our dealers deal with contractors and if the housing and renovation market slows down, that will affect sales in that category." Home Hardware's Friedman agrees that the economy could make sales flatter this year than last.

At Irly, provincial politics will have an impact. "With the election in BC coming up ahead, it could turn out to be a good year this year. If the Liberals get in, it will be good for business," says Richard Tan of Irly Distributors.

"The other big thing is to get the customer buying the right tool. You get a lot of customers coming in saying they want to spend $29.95 but they actually need a $50 tool to get the job done properly. That's been the key to our success."

Retailers are expecting the Paint, D�cor and Flooring category to grow between 5% to 10% in 2001, and it will be driven mostly by flooring sales and confidence in the economy.

Paint, D�cor and Flooring sales have been particularly sensitive to outside forces this year. Whether it's the weak Euro, slow housing starts or just the weather, look at the big picture if you want to predict upcoming sales in this category.

RONA's Martin Menard is predicting a 10% increase in the Paint, D�cor and Flooring category for the coming year. This year saw an uninspiring 2-3% increase in this category, similar to 1999, he says. With 20% of paint sales consisting of outdoor products, the damp summer washed out the numbers. "For 2001," says Menard, "the financial experts are predicting a bit of an increase in housing starts for this year, but not a lot. Hopefully the weather will help. We will be opening some new stores which will mean we'll sell more product."

In British Columbia, replacing the NDP provincial government means anticipated growth in their economy. Many blamed the government for flat housing starts that put the sales burden on the renovation market. Nevertheless, says Glenn Nelson of Windsor Building Supplies, the flooring market was up 5% thanks to renovation and increased advertising. Driven by a recovering BC economy and a new branch in Edmonton, Windsor can expect paint, d�cor and flooring sales to increase by 5% to 10% in the coming year, according to Nelson.

Flooring is the hot segment of this category. Wall to wall carpeting, vinyl flooring and parquet flooring were down, but ceramic and laminate flooring were up last year. Plank flooring is also growing, but ceramic and laminates are driving sales. New construction and the brisk economy are thanked for increased flooring sales in 2000, and Luc Nantel of Reno Depot is expecting another 5% to 10% increase in the coming months.

Nantel picks laminates over parquet because they are cheaper and more attractive. He also explains the downward price trend in ceramic and laminate flooring as supply side driven. "We import a lot from Europe and the Euro is down compared to the Canadian dollar. Secondly, in laminates, there is so much competition on the supply side that prices have dropped significantly," says Nantel.

The Plumbing & Kitchen category for 2001 will be driven by DIY and BIY renovations, plumbing commodity prices, and product selection.

The Plumbing and Kitchen category has a retail format for everyone. Whether you are a local corner store or a warehouse giant, there's sales to be had in this segment. Ace Hardware, for instance, has made its money in basic plumbing and repair items rather than decorative fashion products. Although their margins on brand name faucets have been squeezed to a drip by the box stores, hard-part commodities like pipe fittings and repair items will continue to drive their sales in the coming year.

Plumbing is the largest department at Ace, and they make it a focus. The Ace format is attuned to the convenience-type product more than the project sale, says Peter Simmons at Ace, who predicts commodity driven products will continue to grow while decorative bathroom fashion items level off.

"In 2001, we're bullish for the plumbing area," says Simmons. "Consumers are now spending more money for BIY and DIY, but as time is more precious they are doing smarter buying and are leaning more to BIY."

At TruServ, expanding lines is the formula for increasing plumbing sales in 2001. Says TruServ's Luc Roy, "In the plumbing category, we are expecting good growth again for 2001. We are doing some specific line reviews and maybe getting into categories that we had not been in before. It's a corporate decision to do some expansions."

Those expansions included the faucet category last year and fixtures, toilets, tubs and showers this year. Price increases also helped last years' sales, with commodities like ABS fittings and copper pieces getting more expensive, making it easier to reach sales targets, says Roy.

As for kitchens, Doug Thorogood of Totem says sales were good in 2000 despite housing starts in Alberta dropping from 1999. Predictions that new construction will continue to drop this year, "won't affect us a lot," says Thorogood. "Most kitchen sales, 80 to 90%, are renovation jobs. We don't sell a lot to new construction." With housing starts expected to be flat nationwide in 2001, kitchen sales should stay strong on the basis of renovations.

This coming year, lighting sales are expected to be bright. Competitive pricing, upgraded product and project sales, teamed with proper merchandising, advertising and services like special ordering, will make the difference.

For 2001, fixtures are the big news in the Lighting and Electrical category. Upgraded products will drive those sales.

Lighting is a fashion category. The products and designs are constantly changing, stimulating redecorating and renovation sales. Canadian Tire had double digit growth in d�cor products, according to Dave Pardy, and lighting fixtures are part of the redecorating process for many consumers. "Products that did well were step-up and price point products," says Pardy. "The functional stuff like halogen torchieres etc. are declining--people are tired of them so they are stepping up into nicer things."

Indeed, the up-sell in lighting fixtures is this year's primary trend in the category. And there's a project sales opportunity here. Says Sodisco-Howden's Peter Lynch, "The trend today is if consumers are buying a light fixture for their house, they are more likely today to buy a whole family of fixtures. They'll change all the fixtures in the house or a good number rather than change just one. This means more sales for dealers."

Mario Levesque at Marchand Unis agrees that the upscale product is the focus in lighting. Capitalizing on the increase in disposable income in Quebec, Marchand Unis will add more quality, medium to high range products to its store shelves, he says. Backing up the product with extra service will encourage sales further. "Giving our customers what they want is part of our customer service mandate. Even if the customer wants something special, we will order it for them through our electronic catalogue. That will be part of our success in 2001," says Levesque.

At Cashway/RONA, revamping and updating product assortment has meant an increase of 60% in exterior lighting and 25% in interior lighting last year. Special buys, like clear-outs and end of lines also brought in the customers with sharp prices. Promoting the products has been key in their lighting formula, and will continue to be in the upcoming year. "We are optimistic about the new year" says Cashway/Rona category manager, Bruce Webster. "In general, we do a lot of advertising in lighting. The more the stores set-up and properly merchandise with good displays, the more it reflects in greater sales."

The seasonal category is hoping for better weather to boost summer product sales from last year. But power tools are expected to increase regardless, and on-line shopping will bolster sales in some regions.

For obvious reasons, seasonal merchandise is the product category most vulnerable to the weather. Some items sell regardless, others are more sensitive, as Revy's Susan Ormond call tell you.

"In 2001 we are expecting a late start again into the summer. I think that will be a trend but I don't think it will be as dismal as it was in 2000," says Ormond, referring to poor patio furniture sales. Despite carrying a limited inventory, patio furniture was the big loser for Revy in this category, she says. In 2001, Revy will rethink this segment, selling only sets instead of individual pieces and being generally more conservative in buying. They also plan to capitalize on fashion trends by stocking mostly aluminum furniture, one of the hot material trends at the European shows last year.

Ironically, watering equipment did well for Revy despite the wet weather, and power tools increased by 20% over the 1999. Sundries like pruning tools, edging and fabrics were up, as well as a slight increase in BBQ sales. Ormond is expecting continued growth in the power tool segment in the coming summer.

Co-op Atlantic is going high-tech to sell seasonal products. Increased sales over 2000 were attributed to changing retail trends by Co-op Atlantic's Ron Saunders. "We are catching up to the times," says Saunders. "E-commerce is part of our business."

Internet shopping is catching on at Co-op Atlantic, which posts its website in its advertisements. One in four families in Atlantic Canada currently receive a Co-op Christmas catalogue, which they can browse and then purchase on-line. The product is delivered to the Co-op of their choice, they simply pick it up. In provinces where there isn't the urban density to have stores in every neighborhood, the online phenomena could be just the ticket for promoting seasonal products in the coming year. C