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Luc Rodier, Rona’s executive vice-president of retail, gave store operators a tour of the company’s new, smaller ‘satellite’ model.

Fred Lum/The Globe and Mail

Deep within a cavernous convention hall in downtown Toronto lies Rona Inc.'s vision for better returns.

Here, the Quebec retailer has erected a diminutive temporary store that the home-improvement chain is betting its future on – as an alternative to becoming a takeover target.

The latest new store model – dubbed its "satellite" concept – is a vastly smaller shop than its big-box outlets, many of which the struggling retailer is now closing or downsizing. As part of its initiative to open 11 satellite stores by the end of next year, Rona is buying leases of bankrupt Blockbuster video shops.

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It is wagering that customers will be drawn to the convenience of a neighbourhood hardware store over the far-flung superstores of Home Depot Inc., or Lowe's Cos. Inc., which this week withdrew an informal $1.8-billion takeover bid for Rona.

"We're listening to what the customers want," said Luc Rodier, executive vice-president of retail at Rona during a tour of the mock satellite store, stocked with about one-quarter as many toilets and tiles and other goods as a big-box store.

Rona may be listening to its customers on store sizes, but some Rona shareholders are getting impatient. They say the board of directors, including chief executive officer Robert Dutton, needs to explain why it turned its back on the Lowe's $14.50-a-share proposal. Rona's stock closed at $10.96 Friday on the Toronto Stock Exchange.

"We're disappointed in the board of directors," said Irwin Michael of I.A. Michael Investment Counsel, whose funds hold about 3 per cent of Rona shares, according to recent Bloomberg data.

"The board of directors must explain why they chose not to enter into discussions with Lowe's to maximize shareholder value," Mr. Michael said. "It looks like Lowe's was summarily dismissed. As shareholders, we look at this and we're scratching our head. … Everything just got kiboshed."

Added Richard Fortin, portfolio manager at Bissett Investment Management, whose Bissett Small Cap Fund owned about 2 per cent of Rona shares in June: "We believe that a strategy which focuses solely on the execution of Rona's current business plan while excluding all other value creating alternatives (including a potential combination with Lowe's) isn't in the best interest of shareholders and is the wrong approach."

Mr. Dutton did not make himself available for an interview on Friday as he met with store operators at the convention, while Mr. Rodier declined to speak about the Lowe's offer or shareholders' frustrations. "We have to convince customers first," he said.

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The smaller concept stores, including medium-sized "proximity" outlets, are more efficient to run and build, and are expected to generate sales of more than $300 per square foot – and potentially as much as $400, spokeswoman Michelle Laberge said. That is better than the $300-per-square foot average at current Rona stores, and considerably more than at the big-box stores that it is shutting or reducing in size.

Its satellite stores will focus on better customer service, partly by having more full-time employees than part-time ones – based on the premise that full-time staff are more knowledgeable and committed to the job, Mr. Rodier said. At the same time, the satellite stores will provide Rona with overall labour savings: They'll be staffed with six to 10 employees compared with 100 to 120 employees at the big-box stores.

Along with its satellite stores – Rona already has three test outlets in Canada – the retailer is touting a new model for "contractor first" outlets. Even smaller than the satellite stores, they have a lumber yard but little stock on the floor. Such stores generate higher sales but thinner profit margins because they carry a lot of low-margin building materials, he said.

The satellite stores will stock just top sellers, although they will have special-order desks and online kiosks for e-commerce. Rona will benefit by having to invest much less to build a satellite store: under $500,000, compared with $18-million to $20-million for a big-box outlet and less than $10-million for proximity stores, he said.

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