An Orange Formula

Years ago the electrical industy viewed Home Depot as a major threat. First it was a case of DIY customers and smaller contractors leaving electrical distributors for a more convenient retail experience and most recently it was Home Depot’s foray into the distribution industry, via acquisition, through HD Supply.

In both instances, electrical distributors adapted, and, in many instances, prospered.

The August 31 issue of Fortune magazine had an interview with Home Depot’s CFO, Carol Tome. Home Depot is positioning itself for improved profitability in the current marketplace. While it no longer is the main topic amongst distributors, a number of its strategies may be of benefit to distributors.

Some tidbits from the article:

• As a residentially focused company, Home Depot’s key economic indicator is private fixed residential investment as a percentage of GDP. While this may not mean much to non-resi distributors, it could be key to selected manufacturers.
• Professional contractors (all industries) represent 3% of Home Depot’s transactions and about 30% of its sales!

How has Home Depot responded to the current economic environment?

• Invested in its associates to ensure customers are taken care of. “You win by the customer experience, making sure the service is there and the products are at the right price.”
• Listen to the voice of the customer; measure our performance with them.
• Closed 15 stores and removed 50 stores fom its new store pipeline (manage capital expenditures).
• Reduced support staff
• What drives Home Depot’s economic engine? – productivity and efficiency
• Find cost savings everywhere, even if they are perceived small (changing coffee brands at their Pro counters saved $500K)
• Pricing strategy – believe in “everyday value” pricing rather than promotional pricing … improves gross margins! They also decide which product categories they want to be “the destination” for and price those lines very competitively and have the best price in the market. Impulse items have a higher margin (and not the best price). Don’t increase market penetration (share) of low margin items to improve overall margins.
• Store managers have a financial bonus and non-financial bonus. The financial bonus is a weighted percentage of sales and profit, with heavier weighting on the profit aspect. This supports managing expenses. Drive behavior based on how compensate.

By now just about every distributor has had some level of workforce reduction. Once you go through the pain of a layoff, strategies to stabilize and grow the business become imperative. Taking another page from the Orange Box can help many distributors improve their profitability.