Retailing Shelter from the Recession

In the dismal U.S. retailing industry, home-improvement centers that sell everything from kitchen cabinets to grass seed have been a notable bright spot. Spurred by the spreading do-it-yourself itch, sales at the sprawling emporiums grew more than 10% a year in the 1980s, while retailing in general grew only about 6%. Even the stormy economy has held a silver lining for some companies, since people tend to fix up their homes rather than buy new ones during a downturn.

As consumers launch summer fix-up projects, many are heading for megastores run by Atlanta-based Home Depot, the do-it-yourself industry’s hottest star. Home Depot has grown from four stores with sales of $22 million in 1980 to 145 stores that rang up $3.8 billion last year. Margaret McKenna, who watches the $110 billion-a-year home-improvement and -repair business for Wall Street’s Smith Barney, sees “a wide, wide margin in the industry between Home Depot and everybody else.”

Home Depot has prospered by taking the angst out of the hangar-like spaces and vast array of items that can easily daunt do-it-yourself shoppers. All the firm’s warehouse stores feature clearly marked displays and sales staffs wearing large orange aprons who roam the concrete floors to offer advice. Many employees are former carpenters, plumbers or other craftsmen who have traded in their tool kits for such incentives as the company’s stock-purchase plan, which lets Home Depot’s 26,000 workers buy shares at 15% below the market price; at week’s end, the shares were quoted at 65 7/8, up 23 3/4 since Jan. 2. The idea is to inspire a strong sense of loyalty, which translates into the customer service that is a key to the firm’s success. Admits president Arthur Blank: “The real difference between us and everyone else is not in the merchandise.”

Not that Home Depot lacks for things to sell. The company’s stores average nearly 100,000 sq. ft., or more than twice the industry average, and stock some 30,000 items. To ensure that doors, windows, bathtubs and other goods are available when customers want them, Home Depot tries to stock them in each store rather than in distant warehouses. That pleases shoppers and allows the firm to move merchandise quickly. Despite the recession, Home Depot’s profits jumped from $112 million in 1989 to $163 million in 1990.

The company’s stunning success has bulldozed others out of an industry in which more than 350 major firms are trying to compete. Channel Home Centers, a New Jersey-based chain that has been saddled with a $268 million load of debt since it went private in 1986, entered Chapter 11 bankruptcy last January and plans to sell or close 34 of its 86 stores. Hechinger Co., a major Maryland- based chain of 115 centers, lost $800,000 in last year’s fourth quarter before rebounding with a $7.2 million profit in the first quarter this year. That was down from $8.4 million in the same period a year ago. In California the National Lumber and Supply Co. closed last year when its 60,000-sq.-ft. home-improvement centers proved unable to compete with larger, more efficiently run stores like Home Depot’s.

Other firms are rethinking their strategies to compete with Home Depot. HomeClub, a California-based chain of 70 discount outlets, is dropping its policy of offering lower prices to customers who bought a $10 to $15 annual membership, even though the firm’s profits rose strongly in the fourth quarter of 1990. The fee “was a bar to entry,” explains president James Halpin, and with Home Depot sucking away customers, no competitor can afford such a disadvantage.

For its part, Home Depot is trying to figure out what its customers will want next. Anticipating that aging baby boomers may prefer to hire others to do their fix-up work, the company is testing a program at 17 stores to install such items as carpets, windows and doors. That way customers who weary of the do-it-yourself approach to home improvement can let Home Depot’s experts do it themselves.