March 27, 2007
Home Depot Going to Extremes for Customers
Home Depot is looking to build stores to suit its customers and that means it is constructing locations that are bigger and smaller than any units the home improvement chain currently operates.
“The marketplace for the traditional home improvement store is shrinking, and there’s only so much we can do within that [realm],” Mike LaFerle, vice president of real estate at Home Depot, told The Atlanta Journal-Constitution. “We said we’re going to open 400 to 500 stores by 2010, so we have to look at multiple new designs as part of that.”
On the big side, Home Depot is building a 225,000-square-foot superstore in Union, New Jersey, one of the most heavily trafficked areas of the state. The new unit is going up on a site that previously housed an Expo Design Center.
“The superstore concept is a test. We’re trying to bring the best of both worlds from the Expo concept and a regular Home Depot under one roof,” said Mr. LaFerle.
As to what is going into the store, Mr. LaFerle said it would include “a combination of new merchandise and expanded selections in our existing categories.” Among these would be an expanded home appliance area. Home Depot believes as many as 50 markets in the U.S. can support superstores such as the one being built in New Jersey.
The DIY chain is going small at the same time it tests the superstore concept. The company is in the process of building stores in the range of 35,000 to 50,000-square-feet.
The smaller units, which are looking to have more of a neighborhood hardware store atmosphere, are being targeted to smaller markets and vacation areas.
Home Depot has tested smaller concepts before. In 2001, the company abandoned its Villager’s Hardware format, also tested in New Jersey.
Apparently, the company has reversed its position.
“We think there’s a tremendous opportunity in smaller markets where it’s harder to find land for a full-size store, and where they don’t need a full-size store,” said Mr. LaFerle.
Discussion Questions: What is your reaction to Home Depot’s strategy of building both superstores and smaller neighborhood stores? Do you see greater potential in one format versus the other?
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Smaller formats enable targeting to lucrative market segments. For example, a smaller format store with a narrow selection of goods could easily target urban neighborhoods that are “regentrifying” after years of neglect. These are homeowners who buy $100k to $200k homes and invest another $100 to $300k in the homes. An excellent opportunity if I ever heard of one.
Every large format retailer faces the problem of what to do next. To be successful, large formats require a high concentration of potential customers within reasonable radius of the store. At some point there are simply no locations remaining that meet this criteria. For years clubs have experimented with a smaller format to go into less dense areas. As of yet, they have not found the solution. Wal-Mart has been testing the Neighborhood Market as a way to open new stores. A logical retail strategy is to place your largest format where it works best. Then ring the larger format with smaller ones for customer convenience. I have seen this strategy work well when executed correctly. Home Depot could ring their big format with smaller hardware stores and do very well.
In flexing store sizes, the devil is in the details. Home Depot has 2 major hooks: 1-stop shopping for related items and reasonable prices. If the smaller stores’ assortments are edited too much, hook #1 is gone. If the larger stores’ assortments aren’t compelling enough, they won’t be worth the added inconvenience or overhead. There are several other major appliance chains, for example. Adding more appliances to a Home Depot might not be much of an edge.
Formats ought to reflect market realities and market realities are never constant over disparate geographies.
We have seen the rise of retail store segmentation by demographics and, more recently, by type of shopping trip.
It is not surprising that home/hardware stores, like other formats, would begin to segment their shoppers and adjust their formats to match consumer needs.
The Home Depot announcement that they will test several store size formats in an effort to satisfy consumers is not surprising. In fact, it’s smart! At this time in human history, much is changing. The demographic profile of the American consumer is in flux perhaps more than at any other time in history. What Home Depot has announced is simply an effort to adjust with the needs of the consumer.
What could be the benefit of such action? Perhaps customers will be excited to learn that a retailer is tailoring a store just for them. Maybe consumers will find it refreshing that a retailer is catering to and blending into the fabric of their neighborhood. Of course, no solution will satisfy 100% of shoppers, but if the Home Depot strategy is executed properly, this strategy just might bring additional loyalty from shoppers.
There is a term that I hear more and more as I get older. That term is “back in the day” or “the good old days.” It refers to a time when consumers depended on the neighborhood market and the neighborhood hardware store. Is the Home Depot strategy any different from those “old days”? I think not. It is an effort to provide consumers with a solution that is customized to that consumer’s environment. I believe many will find it refreshing. By the way, Home Depot will likely discover new strategies to improve their sales and margins in the process.
Tailoring each store design to its trading area is a smart way to go. With the growth in the popularity of lifestyle shopping centers, so too will we see growth in lifestyle stores. Circuit City is also testing smaller stores (20,000 square feet, compared to the typical 30-35,000) that incorporate consumer-friendly innovations such as in-store kiosks.
Other lifestyle retailers trying innovative retail concepts include Teavana (tea), MetroPark apparel and accessories), Room & Board (furniture), Dream Dinners (“meal assembly”), and Blue Mercury (upscale cosmetics and spa).
To me, from a customer’s view point, all these efforts by Home Depot are wasted efforts! Just give me knowledgeable help in the store when I need and let me check out without wasting my time. If Home Depot can not do these simple things, then the rest is useless.
The Home Depot is an equity that can only be fully utilized by developing different formats depending on the community they’re building in. There is not going to be any damage to their overall equity if they match the store format to what the customer base is looking for. The risk comes in when they attempt to develop merchandising formats that are not compatible. There’s no sense in them developing stores with large lumber departments when the customer base is primarily apartment/condo dwellers. If they attempt to merely down-size their stores and fit every department into a store half the size then they will run into problems.
The reason why different sized retail store formats are successful in some regions and markets while they fail in others has to some extent to do with the trade area dynamics and population demographics. So it is a good idea to start with a hypothesis that there are some markets that can absorb mega-sized stores, and there are those little nuggets of markets that can be lucrative but cannot support a megastore, so a small format would work best. But the logistics and strategy of running a large format store is very different from that of a small store. So supporting multiple formats can be a costly affair. Also, apart from demographic differences that drive performance for different formats, there are psychographic differences that drive people to one format vs. another. A successful strategy for Home Depot would require identifying these attitudes and making it part of their retail format strategy.
Is it possible that the benefits which Big Box Retailers and Category Killers brought about have peaked? Consumers who were willing to give up service and convenience to travel longer distances and spend more time shopping in bigger stores because of Price and Selection enabled their growth and dominance.
If Price were the “Third Wave” in the retail revolution of the latter half of the 20th century, then it may be argued that “Convenience” will be the “Fourth Wave” in this new 21st Century.
Will consumers be willing to give up some price and selection for greater convenience? If they do, and I believe that they will, it will be the enabler for those retailers and manufacturers who can bring these services and experiences to grow rapidly. Tesco is entering this country as a player in servicing this field with their smaller stores serving localized populations with product that meets the needs of the 21st century consumer.
If Home Depot has a formula in their variable store size and formats which can tap into this growing trend, then they are positioning themselves well for the future.
Time will tell.
I would hold out more hope for the smaller format than the larger. As others have noted above, there are plenty of places to shop for appliances, and there’s little advantage in being able to buy a band saw and a washing machine in one trip. On the flip side, it will be interesting to see if Home Depot can compete on the same playing field as the in-town independent hardware stores they have so greatly pressured.
One of Home Depot’s challenges has been staffing their locations with knowledgeable staff. That will be even harder in a mega-store, but easier in a smaller location. If they can successfully combine their enormous buying power with truly improved customer service, the smaller format may be a winner.
I’m not sure that changing formats is going to extremes for customers. Home Depot, at one time, delivered excellent customer service. Associates were knowledgeable. They were helpful. They would walk you to the product you were searching for. If you walk out feeling that you were treated as a valued customer then it doesn’t matter the size of the store. Maybe, Home Depot believes a smaller footprint will enable them to hire more customer oriented personnel.
At sometime or other the big box stores will run out of places that will support them without cannibalizing themselves. However, if they could find the merchandise mix for a smaller unit 35k square feet or less (like the convenience stores in my area of the country) that are well stocked with the basic things at fair prices and a few frills for fun, I believe they could grow for a long time without great cost. However, the sales growth rate would slower than they want.
Home Depot is for the first time in a long time beginning to look at its customers and their needs and wants. It will probably take some time for Home Depot to fine tune their strategy for servicing their customers with multiple formats, however, it appears they are finally getting back on the road to success.
Bravo, for Home Depot. The realities of the market and consumers are acknowledged!
So why can’t other retailers think this way? Hmmmmmmmmmmmmm
What are Home Depot customers looking for and how can the company expand on convenience and service?
In the larger format stores, I am not sure home appliances will make a difference as there are already lots of competitors which offer these products.
The idea of a small hardware store intrigues me as it seems to be a thing of the past. I will be interested to see if Home Depot can make it work based on its historical approach of mass appeal. These smaller stores may also appeal to customers who tend to feel “lost” in such large stores and possibly attract more women shoppers as well.
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Smaller formats enable targeting to lucrative market segments. For example, a smaller format store with a narrow selection of goods could easily target urban neighborhoods that are “regentrifying” after years of neglect. These are homeowners who buy $100k to $200k homes and invest another $100 to $300k in the homes. An excellent opportunity if I ever heard of one.
Every large format retailer faces the problem of what to do next. To be successful, large formats require a high concentration of potential customers within reasonable radius of the store. At some point there are simply no locations remaining that meet this criteria. For years clubs have experimented with a smaller format to go into less dense areas. As of yet, they have not found the solution. Wal-Mart has been testing the Neighborhood Market as a way to open new stores. A logical retail strategy is to place your largest format where it works best. Then ring the larger format with smaller ones for customer convenience. I have seen this strategy work well when executed correctly. Home Depot could ring their big format with smaller hardware stores and do very well.
In flexing store sizes, the devil is in the details. Home Depot has 2 major hooks: 1-stop shopping for related items and reasonable prices. If the smaller stores’ assortments are edited too much, hook #1 is gone. If the larger stores’ assortments aren’t compelling enough, they won’t be worth the added inconvenience or overhead. There are several other major appliance chains, for example. Adding more appliances to a Home Depot might not be much of an edge.
Formats ought to reflect market realities and market realities are never constant over disparate geographies.
We have seen the rise of retail store segmentation by demographics and, more recently, by type of shopping trip.
It is not surprising that home/hardware stores, like other formats, would begin to segment their shoppers and adjust their formats to match consumer needs.
The Home Depot announcement that they will test several store size formats in an effort to satisfy consumers is not surprising. In fact, it’s smart! At this time in human history, much is changing. The demographic profile of the American consumer is in flux perhaps more than at any other time in history. What Home Depot has announced is simply an effort to adjust with the needs of the consumer.
What could be the benefit of such action? Perhaps customers will be excited to learn that a retailer is tailoring a store just for them. Maybe consumers will find it refreshing that a retailer is catering to and blending into the fabric of their neighborhood. Of course, no solution will satisfy 100% of shoppers, but if the Home Depot strategy is executed properly, this strategy just might bring additional loyalty from shoppers.
There is a term that I hear more and more as I get older. That term is “back in the day” or “the good old days.” It refers to a time when consumers depended on the neighborhood market and the neighborhood hardware store. Is the Home Depot strategy any different from those “old days”? I think not. It is an effort to provide consumers with a solution that is customized to that consumer’s environment. I believe many will find it refreshing. By the way, Home Depot will likely discover new strategies to improve their sales and margins in the process.
Tailoring each store design to its trading area is a smart way to go. With the growth in the popularity of lifestyle shopping centers, so too will we see growth in lifestyle stores. Circuit City is also testing smaller stores (20,000 square feet, compared to the typical 30-35,000) that incorporate consumer-friendly innovations such as in-store kiosks.
Other lifestyle retailers trying innovative retail concepts include Teavana (tea), MetroPark apparel and accessories), Room & Board (furniture), Dream Dinners (“meal assembly”), and Blue Mercury (upscale cosmetics and spa).
To me, from a customer’s view point, all these efforts by Home Depot are wasted efforts! Just give me knowledgeable help in the store when I need and let me check out without wasting my time. If Home Depot can not do these simple things, then the rest is useless.
The Home Depot is an equity that can only be fully utilized by developing different formats depending on the community they’re building in. There is not going to be any damage to their overall equity if they match the store format to what the customer base is looking for. The risk comes in when they attempt to develop merchandising formats that are not compatible. There’s no sense in them developing stores with large lumber departments when the customer base is primarily apartment/condo dwellers. If they attempt to merely down-size their stores and fit every department into a store half the size then they will run into problems.
The reason why different sized retail store formats are successful in some regions and markets while they fail in others has to some extent to do with the trade area dynamics and population demographics. So it is a good idea to start with a hypothesis that there are some markets that can absorb mega-sized stores, and there are those little nuggets of markets that can be lucrative but cannot support a megastore, so a small format would work best. But the logistics and strategy of running a large format store is very different from that of a small store. So supporting multiple formats can be a costly affair. Also, apart from demographic differences that drive performance for different formats, there are psychographic differences that drive people to one format vs. another. A successful strategy for Home Depot would require identifying these attitudes and making it part of their retail format strategy.
Is it possible that the benefits which Big Box Retailers and Category Killers brought about have peaked? Consumers who were willing to give up service and convenience to travel longer distances and spend more time shopping in bigger stores because of Price and Selection enabled their growth and dominance.
If Price were the “Third Wave” in the retail revolution of the latter half of the 20th century, then it may be argued that “Convenience” will be the “Fourth Wave” in this new 21st Century.
Will consumers be willing to give up some price and selection for greater convenience? If they do, and I believe that they will, it will be the enabler for those retailers and manufacturers who can bring these services and experiences to grow rapidly. Tesco is entering this country as a player in servicing this field with their smaller stores serving localized populations with product that meets the needs of the 21st century consumer.
If Home Depot has a formula in their variable store size and formats which can tap into this growing trend, then they are positioning themselves well for the future.
Time will tell.
I would hold out more hope for the smaller format than the larger. As others have noted above, there are plenty of places to shop for appliances, and there’s little advantage in being able to buy a band saw and a washing machine in one trip. On the flip side, it will be interesting to see if Home Depot can compete on the same playing field as the in-town independent hardware stores they have so greatly pressured.
One of Home Depot’s challenges has been staffing their locations with knowledgeable staff. That will be even harder in a mega-store, but easier in a smaller location. If they can successfully combine their enormous buying power with truly improved customer service, the smaller format may be a winner.
I’m not sure that changing formats is going to extremes for customers. Home Depot, at one time, delivered excellent customer service. Associates were knowledgeable. They were helpful. They would walk you to the product you were searching for. If you walk out feeling that you were treated as a valued customer then it doesn’t matter the size of the store. Maybe, Home Depot believes a smaller footprint will enable them to hire more customer oriented personnel.
At sometime or other the big box stores will run out of places that will support them without cannibalizing themselves. However, if they could find the merchandise mix for a smaller unit 35k square feet or less (like the convenience stores in my area of the country) that are well stocked with the basic things at fair prices and a few frills for fun, I believe they could grow for a long time without great cost. However, the sales growth rate would slower than they want.
Home Depot is for the first time in a long time beginning to look at its customers and their needs and wants. It will probably take some time for Home Depot to fine tune their strategy for servicing their customers with multiple formats, however, it appears they are finally getting back on the road to success.
Bravo, for Home Depot. The realities of the market and consumers are acknowledged!
So why can’t other retailers think this way? Hmmmmmmmmmmmmm
What are Home Depot customers looking for and how can the company expand on convenience and service?
In the larger format stores, I am not sure home appliances will make a difference as there are already lots of competitors which offer these products.
The idea of a small hardware store intrigues me as it seems to be a thing of the past. I will be interested to see if Home Depot can make it work based on its historical approach of mass appeal. These smaller stores may also appeal to customers who tend to feel “lost” in such large stores and possibly attract more women shoppers as well.