Lowe’s recent announcement that it has entered into an agreement to purchase the majority assets of Orchard Supply Hardware, after Orchard Supply had filed for Chapter 11 bankruptcy protection, raises several interesting possibilities for both parties.  Though both companies had to endure a legal process which required a waiting period allowing for other companies to place bids for Orchard as a part of bankruptcy proceedings, that period has passed and it looks like the acquisition should be completed shortly with little interruption.

For Orchard, a retailer which was considered to be a fairly unique and exemplary hardware dealer before being acquired by Sears and again after its spinoff by the Sears hierarchy, Lowe’s has promised to keep its management and staff intact.  Lowe’s expects that freed from the debt Orchard was saddled with when the Sears spinoff was executed, Orchard’s capable team will be able to proceed to the hopefully prosperous future envisioned both before and after it was a part of the Sears empire.

For Lowe’s, a company that has been struggling in recent years, the acquisition provides immediate entry into key California markets during a time when the company maintains plans for only very limited expansion.

According to Chain Store Guide’s database of Home Center Operators & Hardware Chains, during the years prior to the recession Lowes expanded by approximately 150 new locations per year.  As the recession approached and the effects of the subprime crisis hit the industry, that number was lowered to around 50.  In recent years that number has yet to reach this year’s projection of ten.  Two years ago Lowe’s actually reported a net loss of four stores in its annual numbers.

In fact, two years ago the company was rocked by a great deal of negative publicity after a couple of rounds of questionable store closures left bad tastes in the mouths of local journalists, politicians, consumers and especially a number of former employees.  At select stores, employees showed up to work only to be informed that that would be the store’s last day of operation.  In fact, politicians and an investigative press combined to question the closures of relatively new stores where the company had been granted tax and legal benefits which had cost local governments dearly, as they hoped to encourage a long term employer, which was not to be.

Lowe’s recent respite from dynamic or even tepid expansion can be seen as a reflection of both the state of an industry uniquely rocked by the two aforementioned economic disasters and a banking climate where few have access to funds for ‘luxuries’ such as expansion.  However, now the wise and efficient purchase of Orchard may prove an opportunity for Lowe’s to grow strategically by entertaining desired markets under a new format.

In fact, Orchard’s prototype may be as much a key to this deal as is the fine reputation the retailer enjoys with its loyal customer base.  For some time, industry observers have wondered if Lowe’s and arch competitor The Home Depot are approaching the point of market saturation for their warehouse-sized big boxes.  In order to properly support locations the size of their typical prototypes, communities must meet considerable demographics in which size matters.

Orchard Supply Hardware locations typically come in at around 40,000 sq. ft. of retail space.  Thus they can thrive in smaller communities which are thought to be under-populated for the dominant big boxes.  They also offer a quicker and more efficient shopping trip than their big box brethren.  This also translates into real estate savings which are considerable.

Keeping Orchard’s seasoned and devoted team intact while maintaining the Orchard brand, should increase the focus of an already diligent management group and workforce.  Add to this Lowe’s buying power behind Orchard’s well established community relationships and the removal of the burden of crippling debt artfully saddled on it by Sears and you likely have a formula for success for Orchard and a new path for Lowe’s.