Building a Dynamic, Employee-Owned Company in North Dakota

By Andrea Gleiter, BA English, University of Mary, 2016

Pens, paper and pencils jumped a full inch when Frederick Scheel’s fist hit his desk. “Sporting goods are the first thing people can do without,” he shouted at his son, Steve.

It was 1977 in Fargo, North Dakota, and Frederick was the CEO of the family’s 14 hardware and homeware Scheels stores in the area. At 30, Steve D. Scheel was in his fifth year working full time for the family business. For his first major assignment, he was put in charge of opening a store in Sioux Falls, the company’s first in South Dakota. Steve proposed making the new venue into an all-sporting goods store.

Steve’s father had always told him that “change is good,” and Steve took the concept to heart. Frederick was less than enthusiastic about this particular change—at first.

The idea of creating the first all-sporting goods Scheels store evolved into the first of three major business ideas that would define the company’s future.

Roots & Change

Steve’s great-grandfather was a German immigrant and potato farmer near Sabin, Minnesota, about 10 miles southeast of Fargo. He used the $300 he earned from his first potato harvest as a down payment ($600 total cost) on a small hardware and general merchandise store, which he opened in Sabin in 1902.

In 1919, Steve’s grandfather took over the business after returning from World War I, where he served in the U.S. Navy. In the following decades, the family opened Scheels stores in and around Fargo on both sides of the Red River Valley.

In 1946, Steve’s father, Frederick, returned from serving as a U.S. Marine pilot in World War II and took over the family business. Frederick was also an accomplished photographer, who studied with photography legends such as Ansel Adams. He published several books of photography as well as a book of poetry.

Outside of business, Frederick Scheel had a lifelong love with photography-both in appreciating the art and creating it himself, such as this simple but powerful study of a prairie sunflower. In 2007, Scheel gave more than 600 prints to the Minneapolis Institute of Art. "Fred saw pattern and form-a sense of order-in the world," said Colleen Sheehy, director of Fargo's Plains Art Museum. "He helps us see the beauty all around us." Photograph by Fred Scheel.

Outside of business, Frederick Scheel had a lifelong love with photography-both in appreciating the art and creating it himself, such as this simple but powerful study of a prairie sunflower. In 2007, Scheel gave more than 600 prints to the Minneapolis Institute of Art. “Fred saw pattern and form-a sense of order-in the world,” said Colleen Sheehy, director of Fargo’s Plains Art Museum. “He helps us see the beauty all around us.” Photograph by Fred Scheel.

Sporting & Outdoor
Goods as the Future

As early as the 1910s, Scheels stores began carrying a small sporting goods selection, which intrigued Steve as a youngster in the 1950s helping out at the stores. After graduating from St. Olaf College in Northfield, Minnesota, with a triple major in economics, political science and history, Steve served in the U.S. Army as a combat engineer for two years. In January 1972, he started working full time at Scheels.

“I took a $500 a month cut in pay and came to work for Dad because he’s such a good salesperson,” Steve said in an interview.

By the late 1970s, big box chain stores such as Lowe’s were opening nationwide, precipitating steep competition in hardware and homeware. Steve had a growing sense that the Scheels company’s future would be in sporting goods. After Home Depot was founded in 1978, any doubts were erased.

Large sporting goods stores such as Dick’s were also proliferating, but there were no sports superstores in North Dakota and few in this area of the Midwest. At the time, the profit margin for hardware and sporting goods was about the same, but since sporting goods average a much higher item cost, making a $5 profit on a baseball glove adds up far more quickly than making 5 cents on a handful of nails.

Also for Steve, an avid cyclist, “sporting goods are more fun,” he said at a talk he gave last October at the Lunch & Learn Series at the University of Mary’s Gary Tharaldson School of Business, co-sponsored by the Bismarck-Mandan Chamber of Commerce.

Nevertheless, Steve’s father saw hardware items as necessities and sporting goods as luxuries, and considered his son’s first major business idea very risky since the original model had worked so well for almost 80 years in the area’s agriculturally based economy.

But Steve negotiated with his father to allow him to incorporate a larger sporting goods selection in the Sioux Falls location. This proved immediately successful. Three years later, in 1980, Steve converted the Sioux Falls store into an all-sporting goods store—without his father’s approval. Sales at that location increased by 30 percent, in contrast to the average annual sales growth of 2 to 4 percent at the other stores.

Frederick applauded the results of his son’s clandestine move and began converting other stores to the new model. In 1989, the first all-sports superstore was opened in Grand Forks, and new stores followed suit. Currently, there are 25 Scheels All Sports (or SCHEELS) stores in 11 states—North Dakota, Illinois, Iowa, Minnesota, South Dakota, Montana, Wisconsin, Nebraska, Nevada, Utah and Kansas—and one remaining hardware store in Fargo.

The first Scheels Hardware and General Store in Sabin, Minnesota opened in 1902.

The first Scheels Hardware and General Store in Sabin, Minnesota opened in 1902.

Disneyland of Sporting Goods Stores

The new SCHEELS all-sports stores were being built progressively larger to accommodate a vast range of sporting goods from hunting to camping to golfing to skiing and so on—along with each sport’s clothing and footwear.

At the same time, Steve realized that customers were spending an average of 20 minutes in a store, just enough to complete a transaction. So Steve’s next big idea was “to make SCHEELS an attraction rather than just a retailer.”

In 2007, Sports Illustrated for Kids chose SCHEELS as the best sporting goods store. “You can buy a baseball glove anywhere,” the magazine wrote, “but SCHEELS flagship stores might be the only places where you can buy a baseball glove, ride a Ferris wheel and snack on an ostrich sandwich.”

Stores hold galleries, aquariums, vast atriums with suspended airplanes, restaurants, children’s rides, shooting galleries and bowling alleys. The average customer visit now lasts more than 90 minutes.

The atrium of the Fargo SCHEELS features a replica of a company floatplane diving from the glass-enclosed ceiling.

The atrium of the Fargo SCHEELS features a replica of a company floatplane diving from the glass-enclosed ceiling.

Bigger, Biggest & Almost Bust

When the first SCHEELS in Grand Forks opened in 1989 at 30,000 square feet, it was the company’s largest venue by far. It soon became clear that more room was needed. A new 50,000-square-foot store opened in Eau Claire, Wisconsin in 1995 and was too small within six months.

A year later, the Fargo SCHEELS opened at 60,000 square feet. Then in 1998, a new SCHEELS opened near Iowa City, Iowa, this time with two stories, which doubled the location’s retail space to 105,000 square feet. In 2002, another store opened in St. Cloud, Minnesota, at 128,000 square feet. The new store in Omaha, Nebraska opened in 2004, boasting 177,000 square feet. Six months later, SCHEELS 23rd superstore opened in Des Moines, Iowa—2,000 square feet larger.

The bigger-is-better model worked so well that Geno Martini, the mayor of Sparks, Nevada, called Steve in 2005 to propose that SCHEELS build the world’s largest sporting goods store in this affluent suburban city bordering Reno. After investing $60 million, Steve presided over the opening of the Sparks venue, which at 295,000 square feet has the same acreage as five-and-a-half football fields.

Two arched 16,000-gallon aquariums at the Sparks location are stocked with brilliantly colored fish and an atrium with a 65-foot Ferris wheel. Shooting galleries and sports simulators let customers test their skills. Thirty flavors of fudge are served at Gramma Ginna’s restaurant, named after Steve’s grandmother.

The Sparks megastore opened on September 26, 2008. One month later, the Great Recession began and retail sales plummeted nationwide. With a third less revenue than expected, the Sparks store was in trouble. Also, since the store was such a huge investment, the downturn put the entire company at risk, along with the employee retirement plan.

Stop Managing Employees,
Start Leading People

These troubled times endangered Steve’s third innovative business idea. By the late 1980s, Steve had become concerned about his biggest ongoing problem: employee turnover. Steve found an intense dislike of management to be a common theme in employee exit interviews.

While his managers had expert knowledge about products, they had never received formal training in leadership. Steve decided that employees needed to be led, not managed, and that the ability of the sales staff to deal with customers as individuals is ultimately what distinguishes a retail outlet.

Steve saw clearly that customer loyalty in an increasingly competitive retail environment would determine the level of SCHEELS’ success and even its survival.

“If we can turn out the best leaders in retail,” Steve said, “we don’t have to worry about the competition.”

In 1990, Steve again approached his father to make a fundamental change to the company’s business model. “It seems we should be managing processes and things like inventory,” Steve began. “But we should be
leading people.”

Frederick wasn’t sure what to make of this vision but this time, he trusted his son and said, “If you think there’s a difference, go for it.”

The front entrance of SCHEELS in Fargo, ND, which also houses company headquarters and training facilities.

The front entrance of SCHEELS in Fargo, ND, which also houses company headquarters and training facilities.

Leadership Training

A year later, Steve became president, CEO and chairman of the board of SCHEELS. Steve believed then and even more strongly now that leaders can be made as well as born, and leadership is key to business success. He instituted mandatory monthly readings for store leaders from the many books he has read, such as John C. Maxwell’s The 21 Irrefutable Laws of Leadership. The readings also pertain to specific strategic goals Steve has set company-wide for that year. It is then up to the store leaders to train the company’s 480 assistant store leaders via weekly meetings on site and by modeling the lessons articulated in the readings.

Steve also prepares the lessons and questions for the weekly staff meetings, which the store leaders lead at each venue. Most importantly, through observation and interactions on visits to every store, Steve works on reinforcing the lessons, believing that repetition matters.

Today, Steve’s son, Steve M. Scheel—the fifth generation of Scheels in charge—is CEO, while Steve remains board chairman and readings’ director. At 70, Steve D. still bursts with energy and smiles often. He is soft-spoken but a forceful presence. He makes a point of being friendly with all staff and treating mistakes as learning opportunities. For decades, he has worked long hours and traveled frequently among stores, which he still enjoys.

Hiring for Character

With developing leadership as the top priority, Steve focused on becoming very selective in the hiring process. He realized that too often absorbing information didn’t translate into treating colleagues or customers well. In response, he implemented high standards for prospective employees that focused on character qualities rather than on skill sets.

“We hire for attitude and train for skill” became the hiring mantra at SCHEELS. To advance, employees go through an evaluation process twice yearly. If these are favorable and consistent, then the employee can advance to the next level of leadership.

The leadership team at each venue is responsible for hiring, managing systems and growing revenue. The store is run almost entirely in-house, rather than from a distance. This enables managers and sales staff to establish fruitful long-term relationships with customers. Turnover is now at the lowest rate in the industry: from 14 to 16 percent per year, occurring mostly in an employee’s first year or two of service.

The bottom line at SCHEELS, Steve continually emphasizes, is that employees are people first, and not mere company assets.

“When I listen to a concern employees have about business or their home lives, I ask a few questions,” Steve recounted. “Then I can really help them become a better person at SCHEELS. Trust is the bedrock of leadership.”

He teaches leaders how to get to know their employees by “asking about hobbies, knowing the names of their spouses and children and finding out what’s going on in their lives.” On the store floor, it is important for leaders to smile and always acknowledge a job well done.

Steve models this approach as essential to SCHEELS corporate culture, and he expects store leaders to do the same.

Steve D, Scheel, an avid cyclist, works on the floor in one of his favorite areas, the bicycle shop.

Steve D, Scheel, an avid cyclist, works on the floor in one of his favorite areas, the bicycle shop.

Product Knowledge

SCHEELS prides itself on having the best-informed sales staff in retail. The company runs four product-training centers, including one focusing on camping and firearms near Lanesboro, Minnesota. In Cedar Shores, South Dakota, sales associates are trained in fishing equipment and water sports. The “Scheels University System” is headquartered in Sioux Falls, and much of the training about clothing and footwear lines takes place in Fargo.

Sales staff spend a full week at the appropriate training facility. They are tested on product knowledge when they arrive. During the week, top product instructors from Trek Bicycle Corporation and Callaway Golf Company, for example, train SCHEELS employees in how to use the products properly and improve their skills. At week’s end, another test is given and sales staff must score 95 percent at minimum before they are authorized to sell the products at a SCHEELS store.

The Wall of Excellence at Fargo headquarters honors achievement in sales and service.

The Wall of Excellence at Fargo headquarters honors achievement in sales and service.

Aesop’s ESOP

As the moral for an Aesop fable puts it: “He (or she) who shares the risk ought to share the prize.” As SCHEELS converted its business model to an all-sports retail chain, Steve also worked with his father on converting the family-owned company into an employee-owned corporation via an Employee Stock Ownership Plan (ESOP), which was created in 1982.

Steve and his father wanted to both acknowledge the sacrifices SCHEELS employees make and ensure they can retire comfortably. SCHEELS has about 7,000 employees, and anyone who is 21 years of age and works at least 1,000 hours a year becomes vested in the plan.

There are three major benefits to an ESOP. First, as employees realize that they are in fact the owners of the company, their attitudes evolve into an ownership mentality.

Secondly, the ESOP enables all employees to retire with a much larger package than they might otherwise. A long-time associate, for example, retired recently at 52 years of age with $3 million in her SCHEELS ESOP. She began her career at SCHEELS as a high school student and became the first full-time product buyer. The next year her husband retired from Scheels after a similar career path; Steve wrote him a check for over $4 million.

Thirdly, the plan encourages employees to continue working at SCHEELS. The prospect of retiring as a multi-millionaire in one’s 50s is an attractive goal that few other companies offer to anyone beyond top management.

Steve budgets $45 million a year for ESOP payouts and writing those large checks is his favorite part of the job.

Steve D. Scheel speaks at the Lunch & Learn series, sponsored by the Gary Tharaldson School of Business at the University of Mary and the BIsmarck-Mandan Chamber of Commerce.

Steve D. Scheel speaks at the Lunch & Learn series, sponsored by the Gary Tharaldson School of Business at the University of Mary and the BIsmarck-Mandan Chamber of Commerce.

Back to Forward

As Aesop noted, there is risk in life. The ESOP grows only insofar as SCHEELS prospers. If the company or the nation’s economy falters, the ESOP likewise suffers. The advantage of sharing risk is that everyone who works full time at SCHEELS becomes dedicated to the company’s long-term success. This certainly played a role in weathering the 2008 recession. The relationships and trust SCHEELS sales staff had established with customers eased the decline in sales revenue. As a result, there were no layoffs or downsizing.

Giving back to the community is also a vital company commitment. Every SCHEELS store must donate 5 percent of profits to local charities and organizations. In good years, store donations double. As well, the Scheels All Sports Foundation donates about $5 million per year to local communities.

Tremendous success continues to follow the Scheel family belief that “change is good,” that innovation and sensible risk bring high rewards. On September 29, 2017, SCHEELS will open a 250,000-square-foot store in Johnstown, Colorado. The same sized store will open in Lincoln, Nebraska, in 2018. The next year, a new SCHEELS at 240,000 square feet will open in Eden Prairie, Minnesota. And in Colony, Texas (near Dallas), a new SCHEELS will open in 2020, which at 300,000 square feet will become the next SCHEELS version of the world’s largest sporting goods store.​