Home Depot learns to go local in some markets

Shortly after taking command of Home Depot Inc. in early 2007, Frank Blake found a pyramid of riding lawn mowers outside a store in Arizona, where lush lawns are uncommon. It turned out the store had sold only one such mower in two years. Then, he learned that the retailer was chronically short of Makita power tools on the West Coast, where they sell particularly well.

Blake ordered changes in Home Depot’s purchasing system, which had favored national uniformity at the expense of local customer preferences. He got a glimpse of the results on a recent trip to Detroit, where stores in some neighborhoods favored charcoal barbecue grills, while others featured gas grills.

The shift in Home Depot’s buying patterns highlights a tricky problem for national retailers: balancing local demand with national efficiency. In Home Depot’s case, the new, more targeted buying has helped lower merchandise costs by reducing unsold goods.

“A lot of retailers go through this shift from localization to centralization as they grow bigger,” said Stephen Hoch, a marketing professor at the University of Pennsylvania’s Wharton School. But some retailers, such as Home Depot, can take it too far, he added.

When Safeway Inc. in 2001 bought Genuardi’s, a small Philadelphia-area supermarket chain, it dropped several local and regional products in favor of national brands. Customers revolted and sales dropped for three years before recovering, says Burt Flickinger, managing director of Strategic Marketing Group, a consulting company.

Safeway spokeswoman Teena Massingil says some early changes “were not well-received, but adjustments were made that went over well.” She says Safeway revamped its organization to improve communication with stores and maintains a database to tailor offerings “on a store-by-store basis.”

J.C. Penney Co., meantime, says centralized product planning helped lead to its upturn in recent years. In 2000, Penney managers thought they were losing sales to rival Kohl’s because they had too many offerings, as each store bought its own merchandise. Penney consolidated its buying operations, which allowed it to bring more fashionable merchandise to more stores, and at lower prices for shoppers. Sales and profit rose, and Penney began opening new stores after years of retrenchment.

Wal-Mart Stores Inc., too, has struggled to find the right mix. Three years ago, Wal-Mart pushed into higher-priced, more fashionable apparel to appeal to trendier and higher-income shoppers. It initially stocked its cutting-edge line, called Metro 7, at 500 mostly urban stores, where it sold well. But when Wal-Mart brought the line to an additional 1,000 stores, there weren’t enough shoppers interested in skinny jeans and leopard-print tank tops. Inventory piled up and earnings sagged.

Fixing such problems isn’t easy or cheap. In Wal-Mart’s case, it created a group of 350 people around the country to better respond to local preferences. Wal-Mart also hired experts to produce more detailed demographic information about each store’s customer base.

Home Depot’s inventory problems stemmed from a 2001 decision by then-CEO Robert Nardelli to consolidate nine regional purchasing offices into a centralized buying operation at its Atlanta headquarters. The move saved money by leveraging buying power and simplifying life for suppliers. But managers found they couldn’t tailor merchandise for specific markets. Home Depot lost the money it saved through centralized ordering by not having the right products in the right quantities in the right stores, said Craig Menear, executive vice president of merchandising.

Mr. Blake resolved to address the issue after replacing Nardelli last year. Executives toyed with deploying expensive software to better manage inventory, but the project moved too slowly, and Home Depot was losing sales to rival Lowe’s Cos. North Carolina-based Lowe’s always has had centralized buying except for plants, which vary by climate. But it tailors local product assortments according to market surveys, says a spokeswoman.

So Home Depot executives built their own system to analyze demographic information and customer preferences. Then, the company applied the data to its huge inventory. Managers examined where higher-priced and lower-priced offerings sell best. They also looked more closely on regional preferences: Aluminum windows sell better in the South, wooden ones in the Northeast. The demographic and sales information helped managers sort stores into 30 “clusters” with similar attributes.

For purchasing, Home Depot built a hybrid system. It recreated a regional merchandise team scattered around the country in about 10 cities, though the team travels as well. The team helps the chain’s buyers, still located in Atlanta, choose suppliers and products.

Home Depot said it can’t yet specify the impact on its bottom line. But gross margin — the percentage of sales after paying for merchandise — has risen in each of the past three quarters compared with the year-ago periods. That is a rare bright spot for Home Depot, whose sales and profit have slid precipitously due to the housing slowdown. The company says the more localized buying strategy seems to be boosting sales of power tools and seasonal items. “It’s great to see change at work,” Menear said.