The sheer size of Home Depot's acquisition of Hughes Supply and the company's plans to build its professional contractor business have caught the interest of Wall Street.
Distributors in the heartland have always had more than an investment interest in Home Depot. With the recent developments, they want to know if Home Depot plans to start selling a broad line of products for professional contractors out of its hundreds of distributor locations across the United States. Indeed, Home Depot Supply has already publicly announced its intentions to have 1,500 locations serving professional contractors in the next few years.
As you will learn in “Big Orange Hits Home” (page 12), Contributing Editor Dale Funk's cover story on Home Depot's Hughes Supply acquisition, a “one-location-serves-all” strategy wouldn't be much of a stretch. Hughes Supply already has “mega-centers” in Miami and Atlanta selling products for contractors in a variety of trades. The Miami mega-center, which operates out of two buildings on a 22-acre campus, sells six product lines: fire protection; water and sewer; water systems and irrigation; plumbing; maintenance, repair and operations; and building materials.
But the customers Home Depot covets have been shopping for years at multi-product line branches operated by companies such as W.W. Grainger Inc., Lake Forest, Ill.; and Fastenal Inc., Winona, Minn. A large percentage of Grainger's $5.5 billion in annual sales comes from the 1 million professional contractors and other customers in the construction, industrial and facility maintenance fields that shop at its nearly 600 branches. (See “Grainger's New Growth,” page 18). With $1.5 billion in sales and a 23 percent revenue growth in 2005, the multi-line strategy works well for Fastenal, which pumps out 500,000 products in 10 distinct product categories through its 1,750 branches.
WinWholesale, Dayton, Ohio, uses a slightly different twist to service its customers in the plumbing, heating, electrical and air conditioning fields. Some of the 400-plus independently operated WinWholesale branches share warehousing space and parking with other distributors in the WinWholesale family. The company made a major commitment to the multi-line strategy with its 2005 acquisition of Noland Co., Newport News, Va., a distributor serving the electrical, plumbing and industrial fields out of 100 locations.
It will be fascinating to see how far Home Depot runs with the concept of serving different trades out of the same location. Perhaps it will roll out the Hughes mega-center concept to all the distributor locations in Home Depot Supply, consolidating branches and simplifying logistics and warehousing. The company could build smaller versions of its gigantic retail warehouses, with each trade getting several aisles. Or it could continue operating its distributor operations more or less autonomously. Corporate branding is an issue, too. Will Home Depot Supply distributors continue to promote their own corporate identities, or will they some day fly the Home Depot flag?
Big Orange has always had an intimidating presence in this industry. The sheer number of products Home Depot carries from blue-chip manufacturers, its loss-leader advertising, the Saturday and evening store hours and number of contractors' trucks in its parking lots have always scared electrical distributors.
Yet, they have somehow competed successfully with Home Depot, and I have never heard that Home Depot put any electrical distributors out of business. They learned from this master of merchandising and retrofitted their own counter areas to make more products accessible to customers. Distributors discovered that while the warehouse format and retail ads created the impression that Home Depot was the cheapest place to shop, their prices were quite competitive. The implications of the Hughes Supply acquisition could very well dwarf the other challenges that electrical distributors have overcome in the past. But they are a resilient bunch, and I think the smart companies will do just fine.