Annual analysis points to the end of an era - Brief Article

Home Channel News, May 21, 2001 by Scott Larson

Despite continued overall growth, 2000 proved a difficult year for home improvement retailers, as even a cursory glance at this year's National Home Center News Top 500 can attest. Those casting about for the reasons why will find plenty of easy answers. Plunging lumber prices. A snowy and cold winter that lingered well into spring. Cautious consumers. Add these and other more subtle conditions together and you get a definitively disconcerting year, one that saw even Home Depot and Lowe's struggle in their own relative ways.

But I wonder if a more fundamental shift isn't behind stalling sales. For years, analysts and others have looked at the greater retail home improvement market and found evidence to suggest that sustained double-digit growth could be considered a given, especially where Home Depot and Lowe's were concerned. There were always new markets to conquer, old ones to fill in and scores of underarmed competitors to put out of business. On the face of things, the market appeared largely fragmented with plenty of opportunities for grabbing more market share.

Yet I'd submit that a look beyond the numbers produces plenty of evidence that the industry has rapidly reached maturity, and that the rate -- or at least the type -- of growth to which some have grown accustomed is likely a thing of the past.

Together, Home Depot and Lowe's account for more than 53 percent of the sales generated by the Top 500. That leaves a not unsubstantial $55.3 billion in business out there divided among 498 companies. But once you get past the first 25 to 30 companies listed, the percentage of those revenues generated by sales to consumers -- the big boxes' bread and butter -- falls precipitously. Indeed, a quick scan of the Top 500 shows that the companies with the biggest sales increases from 1999 to 2000 are largely pro dealers, and that good chunks of their increases came through mergers or acquisitions. To be sure, there is still plenty of room for consolidation, but it's taking place in an arena where Lowe's and Home Depot don't really play. At least not yet.

On the flip side, while the two giants still grew at an 18 percent to 19 percent clip, that growth dropped from recent years and was almost entirely due to store openings. Both retailers have already scaled back new-store expansion for this year.

You do the math.

Also, in the past six to eight months regional chains Pergament and Stambaugh's have gone out of business, passing to the land of the Hechingers, Builders Squares, Grossman's, Eagles, Ernsts and countless others made extinct by a fruitless chase for DIY sales. Every year fewer and fewer of these consumer-oriented chains remain, which equals fewer and fewer opportunities for the Big Two to snatch market share.

I don't mean to suggest that these retailers and the overall industry won't continue to grow. It will just come from a different direction. Dealers on the pro side of the market have been remarkably creative in devising new schemes for expanding their sources of revenue. Now, a somewhat frenzied search for the next format, niche or idea is underway on the consumer side as well, with installed sales, design-oriented formats and smaller stores beginning to emerge as important trends.

From Sears' Great Indoors to the three hardline co-op's convenience and service-oriented prototypes, retailers have begun experimenting with dynamic new ways of marketing home improvement. Already Home Depot is well into planning for the rollout of a new generation of scaled-down versions of its traditional warehouse units that more readily conform to the confines of urban environments. Dubbed "Depot Light," these stores will let location dictate size, layout and merchandise mix.

All told, it seems, these developments portend a dramatic shift for the industry. Call it the end of the DIY era, at least as we knew it.