The Chinese Depot

China appears to be the next international target for Home Depot. News reports indicate the company plans to buy Home Way, an 11-unit chain started in 1995, with which it has had a relationship since that time. Bob Vereen reports…

According to Retail Forward, a management consulting and research organization, Depot faces aggressive retooling, including international expansion, if it hopes to continue the kind of growth it achieved in its first 25 years. In its first 25 years, it had the fastest growth of any retailer, including Wal*Mart. Its target for 2010 is $125 billion, up from its current $82 billion. In a special report, The Home Depot 2010, Retail Forward forecast that the company’s growth would be moderating though it would still log solid overall sales growth. To achieve continued growth, the company will be relying increasingly on retail services, the professional market and international expansion, as prime locations for its big-box stores in the US, become scarcer. Product sales, once representing 92% of volume, will drop to below 65%. They had dropped to 83% of sales last year as the company focused more on installed sales and services.

In addition to “getting serious overseas” in its international expansion, Retail Forward said the company must pursue innovations in other areas. These include:

 

  • Store modernization to improve the shopping experience for customers
  • Merchandising – finding new products that will appeal to customers. It is already trying to upgrade merchandise in many categories, such as high-end major appliances.
  • Services – continued expansion of the “Do It For Me” business
  • Pro markets – unifying its efforts to serve professionals in many fields now that it has purchased so many different companies serving commercial and industrial customers
  • Non-store efforts. It recently discontinued two direct-mail catalogues selling high-end products, but is using its heavily-trafficked web site to offer these products and can be expected to focus more on Internet sales.Two other challenges face the company – developing different formats to tap new markets and enhancing operational efficiency. It currently has 5 multi-level stores, including two in Manhattan which focus more on local needs such as strong storage assortments. It is also expected to roll out smaller (50,000 sq ft units) in smaller markets. While it failed with earlier efforts to do this, the lure of several hundred potential markets will encourage experimentation. Domestically, too, it must continue to improve its existing stores. Lowes’ stores are better merchandised and maintained and more female-friendly. While they are warehouses, too, they are less cluttered and intimidating to consumers. Internationally, Depot’s record is spotty. It has been tremendously successful in both Canada and Mexico, becoming number one in both of those markets, but it failed in its South American efforts, departing both Chile and Argentina when local chains proved to be better merchants. So now the company is taking aim at China, a country with 1.3 billion people. Will it be able to succeed there as it pursues Home Way?

    The Chinese Market

    While China’s population is huge, only about 10% can be considered “middle class” with the ability to buy the kinds of products the company sells. However, China is generating 10 million new jobs annually and will do so for the foreseeable future. It is also creating 4 million university graduates annually, who will earn sufficient income to be modern-day consumers. 150 million rural residents, many escaping poverty, will be moving into the cities seeking better employment and creating tremendous demands for housing and home improvement products. But retailing in China is far different than home center retailing in the US, Canada or Mexico, where Home Depot has been so successful.

 

Jim Inglis, a home center industry veteran who now consults internationally, points out that the home center business in China is focused on furnishing new condos which are ”sprouting like mushrooms everywhere.” When customers buy a condo, they are buying an empty concrete shell. Stores must provide flooring, lighting, sanitary ware, kitchens and furniture, and a very heavy percentage of this business is sold on an installed basis. B & Q says thisaccounts for much of its success.

Inglis knows the Chinese market well. A decade ago when he was vice-president of strategic development at Home Depot, he helped Home Way get underway in China. Home Way was started by Sha Du, a Chinese businessman who formed a partnership with some government-owned building material manufacturers. He asked Home Depot to become a joint venture partner. Depot’s board decided not to take an equity interest but did help Mr Du establish his business and used its Depot stores in California to train his people. Depot’s influence can be seen in the heavy use of Depot orange and in its warehouse look duplicating Depot’s. Home Way subsequently bought out its manufacturing partners and now is a subsidiary of Home World, a private company with more than 70 hypermarkets and a group of shopping centers. England’s B & Q and Germany’s OBI entered the market after Home Way was founded. B & Q opened more stores than anyone else and purchased the OBI stores in 2005. OBI stores were too much like German stores, featuring large garden areas and high priced tools. Inglis said the home center business in China has no real garden business as virtually all middle-class consumers live in high rise condos in its metro areas.

He points out that there is very little construction, repair or seasonal business in the Chinese cities where the affluent middle class live. In addition to Home Way, which operates in northern China and B & Q, which has about 50 stores, there are two other Chinese chains. One, privately owned, is Orient Home with 20 units and the other, called Home Mart, is owned by the Shanghai government. Inglis also said the Chinese market will require a great deal of investment for Depot to gain market share. He predicts a real battle between B & Q and Depot. Doing business in China is different – it is highly focused on special-order products with significantly lower margins than in most parts of the world. The selling process on the sales floor is frequently performed by vendor sales representatives. Said Inglis: “The business is very different from the US or European model.” How the company fares in China, will be interesting to say the least.