US News: Transforming The Giant

The Home Depot that burst on the American retailing scene more than 25 years ago and quickly dominated the hardware/home centre business, is undergoing tremendous changes. Bob Vereen reports…

Bob Nardelli, who became CEO of Home Depot in 2000, after a highly successful career with General Electric, soon realized that the glory days of the company were past, that it could no longer count on double-digit sales gains simply by opening more stores. Too many of its markets were fully stored and there weren’t enough untapped markets to build impressive sales.

Caption: CEO Bob Nardelli has transformed Home Depot

In addition, its major competitor, Lowes, was busy remodelling its own stores, upgrading its presentations, improving its assortment and service and had become a fearsome competitor. Over the past several years, Lowes’ sales and profit gains began exceeding those of Depot. Whereas its retail stores once served about 70,000 households back in 1987, its own expansion and that of Lowes and, to a lesser extent Menards, meant that there are now about 30,000 households per big-box.

Depot now operates more than 2,000 units in North America and Mexico, while in the US alone, Lowes has about 1,200 and Menards, more than 200. If Nardelli’s company was going to satisfy stockholders and keep its share price, sales and profits growing, changes had to be made – changes in store presentations and service, changes in the markets it entered, changes in the customers it served, and, perhaps most importantly, changes in the customers it sought to serve.

One of his earliest moves was to add major appliances to the store’s product mix. The move was a success. Today, Depot’s appliance market share is more than 9%, while that of Sears has continued to decline.

What he has accomplished over the last several years, and increasingly during the past two years, is to remake the company from a conventional home centre retailing giant into a multi-faceted distribution giant, serving not just consumers and some contractors, but every market segment having anything to do with building, construction, and related fields.

Caption: Installation services are a big part of Home Depot’s strategy

The non-DIY construction market is estimated to be $410 billion, considerably larger than the DIY market, which Home Depot already dominates with the largest market share, making major future gains difficult. This effort culminated in early 2006 with the company’s announcement that it was reducing its normal store-opening expansion rate in half from recent years. Its new 5-year plan calls for 400-500 new stores by 2010. Instead of opening up to 200 units a year, it would be opening up to 100. However, it would be increasing its reliance on its newer service and wholesaling operations.

The significance of this strategic shift has not been fully understood or appreciated. When Depot began, it sensed a weakness in existing retailing competition that it could exploit – higher margins by competition that it could undercut to take business away. Apparently, management now senses weaknesses in the service and wholesaling businesses that it feels it can likewise exploit.

Both types of business lack national scale. Most wholesalers and service companies are much smaller, entrepreneurial and lacking the capital, buying power and structure of Home Depot. Nardelli obviously believes that Depot, with far more capital, buying power and technology, can woo major customers and offer better service and prices than existing firms.

As the crowning effort in this slowly-built strategy, the company recently acquired Hughes Supply Inc, one of the nation’s leading distributors of construction, repair and maintenance products. It is being folded into the previously quite small Home Depot Supply division. The addition of Hughes Supply more than doubles Home Depot Supply, which will now have expected 2006 sales approaching US$12 billion and should reach US$23-27 billion within 5 years. Hughes Supply, based in Orlando, operates 500 locations in 40 states, giving Home Depot Supply instant national presence.

Excluding Hughes Supply, Home Depot Supply generated sales of US$3.8 billion in fiscal 2006, about 4% of the company’s total. It expects the supply business to reach 18% of revenue within the next 5 years. Almost simultaneously, Depot said it had acquired Chem-Dry, franchiser of the largest carpet and upholstery cleaning and service provider network, which had 4,000 franchises worldwide, including 2,500 in the US. This acquisition is now part of Home Depot’s ‘At Home’ Services division, which has concentrated on installation of flooring, fencing, roofing, cabinetry and other interior and exterior services – 25 different services in all. Chem-Dry brings a recurring source of service income to the company, since carpets, rugs and upholstery get dirty and need repeated cleaning. It also brings Depot into consumer homes, as well as into businesses, and enables it to focus customer attention on other Depot-provided services and installations. Depot currently has 11,000 daily service appointments and it can thus expose these customers to Chem-Dry for future business. With the “Do it for Me” business growing at a double-digit rate, Depot believes that it can tap into this US$110 billion market opportunity. It expects that 5-6% of its sales will come from services by 2010. Overall, it is looking for annual sales growth of 9-12%, gains that would be very difficult to achieve from its retail stores alone.

Home Depot’s 3rd Avenue store in Manhattan is primarily a showroom catering to architects, designers and the upper-income consumers surrounding it, though it still offers some hardware, electrical fittings, etc for the average homeowner. In catering to upscale markets, many departments include consultation areas where customers and department managers can sit and comfortably confer. Aisles are especially spacious and there are many stand-alone displays. Like so many Depot units now, it includes self-checkout lanes

While Nardelli is expanding into other market segments, he also has been trying to improve the operation of Home Depot stores. Some store improvements have resulted in a less cluttered look and more stylish presentations of fashion-oriented merchandise and a reduced warehouse-look in some portions of the stores. During 2006, it is planning reworked tool displays, expansion of its home organization and storage products, increasing lighting assortments and a new Countertop Solutions Centre.

By introducing self-serve checkout counters, (so far in 1,272 stores) it claims to have freed more employees to be on the sales floor, offering customer service. It expects that 70% of operational hours will be dedicated to the sales floor.

However, many customers continue to complain that housekeeping is not good in the stores and that personal service is lacking – that employees are hard to find and often ill-equipped to answer questions. It seems clear that while the company proclaims redesigned stores and better service, it has not permeated among all of the company’s 345,000 employees.

The company also is testing new store formats, which include a 60,000 sq ft store for smaller markets. If successful, they could provide the opportunity for up to 300-500 additional locations by 2010 and could generate another US$4-8 billion in sales. It also now has four urban stores, one in Chicago, two in Manhattan and one in Vancouver, Canada. More could be opened. Online sales doubled in 2005. More than 3 million shoppers visit the company’s online sites weekly and the website is now supplemented by new upscale catalogues like 10 Crescent Lane and Paces Trading Co.

Caption: Mass impact is created in the lighting department with huge lighting clouds, surrounded by boxed merchandise and basic electrical fittings

The most interesting new concepts recently announced are the testing of two kiosks in Atlanta, Georgia, shopping malls and the planned opening of four “convenience” stores, which will include gas pumps. If successful, it could have pumps at 300 locations by 2010. The kiosks will be evaluated after a 6-month period and if successful, will be rolled out across the country. The kiosks promote the company’s web site and online product category, as well as make consumers aware of the broad range of products available in Depot stores, including electronics, appliances, spas and furniture. They will also promote the installation and service businesses. It might even be possible to set up the kiosks at consumer home and garden shows, since they are quite portable.

Internationally, however, the company has been very cautious. It has operated very successfully in Canada and Mexico for years, but tried and failed in Chile. Currently, it is said to be in talks with China’s Orient Home Centre chain about buying a 49% interest in that firm. European home centres, by contrast, are very active internationally, including China. In its most recent fiscal year, the company achieved sales of $81.5 billion, an increase of 11.5%. Under Nardelli’s leadership and diversification efforts, sales have increased 76% since 2000.

At its recent annual meeting, Nardelli summed it up by saying: “We expect to become the nation’s largest diversified wholesale distributor, become number one in services and will dramatically increase our retail presence.”