Executive briefing: Marvin Ellison
Ask Marvin Ellison any question about Home Depot’s business, and the answer will probably circle around, gravitate toward or — probably most likely — hammer squarely on the concept of customer service.
That’s one of the takeaways from an interview with the Home Depot executive VP U.S. stores. And there were many others, such as his company’s belief in the theory that grabbing market share from competitors is the surest way to growth in a struggling economy. Of course, there’s a service angle to that mission, too.
Here are some highlight bullet points from our briefing with Ellison, which took place during a recent visit to the Home Depot’s “Store Support Center” in Atlanta.
On customer service
“We first made a decision when Frank Blake became chairman and CEO that we wanted to once again regain our customer appreciation and be viewed as a customer service-leading retailer. So we asked, ‘How do you get there?’ It was very basic. You get there by doing some of the old-fashioned things really well. That’s training and staffing and making sure that we create an environment in the stores where customer service is viewed as the most important role of any associate. The second thing you do is to go out and try to find the technology that enables the associate in the store to have time to spend on customer service versus chasing all the other operational and task-driven things that happen in any given store.”
On the 60-40 split
“We did an analysis and realized almost 60% of all hourly payroll was spent on non-customer-facing parts of the business — unloading trucks, auditing the back end, counting cash in the cash room, stocking shelves. And so we were astonished, as a customer-centric company, that most of our money was not spent on customers. What we had to do was pull a 180-degree turn; we’ll have 60% spent on service, not on tasks. We have a plan to do that by 2014, but we’ll be there before 2014. At the beginning of this year we got to 50%, and we’ll end this year at 55%.”
On the First Phone
“The First Phone was a huge initiative toward [getting to 60%]. We put this in the hands of anywhere between 15 to 20 associates in a store. They have it on their hip, and they can do everything. All the key reports are on the phone. Real-time sales so you know exactly what’s going on. More importantly, it gives you the ability to solve a problem with the customer without ever losing connectivity.
“As a mobile POS device, it allows us to address any long lines on busy days. Anyone who has the device is allowed to use it as a mobile POS. For customer service at checkout, it’s a huge deal. The First Phone is part of a location tool. I can type in hammers, and it tells me the aisle and the bay location. It shrinks the amount of time it takes to answer customer questions.
“It also helps us with our in-stock position because this device is used as our in-stock tool. It gives us the ability to put right products on the shelf and allows us to manage our inventory without having to go to extreme steps of stickers on products. From an in-stock standpoint, customer checkout standpoint, locating the product, all those things are very positive.”
On the competition
“We think we’re in one of the most competitive retail spaces in the market place right now. And we also know that our smaller competitors are very formidable because they have product knowledge and they lean on service. But what we believe and what we have proven is that because we have a dominance in product assortment and because of our scale, we have a great advantage on price. And when we layer outstanding service on top of that, then we have a winning proposition. And that’s even more reason why we spend so much time talking about service.”
On the pro customer
“Just like DIY customers, pro customers come from different demographics, different spending patterns. It’s our responsibility to provide them the service they require. Painters or electricians all have different ways they spend and different expectations. We’re seeing all the above, but it doesn’t matter. For us, we strive to create the best shopping environment for our customers, period.”
On growth strategy
“In the U.S. we have a very simple philosophy. When you look at the last five years and look at the impact of the economy on our overall sales, we think that our growth strategy falls within our existing stores. So you’re not going to see a big plan from The Home Depot to open a lot of stores or create unique store formats as a way to create new-store growth. Instead, you’re going to hear us talk about how we’re going to take market share and the steps we’re putting in place to grow sales per square foot in our own stores.”
On the next big thing
“The biggest thing is continuing to make customer service the priority as it relates to how customers shop. You’re going to hear us talk a lot about interconnected retail; creating a seamless connection between dot-com and store; and addressing the needs of how, when and where our customer wants to shop. We call our strategy interconnected retail, because we believe that our responsibility is to make sure however the customer wants to buy that we have the ability to service their needs whether they want to buy in the store or online. But don’t be confused by that. This is nothing but an extension of our focus on customer service.”
Strength in the core
Stormy weather around the country had something to do with Home Depot’s third-quarter sales gain of 2.9%. So did strength in core categories.
The world’s largest home improvement retailer posted a 4.2% comp-store sales gain for the quarter ended Oct. 30. Total sales increased 2.9% to $17.326 billion. And even bigger growth came in the net earnings column, where Home Depot reported a 13.0% increase and net earnings of $934 million.
“Our third quarter was driven by strength in our core categories and storm-related sales, as well as strong operating performance,” said Frank Blake, chairman and CEO. “We will continue to invest in our core initiatives to provide customers with exceptional customer service and great product values.”
At the end of the third quarter, the company operated a total of 2,246 retail stores in the United States and abroad.
The report followed closely the third-quarter report of rival Lowe’s, which posted comp-store sales of positive 0.7% and an earnings decline.
Home Depot also announced that its board of directors declared a 16% increase in its quarterly dividend to 29 cents per share.
Atlanta-based Home Depot’s wind-and-storm-aided sales effort in the third quarter presented several category highlights, according to executive VP merchandising Craig Menear.
The company’s strong third-quarter performance included strength “in the core of the store” and growth in average ticket and transactions.
“The maintenance and repair categories that make up the core of our store continue to perform well,” Menear said during the company’s third-quarter earnings call. “Project basics such as pipes and fittings, fasteners, air circulation, hand tools, chemicals, caulks and appliance parts were positive. And, as customers prepared for winter, small maintenance projects like insulation and waterproofing also sold well.”
In addition to storm-related sales strength, the company saw higher-than-company-average comps in tools, electrical, indoor garden, building materials, plumbing and hardware.
Ten departments in all posted positive comps, with paint, flooring, lighting and kitchens rounding out the list.
Negative comps for the third quarter occurred in the following categories: lumber, outdoor garden, bath and millwork.
Brands and product innovation played a role in sales growth, he said. “We offered outstanding values in power tools from brands like Ryobi, Milwaukee, Makita, Ridgid and DeWalt, and we are seeing consistent response to these brands from our customers,” he said. Pro customers are responding well to exclusive-to-Home Depot hand tools from Milwaukee and DeWalt, he added
LED lighting continues to advance on the shelves, with the first commercially available 75-watt equivalent LED A-Line replacement, he said.
The Home Depot’s chief merchant also shared the following third-quarter trends with investors:
• Total transactions grew by 1.2%;
• Average ticket increased 3.0%;
• Transactions for tickets under $50 — about 20% of the company’s U.S. sales — were flat in the quarter; and
• Transactions for tickets more than $900 — also representing some 20% of U.S. sales — were up 3.6% in the quarter.
As far as the possible return of the housing market to lift home improvement sales, Blake wasn’t optimistic for a quick turnaround. “In the U.S., we still don’t see and we don’t expect to see in the near term any meaningful tailwind from the housing market,” he said. “Inventories remain high, pricing is under pressure and credit is still difficult.”
Home Depot builds on pros
Here’s the compelling math behind The Home Depot’s effort to embrace the pro customer: Pros account for 4% of total Home Depot customers and 30% of total Home Depot sales.
Clearly, these are customers that the world’s largest home improvement retailer wants to impress. The Home Depot has known for years the importance of its pro customer, but something’s different at Home Depot these days, and the difference begins with three little words: “First for Pro.”
As VP – Pro for the Home Depot, J.T. Rieves is one of the key figures in laying the foundation for growth, and he’s a big believer in the First for Pro initiative. “We asked, ‘What do pros really want?’ And for years, the answer really hasn’t changed,” he told Home Channel News during a store tour in Atlanta in the shadow of the company’s headquarters, aka Store Support Center. “It’s been: ‘I want to get in and get out fast. I want you to have great prices. I want you to know who I am.’ We took all those things and created a plan.”
The initiative can be described by its individual parts. Pro customers receive Pro Account Reps (PARs) to serve as a single point of contact. They receive volume pricing, job-site delivery and advance order pulling. And varieties of commercial credit — either revolving or a simple commercial account due in full each month — are available to them through the pro desk.
If that sounds like a traditional lumberyard as opposed to a DIY warehouse, Rieves doesn’t mind at all. Because he believes traditional lumberyards represent an opportunity for market-share growth. The Home Depot knows its pro customers are shopping in many other places, and the retailer is getting just a small portion of the pro customer’s wallet. The new approach is going to move the company’s focus to more of a direct one-on-one with traditional lumberyards. Why? Because if you’re going to get market share, that’s where you’re going to get it.
“We’re saying, ‘Those guys are key competitors, whether it’s the way they price, or the way they use credit, or get you in and out fast, or have coffee for their customers.’ It’s all of those things,” Rieves said. “To grow business today, you’re going to have to take it from somebody else, and it isn’t other retailers as much as it is folks in lumberyards, plumbing supply, electrical supply house.”
The Home Depot has its work cut out for it. A survey from The Farnsworth Group found builders or remodelers view LBM dealers as their primary source for purchasing materials 70% of the time. Warehouse home centers are a primary source for about one-third of remodelers and only 12% of builders (based on a 2010 survey of 400 independent builders/remodelers).
Into this equation, First for Pro was launched in May. Rieves, who was moved from regional VP of the Southeast to VP – Pro in August 2010, shared some First for Pro highlights with Home Channel News at store No. 121 in Atlanta.
• Power hours
The pressure is on the pro side of the store to be ready and accessible during the morning rush. That means getting the store employees away from their behind-the-desk task and engaged with customers. In fact, some of the tasks behind the desk have been removed entirely to encourage customer engagement.
“From 8 to 12, we’re focused on one thing: the people in the building,” Rieves said.
• Dedicated loaders
Many pro customers bring their own assistants to help load trucks with building materials. Under First for Pro, dedicated loaders in orange aprons do the work.
“What we’re saying now is we have somebody here during the most important times of the day, and they’ll help you load your truck so you can get back to your site and get back to work.”
• The First Phone
Technology plays a role in the First for Pro’s emphasis on speed. The handheld device called The First Phone is equipped with multiple functions, including line busting. It even has an attachment than can perform credit card transactions away from the checkout. “It demonstrates to our pro customer that we’re going to try to get you out of here quickly, which they said is extremely important to them.”
• Paint for pros
Rieves describes the pro painter as “an opportunity for us.”
Research showed that about 90% of all pro paint is sold in independent paint stores. So the challenge for Home Depot is to find out what makes that independent paint store so popular, and to bring that to Home Depot. The answer includes product, pricing and people. The company recently unveiled its Kilz Pro-X line, which works with Behr and Glidden to create a good-better-best offering for the pro. There are discounts for large purchases, just like a paint store. Home Depot in most markets can deliver large orders of paint.
“A lot of the painters that we’re talking to today, they buy stuff to apply paint from us, but they don’t buy the paint. And we just have to crack that code.”
How’s it working? CFO Carol Tomé offered this during the company’s third-quarter conference call: She said transactions on the pro side of the business were down, but the ticket was up significantly. “So, the pro who’s shopping with us is more sticky, and is buying more with us.”
If the customer wants Home Depot to imitate a convenience store, Home Depot is going to operate like a convenience store, Rieves said. But it has its sights on a bigger role and a bigger share of spending for this big-ticket customer.
“If the customer wants us to be a convenience store, then we owe that to them and we haven’t really done that in the past,” he said. “In the future, as they consider other opportunities, our goal is to create such a compelling shopping experience that there would be no reason for you to try anywhere else.”