Remember when you used to go to Home Depot to pick up a repair kit to fix your toilet or grab a sack of ready-mix cement? All was well. Yes, the company sold electrical supplies, and it was annoying to see contractors' trucks in their parking lot. But you didn't lose sleep over Home Depot's interest in the electrical market.
The company's acquisition of Hughes Supply Inc., Orlando, Fla., was a wake-up call for distributors in many construction and industrial markets. Under the direction of Robert Nardelli, Home Depot's president, chairman and CEO, it appears Home Depot Supply wants to conquer the world market for all building supplies and a great many installations — starting with the United States, Canada, the United Kingdom, Mexico and now China.
Nardelli and Home Depot Supply's Joe DeAngelo, executive vice president, (two of the many former GE executives who now work for the company) have spent $4.1 billion over the past few years acquiring 35 distributors in different markets, including electrical; plumbing; heating, ventilating and air-conditioning (HVAC); maintenance and repair operations (MRO); roofing; and janitorial and cleaning. According to Hoovers.com, by 2010 Home Depot Supply wants 1,500 locations in all 50 states to account for 20 percent of Home Depot's overall sales.
Home Depot Supply's parent company is a huge corporation now ranked as the third largest retailer in the world. Last year's total sales volume for the Atlanta-based Home Depot was $81.5 billion. It has 325,000 employees and 2,048 store locations. The company was building its familiar retail warehouses at the rate of 180 per year for much of the past decade, but it's now reportedly nearing a saturation point for retail expansion. Now it's “only” adding approximately 100 new stores per year.
However, the company sees plenty of room for expansion by supplying the building trades. Enter Home Depot Supply. It estimates the market in building materials to contractors and repair shops to be $410 billion and sees this target market as very fragmented, with big-time billions available to fill its orange coffers. In fact, Home Depot Supply expects to be doing $21 billion in sales by 2010. To reach this goal, I believe the company has much more in mind in terms of sales growth, staffing and future acquisitions. It looks to me like they are marching toward the “Wal-Martization” of industrial supply and installation options.
By the way, selling supplies is only part of the company's current and future plans. Home Depot Supply also wants to offer customers an incredibly broad array of installation services through a network of independent contractors. On the electrical side, these Home Depot-approved contractors already wire ceiling fans, lighting, generators and home theaters. Eventually, Home Depot Supply reportedly wants to work with developers, functioning as a quasi-sub contractor by providing installation services for a full range of products. This would affect all building trades, not just electrical. The company reportedly wants to expand into commercial jobs as well.
Home Depot may have provided a clue on its commercial intentions in its recent deal with Six Flags Inc., New York, to be the park operator's exclusive supplier of commercial improvement, building supply, installation, repair and maintenance products to all Six Flags parks across North America. Once it has the supply business for a large commercial account like this, don't be surprised if it gets into installation services, too. See the related item in “NewsWatch” on page 9.
The company believes its installation business will continue its double-digit growth and eventually hit 11,000 installations per day. You can find a complete list of the 70 installation services the company already offers at https://www.hdserviceproviders.com/HomeDepot/sp_services.do.
On the Brighter Side
Before you gather all your locknuts, bushings and hidden inventory and take off for Tahiti, remember the electrical distribution industry has survived adversity before. In fact, I wrote an article for Electrical Wholesaling's August 1997 issue, “The Saga Continues,” which covered various distributor “catastrophes” that made headlines in different eras. I see Home Depot Supply's interest in the distribution business in general and the electrical business in particular as another one of these horrible “challenges.” Don't panic. You can learn to cope. Distributors overcame 95 percent of the “disasters” in past decades. In each case, these headaches were every bit as big for distributors back then as Home Depot is for you today. Let's step into your time machine and revisit the post-World War II wholesaling industry.
1950s — Consignment and cash discounts
The death of consignment was big news. In this practice, manufacturers “laid in” inventories of products in distributors' warehouses, and they didn't have to pay for anything until it was sold and replenished. During the 1950s, distributors also saw the end of almost all 5 percent cash discounts that had formerly applied to lamps and most “roughing -in” materials, including fittings, boxes, wiring devices, conduit and most building wire. The only important survivor was lamps.
1960s — Local stocks and NEMRA
The initiation of manufacturers' local warehouse stocks caused a major explosion in the industry because many industry observers believed they would put the “little guy” in competition with larger distributors that carried big inventories of those products.
Another major event in the 1960s was the emergence of the National Electrical Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y. In the eyes of electrical distributors that were members of the National Association of Electrical Distributors (NAED), St. Louis, NEMRA was “persona non grata.” Reps were a threat to the clout wielded by the big players. Established electrical distributors saw independent agents as enemies because they were afraid reps would sell directly to their customers. It took NAED nine years to acknowledge NEMRA.
1970s — The chains and the buying/marketing groups
Predictions ran rampant about major national and regional chains smothering smaller distributors and having more clout because of the volume-purchasing discounts they earned from manufacturers. Large size is always considered a threat, but eventually the industry began to realize that “biggest” does not necessarily mean “brightest.” Many acquisitions by the “biggest” only meant a new owner's name appeared on the building.
When marketing/buying groups came on the scene, they were perceived as a threat in some industry circles. Negotiating collectively by pooling the purchases of their members, they were able to get the same prices as the “big guys” on most commodities. NAED did not welcome the groups at its meetings for years. Eventually, the buying/marketing groups became active participants at NAED functions, and many of the association's larger distributors eventually became members.
1980s — Home Depot
The concern of the day was that home centers led by Home Depot would drive all legitimate distributors out of business by selling name brands, offering loss leaders, taking credit cards and staying open on Saturdays and Sundays. Every time an electrical manufacturer signed on with Home Depot, many more electrical distributors became outraged. In the final analysis, they lived with the problem. But it was a blow to have another competitor selling the same manufacturers' brands for which they had helped create demand.
I don't think Home Depot and other home centers ever put any electrical distributors out of business. Actually, they had a positive effect on many savvy electrical distributors that realized they had to become much more professional in their promotional, merchandising and marketing techniques. Hundreds of distributor counter areas were upgraded during this decade when electrical distributors strived to adapt retail merchandising strategies.
1990s — Integrated supply
Distributors were concerned that national or regional integrated-supply consortiums (made up of either large, multi-discipline wholesalers or groups of independent distributors from different trades) would bottle up the market for MRO sales to industrial plants, hotel chains and other large customers by contracting to supply everything from toilet paper to motor controls. The concept was a little rough around the edges, and some who plunged into it had to back off.
In time, this threat did work in several cases, and it put a dent in the sales of the average MRO electrical distributor. Although they continued to grow, these integrated-supply consortiums never got as big as initially feared. In many cases, customers preferred to stick with their existing sources of supply. Also, the consortiums sometimes had trouble keeping up with the logistics and paperwork associated with tracking products through the supply process.
2000 — Giant wholesalers from Europe and the dot-bombs
Rexel SA, Sonepar SA and Hagemeyer swept over North American and bought dozens of major wholesalers. Although the acquisitions these companies made forever changed the makeup of the North American electrical-wholesaling industry landscape, family-owned independents continue to survive and thrive. The new chains had their own headaches, including paying off debt and, in many cases, encountering employee morale problems.
At approximately the same time, the Internet craze was going full blast, and electrical distributors were fretting about the threat of online business-to-business malls such as EqualFooting.com and PurchasingCenter.com. Distributors were afraid these online companies would put them out of business because of the gigantic pricing advantages the dot-coms would supposedly offer. The dot-bombs all fell flat because they ran out of investment capital, underestimated the strength of local rep-distributor-end user relationships, didn't bother to learn the industries they were trying to take over, or got tripped up by their own undependable technology.
Let's fast forward to today with Home Depot Supply. How can electrical distributors win the battle with another well-heeled giant? First of all, don't panic! And above all, don't sit there and do nothing. For starters, make sure your employees realize Home Depot isn't just another retail store. When one of your salespeople is asked for a product that you don't stock, or may not have in stock, make sure they don't tell customers, “We don't have that item, try Home Depot.” I must have heard that a hundred times when a counter person or telephone salesperson wanted to help a customer. Your salespeople know enough not to send a customer to a major competing electrical distributor, so why send them to the Orange Apron? In fact, to drive home this message, consider making some in-house signs that say “Home Depot Not Spoken Here.”
Your customers should also realize Home Depot's expansion into the installation business is taking business away from them. Ask them why so many building trades' panel trucks (and maybe their own) are parked in Home Depot pickup areas. Home Depot is a competitor to just about everyone and everything in the building supplies and installation business.
Another suggestion: Meet with the principals of all other industrial/building trade product distributors in your area to discuss the effects of Home Depot Supply's plans to offer supply and installation services in your market.
On the bright side (for distributors) is the fact that Big Orange seems to have its hands full with Wall Street and personnel problems. The company also came in dead last in the University of Michigan's American Customer Satisfaction Index, which ranks major U.S. retailers. There have also been several negative articles in the business media about the company. For example, pick up Business Week's March 6 issue, which dedicated eight full pages to Home Depot Supply. More than half of the article was anything but complimentary.
The article said Bob Nardelli is a tough and dedicated taskmaster who reportedly has alienated many employees because of his hard-driving management style. He has hired thousands of former military personnel because, the article said, they respond well under pressure and can handle a tough management regime. The apparently relentless pressure to perform has fueled high turnover in the management ranks, and several former Home Depot executives interviewed for the Business Week article said a “culture of fear” is causing customer service to wane. If this problem is left unattended, it could hurt Home Depot.
Toss in the fact that the company's stock price is not up to the expectations of stock analysts, and that its biggest rival, Lowe's, seems to be Wall Street's darling in the home improvement sector, and you can see the company has plenty of its own concerns.
However, don't count on Home Depot failing to achieve its goals because of these challenges. Although it might show vulnerability, the company is a tough but beatable competitor. The best distributors have overcome past challenges by being closer to their customers than their competitors and having the right product available in the right place at the right price. Work hard to build on these strengths. Don't let this electrical supply “Wal-Mart Look Alike” walk away with your business because you were too slow to react.
Meet the Author
The author is president and founder of Equity Electrical Associates Inc., Bluffton, S.C. In his long and fascinating journey through the electrical wholesaling industry over the past 50 years, Noel founded NEMRA; started his own rep firm; founded Phoenix Engineering & Supply, an international distributor (Europe, Asia and the Middle East), and in 2003 merged Equity Electrical Associates with Electrical Distributors Network (EDN), Bluffton, S.C.
He has written for Electrical Wholesaling occasionally since the 1950s — usually when he wants to rock the boat a bit with a controversial call to action for distributors, manufacturers and reps. This wake-up call follows a piece he did nine years ago that chronicled the resilience of electrical distributors in overcoming major competitive challenges over the decades.