MONTREAL — Home renovation company Rona says it will compete more effectively with large U.S. rivals by eliminating its franchise structure with the purchase of 20 stores that date back to its entry into big-box retailing two decades ago.
The Quebec-based company said Thursday it is acquiring 18 franchise stores in Quebec and two in the Ottawa area for an undisclosed price. They include 17 big-box stores and three smaller outlets.
The move will leave Rona (TSX:RON) with 233 corporate and 275 affiliate stores in Canada that operate under several different banners.
"The competition we're facing in big-box retailing is all corporate, so it gives us agility to be more reactive to promotions, to be more proactive in terms of development across (Quebec) and it's more efficient overall in the company," Luc Rodier, executive vice-president retail, said in an interview.
Rona has been streamlining its operations for three years in an effort to cut costs and restore profits amid a tough retail environment.
Rodier said the change to a structure used by its rivals doesn't set Rona up for an eventual sale.
The franchisees approached the company six months ago about a sale. It follows Rona's purchase of five other franchise locations since 2005.
All 79 of Rona's big-box stores will be wholly owned by the company following the acquisition of the 17 franchised big-box locations.
The deal is expected to close in September, subject to a review of the business at each of the franchised stores.
In total, the Rona franchise stores have 2,600 employees and generate more than $500 million in annual retail sales.
Rodier said the deal won't affect employees and will go largely unnoticed by customers.
"For local communities there's very little changes apart from the ownership. Local management stays, the staff stays, the service stays the same, the assortment will be Rona assortment."
The acquisition will allow Rona to incorporate the franchised store sales and profits into its own results.
But analyst Irene Nattel of RBC Capital Markets said while the transaction will simplify its business model, that does little to change overall challenges facing the company.
"With a challenging outlook for the Canadian housing market and modest consumer spending growth, we believe it will be difficult for Rona to generate meaningful sustainable top line growth after the current period of easy comparables," she wrote in a report.
