State of the industry

The US home improvement industry is undergoing many changes that will continue to impact on its fortunes. The ongoing battle between Home Depot and Lowe’s is a major factor on the shifting dynamics of the industry.

Today Home Depot and Lowe’s are engaged in a fierce battle for the hearts and minds of consumers, as well as those of Wall Street analysts. Right now, Lowe’s is a Wall Street darling, a post long held by Depot, but Depot continues as the largest firm (more than twice its size and with a slight increase in market share last year).

The Glenview store in Illinois is an example of Home Depot’s smaller store format

There is no question, however, that the past two years belong to Lowe’s, as Depot’s CEO, Bob Nardelli, changed so many things, so fast at Depot that morale faded along with its vaunted customer service; longtime employees left, many of them rich because of stock ownership, and remaining employees began fearing for their jobs. The entrepreneurship which marked the company degenerated into slow-moving bureaucracy.

The strategies of the two companies today greatly differ. With far fewer stores in many major metropolitan areas and a softer “warehouse” look, Lowe’s feels it has room to add hundreds of additional stores without any changes. Depot, on the other hand, has nearly saturated most major metro markets and must find its growth either by going into smaller cities (where Lowe’s had long been a major factor) or come up with store formats which will target different consumer and business segments.

In total sales, Depot achieved $58.247 billion last year, an increase of 8.8%, far below its longtime average. Alternatively, Lowe’s has racked up $26.491 billion in sales, an increase of 19.8%. Lowe’s’ net earnings increased 43.8%, far overshadowing those of Depot at 20.4%.

According to data in its annual report, Depot’s sales per store have been flat for the past two years. One reason being the opening of new stores close to existing stores, thereby cannibalising sales and, in some cases, relieving such high sales volumes that stores were too crowded. One store is reported to have done $106 million in one year.

As of fiscal 2002, Depot operated 1,370 Home Depot stores, 52 Expo Design Centers, five Home Depot Supply stores, three Home Depot Landscape Supply units and a Home Depot Floor Store in the US, plus 89 Depots in Canada and 12 in Mexico.

In addition, the company operates Apex Supply Co., Georgia Lighting, Maintenance Warehouse, Your “other” Warehouse, the Designplace Direct and three flooring companies operating under HD Builder Solutions Group. These additional units and divisions make it very difficult to judge if Depot is actually suffering real sales declines in its Home Depot stores.

Remodelling older stores
Home Depot is spending some $250 million this year to remodel and upgrade older, shop-worn stores. More than 25% of its 1,576 locations are more than seven years old, and having cranked out $30-40 million or more per year are showing considerable wear and tear.

After remodelling only eight units in the preceding three years, the company is renovating 22 stores this year. The remodeling efforts include changing most of the warehouse shelving colors from orange to beige, improving lighting, glazing the cement floors and installing much improved and more helpful signing.

These massive makeovers are being supplemented by Type B and Type C remodellings. Type B involves resetting select departments, whereas Type C involves painting, paving and cleaning. Improved signing is being put in place in remodellings of any type.

Some industry observers question, however, whether an annual investment of $250 million is enough inasmuch as nearly 400 stores are more than seven years old. Since Lowe’s embarked on its big-store expansion program fairly recently, a much higher percentage of its stores are “newer” than those of Home Depot.

Lowe’s also recently announced that it will be opening “smaller” stores — 94,000 sq. ft. — in order to lower investment costs and fit stores into smaller markets. The typical new Lowe’s is more than 116,000 sq. ft. in size. Requiring an investment of $12 million to build and $3.5 million for inventory, Lowe’s says they would fit into markets of 15-35,000 households and could generate $20-25 million in sales, compared to the firm’s larger stores which average $33 million in sales.

Home Depot already is testing even smaller stores — under 80,000 sq. ft. — and has opened a two-storey urban store of that size in Chicago. If successful, other inner-city stores could be opened in metro markets such as Manhattan, Detroit, etc. It also has opened smaller stores in Brooklyn and converted smaller test hardware stores in New Jersey to small Home Depots.

With both Lowe’s and Depot concentrating on the top 100 major metro markets, market saturation might not be too distant, so both firms need to find smaller markets which will support continued expansion.

Time is preciousAnother trend that is evident is the increasing number of “time poor” which is also relevant to the Australian industry. With many families having two breadwinners earning paychecks, time becomes a precious commodity. Lifestyles become more hurried and harried. Women no longer have time to “shop, shop and shop”. It is estimated that 70% of young families in the US are time-starved.

This provides an opportunity for smaller stores to emphasise their ability to save time by their convenient location, smaller and easier-to-shop stores, as well as their personal service. But so far, efforts to emphasise these advantages have not been fully or effectively utilised.

Wholesaler rankings
For decades, people have been predicting the demise of wholesalers — especially in the hardware/home centre industry as giants like Home Depot and Lowe’s bought direct and eliminated the need of wholesalers. Yet distributors continue to play an important role. Home Channel News magazine recently published a list of the top 150 firms.

Ace Hardware is the largest hardware wholesaler with 2002 sales of $3.029 billion, up 3.6%. Do It Best, another cooperative like Ace, experienced sales of $2.3 billion, up 9.5%.

TruServ, which once was the largest, now lags with $2.2 billion, down 15% in 2002. It recently reported sales were off 18% for the first quarter of 2003. Its recent problems have caused a defection of retailers, mostly large ones, to Ace and Do it Best.

Orgill, a privately-owned hardware wholesaler based in Memphis, is the largest non-dealer-owned firm with sales of $686 million, up 11%. The next largest non-dealer owned hardware wholesaler is Moore-Handley of Birmingham, Alabama, publicly owned, which had sales of $152.8 million, unchanged from the year before. Emery-Waterhouse of Portland, Maine, is third with sales of $126.5 million, up 1.2%. The largest distributors listed by Home Channel News were those handling building materials.