Big-box reign marches on: consolidation bolsters hard goods verticals - Annual Industry Report Top 150: Hardlines - hardware, office supplies, automotives, toys, sporting goods - Illustration

DSN Retailing Today, July 7, 2003 by Debbie Howell

The battle between the category specialists and broad-line retailers played out in five core hardlines categories last year, with specialty chains seeking new ways to compete and differentiate themselves from the big-box chains.

And as many found out in the last year, such differentiation isn't always easy given the immense sales volumes of established players such Wal-Mart, Sears, Kmart and Target in hardware, office supplies, automotives, toys and sporting goods.

However, some of the category specialists surpass these chains in revenue in their respective categories, as well as in the combined five-product segment. The overall leader is The Home Depot, with its dominance in hardware adding up to more than $30 billion in sales from its U.S. stores last year. No. 2 is Wal-Mart, with an estimated $30.8 billion in U.S. sales among those categories, followed by Lowe's at $15.2 billion in hardware-related goods.

In terms of specific category dominance, Wal-Mart is considered the largest U.S. toy retailer, surpassing $6.74 billion generated by Toys "R" Us. Office Depot leads in office supplies, while AutoZone controls the automotives niche.

Evolving expertise of the specialists has prompted some broadliners to scale back in hardlines, including Kmart with its growing focus on softlines. Target carries a minimal assortment in automotive and hardware as a shopper convenience. Wal-Mart has shown no signs of retreating, however, proving a formidable rival to the specialists with its everyday low-price positioning. Strong, stable categories for the discounters are toys and office supplies.

Sears maintains an advantage in hardware with its Craftsman brand, despite difficulties in growing sales overall. The expansion of its Tool Territory concept has provided some insulation from the inroads made by home centers in the tool segment. In addition, Sears is considered the largest seller of fitness equipment and appliances, though it is losing share in the latter category due to an increased appliance focus by the home centers and Wal-Mart.

Home Depot and Lowe's, which dominate hardware sales, control about 15% of the larger $500 billion home improvement market. The growth of the home center as the preferred hardware format has led to intense rivalry between these chains, with Lowe's ambitiously expanding while Depot searches for alternative forms of growth given it is nearing U.S. saturation.

Both have intensified their emphasis on exclusive brands and worked to make their stores more female-friendly, adding new decor-related categories and softening up the look of the store with less utilitarian fixtures in some departments. Lowe's has been considered the leader in this area, though Home Depot is targeting more women with a rollout of its Designplace initiative, which features carpeted seating areas and vignette displays.

With both, there has been a recent trend to slightly shrink the size of the store. Lowe's now has two size prototypes, while Depot is experimenting with a smaller urban store concept in markets such as Chicago and suburban New York. In contrast, home center chain Menards is heading the opposite direction, with plans to open its largest store of 225,000 square feet next spring.

Though the DIY consumer business has held up despite the economy, home centers continue to emphasize niches that set them apart from the discounters and add new revenue. Installed sales, special orders and programs targeting contractors are a growth segment for both Lowe's and Depot.

This search for new revenue streams is especially pronounced in toys, due to heavy dependence on holiday sales. Toys "R" Us and K*B Toys have expanded to new channels in an effort to make their businesses more year-round in nature. TRU has set up toy shops in Albertsons and Giant Food stores, while K*B teamed with Safeway. Other partnerships include K*B at Sears and CVS, while FAO has opened toy boutiques inside some departments stores operated by Saks Inc.

TRU also debuted a new format last year, its Geoffrey concept that combines elements of Toys "R" Us, Babies "R" Us and Kids "R" Us into one. The four stores are positioned as retailtainment destinations, with features such as party rooms, styling salons and photo studios run by independent providers.

A dichotomy in the merchandising strategies for automotive parts is growing between the specialists and broadliners. While tire or express lube services are key businesses for WalMart, Sears, Sam's Club and Costco, repair parts are generally left in the hands of the specialty chains. Accessories have become more of a focus than commodities like motor oil due to the broad selections offered at chains such as AutoZone and Advance Auto Parts.

Even with an extensive parts assortment, the specialists as well have been adding impulse-oriented accessories to drive sales. AutoZone, for example, has set up a section called The Red Zone that features a changing array of impulse goods, from STP oil treatment to glow-in-the-dark floor mats.