Riding The Wave

Home Channel News, Oct 25, 1999 by Don Longo

Home Depot's initial growth spawned plenty of imitators, but only a handful could hang ten without getting wiped out by the warehouse phenomenon

Not even Home Depot's founders could have predicted the impact on the entire industry caused by their opening two 60,000--square--foot home centers in Atlanta on June 22, 1979.

The stores, which sold hardlines and building materials in an environment that was more like a warehouse or distribution center than a conventional retail showroom, spawned a host of imitators. The stores also had a lasting impact on the way hardware, lumber and building materials are sold. As important, they won the hearts and purse strings of baby-boomer homeowners during the last 20 years of the 20th century. Indeed, a study conducted in the mid-'80s by the Home Center Research Institute documented consumers' preferences for shopping in warehouse stores to buy home improvement products.

With a few notable exceptions, tracing the history of warehouse home improvement retailing is akin to following a weaving path that splits, converges and then branches out again, with many of those roads leading to dead ends.

By now, almost anyone who follows this industry is familiar with the story of how Depot cofounders Bernie Marcus and Arthur Blank were fired by Daylin; how they hooked up with Pat Farrah, whose own 120,000-square-foot store called Homeco had just gone bust; how the trio then leased four Treasury Island stores in Atlanta from JC Penney and opened their first Home Depot less than a year later. Soon after, Home Depot stores opened in Miami, Orlando and New Orleans. The company went public in August 1981, issuing 600,000 shares at $12 to $15 per share. Just 10 years later, this warehouse upstart was passing Lowe's as the industry's largest chain in sales volume -- doing $2.759 billion out of 118 stores compared with Lowe's $2.651 billion from 306 units.

Less than four years after the first Home Depot opened, hardware stores, home centers and lumberyards around the country began wondering how to compete with the new formula. Some jumped onto the warehouse bandwagon. By May 1983, Pat Sher, former president of the Lindsley Home Care division of Evans Products, had opened HomeOwners Warehouse in south Florida. W.R. Grace introduced HouseWorks! in New Orleans. And a group headed by Frank Denny, who resigned as head of Grace's home center division, was set to launch a new chain of warehouse-sized stores in San Antonio called Home Pro, which opened in July 1983 and did $500,000 in sales its first weekend.

HomeOwners Warehouse became Mr. HOW when it was bought by catalog showroom chain Service Merchandise, which began expanding the chain by acquiring five Forest City units in Chicago in February 1985. However, a month later, the company's founders resigned, leaving Service Merchandise's CEO Raymond Zimmerman to run the home improvement business. The headstrong Zimmerman named former Grossman's executive Norm Darrer as president, but the company's slide had already begun. Service eventually sold all its Mr. HOW stores to Handy Andy and Builders Square.

Grace followed its HouseWorks! experiment with HomeQuarters Warehouse (HQ), whose first unit opened in February 1985 in a 103,000-square-foot former Woolco in Lynn haven, Va. Eventually, HQ was sold to former Grace exec Bernie Kossar in November 1986 for $10 million. The company went public in 1987, raising $1.5 million from the sale of 1.25 million shares. In December 1987, Kossar sold the six-unit chain to Hechinger for $66 million. Hechinger identified HQ as its growth vehicle; by 1994, the warehouse division's sales were equal to those of the traditional Hechinger stores. However, by January 1995, Hechinger closed 13 HQs, coinciding with Lowe's conversion to warehouse units in the Carolinas. In July 1997, Leonard Green and Partners, a Los Angeles-based merchant banker, paid $2.375 per share to acquire Hechinger.

Denny's Home Pro changed its name to Builders Square when Kmart paid $90 million to acquire its nine stores. Rapid -- some say reckless -- expansion ensued. Builders Square opened its 100th store in Atlanta on Aug. 13, 1987. In 1988, the Kmart division reported its first annual profit. After many more years of store closings (the chain vacated virtually every metro market where it met with direct competition with Home Depot) and red ink, Kmart finally sold the chain to Leonard Green for just $10 million. Green combined Builders Square with Hechinger/HQ, to no avail: the merged company started liquidating its last 117 stores this fall.

British invasion

In May 1983, British-owned Bowater formed a subsidiary to open 70,000-square-foot warehouse stores in the southern United States.

Such developments prompted Marcus, Home Depot's chairman, to grouse in July 1983, 'Everyday I hear a story about someone who's going to copy The Home Depot. In one way it's flattering, but in another way it's really not because there's been a great deal of thought and imagination that's gone into this business and we're not happy to see people copy us literally item for item, word for word, strategy for strategy."