How Big Box Retailer Home Depot Thrives In A No-Box World

Treating stores as an asset rather than a liability. JL

Paul Ziobro reports in the Wall Street Journal:

We opened three direct fulfillment centers strategically located to deliver online orders to 90% of our customers in two business days or less, and we do so using economical ground parcel service. We drive productivity through lower transportation costs by leveraging our store distribution network for buy-online, ship-to-store orders. 42% of online orders are being picked up in our stores.
Home Depot Inc. HD -0.48 % is riding the rebounding housing market through the turmoil battering retailers.
The Atlanta-based home-improvement chain has a simple explanation as to why it is sheltered from the broad malaise faced by others in retail. Rising home prices, which are near their pre-housing-bust peaks, mean more homeowners are feeling flush. So they’re more willing to splurge on big projects, from installing decks to remodeling kitchens.
The trend has propped up Home Depot sales, which have risen at least 4% at existing locations in 15 of the past 16 quarters. And the retailer has outperformed its main rival, Lowe’s LOW -0.62 % Cos., during the rebound, too.
That gives Home Depot a little more breathing room to figure out a vexing problem in retail today: how to serve a shopper who increasingly does more shopping online and forgoes trips to big-box stores. While rarely opening new stores anymore, Home Depot is figuring out new uses for existing ones, such as shipping orders from stores and having customers pick up online orders there, as well as overhauling its supply chain to accommodate the new reality.
The Wall Street Journal asked Carol Tomé, Home Depot’s chief financial officer, about these challenges. Here are edited excerpts of the talk.
WSJ: You’ve enjoyed the benefits of a rising housing market. How does that affect your mentality?
MS. TOMÉ: The first challenge is to ensure we don’t get complacent. We have to allocate our capital appropriately, so we don’t wake up one day, sadly, like some other retailers are waking up, saying, what happened? What happened to our customers? What happened to our business?
WSJ: Where are some of the places you’re spending your money?
MS. TOMÉ: About 42% of online orders are being picked up in our stores, so we’ve had to allocate capital to build out storage inside of our stores to stage those products. Who would have thought a few years ago that’s where we’d be allocating capital? But we have to, because that’s where the customer is asking us to allocate capital.
WSJ: With digital sales growing so much faster, how do you make sure your stores don’t fall behind?
MS. TOMÉ: We perform merchandising resets that cover about a third of each store annually. That could mean a change in our assortment or it could mean a change in how we display the product. All of this is designed to provide a better customer experience and drive sales. It can be a simple reset like resetting the spray-paint section so that when you take a can of paint, the next one drops into place in the display case, rather than standing the cans side by side. That’s a better experience and actually drives productivity in our stores.
Or it could be the reset of a millwork or flooring showroom. If you shopped flooring in our stores, in some of our older stores, it’s not the easiest experience. With our new flooring showrooms, we make it much easier for the customer to self-select. The displays are easier to shop off of, the signing is better. Oh, and by the way, sales are lifting. So it’s a good experience, and it’s driving sales.

WSJ: What investments are you making in digital?
MS. TOMÉ: We spend on technology that drives the interconnected retail experience. That’s anything from a First phone [used by store associates for functions from walkie-talkie to inventory management] to building out a brand-new website that should be launched by mid-2017. We also have a new order-management system that allows us to track special orders like custom kitchens on the way to the customer.
WSJ: Retail wages are rising. Do you have to find other places to cut to absorb that?
MS. TOMÉ: We have an activity-based model for determining employees’ hours that allocates work hours based on the activity inside the stores. As our transactions grow, so do our hours. And while there are pressures in certain parts of the country to increase wages, we can do that by driving productivity in other areas.
WSJ: Online sales tend to have lower margins because of associated shipping costs. How do you absorb that?
MS. TOMÉ: One way is to drive productivity through our supply chain. Specific to online, we recently opened three new direct fulfillment centers that are strategically located to deliver online orders to 90% of our customers in two business days or less, and we do so using economical ground parcel service. We’re also working to drive productivity through lower transportation costs by leveraging our store distribution network for buy-online, ship-to-store orders.
WSJ: Are there any new stores in Home Depot’s future?
MS. TOMÉ: I can recall a time when we were opening a store every 48 hours. That’s no longer the case. We believe we’ve got the appropriate store footprint in the U.S., Canada and Mexico. There will be a few store openings. If there’s a void, we’ll fill that void. But there are very few voids.
WSJ: Last year, you bought Interline Brands, which supplies maintenance and repair products to customers like property managers, to grow your business with professionals. Why are you targeting that market? MS. TOMÉ: They’re 3% of our customer base but 40% of our sales. Anytime you have that ratio, you’re going to focus on them. We also know the average spend by the pro is $6,200 a year. No pro makes a living spending $6,200 a year. So we aren’t getting 100% of his or her wallet. So we should focus on that. We should be getting more sales from them.
But we are not taking our eye off our do-it-yourself customer, which is also growing nicely.
WSJ: How much do you worry about Amazon.com?
MS. TOMÉ: We look at all competitors as the evil empire and look to compete against them all.
The good news is that we believe the addressable market that we compete in is $550 billion in the U.S. There’s plenty of room for us to continue to grow because our market share is less than 20%.
We are also such a different business than so much of retail because we are a project-based business, so customers are usually buying a range of products, not just one. Yet when customers do need just one item, they often turn to us instead of Amazon because the need is urgent and we have close to 2,000 locations conveniently located to the homeowner to take care of your urgent need.