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he crown of home improvement retailing

he crown of home improvement retailing “The Crown of Home Improvement Retailing” Retailing building supply stores have become a popular retail industry sector due to increased public awareness and the need of many homeowners for the home improvement products. Back in the 1970s, long before warehouse stores ruled home improvement land, do-it-yourselfers shopped at “home centers.” These 30,000 square foot stores offered cheaper prices and wider selection of products, about 25,000 more than local hardware stores and eliminated the extra trip to the lumberyard. The dependence of many of these retailers upon the homebuilding industry for much of their business has also been reduced and the warehouse superstores, such as Home Depot, have become more important. The smaller companies in the retail building supply industry are facing economic difficulties as the industry leaders continue to dominate and warehouse super centers are becoming more evident. Founded in 1978, The Home Depot is the world largest home improvement retailer and the third largest retailer in the United States followed by Lowe’s Companies, Inc. At the end of fiscal year 1999, the company was operating 930 stores, including 854 Home Depot stores, 15 Expo Design Center stores and 2 Villager’s Hardware stores in the United States; 53 Homes Depot in Canada; 4 Home Depot stores in Chile; and 2 Home Depot stores in Puerto Rico. In addition, they operated wholly owned subsidiaries Apex Supply Company, Georgia Lighting, Maintenance Warehouse and National Blinds and Wallpaper. They approximately employed 201,000 associates at the end of the year. The company has been publicly held since 1981. In 1978 when Bernard Marcus and Arthur Blank, executives with Handy Dan Home Improvement Centers, found themselves out of work after a corporate takeover at Handy Dan. Joined by Ronald Brill another Handy Dan employee; and Pat Farrah, former owner of Homeco, the world’s first home improvement warehouse, they mapped out plan for a bigger and better store catering to the needs of do-it-yourselfers. These Warehouse type stores, each averaging about 130,000 square feet, stock 40,000 to 50,000 home improvement products and are aimed mainly at the do-it-yourself trade. The stores however also attract many professional-building contractors. Products include lumber, floor and wall covering, hardware, paint, plumbing supplies, and tools. Home Depot also offers facilities maintenance and repair products through its direct mail subsidiary Maintenance Warehouse, and custom window treatments by direct mail through National Blind $ Wallpaper Factory. Much of the company’s success has been attributed to its superior customer service, along with low process and a broad selection of products. In 1979, they opened three Home Depot outlets in the Atlanta area, adding fourth outlet in 1980. The next year Home Depot when public, opened four stores in South Florida, and posted sales of $50 million. After opening two more stores and making sales of $100 million in 1982, the company was named Retailer of the Year in the home building supply industry. The chain entered Louisiana and Arizona next. By 1983 sales were more than $250 million. The company also began installing computerized checkout systems, and by 1984 inventory reordering was computerized. The same year the company acquired nine Bowater Home Centers in Texas, Louisiana, and Alabama. Home Depot then entered Southern California, Handy Dan’s home turf, opening six stores. The Bowater acquisition and rapid internal expansion caused Home Depot to falter and experienced the only dip in earnings in its history. Back on track in 1986, sales exceeded $1 billion in the firm’s 60 stores. Entering the competitive northeastern market, the company bought three Modell’s Shoppers World stores on Long Island. In 1989 Home Depot added 22 Stores, primary in California, Florida, and New England. Home Depot’s sales rose during the 1990-1992 recession. They opened more than 50 stores in 1990 and 1991, including its first units in New Hampshire, Massachusetts, and Maryland. It acquired a 75% interest in Aikenhead’s a Canadian home improvement retailer, in 1994. A series of gender bias lawsuit began to plague the company in 1994, as female workers on the West Coast claimed they were not trained promote, or paid on an equal basis with male employees. The company reached a $65 million out-of-court settlement in that class action suit in 1997, but not before the US Equal Employment Opportunity Commission joined in Louisiana and the company was ordered to pay another female employee $1.7 million in a case in Oakland, California. Home Depot past the 500-store mark in 1997. In mid-1997 Blank succeeded Marcus as the company’s CEO; Marcus remained chairman. Home Depot bought National Blind & Wallpaper Factory (a mail order firm) and Maintenance Warehouse (a direct-mail marketer). In 1998, Home Depot announced it had reached an agreement with Canada’s Molson Companies Ltd. To purchase for $375 million (Canadian money) Molson’s 25 % partnership interest in the Home Depot Canada. This transaction gave Home Depot total control of its Canadian operations, since then it has opened 53 stores in Canada. Net sales for fiscal 1999 increased 27.2% to $38.4 billion from $30.2 billion in fiscal 1998. This increase was attributable to full year sales from 138 new stores opened during fiscal 1998, a 10% comparable store-for-store sales increase, and 169 new store opening and 6 store relocations during fiscal 1999. Gross profit as percent of sales was 29.7% for fiscal 1999 compared to 28.5% for fiscal 1998. The increase was due to lower cost of merchandise resulting from product line reviews and increased sales of imported products, other merchandising initiatives and sales mix shifts to higher gross margin product categories and assortments. Net Earning as a percent of sales were 6.0% for fiscal 1999 compared to 5.3% for fiscal 1998, reflecting a higher gross profit rate partially offset by operating expenses. Operating expenses as a percent of sales were 19.8% for fiscal 1999 compared to 19.7% for fiscal 1998. Selling and store operating expenses as a percent of sales increased to 17.8% in fiscal 1999 from 17.7% in fiscal 1998. The increased was due to higher store selling payroll expenses resulting from market wage pressures and an increase in employee longevity, as well as to continued investment in new customer initiative. Home Depot key to its strategy is listening to its associates. Claims of keeping communications open at all levels, treating associates with dignity, welcoming creative ideas, and rewarding entrepreneurial thinking by promoting from within. By building a loyal workforce and creating good will within the community both through its employees and through its community programs, Home Depot has made itself a household name. Continuing to expand its customer base by opening stores in new locations while encouraging a team attitude among its associates has allowed Home Depot to give its entire stores the same down-home feeling offering advice, a warm welcome and superior service. Most warehouse-type stores in the past had concentrated on price and selection, but had neglected customer service. By pitting service first and making associates a part of the big picture, Home Depot quickly stepped to the front ranks of its market segment. Size has not diminished the company’s commitment to service and community, making the chain welcomed in most areas. One of the factors that has helped to shape the successful marketing strategy of Home Depot has been the recognition of the large interest among Americans in home improvement projects, both large and small. To cater to do-it-yourselfers whose goals extend beyond merely making repairs. They created a designed center staffed by professional designers who offer free in-store consultation for home improvement projects ranging from lighting to computer assisted design for kitchens and bathrooms. The company has also set up EXPO design Centers in a handful of key markets across the country. These center focus on interior design and renovation projects, including lighting, floor and wall covering, and kitchen and bath modernization. One of Home Depot’s longtime trends has been that of superior customer service. (see Appendix B) This trend put Home Depot at the top and will not likely be abandoned. The same can be said of service to the community. The company has designated budget directed toward affordable housing, at risk-youth, and environmental causes. Home Depot makes citizenship one of its primary concerns. Most of this budget is put back into the communities where Home Depot stores are located. It serves the concerns of its employees with matching gift program and promotes volunteerism among its employees through its Team Depot program, which alerts employees to local volunteer opportunities within the community. Home Depot has also worked with Habitat for Humanity to build housing for those in need. Protecting the environment has been another of Home Depot’s biggest concerns. During the 1990s, Home Depot assumed responsibility towards the environment and towards the promotion of a greener home repair/improvement products, as well as a reduction in its own wastes, a commitment to recycling, and giving money to environmental groups. Home Depot’s environmental initiatives have been highly praised and used in the creation of environmental building standards. They publish and Environmental Green Print to help consumers build and remodel with environmentally safe products and techniques and offer clinics to teach skills locally. In this quest, Home Depot has received numerous awards from the National Environmental Development Association (1993), Renew America and the National Awards Council for Environmental Sustainability (1995), and was recognized with the President’s Sustainable Development Award (1996). Home depot has extended its 24-hour format to an entire region for the first time. Stores in the Seattle, Wash., area now operate around the clock to benefit large numbers of aerospace and other shift workers. New reorganization of its operations area and additional executive promotions has taken place to accommodate plans to have more than 1,900 stores by the end of 2003. It also has acquired three Sam’s Clubs in Argentina, which will be converted to home improvement warehouse stores, with plans to launch four stores this year and four next year. It is home Depot’s strategy to proceed cautiously and gather momentum. The first Expo Design Center was opened in San Diego in 1991 and grew to three stores by 1995. Last year started with seven Expo stores and ended with 15. The company plans to roll out 11 more this year and to ultimately have more than 200 in the next five to seven years. It also introduced its Villager’s Hardware format last year. They appear to be focusing on two new trends: the influences of female consumers and the growth of specialty stores. At Villager’s products found in discount store such as Wal-Mart, Kmart and Target will be available. All of these products are presented with modern, upscale merchandising that helps create a specialty store atmosphere. Other tactics add to this ambience, such as a decorating department that includes space to work on projects and plenty of books for ideas. Villager’s motto sounds as if it was specifically written to meet this demand. Nevertheless, this store is not the first to tap this niche by combining decorative products, appliances and hardware. The twist of villager’s is that it is small store that attempts to add convenience to its value proposition. (see Appendix A) Lowe's Companies, Inc. (NYSE: LOW), is the world’s second largest home improvement retailer competing in a highly fragmented $300 billion industry. It serves more than 4 million do-it-yourself and commercial business customers weekly through more than 653 stores in 40 states. At the beginning of 2000, retailed space total approximately 57 million square feet. The 54-year-old based out of Wilkesboro, North Carolina went public in 1961, currently employs more than 80,000. Lowe’s offers comprehensive services both for the do-it-yourselfer and the commercial business customer. Each store has a full lawn and garden/nursery department, a building materials and lumber department, as well as completely stocked departments in electrical, plumbing, hardware, tools and paint. A large home d�cor/home fashion department features appliances, carpeting, rugs and flooring; and a full kitchen design department with kitchens on display and may styles of cabinets in stock. Lowe’s carries leading national brands such as DeWalt, Armstrong, American Standard, Maytag, Olympic, Owens Corning and Sylvania. Lowe’s has been implementing an aggressive store expansion strategy that has transformed Lowe’s from a chain of small stores into a chain of destination home improvement warehouse. In the later years of the 198Os, Lowe's began increasing the size of its stores. Prior to that time the stores were approximately 20,000 square foot. In 1994 it built its first 100,000 square foot store, and currently has a 121,000 square foot prototype store with a lawn garden center comprising of approximately 35,000 additional square feet. To accommodate the expansion, the company began to lease more of its own space. In 1989 Lowe's owned 89% of the buildings that housed their stores. In 1998, Lowe’s announced a major expansion into the western United States. The westward move extends its retail reach from coast-to-coast, furthering the company expansion strategy. To speed this goal, Lowe’s acquired Eagle Hardware & Garden, Inc., a Washington based company, which has 32 stores in nine Western States. Lowe’s now has stores in half of the top 25 most populated cities in the United States. In addition to the top 25 markets, Lowe’s planned to open 95 new stores in metro markets growing to 75% of they scheduled 125 new store openings in 2001. Net earnings for 1999 increased 34% to $672.8 million or 4.2% of sales compared to $500.4 million or 3.8% of sales for 1998. The company’s sales were $15.9 billion in 1999, a 19% increase over 1998 sales of $13.3 billion. Sales were 20% higher than 1997. The increase in sales is attributable to the company’s ongoing expansion and relocation programs along with growth in store sales. Store sales increases are driven by focusing on commercial business, special order, and installed sales, which is combined with continued strategy of employing an expanded inventory assortment, competitive prices and an emphasis on customer service. Gross Margin in 1999 was 27.5% of sales compared to 26.8% in 1998. Both of these years showed improvement over the 26.6% achieved in 1997. In addition, and increase in the level of controls relating to inventory shrinkage also contributed to gross margin improvements in 1999. Lower product costs, careful/ competitive pricing strategy, and changes in product mix resulting from the expanded merchandise selection available in larger stores continued to provide margin improvements during 1999 and 1998. � Product Differentiation – view changes as an opportunity for differentiation – not just being different, but being better. It fundamental to Lowe’s success as they focus on providing customer more of what they asking for. � Financing program that helped local builders get loans, coordinated building plans with the Federal Housing Administration (FHA), and then helped contractors fill out the government forms and trained construction companies to build FHA approved homes. � When new home construction virtually came to a standstill in the later part of the 1970s, Lowe's made the decision to target consumers. The management team believed that increasing consumer sales would reduce the company's vulnerability during economic and seasonal downswings. � In 1978 the RSVP plan (standing for retail sales, volume, and profit), was introduced to attract consumers in a big way. The strategy worked; by 1982 sales had reached $1 billion, and when the figure reached $1.43 billion in 1983, it marked the first time that Lowe's had made more money selling to consumers than to contractors. � They increased focus on installed sales and commercial business customers, this was as a result of changing trends, because of time pressure, “do-it-yourselfers” are changing to “do-it-for-me”. � Special Order Sales Program – This program satisfies the unique tastes of their customer base and broadens the 40,000+ items stocked in stores to the hundred of thousands of products offered by their vendors. � Focus on providing products and services that please female shoppers. While, women and men make equal number of purchases, women are responsible for initiating and influencing a much greater percentage of home improvement projects. � The change from first-out (LIFO) method to the first-in method (FIFO) to determined the cost of inventory, has reduced costs in most product categories due to a combination of better buying, increasing imported products and logistics efficiencies. The change also aids in financial statement comparability with the retail industry segment. � The first major retailer among the estimated 50 companies offering Internet statement via Standard Register's StatmentLink service. � Internet statement strengthens Lowe's industry leadership in proactively offering electronic commerce services. In addition to distributing statements on-line, Lowe’s will use StatementLink; to send targeted and customized interactive messages to customers, strengthening loyalty through enhanced communication of in-store information and product offering. � Community/Volunteer Programs -- Lowe’s give back to the communities it serves through programs and volunteer involvement. They contribute regularly to nonprofit organizations in towns and cities throughout their territory. � Relationship programs – to understand what customer wants and need are, they have developed programs such as Lowe’s Garden Club, Lowe’s Woodworker’s Club and Lowe’s kids Clinics to show customer that they share their enthusiasm for home improvement. � Commitment to the future – Lowe’s believes that the best way to predict the future is to create it, rather than reacting to opportunities. They do so by analyzing research to identify trends that will impact the industry in coming years. � Lowe’s management in 1999 implemented a new strategy for long-term success: a system of “centrally developed, de-centrally applied” programs. To support these programs, senior management was restructured from two divisions into three: northern, southern and western divisions. Regional management was expanded form eight to thirteen regions. Five state of the art Regional Distribution Center, (RDCs) are strategically placed throughout “Lowe Island.” By now, it’s clear where Home Depot and Lowe’s are heading. Though strategies for market control are very similar, Lowe’s has more of a department store feel, as opposed to the warehouse atmosphere of a Home Depot. Home Depot global expansion will be a key to their long term success, trends in global retailing are accelerating, as retailers consolidate, capitalize on the power of their brands throughout the world. While it may seem unreasonable to think Lowe’s could ever overtake Home Depot, stranger things have happened. Circuit City looked unstoppable, and Best Buy was on the brink of Bankruptcy. Now Wall Street is giving Best Buy a higher growth multiple than Circuit City’s, thanks to new sources of revenue like extended-warranty plans. But the truth is growth is ultimately a factor of management on the one hand and culture among the other things that don’t show up in the balance sheet. Again, while management seems to have devised a clever comeback plan, it may be some time before Lowe’s catches up to Home Depot. Lowe’s Companies, Inc. Declares Cash Dividend, PR Newswire, June 12, 2000 In an Expansion Mode, Lowe’s Sharpens its Customer Focus, The Weekly Newspaper for the Home Furnishing Network, June 5, 2000 p19 Lowe’s Companies Inc., The wall Street Journal, June 1, 2000 Lowe’s Outlines Focus on Customers at Annual Meeting, Pr Newswire, May 26, 2000 Lowe’s Eyes Markets for Growth, Corporate Financing Week, April 17, 2000, p3 Retailing building supply industry, The value Line Investment Survey, April 14,2000, p881 Lowe’s Annual Report, Fiscal Year 1999, Available at: http://www.Lowes.com/ Home Depot Annual Report, Fiscal Year 1999, Available at: http://homedepot.com/ Customer Service that is above and beyond, Philadelphia Business Journal, April 7, 2000 p42 We’re No.1! The Market Loves Top Dogs. Should you?, Fortune, March 6,2000 p446 The Home Depot reports 29% Increase in First Quarter Net Earning; Comparable Store Sales up 7%, PR Newswire, May 16, 2000 The Home Depot Looks to Floor Industry; Test Store Opens in Dallas this Summer, The weekly Newspaper for the Home Furnishing Network, March 27, 2000 p1 Carving a New Niche, Do It Yourself Retailing, September 1999, p49 To find a place in the market, Villager’s must focus on: � Price – Most important to do-it-yourselfers satisfaction is a store’s ability to help them save money. Consumers will make direct price comparison with other price leaders in the market, such as nearby discount stores. � Product selection – Home Depot’s other big strength has been its broad and deep selection throughout every core home improvement category. In Villager’s, it is trying to maintain a reputation for selection by branching into other related product categories, most are discount store items, which plays directly into home Depot’s strength as one of nation’s leading discount stores. This strategy also expands the store’s potential sales. � Service – offering customer service may be the biggest challenge facing Villager’s. Customers have higher service expectations for neighborhood convenience stores. � Convenience – as we seen, Villager’s merchandise suggest that it essentially offers a “trendy discount store hard lines selection.” By stripping away electronics and major appliances, the store may become a convenient alternative to discount store shopping. Customer Friendly Services include: � Special Order Sales – more than 400,000 items available � Free Computer paint matching and mixing � Free computer project design for decks, kitchens and storage buildings � Dedicated commercial sales desk for commercial business customers � Delivery service – 7 days a week � Complete credit services for homeowner and professional customer � One year guarantee on trees and shrubs Bibliography:

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