RETAILING
Old Navy’s sales are soaring
and the bargain basement never looked so good. What
started as The Gap’s attempt to compete with discount stores like Sears and Target, which
had been eating into its sales by selling their own brands of basics, has turned into retail’s
biggest success story.
Old Navy is The Gap’s an-swer to the modern-day discount store. Although about 80
percent of its merchandise is priced under $30, Old Navy is anything but your plain
vanilla discount store. Instead, it’s part bargain hunter’s paradise and way-cool hangout—
and the combination is irresistible to shoppers, not only stealing sales away from the likes
of Kmart but department store shoppers as well. “Very basic merchandise in a very
sophisticated physical environment,” says Ed Nardoza, editor of the fashion bible
Women’s Wear Daily, who thinks Old Navy is a brilliant example of shopping as
entertainment.
In retrospect, the idea that makes Old Navy sail seems obvious enough: make the
clothes inexpensive and the environment amusing. When The Gap CEO Mickey Drexler
hatched the concept, however, no one catering to the bargain shopper paid much attention
to atmosphere. As executives at The Gap started Old Navy in 1994, they talked about
what they didn’t like about discount stores—poor quality, colors that were always just a
bit off. Discount shopping was the hot growth area in retailing, but, Drexler asked, did it
need to be so depressing?
What emerged from their brainstorming is Old Navy—big, loud, fun, and cheap. Old
Navy stores are fitted out with exposed pipes and raw concrete floors. Neon signs guide
shoppers down wide aisles. Instead of shopping carts, there are the cool mesh shopping
bags. There are listening booths where customers can sample CDs and old grocery-store
refrigerator cases stocked with T-shirts shrink-wrapped like packages of ground beef.
Customers are greeted with free lemonade, pretzels, and a fleet of golf carts to ease the
long walk from the parking lot. Then there’s Magic, Old Navy’s irresistible mutt mascot.
The pitch was perfect and Old Navy was an instant success.
Sales at Old Navy have already passed a billion dollars in
annual sales—a feat no other retail clothier has managed so
quickly. By 2000, there will likely be close to five hundred
Old Navy stores around the country with sales approaching or
surpassing $4 billion. Although profit margins are slimmer at
Old Navy stores compared to its siblings The Gap and Banana
Republic, the chain solves this problem by keeping the design
of its clothing very basic—simple A-line dresses, drawstring
pants, and T-shirts are standard items—and making them in
attractive but less costly fabrics. To make its clothes more
fashionable, the store often relies on clever packaging. Such
common, disparate pieces as underwear, socks, and longsleeved tees might be dyed the same color and showcased
together in an eye -catching bundle or in a refurbished ice
cream truck.
Old Navy will soon begin selling its clothing on the Web, like its older sibling The
Gap, giving shoppers another avenue to experience the chain’s “discount shopping with
an edge.” Visit The Gap’s site at http://www. gap.com.1
Attracting consumers is a major concern for today’s
retailers. What factors do you see as being important to a
store’s retailing mix? This chapter seeks to answer this
question and many more by discussing retailers and
w h o l e s a l e r s a s i n t e r m e diaries in the channel of d i s - t r i b u t i o n . E a c h
performs an important role in moving products and services to
the ultimate consumer.
The chapter begins with a discussion of the role of retailing
and the ways in which retail operations can be classified. Also
included is a description of the decisions involved in
developing a retail marketing strategy. The chapter concludes
with a summary of the types of wh olesalers.
Ethics in Marketing
The Ethical Dilemma of Rent-to-Own Retailers
More than seventy-five hundred retail outlets nationwide operate in the rent-to-own
(RTO) industry. RTO retail outlets provide a variety of products to their customers,
including furniture, appliances, electronics, and jewelry. RTO contracts allow customers
to take ownership of the merchandise at the end of a specified series of payments.
However, the $4 billion RTO retailing industry has been under fire lately from critics who
allege these stores charge exorbitant interest rates on consumer goods and unfairly target
poor and minority consumers who don’t have credit cards. Several lawsuits have already
been decided in favor of customers who dealt with rent-to-own retailers. In Minnesota, a
federal judge awarded about $30 million to consumers in a class- action suit that
accused the former Rent-A-Center of charging them unlawful and excessive interest rates
on rent-to-own sales contracts.
A report by the U.S. Public Interest Research Group found average annual interest
rates charged by rent-to-own retailers of 100 percent, five times the typical rate on credit
cards. Some were as high as 275 percent. The survey also found that the rates were not
disclosed to the customer and that 37 percent of items in stores were not clearly marked
to show whether they were new or used. RTO agreements generally only make explicit
the cash price (the retail price of the merchandise if purchased in full immediately) and
the weekly or monthly installment, but typically fail to disclose the interest associated
with the difference in the two.
Depending on the company, the product, and the terms of the contract, renting-to-buy
will cost one and a half to three times more than purchasing the item outright—even if the
customer financed the purchase with a high-rate credit card. One source describes how a
Rent-A-Center store in Roanoke, Virginia, profited by offering a 20-inch Zenith
television for $14.99 a week for seventy-four weeks, totaling $1,109.26. The same set
was on sale at a Sears store across town for $329.99. A 1995 Consumer Reports article
narrates similar situations in which consumers are unaware that they are purchasing
merchandise at effective annual interest rates that exceed 250 percent.
Most often, rent-to-own customers are consumers who can least afford the interest
rates and fees charged—low-income individuals whose credit is not good or who have
difficulty establishing credit. In some cases, these individuals believe they have nowhere
else to turn to buy the goods they want, or they simply don’t understand how much they
are being charged in the long run. RTO outlets are generally located in or near
communities of relative poverty. Promotions are targeted toward members of these
communities, offering the opportunity to rent to own at weekly or monthly rental rates
with no credit checks. Because of their lower socioeconomic status, these customers generally
lack cash to purchase outright from ordinary retailers and are therefore particularly
sensitive to no-credit-check policies.
At the heart of the RTO dispute is a single question: Are rent-to-own transactions
installment sales at usurious interest rates, or are they, as the industry says, unique
transactions with exceptionally high costs to justify the high prices? To decide, readers
must first understand how RTO deals work. At the onset of the agreement, the customer
signs a contract spelling out the cost of the weekly or monthly payments, the number of
payments to be made, and the total that will be paid. If the consumer makes all payments
as scheduled, he or she keeps the item at the end of the deal. If the consumer is late or
misses a payment, the property can be repossessed and any equity that the consumer
thought was built up in the item is gone. In some cases, if a payment is simply late, the
contract allows the consumer to “reinstate” the existing contract for a fee.
Critics argue that the RTO industry legally gets around truth-in-lending laws that
require uniform disclosure of annual interest rates and usury laws, which can cap the
interest rates lenders charge, by calling their agreements rental contracts. Further, the
industry’s “re- instatement” charges are nothing more than a late fee on a consumer
credit transaction. The rent-to-own industry counters that about 75 percent of customers
cancel their contracts within four months. Rental companies must then go through the
cost of collecting their merchandise, refurbishing it, and renting it out again. Only 25
percent of the industry’s customers rent long enough to own.67
What solutions do you think are needed to resolve the ethical dilemmas in the rent-toown industry? What consumer education programs could be developed to assist lowerincome consumers purchase the goods they want without having to pay the higher prices
charged by RTO retailers? Are there some programs that other retailers could develop
that would provide low- income consumers with less costly retail options?
Global Perspectives
Japan Wakes Up and Smells Starbucks
Starbucks is giving Japanese coffee-bar chains the jitters. When a billboard proclaiming
“Opening Soon: Starbucks Coffee” appeared in Tokyo’s fashionable Omotesando district,
local coffee bars went into a flurry of activity. One nearby coffee bar enlisted real estate
agents to help determine where the new Starbucks might open shop. Other Japanese
coffee bars began offering “Seattle Coffee” or remodeled their shops to look like those of
Starbucks. Still others went on intelligence missions to the United States to study
Starbucks’s secrets—all for good reason. Starbucks plans to open at least forty new stores
in the Pacific Rim by mid-1998, including South Korea, Singapore, Taiwan, and the
Philippines. Indeed, Starbucks is so committed to having a presence in every major
market in the Pacific Rim and Asia that it’s very possible that the coffee chain may one
day have more stores there than it does in North America.
SuchanxietymayseemoddforJapanesecoffeeretailers,giventhatJapanisalreadytheworld’snum- berthreecoffeeconsumer,aftertheUnited
StatesandGermany.Withsomanycoffeeshopsandcoffeevendingmachinesalreadyinplace—Coca-Colaalonehasmorethan eighthundred
thousandvending machinesthatsellcannedcoffee—Japan’smarketlookssaturated.Meanwhile,theJapanesehaven’tdevelopedatasteforespresso
drinkslikecaffelatteandcaffemocha;instead,theydrinkalotofinstantcoffeeorready-to-drinkcoffeeincans,aswellasAmerican-stylehotcoffee.
Starbucks has a reputation
for knowing how to create a thirst, though, and Japanese
coffee purveyors fear the new Starbucks’s coffee bars, the first of which opened in
Tokyo’s swank Ginza shopping district, may be able to create new coffee markets in
Japan where Japa-nese efforts have failed. Starbucks’s entrance in the Japanese market
worries Japanese coffee executives because they don’t know how to replicate its touch.
The fact that the Japanese see big openings in Japan for a U.S. company like Starbucks
suggests how far behind Japan is in fostering creative, consumer-oriented service
companies.
SomeJapanesecofee-chainoperatorsadmitheylackStarbucks’ssophisticationinwhatheycal“packagingthestore”:meshingsuchelementsasstoredesign,packagedesign,andothermerchandisingtechniquesintoa
compelingidentiy.
Japanese consumers might need a little hand-holding at first to guide them through the thicket of grandes
and frappucinos. However, Yuji Tsunoda, president of Starbucks Coffee Japan, thinks they’ll catch on fast.
“Four years ago, how many Americans knew what a latte, doppio espresso, or cappucino were?” he said. “It’s
up to us to help our customers understand coffee better.”
Indeed, at Tokyo’s new Starbucks outlet, the wall menu is posted in both English and
Japa-nese. Starbucks is even providing Japanese-language versions of pamphlets like
“Espresso—What You Need to Know.” Employees and customers alike can refer to
blueprint-like diagrams detailing the exact specifications of a caffe latte, down to the
quarter inch of foamed milk that goes on top. The Tokyo shop features the same colorful
coffee paraphernalia featured in U.S. stores, including mugs, espresso makers, plunger
coffee brewers, filters, and coasters.
Although the coffee is cheaper at the local coffee bar down the street—just 160 yen, or $1.50, versus 250
yen, about $2.30—the atmosphere with its low ceiling, somber interior, and cafeteria-style trays hardly evokes
the ambiance of a gourmet coffee house. Neither does the food. Coffee-accompanying snacks include fried
chicken with spaghetti on a hot dog bun and a salty fried noodle sandwich with seaweed on top. Starbucks, on
the other hand, takes a more epicurean tack—cookies, muffins, croissants, and sandwiches made from pita
bread and sesame seed bagels.79
What retailing strategies would you suggest local Japanese coffee retailers consider to
compete with Starbucks? Do you think Starbucks’s cookie-cutter approach to selling
coffee and accompanying food in global markets will be successful? Why or why not?
Entrepreneurial Insights
Hand Technologies Sells PCs Like Tupperware
HandTechnologies,anAustin,Texas, startup company, is hoping that what worked for cosmetics and
plastic food storage bins in the 1960s will work again for computers today.
Founded by members of the management team that set up Dell Computers in the
United Kingdom, Hand Technologies sells computers through a direct retailing method
using a team of consultants to sell computer products via demonstrations in the home and
local seminars for schools and families. The company now has over one thousand part-
time computer buffs, mostly men, in the United States and United Kingdom to sell
personal computers directly to the customer.
As many computer sellers try to follow Dell’s and Gateway’s direct approach of
selling directly to customers over the telephone or Internet, Hand Technologies is betting
on the personal approach. Chief executive Andrew Harris explains that whereas Dell
caters to businesses and experienced users, Hand’s mission is to provide a friendly face
before people decide to buy a computer. Hand customers are generally not as computer
literate as Dell buyers or they are first-time computer buyers.
Harris cofounded Hand on the premise that new users of technology are poorly served
by traditional retail and mail-order suppliers. More than anything else, new users need
time from a friendly, computer-knowledgeable person, not just during the buying process,
but while setting up and learning about the computer and the Internet. In fact, the
company’s name has a double meaning: every sale begins with a handshake, and the
company provides hand-holding to get a customer started and supported down the line.
Hand supplies all the products and services that home or small business users need to
set up and run a computer and gain access to the Internet. It has priced all its products and
services to be a better value than superstores with no price premium, while still offering
respected brands such as Compaq, Hewlett-Packard, IBM, Fujitsu, Apple, Microsoft, and
Lexmark.
People becoming Hand technology consultants are able to use their technical
knowledge to earn money in a flexible working environment. Using the company’s Web
page, prospective Hand salespeople take
a hundred-question on-line quiz to test their
computer skills. After passing the test, salespeople can set up a Web page of their own on
the site and start making contacts to sell computers. For $95, each Hand sales consultant
receives a starter pack that includes business cards, brochures, and a T-shirt.
Commissions average about 10 percent of sales.
Hand’s aim is to give people quality personal service while they are in the process of
buying a computer. Technology consultants demonstrate and explain products and the
Internet in a customer’s home or office, at a level to suit their existing knowledge. If a
customer decides to buy, technology consultants order electronically via Hand’s Web site
and the products are shipped directly to the customer. The technology consultant then
visits the customer to set up the computer and help him or her learn how to use it.
The Hand personal approach to selling computers is expected to be quite successful.
Because buyers are able to understand and assimilate the technology properly, they are
more satisfied with their purchase. This encourages more sales, leads to fewer product
returns, and helps alleviate the level of demand for customer support in the set-up and
learning phase of owning a computer.34
What other product can you think of that would sell successfully using a direct
retailing approach? Explain your choice.
4 closing
Have a friend use the end-of-chapter materials to quiz you. Instead of just giving the
answer to the Review Quiz questions, try to give the rationale also. Don’t forget to visit
the Marketing Web site at http://lamb.swcollege.com for helpful study aids.
marketing miscues
Planet Hollywood Theme Restaurants
Consumers are demanding more fromtheirdiningexperiences:They want to be entertained. Restaurateurs have responded to consumers’ desire to be entertained with a slew of themed
restaurants such as the Rainforest Cafe, the Official All Star Cafe, Hard Rock Cafe, and
the Fashion Cafe. Lately, however, analysts have raised questions about the viability of
the “eatertainment” business. Eatertainment lets operators charge high prices for ordinary
food in exchange for an offbeat and entertaining atmosphere.
The eatertainment concept has proved difficult for Planet Hollywood, the celebritythemed restaurant that promised star sitings and movie memorabilia. The lines that
immediately formed at Planet Hollywood restaurants in its early days made it the envy of
the restaurant business. Stock analysts picked it to become an instant global entertainment
conglomerate and compared Planet Hollywood and its brand-name potential to Starbucks,
Disney, andNike.Amongthecelebritieswith big investments in Planet Hollywood areArnoldSchwarzenegger,
Sylvester Stallone, Bruce Willis, Demi Moore, and Whoopi Goldberg.
Then all of those people waiting in line outside
Planet Hollywood sat down to eat. What they found was
unappetizing and expensive food, halogen spotlights
trained annoyingly on their tables, and video screens
showing the movie stars conspicuously absent from the
restaurant. On the way out they were greeted by a
souvenir shop hawking $18 Planet Hollywood T -shirts.
As a result, same-store sales at Planet Hollywood restaurants fell 11 percent in 1997, and in the first and
second quarters of 1998 plunged 13 percent and 17 percent, respectively. Meantime, Planet Hollywood Stock
plunged from $32.13 the day of its initial offering in April 1996—a level it never reached again—to $3.25 in
November 1998.
Incorporating entertainment has its risks, one of those being overexposure. Planet
Hollywood’s rapid expansion to eighty-seven restaurants means that a substantial portion
of its potential customer base has already experienced its celebrity artifacts and movie
props, often at several locations. The more Planet Hollywood’s that proliferate, the less
special they appear. Now, Planet Hollywood restaurants can be found not only in
glamorous cities like New York, London, Paris, and Las Vegas but also in unglamorous
places such as Gurnee Mills, Illinois, known for its giant outlet mall, and the Mall of
America near Minneapolis.
Another danger is relying too heavily on the themed decor while not paying attention to
food quality and service. Once visitors to the restaurant have “been there, done that” the
entertainment value falls away and the operators must rely on good food and a good
experience to bring them back a second time. Americans also have notoriously short
attention spans and a tendency to react to familiarity with contempt—factors that almost
ensure today’s exciting theme restaurant is tomorrow’s yawner. As more theme
restaurants come along, the customer has trouble distinguishing one from the other.
The link with movie stars, who received stock and options in
return for promotional appearances, has also led to Planet
Hollywood’s woes. Stars come out for grand openings but
seldom ever appear again. Few celebrities want to hang out
where they can be easily found by throngs of adoring fans.
Questions
1. What strategies would you suggest Planet Hollywood implement to reverse its sales
decline and bring back customers a second time?
2. Are you willing to pay more for merchandise or food to be entertained? Why or why
not?
SOURCES: Dan Fost, “That’s Eatertainment,” Marketing Tools, June 1998. Richard Gibson, “Lost Appetite:
Fame Proves Fleeting at Planet Hollywood as Fans Avoid Reruns,” Wall Street Journal, 7 October 1998, pp.
A1, A6. Richard Gibson, “Planet Hollywood Reels as ‘Eatertainment’ Fades,” Wall Street Journal, 23 January
1998, pp. B1, B7. Karen J. Sack, “Restaurants,” Standard & Poor’s Industry Surveys, Volume 166, Number
23, Section 1, 4 June 1998, p. 12.
critical thinking case
The Home Depot
The Home Depot is North America’s largest home improvement retailer, currently
operating over 640 warehouse-style home centers in the United States and Canada, with net
sales for fiscal 1998 reaching close to $30 billion. By 2001, the chain is expected to have
as many as 1,350 Depot centers, about twice as many stores as at the end of 1998. Two
new stores open every week. Since founders Arthur Blank and Bernie Marcus opened the
first Depot store in Atlanta in 1978, they have watched their trademark orange aprons
become just as much a part of Americana as the golden arches.
The Home Depot is synonymous with home improvement and has built its reputation
on broad assortments, low prices, and quality customer service. Depot stores cater to doit-yourselfers as well as to professionals in the home improvement, construction, and
building maintenance trades. Each store stocks approximately forty thousand to fifty
thousand different kinds of building materials, home improvement supplies, and lawn and
garden products. Stores have a design center staffed by professional designers who offer
free in-store consultation for home improvement projects ranging from lighting to
computer-assisted design for kitchens and bathrooms.
The Home Depot is credited with being the leading innovator in the home
improvement retail industry by combining the economies of scale inherent in a warehouse
format with a level of customer
service unprecedented among warehouse-style retailers.
Its em-phasis on customer service and education eliminates much of the mystery for
consumers surrounding home improvement projects. The Home Depot offers many howto clinics to help customers learn how to lay tile, experiment with paint, or build an
outdoor pond.
The Home Depot’s biggest competitor in the home center industry is Lowe’s, whose
sales are only a third of The Home Depot’s. Despite the tremendous growth of both
companies, however, the sales at both The Home Depot and Lowe’s still account for only
about a fifth of the home center market. The industry remains relatively fragmented, with
ongoing opportunities for the strong to get stronger while the weaker chains and local
hardware stores get acquired or go out of business.
The Do-It-Yourself Market
The Home Improvement Research Institute estimates that the
do-it-yourself home center market had sales of $100 billion in
1997, up 4 percent from the previous year. By the end of 2001,
it estimates that this market will swell to over $121 billion, a
21 percent increase in just four years. Future growth of the
home center market depends on many factors, including the
number of homeowners, the age of the housing stock, interest
rates, housing turnover, and housing prices. Home ownership
rates, currently about 65 percent, continue to rise due to low
interest rates, a robust economy, and a wave of empowered
baby boomers who feel more comfortable doing home repairs
and improvement projects.
Studies show that people are staying in their homes later in life, a trend
that enhances The Home Depot’s opportunities to add new stores across
North America as well as increase sales in its existing stores. This trend,
along with a strong housing market and low interest rates, seem s to be
working in The Home Depot’s favor. Today, the typical Home Depot store
generates $43 million in annual sales, up from $29 million in 1990.
Between 1990 and 1998, annual average household spending in Depot
stores jumped 141 percent, from $191 to $46 2. That dropped the number of
households needed to support a single store from 154,000 to 93,000 in the
same period.
Even in an economic turndown, in which home sales grow and interest rates rise, The
Home Depot feels confident that it can grow. When people aren’t buying houses, the
thinking goes, they are more likely to fix up their old ones.
The Home Depot reaches more do-it-yourself customers every year by opening new
stores at a steady rate. Growing the do-it-yourself customer base through store expansion
is the company’s primary growth vehicle. Research shows that do-it-yourself spending
increases when a Home Depot store enters a market for the first time. As a result, the
company continues to add stores to even its most mature markets to further penetrate and
increase its presence in the marketplace.
Added services targeted to the do-it-yourselfer promise to expand The Home Depot’s reach into everyone’s
home improvement project. How-to clinics teach customers to take on projects of varying degrees of difficulty,
from closet organization to installing ceramic tile. In-store professional decorators provide free kitchen
and bath design services. Customers can have their purchases delivered to their home seven days a week, or, if
they can’t wait to have it delivered, customers can rent one of The Home Depot’s Load ’N Go trucks to bring
their purchases home. Customers can also apply for a Home Depot charge card for an affordable way to finance
their home improvement purchases. Several stores are also experimentingwithtwenty-four-houroperations as well as
installation services for roofing, vinyl siding, and vinyl replacement windows. Some Depot stores are pushing
even further into the remodeling business by offering various remodeling services such as complete kitchen
and bath makeovers.
The Professional Market
The Home Depot also targets the professional market, which
includes contractors, electricians, landscapers, plumbers,
remodelers, and property maintenance managers. The
professional market, currently estimated at $215 billion
annually, provides the company with attractive growth
opportunities because The Home Depot’s share of this market
is only about 4 percent. The typical Home Depot professional
customer is a repair and remodeling professional who
purchases up to $200,000 of products annually but buys less
than 10 percent of this from the chain. The Home Depot’s goal
is to capture more of this customer’s purchases by responding
to his or her distinct product and service needs.
A study conducted by The Home Depot on the professional business
market found that the professional buyer wants efficient, personalized
service, convenient locations and hours, appropriate products and product
quantities, competitive prices, customized delivery services, and flexi ble
credit programs. The Home Depot has responded to these needs by offering
such things as packaging in multiple quantities and the availability of “job
lot quantities” for professional customers who need to buy in larger
quantities than the do -it-yourselfers. Providing job lot quantities not only
makes shopping easier for professionals but also increases The Home
Depot’s sales in these product areas.
A test in The Home Depot’s Austin, Texas, market includes adding associates whose
primary responsibility is serving and build-ing relationships with professional business
customers. An in-store Pro Service Desk assists professional customers to more quickly
meet their product and service needs. Additionally, customized services such as enhanced
ordering, credit programs, and delivery options are available to professional business
customers.
The Home Depot also distributes its ProBook
professional equipment and supply catalog to
professional customers across North America as a way
to further reach this market. The ProBook contains
over fifteen thousand products from its stores chosen
especially for facility maintenance managers and the
building trades.
Future Expansion
With only a fraction of the home improvement market dominated by big-box retailers,
The Home Depot is looking for more ways to expand its market share. Besides its
aggressive goal of 1,350 stores by 2001 and its enhanced service tests in the do-it-yourself
and professional business buyer markets, The Home Depot is experimenting with several
alternative store formats, different distribution methods, and global expansion.
Smaller Stores Realizing that its warehouse-sized Depot stores (the typical new store is
108,000 square feet) turn off many customers who say it is difficult to get in and out
quickly when all they need are a few specific items, The Home Depot is introducing new
scaled-down versions (between 35,000 and 40,000 square feet) with the look and feel of a
traditional hardware store. The company plans to open several stores in the Northeast and
on the East coast to serve do-it-yourselfers who prefer the layout of a smaller shop. The
smaller stores will have The Home Depot’s trademark quality service and low prices. The
test will help The Home Depot determine the best products, services, and methods of
gaining home improvement sales it would not be able to get inside its traditional Home
Depot stores.
Stores for the “Have-Someone-Do-It-For-You” Market As house- hold income
levels increase, baby boomers age, and the elderly stay in their homes
longer, The Home Depot speculates that a number of today’s do -ityourselfers will become tomorrow’s buy-it-yourselfers: customers who
select and purchase the products they put in their homes, but who prefer to
hire someone else to complete the proj -ect. In addition to the installation
services that are currently available in Depot stores, the company
introduced Expo Design Centers to cater to this growing market.
Through its Expo Design Centers, The Home Depot is
pursuing a similar strategy to that of The G ap Inc., which
operates its separate Banana Republic chain to sell more
stylish and expensive apparel. Instead of gazing at sawdust and
spackling paste in a Depot store, customers at Expo outlets
stroll through romantically lit mazes of model kitchens and
bathrooms. The Expo formula focuses on total solutions for
customers undertaking renovation projects throughout their
homes. Each store features more than twenty complete kitchen
and bath vignettes to help customers visualize their dreams.
The stores also offer a broad array of appliances, floor
coverings, tiles, lighting products, and window and wall coverings, such as $6,599 Sub-Zero refrigerators and $39,500
Schonbek chandeliers. Only about 10 percent of Expo’s
inventory is the same as that at Depot stores.
The first Expo Design Center opened in 1990. After several years of tinkering with the
format and merchandise mix, The Home Depot is ready for mass expansion. The Expo
division is expected to grow to approximately two hundred stores by 2005. Sears is
opening up similar retail stores, called The Great Indoors, aimed at challenging Expo
stores.
New Distribution Methods The Home Depot’s recent acquisitions of National Blind & Wallpaper Factory, a
$70 million Detroit-based catalog company specializing in window coverings and wallpaper, and Maintenance
Warehouse/ America Corporation, a private company that was the nation’s top direct-mail marketer of
maintenance and repair products to lodging and multifamily housing facilities managers, add direct distribution
channels to the company’s already strong retail channel.
The Home Depot is hoping the purchase of National
Blind will improve customer service in its hundreds of
Depot stores. Company executives admit that Depot
employees, after helping customers pick o ut window
and wall covering products in the stores, sometimes
stumble in the fitting process, often omitting key
questions that can lead to the wrong size being
ordered. Because National Blind sells all its products
by telephone, operators follow a strict script designed
to ensure the customer gets the right product, size, and
color. Depot stores are now experimenting with having
customers order their blinds and wallpaper directly
through National Blind after picking it out in the
store.
The acquisition of Maintenance Warehouse provides The
Home Depot with the means to add a high -growth direct mail
distribution channel to its business and to reach a larger
segment of customers for maintenance and repair products.
Through the combination of Maintenance Wareho use’s
capabilities and The Home Depot’s purchasing and marketing
powers, the company plans to grow its position aggressively in
this attractive segment of the professional business customer
market.
The Internet also holds some promise for increasing sales through direct channels. An
initial foray into on-line sales is expected in 1999 from the company’s Web site at
http://www.homedepot.com.
Global Expansion The Home Depot recently opened its first stores outside of North
America in Santiago, Chile, through a joint venture agreement with S.A.C.I. Falabella,
the largest department store retailer in Chile. The company plans to employ a focused,
regional strategy in its global expansion. Given a successful entry into Chile, its plans are
to expand into other areas of South America, most likely Argentina, Peru, and Brazil. Its
experiments in Chile will serve as an interesting case study of whether a highly successful
American corporation can take its winning culture abroad and make it work despite
language barriers, long supply lines, and differing customer tastes.
Questions
1. How can The Home Depot maintain its high customer-service standards with a
workforce approaching 150,000 associates, some now in countries abroad, over the
next several years?
2. Do you feel the company can successfully penetrate and dominate new markets, like
the $216 billion professional maintenance industry and the have-someone-do-it-for-you
market, while keeping its core do-it-yourself customers from growing bored with
existing stores?
3. Do you feel The Home Depot risks cannibalization at its traditional Depot store by
opening smaller Depot hardware stores and specialized Expo stores?
4.
Lowe’s plans a similar strategy of opening up big -box
retail stores to challenge The Home Depot’s share of the
home improvement market. How can Lowe’s distinguish itself
in the marketplace to obtain a competitive advantage over
The Home Depot?
5. The Home Depot plans to continue its global expansion into other South American
countries like Argentina and Brazil. What factors should the company analyze before
building stores in these countries?
SOURCES:Jed Graham, “Home Depot Shrinks Format to Lure Hardware Store Fans,”
Investor’s Business Daily, 14 July 1998, p. A29. James R. Hagerty, “Gilding the Drill
Bit? Hardware Giants Go High-End,” Wall Street Journal, 28 July 1998, pp. B1, B8.
James R. Hagerty, “Home Depot Offering Home-Remodeling Services in Limited Test,”
Dow Jones Online News, 27 July 1998. James R. Hagerty, “Home Depot’s New Advice
for Do-It-Yourselfers: Don’t,” Wall Street Journal, 19 October 1998, p. B1, B4. Press
releases and information atThe Home Depot’s Web site, http://www. homedepot.com.
The Home Depot 1995 Annual Report. The Home Depot 1996 Annual Report. The Home
Depot 1997 Annual Report. Robert J. Izmirlian, “Retailing: Specialty,” Standard &
Poor’s Industry Surveys, Volume 166, Number 4, Section 2, 22 January 1998, pp. 7–8.
Roy S. Johnson, “Home Depot Renovates,” Fortune, 23 November 1998, pp. 200–212.
Clifford Krauss, “Foreign Expansion: Well-Planned or Ill-Timed?” The New York
Times, 6 September 1998, p. 1.
exhibit A
The $100 Billion
Do-It-Yourself Market
exhibit B
The $215 Billion Professional Business Customer Market