Home Depot's Self-Improvement - Company Business and Marketing

Industry Standard, The, Sept 11, 2000 by Eric Young

The hardware and lumber chain is already making billions selling tools and appliances at its big-box stores. So why does it need the Net?

WHILE ITS COMPETITORS WERE busy sweating over their e-commerce strategies, Home Depot didn't give the Net much attention. The nation's largest home-improvement chain was doing quite well, thank you, without a cyberstore. Why go online when you've rung up $38 billion in sales, 30 percent more than the year before?

That attitude took a turn, albeit a small one, last week.

Home Depot announced it was adding Web sales to its repertoire, nosing ever so cautiously onto the Internet. Starting in Las Vegas, HomeDepot.com will begin selling 40,000 products, from plywood to house paint. Customers can arrange for delivery or go to stores to pick up their goods.

Executives in Home Depot's Atlanta headquarters already are cheering the Net's potential impact on their business. Home Depot's CIO Ron Griffin compares going online to "putting our merchandising and store systems on steroids."

Perhaps.

But Home Depot, known for its huge orange warehouse stores, has to see that the Internet may not be ideally suited to its business. Delivering a stack of sheetrock to shoppers' doors can be prohibitively expensive. If a customer chooses to pick up his order at the store, wouldn't he prefer to pick out his own hammer and lumber? And how will Home Depot pay for the staff to pull together all the orders without raising prices?

If Home Depot really expects to cut costs, as Griffin says, then it will have to find ways to offset the additional expenses it's taking on with its Web outlet. The chain won't reveal what its state-of-the-art site cost, but it couldn't have come cheap.

Home Depot may be the biggest name in home improvement, but it is not the first to go online. In fact, it's late to the party. At least five dot-coms are already competing to sell home-improvement merchandise on the Web, including big names like Amazon.com. Adding to that competition are the brick-and-mortar stores that have launched their own Web initiatives.

Primarily offline stores like Ace Hardware and True Value are using the Web to drive more customers into their aisles. At this point execs won't reveal how much business they're doing online, but none said it was significant when compared with offline store sales.

Each chain is employing a slightly different e-commerce strategy. Whereas Home Depot wants its site to replicate its merchandise mix, True Value limits the number of items it offers online. For example, at True Value, Net shoppers won't find products most people need in a hurry, such as toilet-tank fix-it kits. "You're not going to wait three days to have it shipped so you can stop the water from dripping into your neighbor's apartment," says Neil Hastie, CIO at TrueValue.com.

Ace Hardware, meanwhile, thinks bigger is better. Its site offers almost everything in its stores, plus about 15,000 additional products. Ace's supplementary online offerings are a windfall from its investment in OurHouse.com, a Web-based homeimprovement site that handles Ace's online sales. The two companies split online revenues. Ace joined forces with OurHouse to get a leg up in e-commerce. "We didn't want to be left in the starting gate," says Ken Nichols, a retail operations vice president for Ace.

Waiting in the wings is Lowe's, the nation's second-largest homeimprovement chain. Like Home Depot, Lowe's wants to expand its online presence but is approaching e-commerce slowly. Beginning in October, the retailer will offer a wide selection in a limited number of categories, such as hand tools and appliances. Lowe's will deliver Net orders directly to buyers or to the store closest to the customer, again like Home Depot.

Meanwhile, Internet-only retailers are scrambling to win over customers, vowing to compete against offline chains in price and selection. CornerHardware, for example, says it currently has 125,000 products available -- three times the number available at an average Home Depot store.

The pure Internet players acknowledge that they don't have the brand recognition of Home Depot. But they hope to build their brands before Home Depot and the other brick-and-mortar stores establish a strong online presence. Still, it's not clear that any are benefiting from first-mover advantage. Already two Net pure-plays -- Hardware.com and HomeWarehouse.com -- have gone under.

While Home Depot crows about its online push, the company is hardly moving at Internet speed. Executives won't say when online sales will go national, though they aim to begin online sales in Austin and San Antonio, Texas, later this year. "We want to get out on the ice and gain some experience," says Jeff Cohen, president of direct marketing.

Home Depot executives say they decided to offer an Internet sales channel because customers were asking for one. But just because people want it doesn't mean that it will be profitable.

Home-improvement products are tough to sell when customers can't see or touch them up close -- for example, a professional-quality hammer. A carpenter wants to swing it a few times and compare it with other brands before buying. "There's a balance and a feel for that," says Hastie, the True Value executive. "A power drill is a power drill is a power drill, but there are many items you have to touch, feel or smell."