American DIY market: $208 billion

DIY retailing in the United States is expected to hit $208 billion* by the end of 2003, up just over 5% from the preceding year. That is the prediction of Do It Yourself Retailing, leading US DIY publication in its annual Market Measure report.

In the five year period beginning 2002 and ending in 2007, the market is expected to grow at an average annual rate of 5.2%. As expected, the top three home centre chains continued their massive growth, with Home Depot ringing up $53.2 billion sales in 2002; Lowe’s, $26.5 billion and privately-owned Menards an estimated $5.3 billion.

Table A: Store comparisons
STORE TYPE SALES TO INVENTORY SALES PER EMPLOYEE AVG. SALE GMROI SALES PER SQ. FT.
Hardware 3.3X $131,916 $16 GMROI $148
Home centre 5.1X $205,380 $44 $1.53 $334
Lumberyard 6X $279,247 $80 $1.49 $524

The top 25 hardware, home centre and lumberyard chains accounted for 53% of the industry’s sales in 2002, but most of that is accounted for by the top three companies.

Just how concentrated the business is best illustrated by looking at the sales volume of the tenth largest chain – $577 million in 2002 – compared to the number one ranked hone centre, Depot, with $53.2 billion. The top ten chains operated 3,860 stores, of which Depot owned 1,532 and Lowe’s 854.

Home Depot averaged $38 million per unit last year; Lowe’s, $31 million and Menards, $31.2 million. The average home centre rang up $4 million in sales; the average lumberyard, $4.2 million, and the average hardware store an estimated $1.2 million.

Sears Hardware’s 249 stores averaged $6.4 million, far superior to the average independent hardware store at $1,187,241. In fairness, it should be pointed out that the typical Sears Hardware store is about 3Ð4 times larger than most independent hardware stores. Its Orchard Supply Hardware division has stores of 30,000 sq. ft. or more typically.

The magazine estimates that there were 41,700 hardlines outlets in 2002 comprising of 20,300 hardware stores, 11,300 lumberyards and 10,100 home centres. It sees little change in store numbers over the next few years, although there will be a slight decrease in hardware store units.

Operational data
Hardware stores continue to be plagued by slow stockturns and high expenses compared to the other two types of hardlines stores. Gross margins are much higher, but so are expenses. Margins averaged 38.9% and expenses 38.4%, compared to margins of 30.1% for home centres and 24.9% for lumberyards. Home centre expenses were 28.3%, and for lumberyards, 23.3%.

As lumberyards have much more limited inventories it is difficult to compare their stockturns or average sales per employee with those of the other two retail types, but comparisons between home centres and hardware stores are somewhat more meaningful.

One of the most important measurements is that of GMROI (Gross Margin Return on Inventory). It is arrived at by multiplying gross margin with sales-to-inventory ratio, and allows a retailer with slow turns and higher margins to be compensated fairly compared to a store with high turns and lower margins Ñ i.e., supermarkets compared to hardware stores.

It is commonly felt in the US that a store should never be satisfied unless it generates in excess of $1.00 in gross margin from every dollar invested in inventory. More is much better!

For years, the average hardware store has been trying to achieve a 4-to1 sales-to-inventory ratio. Well run hardware stores do this regularly, but inventory averages this year slipped from the four times achieved last year to this year’s 3.3 times.

Interestingly, both hardware stores and home centres increased gross margins over the last five years, while margins dropped for lumberyards.

The increase in home centre margins grew from 27.9% to 30.2%. Home Depot’s gross margin, under Bob Nardelli’s management, mirrors industry averages, having increased about 2% over the last several years.

Excluding the big-box chains, the average sales floor of home centres is 12,000 sq. ft. and that of lumberyards, 8,000 sq. ft. Both figures are supplemented by sizeable outdoor sales and storage areas. The three largest big-box chains all run stores close to or larger than 100,000 sq. ft. in their current models.

Do It Yourself Retailing also profiled Home Depot and Lowe’s, both publicly owned, and compared them on a number of basic statistics. Readers will find it interesting to insert their own figures alongside the two tables provided, to see how they compare with US averages and two of the best-run home centre chains in the world, Depot and Lowe’s.

China DIY
In another article that appeared in The Economist recently, a boom in private housing is fuelling a new market for home decoration in China. The article notes that “home improvement” has arrived in China – and with it, a potential shopping revolution.

Table B: The “Big Two”
DEPOT LOWE’S
# STORES 1,532 854
AVG SIZE 108,000 111,000
TOTAL $ $58.2bn $26.5bn
$/ SQ. FT. $352 $279
SALES/INV. 7X 6.7X
$/ EMPL. $207,000 $218,000
AVG $ $49 $58
GMROI $2.18 $2.03

As with so many opportunities in the world’s most populous country, the market promises to be huge. B&Q, part of Britain’s Kingfisher retailing group, estimates that one-tenth of China’s 400m households have “western” levels of disposable income, with $1,000 or more a year to spend on home improvements. That number is increasing rapidly.

China’s home-improvement market, estimated to be worth almost 200 billion yuan ($24 billion) two years ago, has since grown much bigger. “Chinese people have the money, intention and desire to improve their homes,” says David Wei, head of B&Q China.

In readiness, foreign chains are trying to move quickly ahead of new rules that will allow them to open shops anywhere in China from December 2004. B&Q is already China’s biggest chain by sales. Its foreign rivals include Sweden’s IKEA and Germany’s Obi. Home Depot, which already has links to Homeway, a Chinese chain, may enter in its own right.

China’s domestic retailers, including Homemart (the second biggest), No 9 and Orient Homes, are expanding. B&Q plans to open 12 new stores a year. It has doubled sales each year since it opened its first store in China in 1999, and will have 15 stores in seven cities by the end of the year, including its largest-ever store, which opens in Beijing in October. Steve Gilman, head of B&Q International, wants to have 75 stores in 30 Chinese cities by the end of 2008.

In China, new homes are often concrete shells, with no plumbing or even dividing walls. Decorating takes enormous energy, requiring trips to scores of stores, and a hunt for a reliable contractor. B&Q is profiting from this. Its “home solutions” service will fit out an entire house, including furniture, and guarantee all the work. It is proving to be very popular, boosting B&Q’s same-store sales in China by 19% this year and prompting it to experiment with the same service back in Britain.

The big challenge facing B&Q, and its rivals in China, is that most customers are not doing it themselves. “Chinese DIY is still really BIY – buy it yourself,” admits Wei. Government policy is to build homes that are more finished, so B&Q needs to turn DIY into more of a hobby and the Chinese into a nation of home improvers, like the Americans and British.

Yet middle-class Chinese feel it is beneath them to build a cabinet or fit a shelf and, thanks to the abundance of cheap labour, have never had to. Many Chinese don’t know how to wire a plug or rise to the challenge of scumble painting. So the company is giving its customers lessons, showing them how to use a drill, for instance, and even teaching children the mysteries of self-assembly furniture.

B&Q must also change its supply chain. In a low-margin industry like retailing, efficient suppliers are the key to success. However in China, getting goods into stores is expensive and costly, says David Inglis, head of operations for B&Q China.

China’s huge size and enormous regional variations mean retailers struggle to establish a national infrastructure, let alone a national brand. “It’s like operating in different countries,” adds Inglis.

As a result, even the biggest retailers remain in thrall to regional manufacturers – and their middlemen – which raises costs. B&Q has 600 vendors supplying its 350 British stores but 1,800 for 15 Chinese ones. Even worse, these middlemen cut deals behind retailers’ backs. Even on the shop floor, vendor representatives routinely offer customers “special” prices. Gilman is concerned: “This is a state-controlled economy. Price fixing is endemic. Retailers are at the bottom of the food chain in China. They have far less power than manufacturers. It is the opposite of the rest of the world.”

Even if foreign retailers can make China’s retail industry efficient, shoppers will not readily trust their promises. In Shenzhen and Shanghai, China’s most western cities, customers in B&Q still try to haggle over price.

By Bob Vereen, Hardware Journal’s US Correspondent.

*All currency in US dollars
Additional information from The Economist Newspaper and The Economist Group.