A look at Home Depot today

For 20 years, The Home Depot rewrote the rules for hardware and home centre retailing — not only in the United States but also around the world. This is the first of a special two-part series.

Under the leadership of its two principal founders, Bernie Marcus and Arthur Blank, Depot created an entrepreneurial atmosphere that opened more than 1,000 stores staffed with motivated, innovative employees who helped the company grow. In over two decades, they transformed the company from four stores in Atlanta into the world’s largest home centre chain and America’s second largest retailer.

The Design Centre is a newer Depot innovation which, in some stores, is done better than in others, but it brings together carpeting, blinds, etc. in one area and is well signed.

According to the two founders, in a book about Depot called Built from Scratch, employees worked long hours, performed any chore, rendered wonderful customer service and were responsible for the company’s esprit de corps. Their ability and willingness to “bleed orange” was what enabled the company to dominate and remake an industry, the founders wrote in the book.

But today, under new management with no previous retail experience but with lots of manufacturing experience, countless changes are being made quickly in virtually every facet of the business, and one question seems paramount: Is the magic gone?

Forever changed?
Is the Home Depot of today as good as it used to be? Or is it that the industry and the American consumer have changed while Home Depot has not changed — at least sufficiently?

Not all stores, even in one city, look quite alike. In this Mid-Western store, the appliance section is clearly visible from a main traffic aisle. Another store in the same city “hides” the appliances behind a towering warehouse fixture.

On answers to that question hinge billions of dollars — billions that have been wiped out in the last two years as Home Depot’s stock price has dropped more than 50%, the biggest drop of any Dow stock…as dozens of long time Depot managerial employees have departed…as Lowes hogs the positive PR and analyst spotlight once focused on Depot…as smaller chains and independent retailers look at deteriorating customer service and aging Depot stores and feel less threatened than before.

It is a question that must be troubling Blank and Marcus, who recruited their successor, Bob Nardelli, when he was passed over as a successor to GE’s retiring Jack Welch, and who then graciously stepped aside from active management in order to let Nardelli assume complete charge of their $50+ billion baby. It is a question which neither man has answered in public c— and probably never will in order not to undermine Nardelli’s plans for the company.

But seeing the changes Nardelli is making, it appears that much of what he is doing is reversing the very strategies Marcus and Blank used to grow Depot into the giant it now is. For example:

 

  • The company had been largely decentralised in order to give local merchants the ability to react quickly to local demands and to tailor their assortments to regional needs;
  • The company relied quite heavily on full-time employees, many of whom had experience as plumbers, electricians, etc., and could help consumers and tradesmen with professional advice;
  • Ongoing training, often led by Marcus and Blank themselves, both trained and inspired employees and kept spirits and enthusiasm high.On Nardelli’s behalf, however, another question deserves an answer: Could the policies that built the chain to a 1,000 stores be continued indefinitely, or would other, more disciplined procedures need to be put in place to control the chain as it grew past the $50 billion sales mark? Conclusive answers to those two questions are still to be determined, though there is no shortage of so-called experts willing to provide their opinions.

 

Plumbing fixtures are better displayed in newer model stores than in the older ones.

When he took over, Nardelli praised the company and its remarkable record, and said he wanted to position the company for future growth and continuing profitability. Obviously, his plans included applying the management techniques used at General Electric. As a result, he immediately tackled information systems, centralisation and other operational facets. The result: Gross margins are up, as are net profits, so some changes are working. In fact, net profits in 2002 grew at twice the rate of sales, and net profits (at 6.5%) were 22% greater than those of Lowes.

Poor morale
But there are lingering problems. There is no question that there has been a serious decline in company morale, which has affected home office and store-level management as well as floor-level personnel. In the past, there has been unbridled enthusiasm among tens of thousands of employees. Now there is a certain degree of fear prevalent, according to a retired senior executive. As one Depot supplier put it: “The good are leaving; the mediocre are trying to hang on”.

And manufacturers who sell to the company see this sometimes in a buyer’s reluctance to make decisions or to defer individual decisions to committee group-think. Another supplier claims that a bureaucracy is moving into what was a highly entrepreneurial organisation.

In this year-old Depot store, there is much improved lighting (similar to that used in Lowes) and better signing for products down each aisle.

By centralising buying in Atlanta, Nardelli’s new policies bring greater discipline to the buying process, but also inhibit the freedom buyers had to try new things, make mistakes on a smaller scale, or find winners locally which could then be spread throughout the entire organisation.

A consulting firm which regularly “shops” Depot for Lowes claims the new regime has “knocked the wind out of everyone who counts at Depot”. He says that with every store visit, he sees a (distinct) deterioration in the quality of product, service and housekeeping.

Almost without exception, manufacturers report that Home Depot buyers are now slower in their decision-making than they had been. They also report that the company is aggressively increasing thousands of prices to such a degree that on many smaller and/or lower-cost items, they are more than doubling their costs, which makes it easier for smaller competitors to become more competitive with them. That accounts for some of the high profit margins.

There is no doubt that Depot continues to be fiercely competitive on some higher-ticket items, such as commodities, but overall, other retailers feel that the number of hot leaders is less and the gap is narrower. Menards, America’s third largest hardware chain is reportedly consistently more price-competitive and less concerned about Depot’s pricing strategy than it used to be.

Bob Vereen, Hardware Journal’s US correspondent

Next month: Bob Vereen discusses whether a change of strategy is needed at Home Depot.