Navigating a map to successful growth

Home Channel News, Dec 11, 2000 by John Caulfield

Lowe's focuses on top metro markets in its ambitious expansion plans for the new millennium

Five years ago, senior-level officials at Lowe's Cos. mapped out an expansion strategy that would lead the industry's second-largest retailer to $20 billion in sales by 2000. When it closes its books for fiscal 2000 next month, Lowe's will be, by most analysts' estimates, about $1 billion short of that goal. But no one at Lowe's headquarters in Wilkesboro, N.C., seems disappointed; on the contrary, company officials have never sounded more confident about the direction that Lowe's is taking or in its ability to compete profitably.

The retailer's plan to open more warehouse stores in the 50 largest metro markets across the United States is being executed with a vengeance. In 2000 and 2001, Lowe's will spend a total of $4 billion to open 222 stores, more than 150 located in metro markets.

Those potentially higher-volume outlets present themselves to customers as cleaner, brighter and better-organized versions of their competitors' stores, with higher-quality, more fashion-oriented merchandise. The stores are staffed by associates whom company officials say have been given a generous package of benefits and incentives that should keep them from straying and, at the same time, increase sales.

Lowe's highly centralized operations have been loosened to accommodate the company's growth ambitions. Technology-assisted "tools" now give store managers the autonomy to adjust their stores' product mixes to meet market conditions within Lowe's expense parameters. Technology also manifested itself in last month's relaunch by Lowe's of its Web site, with expanded online selling features that company officials arc convinced will be the key to boosting the stores' special-order sales.

Expansion, though, has had its rocky moments. The company's $1.3 billion acquisition of 36 Eagle Hardware & Garden stores last year -- which put Lowe's on the map in the West and provides the foundation for its expansion in that region -- has been frustrating. Eagle's stores continue to be a drain on Lowe's manpower and its overall productivity, although company officials insist they are reversing the trend, if slowly.

Eagle's lackluster performance during its assimilation into Lowe's took a bite out of the entire company's comp-store sales growth this year, as did Lowe's builder-oriented Contractor Yards whose future remains unclear. Of equal concern to some company observers has been the profit risk Lowe's may be taking by expanding its major appliances department as other dealers leave the category to stay clear of a price shootout they expect will involve Sears, Home Depot and Best Buy.

Lowe's officials more optimistically see major appliances and the installation services supporting their sales as being among the factors that should help customers differentiate Lowe's from its rivals and drive more business into its stores. The retailer's chairman, Bob Tillman, insists that it would be "dumb" for Lowe's to diversify into other store formats -- as Home Depot and Sears are doing -- right now because it has plenty of opportunities to capture more business from existing customers and expand its brand of retailing to large markets where its presence is slight.

The following articles in this special section takes a closer look at Lowe's strategy. The stories focus on areas which company officials identify as key to Lowe's long-range growth, including:

* Western expansion, and how its Eagle experience has reshaped Lowe's plans;

* The impact of technology and logistics on store operations;

* How the chain is cultivating a new breed of store manager, capable of running a $40 million, 150-employee store in any market under any competitive conditions;

* How, as it moves across the United States, Lowe's introduces itself to new customers, with a case study of the Denver and Pueblo, Colo., markets;

* How the company's "image" is reflected in a merchandise mix that, while not walking away from commodities, places far greater emphasis on higher-margin "fashion" products like carpeting and kitchens, presented in a setting that appeals to the upper-income homeowner Lowe's now pursues more vigorously; and

* Why customers in five markets -- Dallas; Long Beach, Calif.; Muncie, Ind.; Fort Lauderdale, Fla.; and Piscataway, N.J. -- choose to shop at Lowe's, and what they think are its stores' strengths and weaknesses.

A better mousetrap

When Lowe's opened its first 100,000-square-foot home center in Charlotte, N.C., in 1990, and committed to converting most of its stores to a warehouse format, its executives would have been Karnak had they foreseen that their decision would coincide with an unprecedented period of prosperity on which the American economy -- and its home-building and -improvement sectors -- were about to embark.

During the '90s, Lowe's investment in big-box stores paid off in spades. Its sales between 1990 and 2000 increased 6.5 times to $19 billion this year. Its net income grew by more than 10 times to an estimated $850 million. But during most of this period the gap separating Lowe's from Home Depot widened, based on any number of variables -- unit count, revenue, sales per store, return on capital, profit per store and, perhaps most important, customer awareness. Lowe's, it seemed, would have to be content as a very strong No. 2 in an industry that Tillman, its chairman, had come to characterize as "a two-horse race."