Transforming Home Depot

Despite massive profits, the world’s largest home centre chain is still a work in progress. Bob Vereen reports…

Slightly more than four years ago, Home Depot’s control shifted from its entrepreneurial founders, Bernie Marcus and Arthur Blank, to a manufacturing executive from General Electric named Bob Nardelli – a man with no previous retail experience. That transition has been affecting the company in many ways.

All Home Depot stores are undergoing modernization and being equipped with the latest store technology (see pic below as well)

In its first 20 years, Home Depot grew from three thinly-financed big-box warehouses in Atlanta, into a dynamic engine of growth that blew past all of America’s pioneer home centre chains and put most of them out of business. Its free-wheeling management style fostered rapid expansion, growth and local innovation, relying on the charisma of its founders and the entrepreneurial freedom given its managers. Its rapid expansion ended up dominating most major metro markets, particularly in the South and West. New store openings came at a pace previously unknown in the home centre industry. Volume reached unheard-of heights – more than $40 billion.

When Bob Nardelli, who was passed over for the job as GE’s new head, took over in November of 2004, he quickly decided changes needed to be made if the company was to continue to grow and be profitable. He decided to bring many of GE’s managerial concepts to Depot. He also quickly found that some worked and some didn’t.

But today, the company clearly reflects Nardelli’s changes. It employs more and better technology and it is more centralized from a management standpoint. It is more diversified, but continues to achieve amazing growth, making it America’s thirteenth largest company.

And, as its 2004 results reveal, all his efforts are paying off. Sales in 2004 rose 13% to $73.09 billion, up from $64.82 billion. Profits rose even more – up 16% to $5 billion, almost as much in profit as Menard, the third largest chain, achieved in 2004 sales.

Only Lowes presents any significant competitive challenge to the company, and it is less than half the size of Home Depot, despite its own outstanding growth record of the last half dozen years. However, Lowes does present sufficient challenge to keep Nardelli from being complacent. During 2004, its sales reached $36.5 billion, up 18% over the year before. Its net income of $2.18 billion was also up 18%, slightly exceeding Depot’s performance. Both had strong same-store sales gains, but here also, Lowes exceeded Depot, racking up 6.6% versus Depot’s 4.6%.

Nardelli’s focus on technology is perhaps his most significant contribution. Depot is spending 12 times more on information technology than it did when he joined the company. About 10% of its SKUs are now on an automatic-replenishment system, which promises to take more costs out of its supply chain. By year end, this number is projected to double. It also has more than 800 stores with self-checkouts, and in those stores, 32% of customers use them. He says this frees up employees to provide more sales help on the sales floors. It is expected that more than 1,000 of its 1,800 plus stores will be using self-checkouts by year end.

Not everything he tried has worked. Early in his tenure, he cut back on full-time employees and employed more part-timers, but the quality of sales help declined, and he wisely reversed course. Today, the company is providing 23 million hours of training. In its early days, Depot concentrated on hiring tradesmen and women who knew their products and could provide help. Such skilled help is not always available now, as the company opens 150 or more stores annually, so training of employees becomes essential. Bernie Marcus, a master motivator and charismatic leader, kept employees enthused about providing superior service while the company tapped a larger pool of experienced tradespeople. According to Nardelli, customer service has improved, going by surveys the company has conducted, but he also said that with 1.2 billion annual transactions, there are always bound to be some unhappy customers. Nardelli thinks big. The company did $64.8 billion last year. He’s set his sights on $100 million. 2005 sales figures, released in early February of 2005, hit $73.9 billion. Expectations are that sales will rise another 9-12% in 2005, with same-store sales increasing 4-7%. He is also maximizing the company’s exposure with a multi-million dollar deal with reality TV production company, Mark Burnett Productions, which produces The Apprentice.

Nardelli is looking beyond Do It Yourself for his growth. He is intensifying the company’s devotion to installed services, a $100 billion market. He says there is another $290 billion in the professional small repair and remodeling area to be tapped, and he thinks there is another couple of hundred billion in the higher-end professional market. In the installed-sales area, the company has about 25 national programs to install everything from decking to roofing and siding. From such a huge array of opportunities, he says $100 billion or more is attainable. Sales in this division increased 20% last year. (Lowes is also concentrating on this activity and recorded similar sales gains.)

In a recent interview with Fortune magazine, Nardelli criticized himself for not moving faster on store modernization. Indeed, moving as much product as they did, earlier stores did get shopworn and messy. Also, Lowes’ updated format was cleaner, more appealing to women, and provided better signing and information to consumers.

When Depot finally reacted, it became better signed and less cluttered. It softened its warehouse-look, particularly in the areas where it is selling design-oriented products or categories such as kitchen, bath, carpeting and paints/decorating. In many ways, the new Depot prototype leapfrogged the Lowes store style and is now more attractive to women.

The bare-bones warehouse look is diminished, aisle markers and other signs are neat and plentiful, many racks are now painted off-white, not orange, and special non-warehouse fixtures highlight some product categories. The company has invested heavily in modernisation, technology and store growth. Nardelli recently told investment analysts that the company has spent about $17 billion since 2001 in opening 760 new stores, modernizing existing ones and improving technology systems.

It expects its Mexican division to reach $1 billion in sales by year end, and plans to add about 20 stores to its successful Canadian division. Overall, it plans to open 175 stores this year and will be investing $3.7 billion in modernization and new stores. It has also indicated an interest in China, though no timetable has been publicized for that area.

Today’s Home Depot can definitely be declared as the Bob Nardelli model.

Bob Vereen, Hardware Journal’s US Correspondent