Home Depot expected new home construction to be off this year, maybe five to seven percent. Instead, the DIY retail giant watched as the market has fallen harder and faster than it ever expected. In October, for example, new home construction dropped a precipitous 28 percent.
"We haven't seen the worst of it yet," Robert Nardelli, CEO of Home Depot told Forbes. "Seventy-five thousand construction jobs are gone. We see these guys in our stores, competing with [established] contractors."
Mr. Nardelli spoke about the challenges facing large homebuilders such as Centex, D.R. Horton and Pulte that have taken large write-offs on inventory of raw land.
"I've never seen a pull-back so fast," he said. "It takes them 18 months to remobilize. I'm not sure they can turn it on again. If this is a soft landing, it's not a plane I want to be riding on."
Home Depot, as with others in the construction supplies business, is looking for ways to soften the blow from the current downturn and come out stronger on the other end. The company has taken a number of steps that Mr. Nardelli is counting on to make Home Depot stronger and take some of the heat off his back for his substantial compensation package and weak investor communication skills. The chain has slowed new store openings, invested in remodels, moved into new retail product categories, expanded overseas and aggressively pushed into the professional services end of the construction business.
Home Depot cut new-store openings by 37 percent last year and is putting $350 million into remodels.
The company has also sought to repair its customer service image by installing push-button call boxes in 186 stores. An associate is expected to appear within 60 seconds of the button being pushed. Another initiative called Orange Juiced offers bonuses of up to $2,000 for store associates demonstrating superior customer service.
Home Depot is also moving into product areas it believes offer it the opportunity to create incremental revenue streams, including appliances, flat-screen TVs, home security and subscription services for cell phones, cable, satellite TV and radio.
While the housing market may be getting hammered here at home, the situation is China is completely different. The home improvement market on the mainland is growing 20 percent a year and Home Depot now has a piece of that market after purchasing the 12-store Home Way business.
The final piece of Home Depot's strategy is HD Supply, which caters to large industrial and commercial builders. The division represents 13 percent of Home Depot's total revenues and was responsible for 90 percent of the company's sales growth in the third quarter.
HD Supply is looking to grow its business at the expense of smaller players in a highly fragmented market. Even with industry sales down, HD Supply's president Joseph DeAngelo, said the company is in good shape. "We're taking tons of share in the downturn," he said. "The big dog always eats first."
Discussion Questions: How much do you agree or disagree with the statement: As housing goes, so goes the U.S. economy? Will the impact of the housing market downturn begin to be felt more acutely in 2007? What will it mean for retail in the DIY channel and beyond?