Under New Management

Home Depot is getting back to basics under Frank Blake, its new CEO. Bob Vereen reports…

The days of an imperial CEO at Home Depot ended abruptly early this year with Bob Nardelli’s firing by the board, and now, under its new CEO, Frank Blake, it seems to be returning to the culture which enabled it to grow into a multi-billion dollar retailer faster than any American company ever.

That, at least, appears to be the direction Blake is taking the company as he begins taking steps to improve customer service, employee morale and its Wall Street reputation. It is an interesting turn of events, since Blake, like Nardelli, is a GE alumnus. He is also credited as the author of Depot’s move into the wholesaling end of the business, but early reports about his CEO tenure indicate he is revisiting that move to see if the company should continue in this direction.

Two of Blake’s early moves symbolically denote the management change, as mentioned in a recent New York Times article: (1) Ending Nardelli’s practice of enjoying a catered lunch with top staff members in a special location by telling senior execs to pay their own way and eat with other employees in the company cafeteria; (2) resurrecting an old company poster, the ”Inverted Pyramid”, which places the customer at the top of the pyramid and the CEO on the bottom, with each layer from top to bottom reflecting the customers’ needs first.

Blake, 57, quickly put his own stamp on the company by accepting far less pay than Nardelli had been receiving – US$8.9 million compared with US$39.7 million. He also seemed instrumental in encouraging the departure of four other ex-GE officials who occupied key spots and reportedly is trying to bring back some experienced Depot execs who had left the company. In his first 40 days, he began acting quickly and decisively to change the company’s attitude and direction. What is most interesting, perhaps, are the hints he has given that he might sell off the wholesale division he helped build, which is now accounting for US$12 billion in sales. It is generally conceded in retailing circles that while Depot focused on new acquisitions, its basic retail operations lagged in comparison with its #1 competitor, Lowes. Customer service deteriorated; stores were not as clean and attractive (though some efforts were made to improve some of the older ones.) With sales of more than $90 billion, the company continues to exceed those of Lowes, but per-store sales growth has been lagging that of its major competitor for several years. One of Nardelli’s early management edicts was to cut back on full-time workers and rely on more part-timers. This severely damaged customer service, and although the edict was rescinded later, in many cases customer service never regained its former level. Employee morale was also severely damaged. Investment analysts fear that the company’s move into wholesaling diverted management attention from core needs, such as remodeling and upgrading its stores and customer service. Some contend that money spent buying wholesale operations could have been better spent improving its older store base. Nardelli spent US$7 billion to acquire the diversified collection of wholesale businesses it now owns.

The wholesale business operates with lower margins than retailing, and with the dozens of companies Depot acquired, it faces a daunting task of integrating dozens of systems, sources and satisfying many different kinds of customers. Under its founders, Bernie Marcus and Arthur Blank, the home office was considered a support center for the stores. Under Nardelli, it became a headquarters dictating what was to be done locally. He also closed regional offices and centralized everything in Atlanta. Blake appears to think it should become a support center once again. Reportedly, he has even invited Marcus and Blank to give him their thoughts and ideas as they observe his management efforts. Nardelli did do some very needed things at Depot, however. One of the most important was improving its computer systems, which were not as up-to-date as those of other multi-billion dollar chains. A top flight computer system was one of Lowes’ strengths for decades. He also began increasing its gross margins, and quite substantially, at that. At last count, the company averaged more than 33% gross, up from about 28% when he took over, and way above the 25-26% margins that Depot used to drive other smaller chains out of business in the past.

It will be interesting to see if Blake can restore customer service and the esprit d’corps among employees which once made Depot such a feared competitor.