Pay ’N Pak Stores, Inc.

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Pay ’N Pak Stores, Inc.

Public Company
Incorporated: 1961
Employees: 2,200
Sales: $498.4 million
Stock Exchanges: New York
SICs: 2499 Wood Products, nee; 2542 Partitions & Fixtures Except Wood; 2541 Wood Partitions & Fixtures; 2599 Furniture & Fixtures, nee; 3546 Power-Driven Handtools; 3645 Residential Lighting Fixtures; 3632 Household Refrigerators & Freezers; 5211 Lumber & Other Building Materials; 5251 Hardware Stores

Before its 1992 dissolution, do-it-yourself retailer Pay ’N Pak Stores, Inc. sold a wide variety of products, from electrical and plumbing supplies to automotive accessories and sporting goods, and operated as many as 107 stores in 15 states in the western United States. At one time, Pay ’N Pak was a leading retailer in the industry, but as the lucrative market attracted more competitors, the company proved unable to compete and ceased operations in 1992.

Created in 1961 with the establishment of one plumbing and electrical supply store in a rural community in Washington State, Pay ’N Pak expanded rapidly during its first several years, adding stores throughout western Washington. During these formative years, Pay ’N Pak enjoyed much success, opening an average of two stores per year and developing a program to create Pay ’N Pak franchises that extended as far south as California. While this early growth provided an important foundation for the company to build on, the first defining event in Pay ’N Pak’s existence came eight years after its inception, in the form of a merger. The merger, in 1969, combined 14 company stores and five franchise stores with the assets of Eagle Electric & Plumbing Supply and Buzzard Electrical & Plumbing Supply. Joined together, the amalgamation of the three companies comprised 22 stores plus Pay ’N Pak’s five franchised stores, giving the newly formed entity revenues of more than $15 million. Although the merger increased the number of stores Pay ’N Pak operated and extended its presence into eastern Washington, the new management was of greater importance to the future of the company.

The key figure in the new management was David J. Heerensperger, president of Eagle Electric and the largest stockholder in the merged operations of the three companies. Once the companies merged, Heerensperger, who had founded Eagle Electric ten years earlier, took control of the combined operations and immediately began to initiate changes that had a lasting affect on the future of Pay ’N Pak. First, he eliminated Pay ’N Pak’s franchise program and its recently-formed modular housing operation, both of which were experiencing considerable financial difficulties at the time of the merger. Next, Heerensperger placed a greater emphasis on customer service by hiring a training director to develop an instructional program which stressed product knowledge and various installation techniques used for projects that utilized products sold by Pay ’N Pak. Employees who underwent such instruction were able to impart valuable information to Pay ’N Pak customers, a vast majority of whom were consumers remodeling or repairing their residences without the assistance of professional contractors. This type of informative salesmanship became a hallmark of Pay ’N Pak’s early success, enabling a customer to purchase the proper tools and supplies for a particular project and also receive advice on how the project might best be completed.

The average size of a Pay ’N Pak store in the years following the merger was 18,000 square feet, with the various products displayed in both bulk quantities and room arrangements. The company offered a wide array of home improvement products, including plumbing, electrical, and lighting fixtures, as well as building materials, cabinets, and appliances. In addition to products that catered to the do-it-yourself market, nine of the company’s stores also sold automotive parts and sporting equipment, adding to Pay ’N Pak’s appeal. This was particularly important since Pay ’N Pak stores were located in rural or suburban areas with populations ranging between 50,000 and 75,000, areas that generally offered a limited selection of merchandise to neighboring residents. After Heerensperger made his sweeping changes, the square footage of the stores increased by 70 percent, with some as large as 33,000 square feet, lending a “warehouse feel” to the stores that encouraged greater sales.

Greater sales were exactly what Pay ’N Pak produced, as the effect of the changes made an immediate impact on the financial health of the company and fueled its expansion. By 1974, Pay ’N Pak operated 48 stores in ten states in the western United States and experienced a phenomenal increase in its revenues. Since Heerensperger had assumed stewardship of the company, revenues had increased 29 percent annually and earnings had swelled at a faster clip of 34 percent. At this point, Pay ’N Pak boasted $51.9 million in revenues and was formulating plans to open six to eight stores per year in the coming years. This success was partly attributable to the growth in the do-it-yourself home improvement market nationwide. According to research conducted by Building Supply News, over $22 billion was spent per year during this time on products similar to those sold by Pay ’N Pak, and this figure was expected to increase as more consumers completed household projects themselves instead of hiring professionals.

Because nearly 75 percent of homeowners nationwide engaged in remodeling or repair projects, Pay ’N Pak focused their advertising on consumers and eschewed the professional sector. Pay ’N Pak’s advertising efforts saturated the markets it operated in, employing 37 newspapers in 30 cities and augmenting those advertisements with tabloids inserted in newspapers to announce its yearly chainwide sales. The employee training programs that had proven effective were held three times a year, and employees had access to approximately 40 sound and color films detailing the specifications and installation procedures of Pay ’N Pak’s products. Thus, with aggressive advertising, a knowledgeable sales staff, and the likelihood of further growth in the do-it-yourself market, especially in the Pacific Northwest, where the economy was growing at a faster rate than the national average, Pay ’N Pak achieved remarkable results in the years immediately following the merger and stood ready to open additional stores to build on this success.

By 1975, Pay ’N Pak had opened an additional six stores, for a total of 54, and increased its revenues to $60 million despite a nationwide recession that caused many retailers to suffer appreciable losses. As a result of the recession, consumers were left with less disposable income, but tended to spend what little they possessed on more prudent expenditures, such as repairing their plumbing or electrical problems themselves. Accordingly, Pay ’N Pak was sufficiently insulated against the economic downturn and was able to post an increase in earnings of roughly 20 percent. Further, housing industry cycles, which negatively affected retailers involved in the building industry at this time, had little impact on Pay ’N Pak’s business since lumber accounted for a mere four percent of the company’s total revenues.

Even though the market niche Pay ’N Pak had carved for itself served as a buffer against a majority of the pernicious affects of the recession, some of the items the company sold did suffer from a decline in sales. More expensive items, such as appliances, did not generate as much revenue as before the recession, but Pay ’N Pak’s line of automotive parts experienced a surge in sales that more than made up for losses. Beyond cutting inventories by $3 million, Pay ’N Pak emerged from the recessionary mid-1970s as a financially stronger company, still looking to expand and possessing the necessary cash flow to finance such growth.

Over the next five years, Pay ’N Pak opened an average of approximately five stores each year and extended its presence into five more western states, giving the company 78 stores in 15 western states by the end of the 1970s. Revenues had also increased during this period, more than doubling from $60 million in 1975 to a robust $138 million in 1980. Heerensperger, who by now was chairman and chief executive officer of Pay ’N Pak, had witnessed a 23 percent annual increase in revenues since he joined the company, growth that was still largely predicated on the superior service its salespeople provided to customers. Retail chains similar to Pay ’N Pak offered their products in warehouse style formats, but operated their stores as self-service establishments, typically hiring part-time help to staff the stores. This lack of qualified sales support on the part of Pay ’N Pak’s competitors gave the company a distinct advantage in the do-it-yourself market, establishing it as a haven for consumers who wished to complete home improvement projects but did not possess the expertise.

In 1982, after spending $750,000 to affix new colors and graphics to each store and remodel each bathroom and kitchen room arrangement, Pay ’N Pak eliminated its automotive and sporting goods product lines, which had proven to be low-profit items. At this time, retailers nationwide were once again reeling from poor financial conditions, as inordinately high inflation rates shrunk profit margins. But Pay ’N Pak’s financial position remained strong, buoyed by homeowners forced to remodel their homes instead of moving to new ones and by growth in the building materials retail market, a segment of Pay ’N Pak’s business that was expected to double in the next three years. With 90 stores and revenues of $180 million, the company was growing at a prodigious rate and seemed immune to the recessionary periods that affected other retailers.

By 1985, Pay ’N Pak was operating 107 stores and revenues had topped $300 million, a rate of growth indicative of the vitality of the home improvement market, which now was a $50 billion business. Encouraged by the profits that could be gleaned in this lucrative market, many large retailers diversified into the home improvement industry and Pay ’N Pak began to suffer from the proliferation of competitors. Reacting to the increased competition, Heerensperger insisted on maintaining Pay ’N Pak’s market share even if it resulted in losses for the company, which was exactly what happened the following year. In 1986, although revenues rose to $333 million, the company’s earnings dropped to $8 million from the $10 million posted the previous year. A price war soon developed among the home improvement retailers, which further eroded Pay ’N Pak’s earnings, but the company remained true to its promise to uphold its market share, and slashed its prices as well. By this time, in 1987, Pay ’N Pak’s market had attracted the attention of a corporate takeover specialist named Paul Bilzerian who attempted a hostile takeover of Pay ’N Pak. Bilzerian’s efforts failed, however, due to a management-led buyout of Pay ’N Pak, but the cost of rescuing the company from the takeover drained a considerable amount of its resources and left it saddled with a hefty debt.

Pay ’N Pak now suddenly found itself on the verge of collapse. The company had changed from a rapidly expanding retail chain with an enviable rate of revenue growth to a company that had overextended itself and was unable to successfully compete in a market saturated with competitors. To exacerbate the situation, the price war continued after 1987, as Pay ’N Pak fought to service its debt and operate with reduced profits. This was a losing battle, made more difficult by the company’s better-financed competitors. K-Mart Co.’s Builders Square, Service Merchandise Co.’s Home Depot Inc., and HomeClub could sustain the losses induced by the price war, but Pay ’N Pak, with its mounting debts and limited cash flow, could not. The company limped along, losing more money each year, until 1991, when it defaulted on a $12.5 million debt payment. Pay ’N Pak’s inability to pay its bankers eventually led the company to file for bankruptcy in September of that same year and it attempted to reorganize under the protective conditions provided by Chapter 11 of the United States Bankruptcy Code.

The United States Bankruptcy judge presiding over Pay ’N Pak’s case granted a $100 million debtor-in-possession financing package to the company, enabling it to restock some of its 74 stores, and initiate a new merchandising plan that placed a greater emphasis on home design products. The company opened eight stores with this new concept in early 1992, but just as the new stores opened for business, Pay ’N Pak decided the competition within its territory and the debilitating debt were too much to bear. Less than a year after Pay ’N Pak filed for bankruptcy, it liquidated as much of its inventory as it could and closed the doors to the company’s stores by the end of September in 1992, ending 31 years of business in the do-it-yourself industry.