Healthy home starts keep sales buzzing

DSN Retailing Today, May 9, 2005 by Debbie Howell

A strong housing market, low interest rates and continued keen interest by consumers to enhance their homes drove sales in the do-it-yourself home improvement market up 12.4% to $200 billion last year, despite the effects of rising utility and gas prices. And even though home sales are projected to slow from record highs and interest rates have begun to creep back up, retailers and industry experts forecast minimal market impact.

Consumer home improvement and lawn and garden sales are projected to rise 3.4% this year, with a 2.9% annual gain forecast for the broader segment that includes the professional market through 2009, according to the Home Improvement Research Institute.

What this means for category specialists such as The Home Depot, Lowe's and Menards, and mass retailers that offer select home improvement categories like Wal-Mart, Sears, Meijer, Costco and Target, is that effective execution can yield strong, sustained sales growth. In addition, retailers are becoming adept at expanding into related home categories such as interior decor, outdoor living, storage, appliances and services to grow the market and inspire consumers to tackle home-related projects both complex and simple.

"When you think of general trends in the industry, all you have to think of is home," said Jim Robisch, senior partner of The Farnsworth Group, a hardware industry consulting firm. "Growth is being driven by appliances and the exceedingly strong approach some people have been taking to home decor and making the home a greater place to live."

Besides expanding through new categories, home improvement retailers are bullish on growth and rebuff predictions of the home center market nearing saturation. One investment firm, Merrill Lynch, estimates penetration of the U.S. home center market at 80%. These warnings so far haven't slowed expansion plans. Category leader The Home Depot, with 1,657 traditional warehouse stores and 54 Expo Design Centers in the United States at the end of fiscal 2004, plans to open 146 more of these domestic core formats in 2005. Lowe's, which grew its store count 14% to 1,087 in 2004, plans to open 150 stores.

Optimism regarding domestic growth doesn't equate to satisfaction with the status quo, however. The Home Depot, which grew corporate revenue 12.8% to $73.1 billion last year, has aggressively chased new formats, markets, categories and services in recent years. Excluding $3.6 billion in service revenue and $4.2 billion in international sales, the retailer's core domestic home improvement revenue grew 11.4% to $65.3 billion last year.

Home Depot's 5.4% rise in comparable-store sales came through gains in both transactions and the average ticket, with the latter growing $3.74 to $54.89. Customers responded favorably to store remodels, new formats, expanded services and distinctive new products and categories, noted cfo Carol Tome at a Merrill Lynch conference.

"While we are the largest player in our industry, there is significant room for continued growth," Tome said. "We had a great year in 2004 and we have built a solid plan in 2005."

Hot growth categories for Home Depot--and most others in the industry--include major appliances, home decor, paint, storage and outdoor living. In appliances, Home Depot grew its share faster than any other leading retailer in 2004, Tome said, after entering this category just three years ago. The retailer is fighting with market-share leader Sears and Lowe's for control of this $18 billion market, with plans to turn on the heat by adding new appliance models from Maytag, GE and LG Electronics this year.

Experimentation with new store formats and international markets are providing other growth opportunities. At year-end, Home Depot operated 117 stores in Canada and 44 in Mexico, with plans to add 29 more stores in those markets this year. China is next on Home Depot's radar.

In terms of alternative formats, the company operates the upscale Expo Design Center, Home Depot Landscape Supply, the pro-targeted Home Depot Supply and Home Depot Floor Store. Formats with unique merchandise and layouts targeting urban areas are another initiative, including two stores in New York City and one each in Chicago and Vancouver, British Columbia. The company is also testing smaller-sized formats in rural areas of Mexico and Canada that, if successful, may be transplanted to smaller markets in the United States. Growth at Lowe's, the second largest home center chain, has been just as phenomenal. Excluding installation revenue, sales increased 18% to $34.5 billion last year. Comps rose 6.6%, with gains across all categories. The average ticket rose 7.1% to $63.43.

Besides concentrating on domestic expansion, particularly in major metropolitan markets, Lowe's has been pushing growth of installed, special order and commercial sales. Expansion of distinctive private labels and exclusive brands is another focus. And similar to Home Depot, Lowe's has broadened its array of female-targeted categories in recent years such as home decor, window coverings, furniture and appliances.