Home Depot attempts to think outside big box
By Steve Matthews
Bloomberg News
CHICAGO — The first thing a shopper notices upon entering Home Depot Inc.'s prototype store in Chicago's Lincoln Park is what's missing — riding lawnmowers, rolls of wall-to-wall carpeting and slabs of drywall stacked to the ceiling.
The glass-enclosed store operated by the world's biggest home-improvement chain devotes shelves near the entrance to household goods such as Pledge furniture polish, Downy fabric softener and Bounty paper towels. At 80,000 square feet, the two-level store is one-third smaller than most Home Depots.
The urban store is the latest in Chief Executive Officer Robert Nardelli's search for new formats, ranging from garden-product to home-decor outlets, to try to boost revenue as sales growth stalls because of increased competition from Lowe's Cos.
Investors are concerned that Home Depot's 1,500-plus warehouse-style stores may be close to saturating the United States.
"Home Depot will have to be more successful at doing things outside the box," said Phil Larkins, who manages $330 million for Northern Trust Corp., including 250,000 Home Depot shares. "They have to be more successful in niches."
The urban Home Depot is the Atlanta-based retailer's second attempt to scale back its home-improvement store plan. The company in 1999 created Villager's Hardware, stores of 45,000 to 55,000 square feet that sell products for minor remodeling projects.
The four Villager's Hardware stores near Elizabeth, N.J., were converted last year to the orange Home Depot logos after Nardelli decided that the main brand would attract more customers. Some of the Villager's Hardware merchandise, such as home products Clorox bleach and Cascade dish detergent, have been included in the Chicago store.
"We go local, go specific," said Lincoln Park store manager Ellen Highbaugh, who says she spent weeks visiting local residences to decide what merchandise to offer. "We have products you might buy in a grocery store."
The company's first multilevel outlet, which also has a parking deck, places more emphasis on household items, displaying cleaners near the front door rather than on harder-to-locate shelves.
Gone are the sprawling stacks of lumber and supplies to support professional contractors, a big market for Home Depot's suburban stores, including 55 in the Chicago area.
The store's aisles contain broader selections of rugs, track lighting and art-deco lamps to attract residents of high-rise apartment buildings and row houses in Lincoln Park, a neighborhood about four miles north of Chicago's downtown along Lake Michigan.
Same-day delivery is offered on all items, Highbaugh said. The service is limited to select merchandise at other Home Depots.
"A lot of people don't have cars in the neighborhood," she said. "They buy a grill and they have no way to get it home."
Home Depot is looking for ways to increase revenue. Sales at stores open at least a year fell 6 percent in the fourth quarter. They fell 1.6 percent in the first quarter, which was less than analysts expected. Nardelli said last month that sales for the second quarter were expected to improve.
Signs of a turnaround have helped the stock surge as much as 35 percent this year.
Nardelli said niche stores can be profitable. In February, Home Depot announced a plan to open five lawn-and-garden stores in Texas. The company will open two Expo Design Center home-decor stores this year, as part of the changes Nardelli has made since the former General Electric Co. executive took over in December 2000.
He also has centralized purchasing and marketing, which he said was necessary as Home Depot grew to more than $50 billion in sales.
"What got us here won't get us to the next 50," Nardelli said.
Business at the Lincoln Park store is picking up, manager Highbaugh said.
"Every week, we see increases in sales and customer count," she said. Home Depot doesn't disclose individual store sales.
Neil Stern, partner of the Chicago-based retail consultant McMillan/Doolittle, ssaid the Chicago model, because it's compact, might be duplicated in urban neighborhoods in Manhattan; Washington, D.C.; Philadelphia; Boston; and San Francisco, where Home Depot already sells in suburban sites.
But urban stores may not be the answer to saturation, Stern said. The Lincoln Park outlet probably won't be as profitable as Home Depot's warehouse stores because of fewer sales and higher real estate costs, he said.
Competition is increasing from No. 2 home-improvement retailer Lowe's in urban markets.
Wilkesboro, N.C.-based Lowe's plans to add 65 percent of new stores this year in large metropolitan markets and is considering an expansion into Manhattan, Chief Executive Robert Tillman said at an analyst conference last month.
Manhattan residents don't have many options for buying home-improvement products, he noted.
