Costello’s ACE Hardware Interview with CEO Mike Costello

In our last issue we introduced you to Costello’s ACE Hardware, one of the top ACE Hardware retailers in the USA operating in five states. Following is an in-depth interview with CEO, Mike Costello, about what continues to make this company one of the best hardware retailers in America.

Mike, I notice that you call your Store Leaders, Managing Partners. What is the difference between
a Managing Partner and a Store Manager?

It speaks to our culture of autonomy within the stores. It’s a way of looking at the role and recognising monetarily each individual’s performance, as they share in the profits of their store. We offer opportunities to share in the success of the store and to think and act like store owners.

What are the most important qualities you look for in a Managing Partner?

To Be Smart – to think and act like an entrepreneur – to have the ability to handle difficult situations as appropriate and to see problems, prioritise and solve them.

I think it’s the most difficult position that we have in our company.

We are looking for leaders, those who embrace technology and the processes that are going to help them to run the store efficiently.
We want people who believe in the values of the company. In a perfect world we would promote from within the company so that they already have a sense of what we do and how we do it. However, our growth path does not always allow that. We have acquired some managing partners through the
acquisition of stores, we always try to take that team on board and not lose their skill set.

What financial information do you share with your Managing Partners?

Full visibility of P&L statements each month, they see every line that I see, both controllables and non-controllables. This is so that they know what issues are impacting the business, even if it’s out of their control! For example, did Costello’s negotiate a favourable lease for that store in the first place? The outside economy? The more information we give our Managing Partners the better position they are in to make good operational decisions that affect us favourably financially.

I see the P&L as a history lesson, did our actions throughout the month achieve the desired results?

Financial statements don’t make a lot of sense on their own or at the beginning of a new project. It is only when you run the numbers on a regular basis that patterns emerge and you start to connect the operational activity with the financial results and the impact of same. When we sit down and look at a P&L statement all of our conversations are about operations, processes and efficiency, the numbers prompt these vital touch points.

We obviously look at sales every day and most importantly our margins.

We look at breakdowns by our strong brands, categories, and sales by market segment including Trade / Pro sales, DIY / Consumer and increasingly our online business. We not only compare a store’s performance with its own figures from a previous period, we actively compare stores with each other. Taking into account each store’s uniqueness, we look to find patterns for what is working well and also how to fix problems by the experience gained in other stores. We look to take successes from our best performing stores and use that knowledge in our existing and new stores.

An obvious example is making sense of expenses, it’s easier when you have several sets of expenses to see where the best value is. We have the data available to make comparisons and good decisions. We share a lot of data within the greater ACE Hardware network to understand what the common matrixes are within the business.

Please tell our readers what the most important daily activities your Managing Partners ‘MUST DO’ to create success in their business.

The first thing is communicating to, training and coordinating their store team. We are in a people business and there is no way one person, no matter how good they are individually, can get something done better or faster than by including their team. We need team leaders who delegate and not individual doers! Everything we do should be about getting the store ready for business or serving customers, that’s it. We need to establish on a daily basis, that we have a good in-stock position.

Do we have the right quantities, of the right items in the right spots in the store? Are we organised as a team so that we can help customers? We want to spend as much time as possible interacting with customers. As an independent hardware retailer up against competition that is larger than we are, it’s all about putting our people in front of customers and letting them be the differentiator. The primary enabler of helpful, attentive service is efficient processes for staying in stock, well merchandised, and ready for business. If we are ready for business, the process of helping customers takes us less time and delivers a high level of conversion and satisfaction. If we aren’t ready for business then serving is more cumbersome for our team, and less satisfying for our customers.

There was a time when our job descriptions weren’t very clear and we didn’t stress having a lot of defined processes. We stressed autonomy and allowed our leaders to get it done “their way.” That was a time when we had a lot more experience across the company. We were running on “institutional knowledge” which is a great thing…until it runs out. What’s happened over the past several years is more experienced team members retiring and being replaced with folks that are new to the hardware business.

We now believe that for the most part the days of finding an experienced, seasoned hardware store recruit from the outside are pretty much a thing of the past. This lack of available experience and the increase in the turnover of staff have caused us to really hone in on the processes and technology.

We need to be efficient in being ready for business, receiving and putting away deliveries, merchandising, handling overstock, housekeeping, and maintaining inventory accuracy. It doesn’t take years of product knowledge to do these things; only efficient processes, a dedication to training, and lots of discipline. We used to think that giving autonomy across the board was what our leaders wanted, but what they really want is to do things efficiently. They would prefer not to have to figure everything all out for themselves.

What are your Non – Negotiables at Costello’s

Our values are non-negotiable regardless of your position in the company, and that includes me. I had the privilege of working with our founder (and my father), Vinnie Costello and observing firsthand what it means to be driven by values, every day, every customer, every time. Even though he was the owner, he acted more like a caretaker, making sure that the decisions he made were the right decisions-right for the customer, right for the team, right for the success and growth of the company. We want our leaders to understand and lean on our values in their decision-making, just like Vinnie did.

Two other non-negotiables: (1) We are ready for business with a superior in- stock position; and (2) We are prioritising service and building strong relationships with our customers. We can schedule any task within a store, but we can’t schedule when a customer is going to walk into one of our stores. Tasks need
to get done, but when customers are around, we give them our full and undivided attention, that’s non-negotiable!

How is Costello’s adapting to the changing economy?

During covid we, like most of our competitors, were in crisis mode. We had a glut of business; our top line sales were very strong and we weren’t focused on our expenses. Now post-covid and with the supply chain challenges and price inflation at store level, it’s about cutting out waste. Being efficient with our
payroll and balancing that by not losing sales that we should be getting. We need to keep stock levels correct, we like to keep a pretty healthy stock level, we don’t want to lose the easy sales by not having the item in stock.

Also, is there a category, a brand or a segment in which we could outperform our competition and on a percentage basis outperform our overall sales performance. If overall, we are down 5% and DIY is down 10% can we drive sales in Trade / Professional to increase it by 10%?

How is Costello’s adapting to the changing buying patterns of your customers, most importantly the
impact of online retailing?

The demand for online is increasing, it spiked in 2020, it was strong in 2021 with a small dip in 2022. If you look at it over several years, it’s a much bigger slice of the pie than it ever was before.

Initially online for us was customers searching and learning about products online and then coming to the store to buy. Today, they are still searching online but expect to be able to buy at that point. They also expect inventory transparency-live stock levels and to be able to go instore to access that product without having to ask any of our team members to check.

It puts a lot of pressure on our operations because the numbers have to be right. If not, we lose a sale and now we upset a customer!

We also need to treat our online customer the same way that we treat a customer in-store. We need to process the order quickly and let them know their purchase is ready for pickup. About 90% of our online sales are buy online and pickup in store or at the curbside, we also have delivery options.

The biggest issues for our customers are accuracy of stock and quick turnaround. Our standard at present is that every online order gets a response within 15 minutes. Our online customers are probably more focused on service than on price, our instore and online prices are the same.

An interesting stat is that 28%-30% of our online sales are happening when our stores are not open! The priority for our teams the next morning is fulfillment of those online sales. What are the biggest challenges that Costello’s faces as you move into 2024?

We have the sense that we have lost some of our momentum, which is probably not that uncommon. And if we are aware of it, we can fix the issue. Again, it comes back to the basics being in stock and ready for business. Efficiency is top of mind; we need effective processes that allow store associates with less product expertise to maintain high standards. Consistency is also crucial; we can’t have a lot of different
ways of getting the job done, there should be only one way.

External issues are also impacting like minimum wage, six years ago in New York, it was $10 per hour, now it’s $15 going up to $17. The onus is on us owners to help make our people more productive by offering better training, improved processes and by putting technology into their hands that help them do their jobs more efficiently and to a consistent level.

Will you describe your planning process for 2024. Can you give us an overview of how that planning process will be structured?

The first thing is having a good memory for the current frustration points we are having right now. It’s an ongoing process, our management team have a constant individual priority list in their heads and are setting the groundwork in getting their ideas out there for what they will bring to table when we sit down to plan for next year. We don’t start with a blank sheet of paper; we will have had informal discussions that will be thought about and considered well before final decisions are made at the end of the year. A struggle we have had in the past is “too many priorities.” We need to do a better job at focusing on what is most important and also deciding on what will no longer be a priority. We never prioritise something that is not important, but sometimes we have so many things we are trying to get done that we lose focus. We need to line them up, fix one area, and move on to the next one.

Finally, Mike, regarding 2024 tell us one thing that if you can wave a wand and fix, what is it that
can REALLY move the needle and could improve Costello’s business significantly.

I would like every associate that comes into our business to get exactly the same training for the first 30 days that they work with us. The same training, same oversight and same coaching. If we were able to do that, we would put them in a much better position and they would want to stay with us long term. If we were able to make that sacrifice on behalf of our people early on in their journey with us, we would help them gain confidence and in turn make them more productive. A win win for all. The biggest frustration for me as CEO is speaking to our associates that are frustrated with their job, whether that’s dealing with a difficult or unclear process, a lack of training or communication, or dealing with a poor result. This is a
rewarding business. Solving customer problems, making friends in the community, our people should feel good at night knowing that they are making a difference. When our people are frustrated they are asking for something: more training, more communication, a better process, more technology, something that will help them to be more efficient or more effective. It’s our job as leaders to figure out what needs to be fixed and how to do it.

I am heartened to know that our staff churn is well below the industry standard and we are in the top twenty Fortune Best Workplaces in Retail™ 2023 *. It tells me we are doing a lot right, but as Vinnie Costello would remind us, there is always room for improvement!

In the Nov / Dec issue of The Hardware Journal, we will have the third and final article where we will get a
boardroom view of the Costello’s ACE Hardware planning process for 2024.