Eye on the prize: having conquered retail home improvement, The Home Depot sets its sights on professional and commercial customers

Prosales, May, 2006 by John Caulfield

The Home Depot's booth at the International Builders' Show (IBS) in January was packed with visitors and buzzing with activity as the world's largest home improvement retailer showcased its vendors and services. It also used the event to introduce a credit card, financed by IndyMac Bank, through which participating contractors could borrow up to $2 million in construction loan financing.

Builders, contractors, and remodelers have always been on The Home Depot's radar. But the Atlanta-based retailer is pursuing pros more aggressively now than at any time during its 27-year history, not only as customers for its stores, but also as partners in services it provides to homeowners and businesses.

The Home Depot doesn't break out its pro sales, but has indicated previously that pros account for 30 to 35 percent of its annual revenue, which in 2005 would have translated into between $24.5 billion and $28.5 billion, making Depot's pro business at least six times larger than that of the largest pro-oriented dealer, Raleigh, N.C.-based Stock Building Supply. But collectively pros have never warned to Depot's stores as destinations of choice. A recent article about the company in BusinessWeek drew several online reader responses from contractors who disparaged The Home Depot's in-store service. And almost any discussion with pros inevitably finds their opinions of the retailer ranging from ambivalent to hostile.

It's not that The Home Depot hasn't made overtures to these customers. By the end of 2005, the company had expanded its "Pro Initiative"--which includes checkouts, help desks, and products specifically for professional shoppers--to an estimated 1,740 of its 2,000-plus stores. The Home Depot has Tool Rental Centers in nearly 1,200 stores. The company also reported that installed sales--which it provides through captive installers in the United States and through a network of 3,500 contractors and 70 companies in Canada--rose 21.4 percent in 2005 to an estimated $5 billion.

But its recent actions suggest that The Home Depot officials accept, at least on some level, the conventional wisdom that its stores can capture only so much pro business, and that it ultimately must offer builders and remodelers a transactional environment they are more comfortable with.

Company executives declined, through a spokesperson, to be interviewed. But over the past several years, Depot has made strategic acquisitions that expand its business with production builders and contractors through operations separate from its retail stores. And last year was the first time that The Home Depot ventured outside of its retail envelope to acquire direct competitors that specialize in selling to pros. Several competitors and suppliers believe that The Home Depot initially coveted Builders FirstSource before that Dallas-based pro dealer went public last year. Depot then bought two smaller pro dealers--Williams Bros. in Georgia and Contractors' Warehouse in California--and there have been subsequent, if unsubstantiated, rumors about its interest in others. (Such acquisitions have been in addition to a number of recent purchases of specialty and service-related companies, including Hughes Supply, National Waterworks, and Chem-Dry.) Officials from three major manufacturers told PROSALES during IBS that The Home Depot wants to boost its business at pro dealer yards to $2 billion by 2007. And Joe DeAngelo, executive vice president of The Home Depot Supply division of the retailer's HD Builder Solutions Group, has stated that the seven-store Contractors' Warehouse could grow to as many as 300 stores.

Depot's maneuvers must be evaluated within a larger context. In a presentation he delivered to investors and analysts in January, DeAngelo said that The Home Depot now targets a fragmented $970 billion market comprised of domestic and international DIYers and buy-it-youselfers; North American home builders, contractors, and remodelers; maintenance and repair organizations; and commercial construction accounts. Right now, The Home Depot's share of any of those markets, except for the DIY sector at home, is minuscule. But after watching this retail juggernaut lay out $2.5 billion to acquire 21 companies in 2005, competitors in all of those sectors have to be asking themselves: What's next?--John Caulfield is a contributing editor for PROSALES.