Zeev's Turnips Patch-No Politics (ZEEV)

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Retail Renovation
December 2004

After four years of remodeling, Home Depot CEO Bob Nardelli sees his vision paying off.

Quite honestly, associates weren’t sure what to expect when I arrived on the scene in December 2000,” laughs Bob Nardelli, recalling The Home Depot Inc. (HD) employees’ reactions when he joined the company as president and CEO. “They said, ‘He doesn’t know retailing,’” says Nardelli, who came from General Electric Co. (GE). But if there is one lesson the executive says he has learned in all his years in the business world, it is that “you don’t become chairman or CEO without selling every single day.”

Nardelli, who also became chairman in 2002, set about improving sales by sprucing up aging stores, investing in technology, adding products, expanding into new markets and appealing to a broader range of customers, including women and people looking for less do-it-yourself and more do-it-for-me services, he says. And today the Atlanta-based company, reported to be the nation’s second-largest retailer by sales volume [behind Wal-Mart Stores Inc. (WMT) ], says no one at Home Depot is nervous, although the same can’t necessarily be said for the competition.

When Nardelli came to Home Depot, he says, the story of the company’s phenomenal growth was legendary. The business had grown from a trio of stores in Atlanta, which in 1979 had 200 employees and sales of $7 million, to a chain of 1,096 stores from Canada to Chile with 226,000 employees and annual sales of more than $45.7 billion, the company reports. By 2000, Home Depot had become a household name, but its growth had hit a plateau and the company needed to undergo a renovation of its own, according to board members.

So, Nardelli says, he was brought in to remodel the house that founders Bernie Marcus and Arthur Blank had built. The challenge was to undertake a major revamp without destroying Home Depot’s character and spirit, says Nardelli. The CEO says he immediately launched a $10 billion overhaul of not just the company’s physical stores but also its technological infrastructure. Perhaps most important, he says, he brought new processes and discipline to a company in which store managers ran their stores as they saw fit without considering the impact that buying decisions might have on a national level. While this adversely affected the bottom line, Nardelli says, he realized that different areas of the country have different needs. So to preserve the company’s entrepreneurial spirit, he says, he keeps in close contact with store managers and tailors different stores to better serve their particular markets.

Four years later the vision is paying off, says Nardelli. Home Depot, which recently celebrated its 25th anniversary, reports that it is the world’s largest home-improvement specialty retailer, with fiscal 2003 sales of $64.8 billion. Sales for the second quarter of 2004 increased 11 percent to $20 billion, the highest sales mark in a single quarter in the company’s history, Home Depot says. The company adds that it is also the eighth-largest employer in the U.S., with more than 300,000 employees, and at press time had a total of 1,788 stores. “On average, we open a new store every 48 hours,” points out Nardelli.

Listening Up

Today Nardelli says he is receiving accolades from employees and board members, but getting to this point in his career wasn’t easy. Over the past 35 years, he says, he has moved his family 13 times and tackled a variety of businesses. A former football player at Western Illinois University and avid fan — he says he once considered coaching — the 56-year-old Nardelli is seen by many as a tough-as-nails competitor, analysts say. He says he’s also a NASCAR buff — Home Depot sponsors the bright orange No. 20 car. Armed with a B.S. in business, Nardelli says he started as a manufacturing engineer at GE, earning less than $10,000 a year, in 1971, the year he married his college sweetheart, Sue. (They now have four children.) He recalls going to night school to earn his M.B.A. from the University of Louisville and working his way up GE’s ladder.

Nardelli held a number of executive positions at GE until 1988, when he joined Case Corp., now part of CNH Global NV (CNH) , where as executive vice president he led the Case Construction Equipment global business, he says. In 1991 he was lured back to GE and became president and CEO of GE Transportation Systems and then CEO of GE Power Systems in 1995. According to analysts, GE Power Systems was then considered a mature business. But Nardelli grew the company’s services and increased profits by more than six times over the five years he was in charge by completing dozens of acquisitions and focusing the business more on services than products, he says.

In 2000, analysts characterized Nardelli as a leading contender to succeed GE’s then CEO Jack Welch upon his retirement. But following Welch’s announcement that he had chosen another candidate, GE Medical Systems’ then CEO Jeff Immelt, Home Depot says its board pounced at the opportunity to hire Nardelli. Within days, Nardelli was working in Atlanta, according to Home Depot.

But some had reservations, Nardelli acknowledges, since he was the first person without retail experience ever to head a major U.S. nonfood retailer, and an outsider replacing a co-founder, Arthur Blank. “When Bob joined our company I was petrified,” Home Depot Executive Vice President and CFO Carol Tomé confesses. Tomé says that, like others at the retail giant, she saw Home Depot as a people-based business. “I thought, ‘He’s from GE. He’s going to care only about the bottom line.’” When Tomé visited one of the company’s stores with Nardelli, she recalls being pleasantly surprised. “He didn’t look at the numbers,” she says. “He talked to everyone in the store: the cashiers, the managers, the customers.”

“Bob spends tons of time listening to what customers want,” concurs Larry Johnston, chairman, CEO and president of the food retailer Albertson’s Inc. (ABS) . Johnston, another GE alumnus, says he worked with Nardelli on GE’s executive council. “When Bob was in transportation and power systems at GE, he traveled the world listening to what customers wanted,” says Johnston, who joined Home Depot’s board this year. “He’s doing the same thing at Home Depot, and it has had very positive results.”

Process As Change

Nardelli says he listened, but he adds that he also set about making big changes based on his deeply held conviction that better processes lead to better products and greater profits. “Bob believes in process, and that means using more data to make decisions, rather than gut feeling or tribal knowledge,” explains Tomé. As an example, she points to Nardelli’s application of Six Sigma quality-control techniques, which involve the collection of data about every step in a process and the application of statistical analysis to uncover the weak links in the chain. “The company badly needed contemporary leadership practices,” agrees Johnston. “Every store got to do what it wanted. But today nationwide execution is incredibly important.”

“For example, we had a problem in shrink,” says Tomé, referring to inventory losses that can be caused by anything from spoilage to tracking errors. “We sell live plants and assumed that the shrink in live plants was because we weren’t watering them.” However, the company says that after breaking down the process by which plants were purchased and sold, it discovered that the shrink in plants was actually the result of inventory-tracking problems in receiving, which were quickly rectified.

By talking to customers, Nardelli says, he noticed other in-store processes that needed to be changed. “We moved to night receiving,” Nardelli explains, so that shelves could be replenished with products without disrupting the customer’s shopping experience or interfering with sales transactions during the day.

Being hard-nosed about such details, Nardelli says, he realized he would have to put out to pasture one of Home Depot’s sacred cows: its cash-return policy. In the past, customers could return any item purchased at a Home Depot without a receipt and get their money back — even if the purchase was years old. Citing process analysis, Nardelli says, he showed store managers that the returns policy cost the company millions each year. Now, he says, the policy is to refund cash only for goods returned with a sales receipt within 90 days; returns lacking a receipt or returned after the 90-day limit receive a store credit, he adds.

Such moves “were unparalleled changes in this company,” asserts Nardelli, who says he also realized that achieving even better process controls meant turning a fast-growing, decentralized company into a centralized corporation that could add consistency and leverage its market power. So Nardelli centralized the merchandising organization, combining nine separate buying offices into one, he explains.

“Some thought that was killing the entrepreneurial spirit,” he says. “I thought it was taking advantage of size and gaining leverage in working with our partners.” Nardelli suggests that because of the changes, “our gross margin has gone up three percentage points, and we’re able to bring our customers and our shareholders better value.”

“Bob understands the power of cash,” agrees Tomé. “We were paying our suppliers faster than anybody in the industry when he came here. Then we changed our terms,” so that payments were graduated. When Nardelli arrived Home Depot reports it had just $200 million in cash; the company ended the second quarter of 2004 with $3.7 billion in cash after completing a $6 billion share-repurchase program. In August, the company’s board of directors says, it authorized an additional $1 billion share-repurchase program to benefit shareholders and improve per-share profits.

However, to really have an impact on the customer’s experience, Nardelli says, he realized he would have to physically upgrade Home Depot’s aging outlets. “We turned the stores upside down,” he admits. The company says it revamped lighting, signage and point-of-sale packaging, eschewing the traditional bare-bones approach of big-box stores and incorporating more attractive, modern displays. Stores improved their visual merchandising, and the company added show areas for appliances, all as part of a $10 billion upgrade, Home Depot says. “We are bringing the consistency of expectation to our stores that our customers said they were looking for” in surveys and focus groups, says Nardelli.

Structural Improvements

Such changes couldn’t be realized without the proper infrastructure, Nardelli says, adding that he saw immediately that the company needed to make significant investments in underlying technology.

“There was an aversion to technology,” he notes. “When I got here I couldn’t send an e-mail directly to a store manager.” Today, Nardelli says, he regularly communicates with store managers via e-mail. Home Depot even has its own broadcasting network, which enables the company to beam new product information and other data to its stores via satellite 24/7, he adds.

“Bob understands the need for infrastructure,” says Robert DeRodes, Home Depot’s executive vice president and CIO. “He looks at technology as an investment in our associates and our customers.” DeRodes says that since he joined the company in March 2002, Home Depot has invested more than $1 billion in technological improvements. Last year, he points out, the company performed a $250 million network and systems upgrade in its stores. As part of the technological upgrade, Nardelli points out, each store now has learning kiosks where employees can access information about new products, selling techniques and building methods to help customers.

Nardelli says that Home Depot has combined that automation with face-to-face training programs. The CEO estimates that the company will have invested in more than 23 million hours of employee training in 2004 alone.

“All this technology has also improved customer satisfaction and our efficiency,” says DeRodes, who cites as one benefit faster special-order times — a process that used to take days now takes just minutes, he explains. DeRodes also points to wireless scan guns with built-in screens that allow a cashier to see whether a product was correctly recorded without looking back at the computer screen, thus improving checkout speed and accuracy. In addition, Home Depot has installed self-checkout systems at 840 stores, and according to company surveys, “customer satisfaction is now higher in those stores,” says DeRodes. “So we’re going to extend it.”

Home Depot says it is making investments in areas customers don’t see. This year, the company says, it is implementing SAP AG’s (SAP) core financial systems, which are beginning to improve processing and analytical capabilities by using current sales data to automatically replenish inventory and issue purchase orders. It says it has also completed the rollout of its new human-resources-management system to improve hiring and benefits tracking.

“The introduction of a stronger IT infrastructure should also help gross margins,” reports Wayne Hood*, a retail analyst at Prudential Equity Group LLC, a Prudential Financial Inc. (PRU) company. Hood says he foresees Home Depot reaping additional benefits as it begins to leverage its investments in self-checkout systems, checkout- and transaction-tracking system upgrades and certified receiving to improve the company’s supply chain and inventory control and tracking.

Keeping the Spirit

All this process control, centralization and automation have not eliminated the lively individuality of Home Depot’s stores, Nardelli insists. “Over the last 18 to 24 months we’ve realized we must be able to change formats and change the mix” of stores in different locations, he adds. As an example, Nardelli points to the opening in rural locations of slightly smaller stores that are meant to cut down on the time customers need to travel to get the convenience of a Home Depot store.

And he notes the recent opening of urban stores, such as the September debut of a Home Depot in Manhattan. That store has services to cater to city residents, such as space-saving remodeling ideas for New York’s small apartments, Nardelli says.

Geographical and cultural differences are going to be even more important in the future, he says, considering the company recently announced plans to enter China’s retail market. Nardelli recently appointed Bill Patterson to the new position of president of Home Depot Asia. “About 70 percent of home-improvement spending in China is for completion of interior space,” says Patterson, adding that he believes that fact plays into Home Depot’s strengths. The company estimates China’s home-improvement market to be about $50 billion annually.

Nardelli has also emphasized adding services and products appealing to women and baby boomers. “We started the industry’s first-ever ‘Do It Herself Nights,’” says the CEO, and since May 2003, “we’ve had close to 200,000 women participate.” But, Nardelli says, not all customers want to do it themselves, so the company is expanding its at-home services. “Baby boomers are moving from the do-it-yourself to the do-it-for-me model,” he says. “Time has become a precious commodity, so they are looking for a company that will work with them on redoing the kitchen and bath, putting in an entertainment center,” Nardelli explains. He estimates that the at-home-service business is a $200 billion market in potential sales. Home Depot now offers roofing, siding and heating, ventilation and air-conditioning services, he adds. “Our goal now,” says Nardelli, “is to introduce eight to 10 of these national programs a year.” Over the past two years, Home Depot’s at-home-service business says it grew 35 to 40 percent a year.

Never-Ending Renovation

During this renovation, Nardelli says, sharing the company’s success with employees is crucial to maintaining morale. So Home Depot is always updating benefits and adding programs that let employees share the financial rewards, he says. Nardelli notes that he has introduced a benefits program for part-timers, accelerated tuition reimbursements and increased bonuses for stores that exceed targets. The approach, he says, boosts morale and cuts turnover, aiding the bottom line.

“The company is also revamping its Success Sharing incentive compensation plan,” says analyst Hood, “to more tightly link associate bonuses to sales plans.” Last year, the company says, it paid out $47 million in bonuses to its associates, or employees, in the Success Sharing program.

“Today 1,800 of my associates have been called to active duty” in the armed forces, says Nardelli. Since “we see that as a responsibility, not a burden,” he explains, the company has extended pay and benefits to employees who have been called up. (By law, employers have to hold jobs for those called up for duty but do not have to extend any other benefits, according to the company.) Home Depot also set aside $1 million and 1 million volunteer hours from other associates to launch Project Homefront, which helps maintain and repair the homes of the families of its deployed personnel. Nardelli says Home Depot also shipped $1 million worth of cordless power tools to associates serving in Iraq to help them set up and break down their camps.

Has Home Depot finished renovating? “It will probably never end,” says DeRodes, who adds that he is looking forward to new projects. Nardelli points out that change is an essential part of business, and new needs are always cropping up. For example, Home Depot is replacing the mobile networks in all of its stores with kiosks and handheld computers to get information to customers and salespeople on the floor faster, and the company is experimenting with portable devices for inventory management, says DeRodes. “Bob personally looks at all the projects,” the CIO adds, “and he’s always sending me suggestions and new articles about technology.”

As Nardelli puts it, “We want to improve everything we touch.”

Sidebar: Community Building

Home Depot Believes in “Giving Back” Through Philanthropy and Environmentally Friendly Policies.

Large, successful retailers don’t always receive a warm reception when they open a store in a new neighborhood, says Home Depot CEO Bob Nardelli. “But we’re a company that believes in giving back and taking care of one another,” he explains. Home Depot reports it spent more than $25 million in 2003 on philanthropic efforts and contributed another $20 million in kind. Furthermore, it says its employees donate millions of hours each year of volunteer time to communities, including more than 260,000 hours to programs in North America and China during last fall’s Week of Service. The company’s philanthropic efforts leverage the retailer’s strengths, Nardelli points out. For example, Home Depot says it works on creating safe playgrounds for kids in underprivileged neighborhoods, building affordable homes for families in need and assisting in reforestation efforts and energy conservation.

“We’ll build 100 inner-city playgrounds this year with [non-profit organization] KaBoom,” notes Nardelli. Home Depot says it also donates time, materials and tools to Habitat for Humanity, which is dedicated to building affordable homes for those in need. Since 1993, Home Depot says, it has helped the group build more than 160 homes in North America.

“We’re also committed to the environment,” Nardelli says, adding, “We’re very adamant about certified lumber.” The company says its policy is to sell lumber only from suppliers committed to environmentally friendly logging and lumber practices, which means primarily selling materials certified by the Forest Stewardship Council and avoiding lumber culled from environmentally at-risk areas. For example, says Nardelli, the company buys cedar taken only from second- and third-generation, or newer, forests rather than original ones that are at risk of extinction. Home Depot says it has backed up this commitment by aiding reforestation efforts, recently contributing $1 million to the California Wildfire Recovery Project to help reforest nearly 60,000 acres of destroyed land.

Nardelli says he’s also proud of the company’s energy-conservation efforts, pointing out that earlier this year Home Depot received the National Product Campaign Award from the Environmental Protection Agency for its support of two national energy-conservation programs. It was the first time a retailer was granted the award, according to the company. “We received the award not only for the way we conserve within our facilities but for the products that we distribute,” says Nardelli, who adds that the company’s energy-saving products range from ceiling fans to programmable thermostats to compact fluorescent bulbs.

“We can’t do anything about the cost of electricity,” Nardelli says, “but we can definitely support our customers in the efficient use of electricity.”

http://www.nyse.com/about/publication/1101074792807.html