Home Improvement Chains Battle Online - Home Depot and Lowe's - Company Business and Marketing

Industry Standard, The, May 21, 2001 by Eric Young

Home Depot used to ignore e-commerce. Now it's rushing to sell hammers and grills online. Thank Lowe's.

FOR YEARS HOME DEPOT, THE NATION'S third-largest retailer, rolled out its bright-orange boxlike stores in an assembly-line fashion, opening more than 1,000 outlets since 1985. Lowe's was a distant runner-up in home improvement sales. And while other retailers scrambled to bring their businesses to the Internet, Home Depot barely bothered. Business was too good in stores.

Cut to 2001. The nation's broad economic slowdown hit Big Orange hard: Earnings for the latest quarter fell 20 percent, the company's first quarterly profit decline in more than a decade. Home Depot executives postponed plans to open 25 of the 225 new stores set for 2001. Then last month, in the midst of a retrenchment, the company trumpeted that it was ready to do online sales nationwide.

Home Depot stepped up its e-commerce efforts five months after Lowe's began pushing its products online. It's yet another example of how the No. 1 home improvement company is looking over its shoulder at a rival that company execs insist is irrelevant anyway.

At this point, the battle for Internet customers is pretty low-key. Officials at Home Depot and Lowe's decline to provide online sales numbers, though both companies admit the numbers are small so far. What's striking, however, is that the two have clearly identified e-commerce as a growth business and are putting more money into it even as they scale back in other areas.

Home Depot's annual report, for instance, notes that the company's administrative expenses as a percent of sales rose to 1.8 percent in 2000, from 1.7 percent the previous year, and it attributed that increase largely to spending on the Net. The difference sounds small, but it's significant for a company that has steadily cut administrative expenses over the past two decades and had total sales of $45.7 billion in 2000. And Home Depot's decision to roll out its e-commerce offerings nationally comes after eight months of testing in three cities that clearly left its executives with an appetite for more.

In turn, Lowe's is continuing to build its business on the Net. A few weeks ago, it opened a new portal, Accent & Style, which offers home decorating tips. If all goes as planned, the site will drive sales online and in stores.

Both companies emphasize that the Web has its limits, and each site offers only an abbreviated selection of items. Homedepot.com sells about 40 percent of the 50,000 items it stocks in stores; the Lowe's Web site carries about 35 percent of its total store inventory.

Even though the online stakes are comparatively small for the two giants, offline competition between them is getting so intense that even incremental business can make a difference. Home Depot has saturated the nation with stores, and now Lowe's is beginning to move into many of the markets where Home Depot used to have a lock. This means that the company with the better online arm will have an advantage.

To understand why the Web could become more important, look at the Home Depot in Colma, Calif., just south of San Francisco, where the atmosphere on a recent afternoon could be described as merry mayhem. Customers walking down the aisles had to maneuver around beeping forklifts and employees attacking packages with box cutters. Home Depot has made it a priority to improve this ambience, and the online option could help: Customers could avoid, or at least spend less time, in the store. Indeed, four out of the nine shoppers interviewed that day said they would have shopped online if only they had known about Home Depot's site.

True, many customers still want to see and touch what they're buying. It's almost a cliche that consumers won't buy big-ticket items they can't check out first. Yet there's some evidence that appliances -- a category that Lowe's and Home Depot are counting on for growth -- could sell well on the Net.

Unlike other expensive items, such as automobiles, you can't test out a washing machine before buying it. In addition, big appliances have to be delivered to the buyer at home, even after being purchased at the store. And early reports from Maytag, the nation's third-largest appliance maker, suggest that large appliance sales have a future with e-commerce. Seventy percent of sales on Maytag.com, which launched in January, are for items costing $600 or more, says Kenneth Boyle, Maytag's e-commerce manager. He declines to provide the company's online revenues.

A major factor in whether the e-commerce plans of Home Depot or Lowe's become profitable is the companies' ability to control fulfillment costs. Lowe's gives customers the option of having items delivered or of picking them up at the store. In the latter choice, Lowe's store personnel package orders that come in from the Web. For its other e-commerce deliveries, Lowe's contracts with NFI Interactive, a Cherry Hill, N.J., logistics company.

Home Depot has a simpler arrangement: E-commerce items are shipped via UPS. The company says that orders are handled by store staff who are already responsible for fulfilling orders placed by professional contractors. Thus far, Home Depot reports, it has not had to hire additional personnel to handle Web commerce.