December 26, 2006
HD Looks to Build While Housing Collapses
Home Depot expected new home construction to be off this year, maybe five to seven percent. Instead, the DIY retail giant watched as the market has fallen harder and faster than it ever expected. In October, for example, new home construction dropped a precipitous 28 percent.
“We haven’t seen the worst of it yet,” Robert Nardelli, CEO of Home Depot told Forbes. “Seventy-five thousand construction jobs are gone. We see these guys in our stores, competing with [established] contractors.”
Mr. Nardelli spoke about the challenges facing large homebuilders such as Centex, D.R. Horton and Pulte that have taken large write-offs on inventory of raw land.
“I’ve never seen a pull-back so fast,” he said. “It takes them 18 months to remobilize. I’m not sure they can turn it on again. If this is a soft landing, it’s not a plane I want to be riding on.”
Home Depot, as with others in the construction supplies business, is looking for ways to soften the blow from the current downturn and come out stronger on the other end. The company has taken a number of steps that Mr. Nardelli is counting on to make Home Depot stronger and take some of the heat off his back for his substantial compensation package and weak investor communication skills. The chain has slowed new store openings, invested in remodels, moved into new retail product categories, expanded overseas and aggressively pushed into the professional services end of the construction business.
Home Depot cut new-store openings by 37 percent last year and is putting $350 million into remodels.
The company has also sought to repair its customer service image by installing push-button call boxes in 186 stores. An associate is expected to appear within 60 seconds of the button being pushed. Another initiative called Orange Juiced offers bonuses of up to $2,000 for store associates demonstrating superior customer service.
Home Depot is also moving into product areas it believes offer it the opportunity to create incremental revenue streams, including appliances, flat-screen TVs, home security and subscription services for cell phones, cable, satellite TV and radio.
While the housing market may be getting hammered here at home, the situation is China is completely different. The home improvement market on the mainland is growing 20 percent a year and Home Depot now has a piece of that market after purchasing the 12-store Home Way business.
The final piece of Home Depot’s strategy is HD Supply, which caters to large industrial and commercial builders. The division represents 13 percent of Home Depot’s total revenues and was responsible for 90 percent of the company’s sales growth in the third quarter.
HD Supply is looking to grow its business at the expense of smaller players in a highly fragmented market. Even with industry sales down, HD Supply’s president Joseph DeAngelo, said the company is in good shape. “We’re taking tons of share in the downturn,” he said. “The big dog always eats first.”
Discussion Questions: How much do you agree or disagree with the statement: As housing goes, so goes the U.S. economy? Will the impact of the housing
market downturn begin to be felt more acutely in 2007? What will it mean for retail in the DIY channel and beyond?
BrainTrust
Recent Discussions
Discussion Questions
Poll
Now that the housing feeding frenzy has slowed, it is time for Home Depot to focus on its customer. They aren’t based on my experience; over 2 years, totally rehabbing our nine room house. Yet we still managed to spend more than $20,000 there. It seemed like every day we’d take the station wagon (which we bought for Home Depot hauls) to the nearby store.
During the period, we spoke to dozens of Home Depot associates helping us select the right products. We often returned items. How did they do? On the surface, not bad. Product knowledge was adequate. Customer returns usually went smoothly. I was always able to get someone to help me carry and lift something heavy into the wagon. I’d give Home Depot a B- on customer service. Not bad for a company focused on product sales and customer self service.
But now that the housing bubble has burst, HD might rethink its basic business model to focus on rehabbers. I wonder how many $20,000 customers go undiscovered like my wife and me. If they had focused on our needs rather than the products we wanted to buy, we might have spent twice that at the store.
The first step is to identify rehabbers. That shouldn’t be too tough and a lot cheaper than opening lots of stores. HD should consider mining transaction flow for identify high volume repeat customers. They should be able discover rehabbers based on the shopping frequency and the type of products purchased. And store associates also can tell rehabbers from their day to day conversations with them.
Once discovered, HD should assign a qualified associate as a personal shopper to qualified rehabbers — those with project that will require more than $10,000. Then working with the contractor, HD should get a copy of the plans, the schedule, and be informed of the items that the rehabber must buy. Discounts should kick in above threshold purchase amounts. The store associates might make site visits for big spenders.
The housing bubble is slowed new home buying. But rehabbing is still on fire. It’s time HD focused on full requirements of the consumers that are already in their stores. Home Depot, it’s time to maximize. Rehabbers will buy more and refer their follow rehabbers to HD. And contractors will begin to throw business your way.
We are in the final stages of building a new house and I have been the general contractor. We have bought very little at HD and that is a shame. HD used to be my favorite D-I-Y store, but they have slipped badly in my opinion in customer service. At the stores near us, it is hard to find an associate to help you and even harder at times to get checked out. The last trip they only had the self scan lanes open. I’m not opposed to self scan, but you should have a choice. And if that was bad enough, they are underpriced on many items by Menards.
All the problems I have with HD are easily fixable, but will cost them in operating expenses. As poor as the customer service has been in the good times, I shudder to think how they will be with volume down so much. It is hard to save your way into a profit, much better to do it with increased, profitable sales volume in my opinion.
On a positive note, HD has great locations. I agree that they should focus on rehabbers to grow their business during this downturn in new construction and sales. It will be interesting to see how “the big dog” as they say conducts itself in the short term. Another analogy is “the bigger they are, the harder they fall.” I wish them the best.
Home Depot is an interesting composite of what happens and what to do when the primary market for your goods and services faces a decline, and overall how to handle the problem many retailers in the US face of having been the one trick pony. HD under Nardelli has focused on broadening the market in which it competes, giving it a hedge against pieces of the market facing challenges.
As this is still very much a work in progress, how well HD fares during the current decline will be measured in part by how nimble it is given its current structure. The diversification efforts, however, are a significant step and a lesson from which other retailers should learn.
In its core retail environment, HD still struggles. Many departments carry inferior products as HD undoubtedly works to keep its margins up. Staffing is less than adequate and customer service, as many have lamented, leaves a huge amount to be desired.
The decline in the housing market is an opportunity for HD and, given its size, it has the muscle to pull through. Whether it will simply muscle through or do so elegantly and with less effort is dependent to a great degree on whether HD can and will focus on its customer. Orange Juiced simply isn’t enough.
I believe Bill hits some strong points. As an avid DIY home owner and a long time HD customer, it would serve HD well to get smart about my shopping patterns and habits. If they had, I suspect I would have purchased quite a bit more over the years. By taking the time to learn what I’m doing and monitoring purchase patterns, HD, and their shareholders, would be well served to pay attention to customers like me instead of simply opening more stores.
I remember my first experiences with HD back in the late 80s when I was able to discover new items with enthusiasm. HD has certainly streamlined its SCM but by making it operationally easier for HD, they’ve lost that surprise and delight element from the shopping experience. Ironically, HD was the place to discover new and exciting things in hardware, tools, gadgets and building supplies whereas the local hardware store had just the basics. Through increased SCM efficiency, everything has gone through the DIY ‘cuisinart’ where everything is bland without discovery.
Recently, I’ve found that a good local hardware store has become the place to discover ‘new’ things. Perhaps, HD should go back and rediscover its roots.
Of course the economics of the housing industry play a part in the country’s overall economy. But, it doesn’t drive the economy to the point that it is the sole barometer or even the most important barometer.
Consider, for instance, an interesting dynamic that has taken place time after time: When housing sales decline, restaurant sales go up. More disposable income is available, since fewer mortgages are being sought. Not necessarily an “opposite and equal reaction,” but a reaction nevertheless.
As with everything, it’s a question of balance. The stock market remains strong, unemployment remains low, and positive steps are being seen in several sectors. While DIY retail will take its lumps, look for balance to occur in other retail sectors.
Some of Home Depot’s diversification won’t help its core driving force (example: consumer electronics), and some of the diversification will (example: more Do It For Me home improvement services). Any retailer investing in tangential, noncore categories is making a mistake. The best businesses are focused. Every square foot of space, every SKU in inventory, every customer interaction, every advertisement needs to reinforce the focus. Anything else is wasteful.
Try this test: take a handful of stores scattered all over the country and pay everyone in the store a daily bonus based on sales. Don’t change anything else. I bet those test stores will beat the profit increase of any other group of stores in the chain.
This is really not about withstanding the downturn in the housing market. Instead, it is about diversifying HD’s business model and making it work despite any downturn.
As the nation’s second largest retailer, HD is being forced to recognize that it is a retailer, and not just a Home Goods Supplier. This means that if a product or service makes sense for their customer, they need to provide the channel to offer this. This will require HD to think like a business rather than a Home Goods Supplier.
After recently buying and selling a home and moving from the Mid-Atlantic to the Northeast, my experience is that the housing market, while weaker that it may have been on the past three years, still has pockets of homes and areas that are still desirable and in demand.
The impact for retailers like Home Depot and Lowe’s, will be to continue to educate and train homeowners to tackle those smaller projects that will help in the reinvestment of their homes. By creating a destination for knowledge and resource, they will build their relationship with consumers, and be in a better position to sell those non-traditional items like flat screens and phones.
The implementation of these services still lays with the associates at store level and while it is good that they have created customer service programs, there seems to be from my experiences in the stores, an unevenness of execution of customer service, especially a the front end.
I agree with the others. 2 specific recommendations:
1. Continue to cultivate the DIFM (services) side of the business.
2. Accelerate outreach to contractors — commercial construction is in fine shape, as this is a residential downturn only.
As many others have observed, the housing market was overheated and is going through a correction in order to allow prices to reach more rational levels. As with any other business, when the problem of inventory oversupply starts to correct itself then the demand should recover and prices along with it — presumably at a more measured pace.
This may take at least through 2007, depending on the specific metro area, so D-I-Y retailers will want to cultivate demand for home-improvements on existing houses in the meantime. Even in the middle of a dip in the housing market, it’s an opportunity for the D-I-Y retailer who executes the best to take market share away from competitors and position itself for the next growth phase.
The big question for Home Depot is why and how its stock price and comp sales languished for so many years even in the middle of the housing “bubble.” The steps being taken to reexamine its business model are long overdue, and investors won’t have the patience to hear about external issues (like the slow housing market) that are out of HD’s hands.
Thousands of companies have ventured down this path when faced with the same problems. Diversification in itself is neither positive nor negative, because it depends how you do it. Diversification cannot solve issues that many organizations in this situation face, such as product delivery issues embedded in the business model (big stores with lots of items and low numbers of service staff must equal inconvenience and long shopping times which must equal customer frustration). Beneath all this, many retailers have a Master System that produces manifold errors of many kinds on many levels, and no matter how many different kinds of businesses you acquire, the Master System is the Master System and will not change. My point in all of this is: diversification is really not the problem. Fundamental system errors are.
As the economy goes, so goes housing.
More Discussions
Is Five Below Poised For Even Greater Growth?
Five Below is hitting serious growth numbers. Can this trend continue?Should IKEA Be Flattening Management?
Should IKEA be trimming down its management headcount?Is Legislation the Answer on Visa, Mastercard Swipe Fees as ~$200 Billion Record Is Set?
Is lawmaking the way forward on swipe fees?
Now that the housing feeding frenzy has slowed, it is time for Home Depot to focus on its customer. They aren’t based on my experience; over 2 years, totally rehabbing our nine room house. Yet we still managed to spend more than $20,000 there. It seemed like every day we’d take the station wagon (which we bought for Home Depot hauls) to the nearby store.
During the period, we spoke to dozens of Home Depot associates helping us select the right products. We often returned items. How did they do? On the surface, not bad. Product knowledge was adequate. Customer returns usually went smoothly. I was always able to get someone to help me carry and lift something heavy into the wagon. I’d give Home Depot a B- on customer service. Not bad for a company focused on product sales and customer self service.
But now that the housing bubble has burst, HD might rethink its basic business model to focus on rehabbers. I wonder how many $20,000 customers go undiscovered like my wife and me. If they had focused on our needs rather than the products we wanted to buy, we might have spent twice that at the store.
The first step is to identify rehabbers. That shouldn’t be too tough and a lot cheaper than opening lots of stores. HD should consider mining transaction flow for identify high volume repeat customers. They should be able discover rehabbers based on the shopping frequency and the type of products purchased. And store associates also can tell rehabbers from their day to day conversations with them.
Once discovered, HD should assign a qualified associate as a personal shopper to qualified rehabbers — those with project that will require more than $10,000. Then working with the contractor, HD should get a copy of the plans, the schedule, and be informed of the items that the rehabber must buy. Discounts should kick in above threshold purchase amounts. The store associates might make site visits for big spenders.
The housing bubble is slowed new home buying. But rehabbing is still on fire. It’s time HD focused on full requirements of the consumers that are already in their stores. Home Depot, it’s time to maximize. Rehabbers will buy more and refer their follow rehabbers to HD. And contractors will begin to throw business your way.
We are in the final stages of building a new house and I have been the general contractor. We have bought very little at HD and that is a shame. HD used to be my favorite D-I-Y store, but they have slipped badly in my opinion in customer service. At the stores near us, it is hard to find an associate to help you and even harder at times to get checked out. The last trip they only had the self scan lanes open. I’m not opposed to self scan, but you should have a choice. And if that was bad enough, they are underpriced on many items by Menards.
All the problems I have with HD are easily fixable, but will cost them in operating expenses. As poor as the customer service has been in the good times, I shudder to think how they will be with volume down so much. It is hard to save your way into a profit, much better to do it with increased, profitable sales volume in my opinion.
On a positive note, HD has great locations. I agree that they should focus on rehabbers to grow their business during this downturn in new construction and sales. It will be interesting to see how “the big dog” as they say conducts itself in the short term. Another analogy is “the bigger they are, the harder they fall.” I wish them the best.
Home Depot is an interesting composite of what happens and what to do when the primary market for your goods and services faces a decline, and overall how to handle the problem many retailers in the US face of having been the one trick pony. HD under Nardelli has focused on broadening the market in which it competes, giving it a hedge against pieces of the market facing challenges.
As this is still very much a work in progress, how well HD fares during the current decline will be measured in part by how nimble it is given its current structure. The diversification efforts, however, are a significant step and a lesson from which other retailers should learn.
In its core retail environment, HD still struggles. Many departments carry inferior products as HD undoubtedly works to keep its margins up. Staffing is less than adequate and customer service, as many have lamented, leaves a huge amount to be desired.
The decline in the housing market is an opportunity for HD and, given its size, it has the muscle to pull through. Whether it will simply muscle through or do so elegantly and with less effort is dependent to a great degree on whether HD can and will focus on its customer. Orange Juiced simply isn’t enough.
I believe Bill hits some strong points. As an avid DIY home owner and a long time HD customer, it would serve HD well to get smart about my shopping patterns and habits. If they had, I suspect I would have purchased quite a bit more over the years. By taking the time to learn what I’m doing and monitoring purchase patterns, HD, and their shareholders, would be well served to pay attention to customers like me instead of simply opening more stores.
I remember my first experiences with HD back in the late 80s when I was able to discover new items with enthusiasm. HD has certainly streamlined its SCM but by making it operationally easier for HD, they’ve lost that surprise and delight element from the shopping experience. Ironically, HD was the place to discover new and exciting things in hardware, tools, gadgets and building supplies whereas the local hardware store had just the basics. Through increased SCM efficiency, everything has gone through the DIY ‘cuisinart’ where everything is bland without discovery.
Recently, I’ve found that a good local hardware store has become the place to discover ‘new’ things. Perhaps, HD should go back and rediscover its roots.
Of course the economics of the housing industry play a part in the country’s overall economy. But, it doesn’t drive the economy to the point that it is the sole barometer or even the most important barometer.
Consider, for instance, an interesting dynamic that has taken place time after time: When housing sales decline, restaurant sales go up. More disposable income is available, since fewer mortgages are being sought. Not necessarily an “opposite and equal reaction,” but a reaction nevertheless.
As with everything, it’s a question of balance. The stock market remains strong, unemployment remains low, and positive steps are being seen in several sectors. While DIY retail will take its lumps, look for balance to occur in other retail sectors.
Some of Home Depot’s diversification won’t help its core driving force (example: consumer electronics), and some of the diversification will (example: more Do It For Me home improvement services). Any retailer investing in tangential, noncore categories is making a mistake. The best businesses are focused. Every square foot of space, every SKU in inventory, every customer interaction, every advertisement needs to reinforce the focus. Anything else is wasteful.
Try this test: take a handful of stores scattered all over the country and pay everyone in the store a daily bonus based on sales. Don’t change anything else. I bet those test stores will beat the profit increase of any other group of stores in the chain.
This is really not about withstanding the downturn in the housing market. Instead, it is about diversifying HD’s business model and making it work despite any downturn.
As the nation’s second largest retailer, HD is being forced to recognize that it is a retailer, and not just a Home Goods Supplier. This means that if a product or service makes sense for their customer, they need to provide the channel to offer this. This will require HD to think like a business rather than a Home Goods Supplier.
After recently buying and selling a home and moving from the Mid-Atlantic to the Northeast, my experience is that the housing market, while weaker that it may have been on the past three years, still has pockets of homes and areas that are still desirable and in demand.
The impact for retailers like Home Depot and Lowe’s, will be to continue to educate and train homeowners to tackle those smaller projects that will help in the reinvestment of their homes. By creating a destination for knowledge and resource, they will build their relationship with consumers, and be in a better position to sell those non-traditional items like flat screens and phones.
The implementation of these services still lays with the associates at store level and while it is good that they have created customer service programs, there seems to be from my experiences in the stores, an unevenness of execution of customer service, especially a the front end.
I agree with the others. 2 specific recommendations:
1. Continue to cultivate the DIFM (services) side of the business.
2. Accelerate outreach to contractors — commercial construction is in fine shape, as this is a residential downturn only.
As many others have observed, the housing market was overheated and is going through a correction in order to allow prices to reach more rational levels. As with any other business, when the problem of inventory oversupply starts to correct itself then the demand should recover and prices along with it — presumably at a more measured pace.
This may take at least through 2007, depending on the specific metro area, so D-I-Y retailers will want to cultivate demand for home-improvements on existing houses in the meantime. Even in the middle of a dip in the housing market, it’s an opportunity for the D-I-Y retailer who executes the best to take market share away from competitors and position itself for the next growth phase.
The big question for Home Depot is why and how its stock price and comp sales languished for so many years even in the middle of the housing “bubble.” The steps being taken to reexamine its business model are long overdue, and investors won’t have the patience to hear about external issues (like the slow housing market) that are out of HD’s hands.
Thousands of companies have ventured down this path when faced with the same problems. Diversification in itself is neither positive nor negative, because it depends how you do it. Diversification cannot solve issues that many organizations in this situation face, such as product delivery issues embedded in the business model (big stores with lots of items and low numbers of service staff must equal inconvenience and long shopping times which must equal customer frustration). Beneath all this, many retailers have a Master System that produces manifold errors of many kinds on many levels, and no matter how many different kinds of businesses you acquire, the Master System is the Master System and will not change. My point in all of this is: diversification is really not the problem. Fundamental system errors are.
As the economy goes, so goes housing.