After six years, Home Depot investors were left holding a bag of stock that had lost 8% of its value. During the same time period the stock of Lowe's, the No. 2 home-improvement chain, was up 188%.
If you just look at Home Depot's numbers, Nardelli did a good job. In six years, sales were up 99% and profits were up 125%.
But compare Home Depot to Lowe's. When Nardelli took over, Home Depot had revenues that were 2.4 times that of Lowe's. When Nardelli left, Home Depot had revenues that were only 1.9 times that of Lowe's.
Room for growth
There's still plenty of room for growth at both chains. Lowe's estimates the U.S. home-improvement market is $700 billion. If that's true, Home Depot and Lowe's combined have less than 18% of the market.
Why did Home Depot fail to keep pace with its smaller rival? I believe it's because the chain violated one of the fundamental laws of marketing -- the law of focus.
What was Nardelli's strategy? It was a concept he called "The three Es."
- Enhancing the core.
- Extending the business.
- Expanding the market.
In the past two years, Home Depot spent more than $6 billion to acquire some 25 wholesale suppliers to bulk up Home Depot Supply, its major effort to get into the building-supply business.
The grass is always greener on the other side. Why is it that a company like Home Depot keeps looking for other businesses to get into when it still hasn't dominated its existing business. (Keep in mind that 18% market share for both Home Depot and Lowe's.)
Furthermore, building supply and home supply are two different businesses. "Contractors rely on long-standing relationships with suppliers and trained salespeople," The Wall Street Journal pointed out. "Many associate the Home Depot brand with do-it-yourselfers and soccer moms pushing shopping carts, and avoid the stores."
In my experience, Home Depot is typical of many companies that keep looking to increase their businesses by 1) line extension, 2) diversification or 3) synergy. None of these strategies can compare with the power of a simple focus.
You might think that Home Depot would have learned a lesson from its previous experience with one of the Es, "extending the business."
Expo Design Centers
In 1991, the company introduced Expo Design Center, a kitchen and bath project-based business. Today there are just 34 Expo Design Centers and it's my guess they're not very profitable and a big distraction for Home Depot management.
In 1995, the company introduced Home Depot CrossRoads, a concept intended to service rural markets with products like tractor tires. The concept died an early death.
In 1999, the company introduced Villager's Hardware, a mom-and-pop-style store, one-third the size of a typical Home Depot. Why would anyone try to launch a hardware brand (with a weak name) in a declining market dominated by two major chains, TrueValue and Ace? Villager's Hardware is no longer with us.
Nardelli should have focused all his efforts on his Home Depot brand. Instead of an aggressive campaign to cut costs (not generally a good idea in retail), he should have poured money and effort into keeping the Home Depot ahead of the pack.
From plumbers to part-timers
"Mr. Nardelli moved to cut back on higher-paid full-time employees with experience as plumbers or handymen," the Wall Street Journal reported, "and to rely more on part-time workers with less experience answering home-improvement questions from customers."
Nothing lasts forever. In many categories, brands need constant attention to keep them up-to-date and "with it."
For instance, take a look at what happened to Dell. The same thing that happened to Home Depot. The first company to sell personal computers direct, Dell built a powerful brand and a powerful company by building PCs from scratch so it could tailor them to the needs of the business community. (Headline of Dell brochure: "New computers custom built to do your business your way." Not very poetic, but certainly very definitive.)
Then Dell jumped into the consumer market with both consumer electronics and consumer PCs. Remember the Steven character played by Benjamin Curtis on TV: "Dude, you're gettin' a Dell?" (After Curtis was arrested with marijuana in his possession, he and the campaign were scratched.)
But the consumer buyer is a different customer than the business buyer. Tailor a computer to the consumer's needs? How many consumers knew what they needed? Furthermore, the business buyer didn't particularly care what a computer looked like; they were much more concerned with how it performed.
But most consumers liked to touch and feel a PC before buying. In spite of massive advertising campaigns, consumers represent only 15% of Dell's sales today. (In 2005, Dell was the seventh largest advertised brand in the U.S. in terms of measured media, spending an estimated $776 million.)
In spite of broadening its line, Dell's share of personal computer sales fell to just 14% of the worldwide market from a high three years ago of 18%. And CEO Kevin Rollins met the same fate as Robert Nardelli.
What's happening at your company? The talk in most boardrooms of America is about expansion. How do we increase sales by expanding into new products, new services, new distribution, new price categories?
In most boardrooms, focus is something you do with a camera, not a corporation.
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Al Ries is the author or co-author of 11 books on marketing, including his latest, The Origin of Brands. He and his daughter Laura run the Atlanta-based marketing strategy firm Ries & Ries. Their website is Ries.com.