Romancing the pros
Drive into any Home Depot parking lot and you’ll find a collection of rag-tag pick-up and utility trucks parked near the store’s pro entrance. The owners of the vehicles represent almost one-third of Home Depot’s $66.2 billion in annual sales. Yet they only spend, on average, $5,000 a year apiece.
Home Depot is where they stop if they run short of something or to grab a few items on their way to a job.
This reality — that Home Depot serves as a convenience store for the pro customer — is readily acknowledged by the Atlanta-based home improvement giant. At the company’s 2010 Investor & Analyst Conference on Dec. 8, executives discussed how they have come to terms with this.
“The pros shop us for more convenience than what we had believed in the past,” Marvin Ellison, executive VP U.S. stores, told analysts. “I think we had a self-developed idea of what we were to the pro customers, but the more time we spent with them in focus groups and town halls, we started to understand it.”
Ellison went on to say that Home Depot — as a store of convenience — had the potential to expand its business with professional customers.
“We’re taking the things that worked on the retail side of the business — simplicity and service — and we’re transporting those things to the pro side of the business, but specific to the needs of the pro customer,” Ellison said.
The new initiative, called “First for Pros,” has already been piloted in Home Depot stores on the West Coast and in the southern and northern divisions. Although the company is protective of the details of the program, Ellison highlighted its main features on Dec. 8:
• Special store hours for pro customers
• Dedicated cashiers
• Loading assistance
• Simplified returns process
With a planned 2011 rollout, Ellison said he hoped to have the program up and running by spring, “[when] hopefully we [can] reap the benefits when our traffic picks up during that very busy season for us.”
Both Ellison and his boss, CEO Frank Blake, outlined modest goals when it came to “First for Pros.”
“Obviously, we have a very small share of the pro’s wallet,” Blake said, referring to the $5,000 average annual spend. “And while we will try to broaden that spend, our principal effort will be … to make that purchase of convenience the best possible experience.”
Satisfying the pro customer has always been a struggle for Home Depot. The retailer has made numerous attempts over the years to tailor its services, staff and store format to this diversified — and notoriously demanding — customer segment. In 1998, the company began testing a “pro-only” format in Colma, Calif., just south of San Francisco. The 89,000-sq.-ft. unit, located right across the street from a regular Home Depot store, carried no lawn and garden, home decor or paint, but offered a deep inventory of plumbing, electrical and building materials. Another Home Depot Pro store was opened in Phoenix in 2001, and then three more pilots were added in 2002 in the Dallas, Denver and San Jose, Calif., markets.
By this point, the name had changed to Home Depot Supply, and the design had changed. The stores were bigger (130,000 sq. ft.), and each department had its own pro desk. Meeting space was set aside for builders and their clients, and delivery vehicles were added. An expanded rental program was also tested at six stores in the Las Vegas market; scissor lifts, skid steers and other heavy equipment was brought in to attract members of the building trades.
Bob Nardelli, who served as Home Depot’s chairman, president and CEO in 2002, told an audience of builders and contractors at the International Builders’ Show that year that the retailer was happy to serve as a convenience store for their job sites.
“We want to be your 7-Eleven,” Nardelli said during a panel discussion in Atlanta.
But in 2004, Nardelli revealed much bigger ambitions when he purchased White Cap Construction Supply and Creative Touch Interiors, both aimed at the residential builder market. More acquisitions followed, and by 2005 the companies had been rolled into their own division, HD Supply, that targeted professional customers of every stripe, from municipal water line installers to school janitors. For home builders, HD Supply hoped to provide the whole package, starting with the sewer pipes and ending with the roofing tiles. Fast forward three years to 2007, and HD Supply had grown to nearly 1,000 locations and racked up annual sales of $12.1 billion.
But Home Depot has a new CEO, Frank Blake, and the construction industry has entered the doldrums. Blake announced that it was time to refocus on retail: fixing up the stores, retraining the sales associates, perking up the merchandise. HD Supply was sold to a group of private equity firms in August 2007.
Home Depot still needed to hold on to the small repairer and remodeler, who accounted for 30% of its sales on the retail side in 2007. So the company launched its “Own the Pro” initiative, which included a loyalty club program, expanded credit offerings, volume discounts and direct shipment to job sites for large orders, negotiated with vendors through Home Depot’s corporate office.
Home Depot executives were careful not to set any monetary goals with this latest pro initiative. Their philosophy seemed to be: Make the pro happy, and he or she will open his wallet wider.
“[Pros] got a big share of wallet outside Home Depot, which we know,” Blake told investors Dec. 8. “We do spend some time thinking about … how you gain that share of wallet. But we’ve got a lot more opportunities making sure that the folks that are in there now who are using us as a store of convenience have an even better experience as they shop.” e
The prolonged housing downturn has pushed the building materials industry into uncharted waters where everyone is trying to hold their place in a shifting topography of competitors, suppliers and customers. Big or small, LBM operators are learning that the rules of engagement have changed. Here today, gone tomorrow, back next week in a reconfigured shape.
What a perfect time to try something new.
US LBM Holdings, the fastest-growing building materials distributor in the country, certainly qualifies as “something new.” On Dec. 1, the company celebrated its one-year anniversary by gathering together its six division presidents, yard and sales managers, corporate executive staff and private equity backers in Lake Geneva, Wis. It was a good opportunity for everyone to take stock of how quickly the organization has grown: 900 employees working at 30 lumberyards and component plants, most of them added through separate acquisitions over the past 12 months. And of course, the first annual meeting was a perfect time to articulate who, exactly, US LBM is.
The best person to answer that question is L.T. Gibson, the company’s president and CEO. (The L.T. stands for Larry Todd.) A former VP at Stock Building Supply, where he ran both the northern and central divisions, Gibson says he’s now “the guy who takes ideas from one group to the other.” Ask him to explain the US LBM model, and he starts with the name.
“We added ‘holdings’ at the end of the name for a very particular reason,” said Gibson.
Holdings refers to the typical infrastructure of a parent company, which US LBM provides: human resources, IT support and finance. As CEO, Gibson oversees the six different operations and their presidents, traveling from state to state and also meeting with the company’s financial backers, a private-equity firm called BlackEagle Partners.
Gibson is quick to point out that each division has considerable autonomy in hiring, extending credit and, to some degree, purchasing. He admits that it’s a delicate balancing act, but this is where the “something new” comes in.
“Some of our competitors find our business model puzzling,” Gibson admitted. But in reality, US LBM borrows heavily from the tried-and-true roll-up model pioneered by Lanoga, the forerunner of ProBuild: Keep the owner in place, don’t change the name, and tread lightly when introducing corporate-wide policies and “best practices.”
“We try to keep everything autonomous that faces the customer,” Gibson explained. “This is a relationship business, and we don’t ever want to get in the way of that. Our customers are best served at the local level by the people they’ve been doing business with for years.”
In accounts receivable, for example, each division has its own person keeping tabs on customers and their invoices. At the company’s central office in Green Bay, Wis., an A/R director oversees all the divisions, and at the top is VP finance Brian Hein. But a Chicagoland builder buying plywood from Edward Hines Lumber or a remodeler purchasing decking at Universal Supply in New Jersey won’t know this.
“We don’t have anyone in the corporate office making calls to collect money. That’s about as cold as it gets,” Gibson said.
Purchasing is another area where the company tries to strike a balance between a centralized approach — e.g., volume buying and discounts — and local autonomy.
“We know there’s an advantage in being big, and we can buy as well as anybody in the industry,” Gibson said. “But we don’t just focus on [vendor] rebates. Sometimes we’ll focus on the invoice price instead. I count on the vendor to help us find a better plan to grow sales. But we will not mandate a vendor in any market.”
The end result is national buying programs for many products, but usually with some holdouts. In engineered wood products, iLevel by Weyerhaeuser is stocked at almost all US LBM locations, but one location has Boise. Jeld-Wen is the preferred window vendor in most (but not all) yards. Much depends on who the customers are in a particular division.
While remodelers and custom builders are the bread and butter of US LBM’s business, the company also serves national builders, primarily in Chicago and Indiana. The company was formed in November 2009 when Building Industry Partners, an M&A firm that specializes in building products manufacturers and distributors, brought several former Stock Building Supply locations to the altar with BlackEagle Partners. Wisconsin Building Supply, Bellevue Builders Supply and East Haven Builders Supply came under the US LBM umbrella, covering three markets: Wisconsin, Central New York and Connecticut.
More acquisitions followed, plus some organic growth.
“We looked at 30 or 40 companies. We were able to buy some businesses that most people couldn’t because they knew they weren’t going to lose their name and their autonomy with us,” Gibson said.
Although some companies were operating in the black, others were “distressed” or having trouble with their lenders.
At Edward Hines Lumber Co., which joined US LBM in March 2010 as the fifth acquisition, BlackEagle Partners saw potential in the 118-year-old company and its subsidiary, Indiana-based House & Hall, despite the fact they were in financial trouble.
“We saw a clear path to take them back to the No. 1 position in the Chicago market,” Gibson said.
An infusion of funds got the operation firing on all cylinders again. Two months later, Edward Hines Lumber announced it was adding another location in Alsip, Ill., a southern suburb of Chicago, bringing the total number of locations to four.
Gerry Wille was president of Edward Hines Lumber before the acquisition, and he still is today. Wille is also an investor in the company. Although the arrangements vary with each individual, US LBM wants all of its division presidents to have some skin in the game.
Wille is a no-nonsense Chicagoland operator; it’s hard to imagine anyone telling him which brand of windows to sell or the best way to route his delivery trucks.
“We do discuss who’s buying what from whom,” Wille said in an interview with Home Channel News.
Division presidents also discuss inventory management and other best practices on twice-monthly calls. News about purchasing discounts is shared, “but we’re free to buy for our market,” Wille said. He’s deviated several times from the rest of the chain because of customer preferences.
“We have national builders who like [a] certain product, and we’ve been buying it for several years. Had we changed [that product], we might have lost that business.”
The company has also adopted a hands-off policy on hiring, although Gibson does provide some guidance.
“The markets are autonomous,” he said.
Wille hired 13 outside salespeople between April and September 2010. Most of them were from ProBuild, which experienced a six-week teamsters strike this summer at two of its Chicago-area locations. The walk-out ended when the Denver pro dealer consolidated the two locations. By that point, area operations manager Doug Jones had already left the company to join US LBM as regional VP.
Now that he’s fully staffed, Wille is ready to go after some of the new builders who are coming into Chicago from out of state. He also has some commercial work lined up. Having a private-equity firm standing behind him gives Edward Hines credibility with new customers, he said.
“They like to know there’s a big brother in the food chain.”
It also helps him sleep better at night.
“Bankers are running from this industry so fast you can see the vapor trails,” he joked. “You have to have financing to get through this trough.”
Bryan Tolles, one of four BlackEagle partners, admits that he’s swimming against the current by investing in the LBM sector. But his firm, which gravitates toward “out of favor” companies that are restructuring, undergoing liquidity issues or underperforming operationally, is taking the long view on the building industry.
“The market will rebound at some point in time,” Tolles said. “It’s a question of when, not if.”
Tolles sees special opportunity in custom home building and remodeling, which have “significant barriers to entry,” he said.
First, there’s geography.
“The home-building industry is still a local business,” Tolles said. “There are big home builders all over the place, but many of the deals get cut at the local level. For the customers we serve, the customer builders and professional remodelers, it’s a local [buying] decision.”
As for the technology, US LBM has equipped its management team with some high-performance software to track sales, margins, costs, expenses and other metrics on a daily basis. The company uses Activant’s Catalyst solution to deliver daily numbers from these key areas to its executives. Gibson has pushed beyond these dashboard deliveries, he said, with customized forecasting tools.
“We have the ability to give everybody a picture of what things are going to look like at the end of the month, so we can make decisions early on,” he said.
Sounds like some pretty fancy stuff for local lumberyard operators, but that’s part of the US LBM model. The technology will help the various divisions compete with larger players, while allowing them to remain decentralized where it counts.
Ironically, the second “barrier to entry” that makes the LBM sector an attractive investment is technology, Tolles said. There’s no technological shift that can suddenly make lumberyards obsolete.
“The builders want to manage and house the inventory. But that’s not what they’re best at. They need to build the house,” Tolles observed.
And that’s where local lumberyards and delivery come in.
The challenge for US LBM may be how to stay small while growing large. Gibson would like to keep a Northeastern-Midwestern footprint, but he’s looked at operations in Texas and Nevada.
“We don’t want to spend any more time in airplanes than we have to,” he explained.
But the company receives a number of queries every month, many of them from good operators strapped for cash. And LBM Holdings is still on the hunt.
“We’re going to be fairly aggressive on acquisitions over the next 12 months,” Gibson said. “And we’re looking at stuff outside our [current] geography.” e
For senior executives, salaries rise
Economic forecasts for 2011 are a mixed bag for senior executives in retail companies. Executive compensation packages and salary increases are expected to be healthier than in the last two years, but the overall economy is, at best, in a state of stagnation.
The Society for Human Resource Management, or SHRM, based in Arlington, Va., projected median salaries across all industries would rise 3% this year, compared with the more modest 2.5% increase that was the median in 2010.
Similarly, a recent survey of more than 1,450 large companies conducted by AON Hewitt, a human resource consulting firm headquartered in Lincolnshire, Ill., predicted a 2.9% salary increase for executives in 2011, a moderate uptick from last year’s 2.4% increase but an impressive spike over the 1.4% increase that was the norm in 2009.
The 2010/2011 U.S. Compensation Planning Survey conducted by New York-based Mercer drilled deeper into specific industries and concluded the retail industry would experience average salary increases of 2.8% in the coming year.
The real opportunity to increase earnings, according to many in the industry, will be through bonuses and incentives — perks that will likely extend from the most senior executives into middle management.
The Hay Group, which has its global headquarters in Philadelphia and does management consulting for some of the largest retailers, including Wal-Mart Stores, The Home Depot and Macy’s, reported that 39% of companies have already increased or have plans to increase the proportion of variable pay in compensation packages.
For example, Sears Holdings Corp. awarded its CFO a 16.7% merit increase, from an annual salary of $600,000 to $700,000, but the executive’s total targeted cash award increased by 26.7% because the incentive plan was raised from 75% of the fiscal 2010 salary, a targeted bonus of $450,000, to 90% of the fiscal 2011 salary, a targeted bonus of $630,000.
Incentives are typically defined as “targets” because, as the Hay Group stressed, there is a renewed focus on performance-based criteria. The company conducted a survey of more than 1,300 companies and analyzed detailed data from an internal database of more than 14,500 organizations to arrive at its assessments.
Performance-based pay is definitely on the rise, agreed Bob Cartwright, president and CEO of Austin, Texas-based Intelligent Compensation and a member of the Total Rewards/Compensation and Benefits Special Expertise Panel for SHRM. The difference, Cartwright noted, is that in the current environment, incentive compensation will be based largely on the individual’s contribution to the company’s performance.
Research by the Hay Group supported this thesis, with 51% of the companies surveyed indicating they would rely on “hard” financial metrics such as revenue, profit and sales to evaluate the performance of individual contributors.
This approach presents a slippery slope for retail executives, many of whom face an uphill battle if they are to exceed expectations for the new fiscal year. One issue is that year-over-year improvements will be harder to achieve this year than in 2010, when retailers were competing against back-to-back years of dismal comp sales in 2008 and 2009. From this perspective, some may view retail executives as victims of their own successes.
Truthfully, however, the stalled economy remains the real culprit. Performance-based pay usually takes a hit when a company is unable to grow its bottom line, and the domestic market looks bleak with the U.S. GDP expected to decline from 2.6% in 2010 to an even more sluggish 2.2% this year.
This article first appeared in the January issue of Chain Store Age, a sister publication of Home Channel News. e