Improving the Customer Experience at Home Depot
Rev. 12-2012
During 1990’s, the Home Depot was well renowned for its orange-blooded entrepreneurial
culture and outstanding customer service. From the beginning, the retailer took a long-term
approach by training its associates to form enduring customer relationships rather than push
for incremental sales gains. As a result, the company grew very quickly becoming the fastest
retailer in history to reach sales milestones of $30 billion, $40 billion, $50 billion, $60 billion and
$70 billion in revenuesi. Despite this remarkable success, Marcus and Blank, the founders of
the Home Depot, stepped down as leaders stating that continued growth required new
leadership with fresh and innovative business approaches.
Thus, in 2001, Robert Nardelli was named Chief Executive Office of the Home Depot. Nardelli
introduced many new initiatives to the company such as, centralized buying, company-wide
analytics and improved information systems, which were essential for the company to remain
competitive. Many of his other changes, however, led to significant dissatisfaction, low morale,
high turnover, reduced productivity, and general discontent among the associates that
seriously derailed the company from the customer-centric approach that made the Home
Depot such a success story during the Marcus and Blank era.
The result was the most dramatic decrease in customer satisfaction in retailing history. In 2001,
the Home Depot and Lowe’s both had customer satisfaction scores of 74 on the American
Customer Satisfaction Index (ACSI). By 2005 however, customer satisfaction at the Home Depot
fell to 67, becoming the worst performing retailer on the American Customer Satisfaction Index
(ACSI) that year.ii As Claus Fornell aptly stated: “Home Depot had devalued its most critical
asset: the health of customer relationships”.iii
In turn, this drastic decline in satisfaction led to a significant deterioration in financial
performance for the company, as well. By the fourth quarter of 2006, earnings for the
company decreased by 28 percent and comparable store sales declined by 6.6 percent. This
represented the first period of financial decline in the history of the Home Depot.iv By the end
of that year, Frank Blake replaced Nardelli as the Chief Executive Office of the Home Depot.
Frank Blake, heralded by many as the “calmer-in-chief”, represented a much-needed departure
from the command-and-control style of Nardelli.v Putting the Home Depot on the right course,
however, was a huge under-taking even for the most experienced of leaders.vi Blake began by
investing $2 billion in five key areas: 1) associate engagement, 2) product excitement, 3)
product availability, 4) shopping environment and 5) professional or trade customer (“own the
pro”).vii
Although it took some time, under Blake’s leadership, the company finally experienced notable
improvement in many important areas. For example, customer satisfaction increased by 11
points on the American Customer Satisfaction Index (ACSI) between 2007 and 2011 and
voluntary associate attrition dropped by 20 percent by the end of 2010.viii
This case was prepared by Dr. Ronald L. Hess, Jr., Associate Professor of Business at the Mason School of
Business as a basis for class discussion. It is not intended to illustrate either effective or ineffective
management.
W&M-M-174
In addition, the company reported better overall retail sales and comparable store sales growth
in 2010 and 2011. In 2010, overall sales and comparable store sales increased by 2.8 and 2.9
percent, respectively (See Table A below).ix In the second quarter of 2011, the Home Depot
reported 4.2 percent increase in total sales and 4.3 percent growth in comparable store sales.x
See Exhibit 1 for annual financial statements for the Home Depot for 2009-2011.
Table A: Total Sales and Same-Store Sales Percentages 2007-2011Q2*
Total Sales
Comparable
Store Sales
2007
-2.1%
2008
-7.2%
2009
-7.2%
2010
2.8%
2011-Q1
-0.2%
2011-Q2
4.2%
-6.7%
-8.7%
-6.6%
2.9%
-0.6%
4.3%
* Source: Home Depot Annual Reports, homedepot.com
The story, however, was very different at Lowe’s. In Q2 2011, Lowe’s reported overall sales
growth of 1.3 percent and comparable store sales were flat.xi The company lowered its revenue
forecast for the remainder of the year and announced a significant restructuring of its store and
merchandising organizations. According to leadership of the company, the goal of the
restructuring was to make Lowe’s “faster and more nimble”.xii To make matters worse, Lowe’s
stock price dropped 18 percent during 2011.
As Blake reflected on the recent achievements of the Home Depot, he remained notably
cautious. Although he was fully aware of the considerable progress that had been made by the
company, he believed that there was still much to improve. Customer satisfaction scores for
the Home Depot still trailed Lowe’s by 1 point according to the 2011 American Customer
Satisfaction Index (See Exhibit 2). Most unsettling, the 2011 J.D. Power and Associates U.S.
Home Improvement Retailer Satisfaction Study revealed that the Home Depot (737) ranked
sixth in customer satisfaction behind Ace Hardware (786), Lowe’s (771), Menard’s (765), Sears
(754) and True Value (742). Only Do It Best/Do It Center (708) ranked below the Home Depot in
the study.xiii
Blake wondered how the company could leverage its initial success to further improve the
customer shopping experience at the Home Depot. The next several years would be critical for
the company, as incremental improvements in the shopping experience required more
consistency with execution across stores and stronger dedication from store-level managers.
Home Depot: The Worst in Customer Satisfaction
The American Customer Satisfaction Index (ACSI) publishes satisfaction scores annually based
on a 100-point index. Retailers with ACSI scores that exceed 80 point were typically considered
best-in-class. Historic data from the American Customer Satisfaction Index (ACSI) showed that
in 2001, Home Depot and Lowes had equivalent customer satisfaction scores of 74 (see Exhibit
2). In only two short years, the Home Depot’s ACSI dropped by two points to 72 and Lowes
Page 2
W&M-M-174
increased by the same amount, reaching 76.xiv These changes produced a satisfaction gap of 4
points between the two retailers. A gap of 4 points was evidence enough that the customer
experience at Home Depot was substandard and needed serious retooling.
Unfortunately, while the management team at the Home Depot was fervently developing
numerous quantitative metrics to control expenses and improve profitability, they ignored this
sizeable drop in satisfaction, and the condition deteriorated further. By 2005, the ACSI for
Home Depot dropped by an additional 5 points, falling to 67, a score that also made history as
being the worst satisfaction score of any retailer that year. Meanwhile, customer satisfaction at
Lowe’s had increased by 2 points reaching 78 in 2005.xv This created an 11-point satisfaction
gap between these retailers – a gap that was unmistakable to customers (See Exhibit 2). As a
result, data collected by Kanter Retail indicated that customer preference for Home Depot fell
to its lowest level at 34% compared to 47% for Lowe’s.xvi
By 2006, Nardelli and his management team were aware that customer satisfaction problems
existed and made some changes to stores and policies to improve the scores. The company
invested $350 million in additional frontline associates, new radio-equipped call boxes for
customer self-service assistance, and an incentive program rewarding associates for providing
excellent customer service.xvii These programs were effective and customer satisfaction scores
improved by 3 points to 70 by the end of 2006. The improvement was only temporary,
however, as the ACSI for Home Depot decreased by 2 points to 68 in 2007.xviii
New Leadership Style and Orange-Blooded Cultural Healing
Blake took over as the unlikely successor to Nardelli in early 2007. With a legal education, little
retailing background, and strong ties to Nardelli, Frank Blake was not what most people
expected from the new leader of the Home Depot. However, Blake possessed a very different
management style than Nardelli and was very willing to listen to new ideas. “What makes
Frank Blake adept is that he brought sensibility to Home Depot”.xix According to the leadership
consultant Jeremy Garlington, “Lawyers are classically trained in conflict and how to navigate
deep-rooted issues that have human resources and financial implications”.xx
Blake began his tenure as CEO by easing existing tensions between headquarters and store
associates. He read to all of the associates on a live television broadcast from the company
biography, “Built from Scratch”, written by founders Bernie Marcus and Arthur Blank.xxi The
goal was to restore some of the unique orange-blooded culture that made the Home Depot
such a success. Blake also regularly consulted with Marcus and Blank to help formulate a
customer-centric strategy and get the company back to its original “orange-blooded culture”.
Blake frequently walked the Home Depot stores with Marcus and Blank and had them present
annually at the Home Depot rallies to reinvigorate the store managers.xxii
Blake also found it important to reintroduce several of the symbols and ethos that were once
very important at Home Depot. For example, Blake made it quite clear early in his tenure that
Page 3
W&M-M-174
he was the “least important employee at Home Depot because he doesn’t work with customers
every day.” A symbol of this gesture was to reinstate the Home Depot’s Inverted Pyramid (see
Exhibit 3). The Inverted Pyramid presented the front-line associates on the top (rather than on
bottom) and the Chief Executive Officer and headquarters on the bottom (rather than on top).
The objective of the Inverted Pyramid was to demonstrate that management’s central role was
to support store associates who directly served customers.
Blake also practiced a non-hierarchical management style that cultivated a strong team spirit.
“There was a symbol that Bernie and Arthur had: That we’re all associates and we’re all
available. We’re all in this boat together”.xxiii In terms of leadership style, Blake possessed great
humility but could be forthright and demonstrate considerable conviction in his beliefs about
the direction for the company. According to one devoted Home Depot associate, “Frank is very
candid. If he thinks something (stinks), he will tell you. If he believes in something, he will
explain why we are doing it. He has conviction and will stand up for what he believes, but also
know what it means to listen”.xxiv
Blake’s Sincere Apology to Customers
MSN Money published a column by Scott Burns who wrote a malicious diatribe about the
dismal customer service that he experienced at the Home Depot. This particular column grew
considerable momentum and attracted thousands of former customers to post messages on
the MSN boards sharing their personal stories of poor service from the Home Depot. More
than 10,000 customers also sent e-mail messages directly to MSN editors to report their horror
stories about the Home Depot.
In response, Frank Blake posted his own heartfelt response, requesting customer forgiveness,
promising to improve the shopping experience, and pleading with them to give the Home
Depot a second chance. Blake was especially remorseful towards the very loyal Home Depot
customers: “I recognize that many of you were loyal and dedicated shoppers of The Home Depot
. . . and we let you down. That's unacceptable. Customers are our company's lifeblood -- and
the sole reason we have been able to build such a successful company is because of your
support. The only way we're going to continue to be successful is by regaining your trust and
confidence. . and we will do that.” (See Exhibit 4 for Blake’s letter) xxv
Blake also explained that efforts were underway at the Home Depot to improve the appearance
of the stores, create a fun and convenient store atmosphere, and encourage associates to
acknowledge customers and assist them in solving their home improvement issues. Although
this period represented one of the lowest points in Home Depot’s illustrious history, it also
allowed Blake to make a bold statement that new customer and associate initiatives had been
introduced and significant improvements were on the way.
Big Changes at Home Depot
Page 4
W&M-M-174
Blake was praised for producing a very strong management team at the Home Depot. One of
the key members of this team was Marvin Ellison who was promoted to executive vicepresident of U.S. stores. Ellison previously held a regional management position at Home
Depot as the head of the northern division where he had established a reputation for running
some of the best stores in the company. As Blake commented, “you could go blindfolded into
two stores and know when you were in Marvin’s stores”.xxvi
Ellison felt that store managers received far too many conflicting messages from headquarters.
“We were focusing on too many things – reporting and other nonsensical metrics – as opposed
to making the customer the priority. That’s not to say that we didn’t think the customer was
important, but customer service was one of many things on an associate’s plate. Now it is clear
what is most important, and we have defined the associate’s role in taking care of the customer
first”.xxvii As the head of the northern division, he gave store managers three well-focused goals
- clean warehouses, well-stocked shelves, and top customer service.xxviii
As head of U.S. stores at the Home Depot, he remained committed to simplifying the roles and
responsibilities of the store managers. Ellison established four steps to improve customer
service: 1) simplify the store environment, 2) create clear service expectations, 3) leverage
technology, and 4) celebrate success. During a 2010 Investor and Analyst Conference, Ellison
stated that customer service was the first leg of Home Depot’s ‘strategic stool’ and must be a
point of differentiation for the company.xxix
Orange-Blooded Culture Reprise
"Bernie and I founded the Home Depot with a special vision -- to create a company that would
keep alive the values that were important to us. Values like respect among all people, excellent
customer service and giving back to communities and society"xxx
Blake also believed strongly in the importance of rekindling many of the values that made the
Home Depot such an inclusive and engaging working environment. The company’s website
stated that, “The Home Depot’s values guide the beliefs and actions of all associates on a daily
basis. Our values are the fabric of the Company’s unique culture and are central to our success.
In fact, they are our competitive advantage in the marketplace. Associate pride and our
“orangeblooded” entrepreneurial spirit are distinctive hallmarks of our culture.
The company website lists the following core values:
1. Taking care of our people: The key to our success is treating people well. We do this by encouraging
associates to speak up and take risks, by recognizing and rewarding good performance and by
leading and developing people so they may grow.
Page 5
W&M-M-174
2. Giving back to our communities: An important part of the fabric of The Home Depot is giving our
time, talents, energy and resources to worthwhile causes in our communities and society.
3. Doing the right thing: We exercise good judgment by "doing the right thing" instead of just "doing
things right." We strive to understand the impact of our decisions, and we accept responsibility for
our actions.
4. Excellent customer service: Along with our quality products, service, price and selection, we must
go the extra mile to give customers knowledgeable advice about merchandise and to help them use
those products to their maximum benefit.
5. Creating shareholder value: The investors who provide the capital necessary to allow our company
to grow need and expect a return on their investment. We are committed to providing it.
6. Building strong relationships: Strong relationships are built on trust, honesty and integrity. We
listen and respond to the needs of customers, associates, communities and vendors, treating them
as partners.
7. Entrepreneurial spirit: The Home Depot associates are encouraged to initiate creative and
innovative ways of serving our customers and improving the business and to spread best practices
throughout the company.
8. Respect for all people: In order to remain successful, our associates must work in an environment of
mutual respect, free of discrimination and harassment where each associate is regarded as a part of
The Home Depot team.xxxi
Associate Selection and Development
Significant changes in associate training were also implemented at the Home Depot. All
salaried, hourly and part-time associates were required to complete the same training program
called ‘Customer F.I.R.S.T.’ ‘Customer F.I.R.S.T.’ is an acronym for the five steps (Find, Inquire,
Respect, Solve, Thank) required by associates to satisfy customers.xxxii This training utilizes
lecture and written materials, role-playing exercises, and in-store associate assessments. This
very unique training program was taught entirely by store managers, with follow-up training
performed by assistant managers and department supervisors.
A central goal of the ‘Customer F.I.R.S.T.’ training program was to set clear expectations for the
appropriate roles and behaviors for associates when on the sales floor. The company believed
that generalized slogans such as ‘put customers first’ failed to give associates enough guidance
about appropriately serving customers. According to Ellison, providing store associates with
more specific expectations about their behaviors was working: “you can watch an associate
working with customers, and it’s immediately clear whether they’re following our customer
service plan or not”.xxxiii
An additional program that was recently introduced at the Home Depot involved helping
associates better understand how to perform common customer projects. Project experts
were identified throughout the company who trained fellow associates about projects within a
Page 6
W&M-M-174
specific department. This training often required associates to actually complete a home
improvement project on their own such as, tiling a bathroom, refinishing furniture, or building a
fence.xxxiv The goal was to help associates become more comfortable assisting customers with
projects and solving their project-related problems.
Workplace and Job Design
Management also made significant changes to simplify the associates’ roles in the stores.
“Ellison is trying to keep things simple. He has slashed the number of reports, tasks, and
messages handed down from the corporate office. Store managers who were flooded with
some 200 company e-mails and reports on any given Monday now typically get one: The rest
are available online. And he severely restricted messages from headquarters to the stores
during the rest of the week”.xxxv As Ellison indicated, “reports don’t buy hardware; customers
do, so I wanted our associates focused on customers”.xxxvi
One key initiative that was implemented early in the process was to add more employees to the
stores to serve customers. “When you’re an hourly associate and you’re trying to cover 3,000
square feet by yourself on a Saturday, that’s going to damage morale”.xxxvii The company
discovered, however, that simply adding more bodies to store floors did not directly translate
into these associates spending more of their time interacting directly with customers.
Thus, in 2008, Home Depot began a customer service imperative called ‘60/40’ to reallocate
associate time from tasking activities to customer facing activities. Data collected on time
allocation showed that the Home Depot associates spent only 45 percent of their time directly
interacting with customers in 2008. The company reported that this percentage had improved
to 51 percent in 2010. The company introduced ‘60/40’ with the goal that by 2013, at least 60
percent of associate time would be devoted to customer facing activities and 40 percent of
their time would be used for tasking activities (e.g., completing reports, reviewing inventory,
maintenance activities, etc.).xxxviii
Management also believed that there were specific times during the day when full attention
must be given to customers. As Ellison noted, “we could not address customer service needs
because we were too busy doing other things”.xxxix Thus, ‘Power Hours’ were established
between 10:00 am and 2:00 on weekdays and all day on Saturday and Sunday when associates
were asked to only serve customers, rather than stock shelves, unpack boxes, and review store
inventory levels.
In addition, Merchandising Execution Teams were established to improve the consistency of
merchandise displays. Previously, some replenishment was out-sourced which often led to
inconsistencies with merchandise availability and store appearance. By 2011, nearly all of the
replenishment was performed by the in-house merchandising execution teams. Marc Powers,
head of operations at Home Depot, stated that this program led to considerable improvements
in associate product knowledge and opportunistic sales event execution.xl
Page 7
W&M-M-174
Tools for Serving Customers
Several initiatives were underway by 2010 to use technology to enhance customer service at
the Home Depot. First, the company had introduced Bay Sequencing, a system to help
associates locate products for customers within the store. Product locations could be different
across as many as 1000 stores, making it nearly impossible for associates to efficiently assist
customers looking for a specific product.
Second, the company invested $64 million on the FIRST Phone, a handheld mobile device.xli
Thirty thousand FIRST Phones were distributed to about 2,000 Home Depot stores in 2010.xlii
Previously, each store used mobile carts that contained a computer monitor and printer
powered by a 12 volt boat battery. The FIRST Phone was designed by Home Depot associates
and performed many useful functions including the ability to locate specific products within the
store, search for products at nearby stores, serve as a mobile point-of-sale register and
computer, monitor sales trends, order products, and allow mobile communication with other
associates by walkie-talkie or cell phone (Marc Powers, 2010 Investor and Analyst Conference).
The FIRST Phone also provided store managers with real-time sales and gross margin
productivity data by department, isle, bay, and stock-keeping unit (SKU).xliii Initial reviews by
company associates suggested that the first version of the technology may need some
refinement.xliv
Third, the Home Depot also significantly redesigned the checkout system. The new system
allowed multiple associates to run a single register and improve the checkout process.
Previously, once an associate signed on to a specific register it could not be used by other
associates until they signed out. According to Marc Powers, results were encouraging for the
new checkout system with lower customer wait times resulting in immediate increases in
customers satisfaction ratings for the checkout process.xlv
Fourth, the company also implemented a customer care resolution team, responsible for
proactively searching online social websites such as Facebook, Twitter, and others to uncover
customer problems and concerns. The team was empowered to contact disgruntled customers
and appropriately address their problems.xlvi
Finally, the Home Depot introduced a payroll optimization system that allowed for real time
payroll management at the store level. This new system provided store managers with storelevel P&Ls, run rates, and weekly payroll expenses on a daily basis. The system greatly
improved the scheduling of associates within the store as well.xlvii
Associate Rewards and Recognition
Blake was also quite aware that even well planned service-related initiatives were highly
contingent upon the alignment of associate evaluations and reward systems. Thus, a newly
designed performance review program was introduced that relied heavily on customer
Page 8
W&M-M-174
satisfaction as the criterion for assessing associate performance reviews. Financial incentives
had also been expanded to reward those who delivered excellent service to customers.xlviii
In 2007, Blake granted stock options to all assistant store managers and spent $164 million for
“Success Sharing” bonuses for the hourly associates. Expenditures on bonuses during fiscal
2007 represented a six-fold increase over 2006.xlix In 2010, Home Depot distributed over $126
million in “Success Sharing” Bonus Program payments to its associates.l Store managers were
also held responsible for implementing the Customer F.I.R.S.T. program in their stores. Store
managers were evaluated on how well the program was executed and results from storespecific customer satisfaction surveys. The company collects approximately 300,000 surveys
from customers each month. One primary method the Home Depot uses to collect data from
customers is an on-line survey that utilizes a specific user ID and password found on register
receipts. Customers are asked to go to www.homedepot.com/opinion to complete the survey
and enter a contest to possibly win a $5,000 Home Depot gift card.
Several programs were also introduced in the stores to reward and recognize associates for
superior customer service. Bonuses were awarded to specific stores bi-annually that achieved
certain customer satisfaction benchmarks. In addition, the best associates were recognized
with the Homer Award, an apron badge and financial incentive that was given when customers
provided the name of a specific associate in their customer service survey.
The Bravo Program was also introduced for associates to recognize one another for service
excellence. Finally, the Home Depot Legends Program recognized associates on the company
website for providing impressive customer service. The most remarkable associate stories were
further recognized with a trip to headquarters in Atlanta to shoot a video about their
accomplishments in service. For example, Jessica Jones, spent weeks of her personal time
taking an evening course at a local community college to learn sign language to better
communicate with the numerous illiterate professional customers at Home Depot who had
difficulty expressing their material needs while in the store.li
Own the Pro
Blake acknowledged early in his tenure that the professional customer was “critically
important” to success of the Home Depot.lii The company defined the professional customer
segment as including general contractors, professional remodelers, tradesmen, small business
owners, and repairmen.liii One interview with Ellison reported that the professional customer
represented only about 4 percent of its customers based but approximately one-third of total
sales for the Home Depot.liv He also indicated that the average ticket of the professional
customer was under $5000, but failed to give more specifics.lv
The company, however, continued to struggle with how to best attract and retain this highly
desirable customer segment. In 2010, Ellison said that “the majority of professional sales are
made more out of convenience for the professional and are not contractual or large purchases.
Page 9
W&M-M-174
We need to make that purchase of convenience the best possible experience. We are going to
accept that we are a store of convenience”.lvi
One of the first programs to be implemented by Blake to better serve the professional
customer was the ‘Pro Bid Room’. This program allowed the company to better manage large
customer orders. To complement this program, the company also revised its delivery service to
improve utilization. In 2007, the Home Depot also began to utilize its customer data to better
distinguish the profitability and customer lifetime value of various professional customers. The
goals of these efforts were to better understand the purchasing activity of specific professional
customers and to develop stronger relationships with key customer segments.lvii
Marvin Ellison stated at the 2010 Investor and Analyst Conference that the Home Depot had
not yet adjusted its service to meet the needs of the professional customer. He suggested that
the company needed a “more unique service offering” for this customer segment. He also
noted that the company had numerous problems implementing and executing its professional
business including 1) numerous metrics and audits, 2) inconsistent staffing decisions, 3) failure
to listen to the professional customer, and 4) overly complicated service process. Future efforts
were expected to simplify the activities of the associate service the professional customers,
develop a single scorecard, implement a consistent staffing model, and better utilize and act
upon the 72,000 monthly professional voice of customer survey responses.
The company collected surveys from key pro customers to understand their specific purchasing
needs, preferences for the retail environment, and most useful service-related activities
provided by the stores. According to Ellison, “the key for us is to engage our customers and
understand what they’re working on”.lviii “In serving our pro customers, time is money. We
need to get them in and out fast”. As Ellison noted, “the company went deeper into its
analytics and reviewed the shopping habits of professionals at its stores. Home Depot officials
reviewed when, at what locations, and in what departments professionals shopped in. They
wanted to understand the professionals and better serve them.”lix
In the first quarter of 2011, the Home Depot introduced the ‘F.I.R.S.T. for Pro’ Program with the
goal of “driving consistency and simplification.” This program, while similar to the Customer
F.I.R.S.T. Program used in the retail stores, had several unique initiatives including 1) unique pro
power hours, 2) dedicated point of sale staff, 3) lot loading assistance, 4) dedicated professional
parking, 5) simplified return policy, and 6) enhanced customer service training focused on the
specific needs of the professional.lx
Customer Satisfaction, Preference, Purchasing Behavior and Results
In just four short years, Blake and his management team had transformed the customer
shopping experience at the Home Depot. These initiatives led to significant increases in
customer satisfaction. At the end of 2011, the Home Depot reached 78 on the ACSI, only 1
point below Lowe’s score of 79. The company made history by achieving the highest point
Page 10
W&M-M-174
increase on the American Customer Satisfaction Index in the shortest time period (5 years).
From 2007-2010, the Home Depot increased its customer satisfaction score by 11 points,
representing the second highest point increase in the history of the American Customer
Satisfaction Index. Only one other retailer (MCX) achieved a higher point increase (12 points),
but that change occurred over a much longer time period (8 years).lxi
Although the Home Depot made significant strides to improve the customer experience in the
stores, overall customer preference for the retailer continued to trail Lowe’s. In a study by
Kanter Retail conducted in August 2011, customers who patronized both the Home Depot and
Lowe’s (cross shoppers) still preferred Lowe’s (46%) to the Home Depot (34%). These finding
remained relatively unchanged from 2007 to 2011, as shown in Exhibit 5.lxii
The strength of the preference between the two retailers, however, changed significantly from
2007 and 2011, as presented in Exhibit 6. Of those cross-shoppers who preferred the Home
Depot, 53 percent preferred the retailer “a lot more” and 6 percent preferred the retailer
“somewhat more” than Lowe’s. This represented a considerable improvement over the results
from 2007. In 2007, 24 percent preferred the Home Depot “a lot more” and 50 percent
preferred it “somewhat more”.
Compared with the results for Lowe’s, only 11 percent preferred Lowe’s “a lot more” and 47
percent preferred the retailer “somewhat more” than the Home Depot in the 2011 study. The
results for Lowe’s were notably different from those reported in the previous study. In 2007,
39 percent preferred Lowe’s “a lot more” and 42 percent preferred the retailer “somewhat
more” than the Home Depot. It should be noted that, “whereas a stated preference for a
retailer doesn’t necessarily translate into a transaction, shoppers who are more enamored of a
retailer are more likely to pull the trigger and make a purchase or add more items to their
basket”.lxiii
The Home Depot’s focus on improving the shopping experience also paid off in terms of several
important customer purchasing metrics and financial results in 2011 (See Exhibit 7 for a
summary of key quarterly metrics). As discussed earlier, total sales at the Home Depot
increased by 4.2 percent and only 1.3 percent at Lowe’s in Q2 2011. Similarly, comparable
store sales growth increased by 4.3 percent (3.5 percent in U.S.) for the Home Depot and
decreased by 0.3 percent for Lowe’s. Also interesting, operating margins were 11.3 percent for
the Home Depot and 10.3 for Lowe’s. These margins helped the Home Depot improve
profitability by 14 percent in Q2 2011.lxiv
One comment by Marvin Ellison was especially pertinent to the recent financial success at the
Home Depot: “We have a very simple belief: If you combine a compelling merchandising offer
with outstanding service, you will get improved transactions. And in our business, improved
transactions lead to positive sales growth”.lxv Indeed, as shown in Exhibit 7, total transaction
growth (number of customer orders) increased by 1.1 percent and average ticket growth
Page 11
W&M-M-174
(spending per order) increased by 3.3 percent for the Home Depot in Q2 2011.lxvi Average
ticket only grew by 0.7 percent at Lowe’s during the same period.
Equally important were the very different results between these retailers for big ticket
purchase growth in Q2 2011. The Home Depot reported 5 percent growth in big ticket
purchases, defined by the company as purchases of greater than $900. Meanwhile, big ticket
growth, defined as purchases more than $500, decreased by 1.0% at Lowe’s. Small ticket
purchases, which entail purchases of less than $50, were mostly flat for both retailers.
In response to the less than expected financial results for Lowe’s, Mr. Robert Niblock,
Chairman, President and CEO commented that: “Our second quarter consumer survey indicates
that high fuel prices remain at the top of consumers' minds as they consider future spending
plans. However, recent headlines regarding slowing growth and the U.S. credit rating
downgrade underscored the continued weakness in the U.S. economy. The volume of negative
news and the unsettling impact on equity markets is having a significant effect on already
fragile consumer mindset. More specifically with regard to home improvement spending,
consumers continue to focus on small ticket, less than $500 repair and maintenance items and
projects. Even after taking into account the challenge of the macro environment, we're still not
pleased with our performance this year. For both do-it-yourself and commercial business
customers, we must drive more trips, close more sales and build bigger baskets”.lxvii
More Work Must Be Done
According to some critics, the Home Depot still had a lot to improve upon in its stores. As one
customer noted, “five or six people said ‘welcome to Home Depot’. But then I wandered
around trying to find someone in the paint isle to help. Ellison agreed by stating: “our goal will
always be to improve, not maintain. To do that, we have to continue to simplify life for our
store associates so they can focus on the customer, provide them the tools to be effective,
empower them through learning programs, and reward them when they succeed.lxviii
Critics argue that Blake may not be the appropriate leader for the future of Home Depot.
“Generally the guy who comes in as calmer-in-chief and rights the ship isn’t the guy who leads
the next wave of growth”.lxix
Page 12
W&M-M-174
Exhibit 1
Home Depot Annual Financial Statements (FY2009-2011)
FY 2011
FY 2010
FY 2009
Total Revenues
Net Sales Increase
Costs of Goods
Gross Profit
Gross Profit Margin (%)
SG&A Expense
Depreciation & Amortization
Total Operating Expenses
Operating Income
Operating Margin (%)
Interest and Other Expenses
Income Before Taxes
Income Taxes
Net Income After Taxes
Net Profit Margin (%)
$70,395
3.5%
$46,133
$24,262
34.47%
$16,028
$1,573
$17,601
$6,661
9.46%
$606
$6,068
$2,185
$3,883
5.52%
$67,997
2.8%
$44,693
$23,304
34.27%
$15,849
$1,616
$17,465
$5,839
8.59%
$566
$5,273
$1,935
$3,338
4.91%
$66,176
-7.2%
$43,764
$22,412
33.87%
$15,902
$1,707
$17,609
$4,803
7.26%
$821
$3,982
$1,362
$2,661
4.02%
Balance Sheet
Cash
Net Receivables
Inventories
Other Current Assets
Total Current Assets
Net Fixed Assets
Other Noncurrent Assets
Total Assets
$1,987
$1,245
$10.325
$963
$14,520
$24,448
$1,550
$40,518
$545
$1,085
$10,625
$1,224
$13,479
$25,060
$1,586
$40,125
$1,421
$964
$10,188
$1,327
$13,900
$25,550
$1,427
$40,877
Accounts Payable
Accrued Salaries & Related Exp.
Other Current Liabilities
Total Current Liabilities
Long-Term Debt
Deferred Income Taxes
Other Noncurrent Liabilities
Total Liabilities
$4,856
$1,372
$3,148
$9,376
$10,758
$340
$2,146
$22,620
$4,717
$1,290
$4,885
$10,122
$8,707
$272
$2,135
$21,236
$4,863
$1,263
$4,237
$10,363
$8,662
$319
$2,140
$21,484
Total Stockholders’ Equity
$40,518
$40,125
$40,877
Page 13
W&M-M-174
Exhibit 2
American Customer Satisfaction Index 2001-Present: Home Depot vs. Lowes
80
77
78
76
76
77
76
75
74
ACSI Score (1-100)
78
76
75
75
74
73
74
79
79
78
73
72
72
70
70
70
67
68
67
66
64
62
60
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Year
Page 14
W&M-M-174
Exhibit 3
The Inverted Triangle at Home Depot
Stores and customers are positioned at the top, while senior management is at the bottom.
Everything in the Company, from senior management to corporate support systems, is
designed to support and enable the success of associates and customers.
Page 15
W&M-M-174
Exhibit 4
Frank Blake’s Response to Scott Burn’s Column in MSN Money
“I'm Frank Blake, the new CEO for The Home Depot. I've read a number of the postings on the MSN
message board (unfortunately, there were a lot of them), and we've dispatched a dedicated task force -working directly with me – that is ready and willing to address each and every issue raised on this board.
Please give us the chance.” “There's no way I can express how sorry I am for all of the stories you
shared.
I recognize that many of you were loyal and dedicated shoppers of The Home Depot . . . and we let you
down. That's unacceptable. Customers are our company's lifeblood -- and the sole reason we have been
able to build such a successful company is because of your support. The only way we're going to
continue to be successful is by regaining your trust and confidence, and we will do that.”
“We've already taken steps to cure many of the ills discussed on this message board: We will be and
already are increasing our staffing in the stores. We're also in the early stages of launching a nationwide
program to recruit and hire skilled master trade people to staff our stores so that our customers receive
the kind of service and expertise that made The Home Depot great.
We're investing significantly in the appearance of our stores to make them an easier and more fun place
to shop.” “And we're making it clear to all our associates that nothing is more important than you, the
customer. Every associate knows that his or her number one job is to make you smile and to help you
solve your home improvement problem . . . no matter how big or how small.”
“But the real judge of all of these changes we’re making is you. All I ask is that you please give us the
opportunity to win you back. When you enter our stores, you should receive a personal greeting. After
that, you should encounter a helpful associate who will walk you to find the tools, material or service
you need. If you don’t, please let us know . . . just like Scott Burns did.”
I'd like to thank Scott -- his column about our company was insightful and revealing. You can easily tell
that it struck a nerve with me. Scott, we'll do all in our power to again make The Home Depot the store
you and your wife, Carolyn, once referred to as "our store."
I'd also like to give my thanks to the many people who posted comments on this board. We want them.
We need them . . . to enable us to keep getting better. We're committed to being the company that
helped set the standard for customer service excellence in home improvement.
Please continue to hold us accountable. You have my personal assurance that every effort will be made
to address your concerns. The Home Depot was built on great customer service, and we hope to rebuild
your trust on that same tradition -- just give us the chance!
Page 16
W&M-M-174
Exhibit 5
Cross Shopper Preference: The Home Depot Vs. Lowes
Cross Shopper Overall Store Preference
(Among respondents who shopped both The Home Depot and Lowe's in the
past year)
2011
46%
2007
48%
Lowe's
34%
34%
The Home Depot
19%
18%
Don't know/Not sure
Source: “Home Improvement Retail Perspectives, Kanter Retail (August 2011)
Page 17
W&M-M-174
Exhibit 6
Strength of Preference: The Home Depot Vs. Lowes
Strength of Preference for The Home Depot
Among HD-LOW cross-shoppers who prefer The Home Depot (n=431)
53%
2011
6%
24%
2007
42%
50%
A lot more
26%
Somewhat more
A little more
Strength of Preference for Lowe's
Among HD-LOW cross-shoppers who prefer Lowe's (n=580)
2011
2007
11%
47%
39%
A lot more
42%
42%
Somewhat more
19%
A little more
Source: “Home Improvement Retail Perspectives, Kanter Retail (August 2011)
Page 18
W&M-M-174
Exhibit 7
Key Quarterly Metrics: The Home Depot Vs. Lowe’s
The Home Depot
Lowe’s
Q2 2010
Q2 2011
Q2 2010
Q2 2011
1.8%
1.7%
(US 1.0%)
4.2%
4.3%
(US 3.5%)
3.7%
1.6%
1.3%
-0.3%
Gross Margin
Operating Margin
33.9%
10.6%
34.0%
11.3%
34.9%
9.9%
34.5%
10.3%
Average Ticket Growth
0.1%
3.3%
2.3%
0.7%
Comp Ticket Growth
Big Ticket (HD >$900/LOW >$500)*
Small Ticket (< $50)
0.0%
-5.0%
2.0%
3.3%
5.0%
0.0%
2.1%
2.0%
0.0%
-0.9%
-1.0%
1.0%
Sales Per Sq. Foot Growth
1.9%
4.6%
1.3%
-0.3%
Total Transaction Growth
Comp Transaction Growth
1.9%
1.7%
1.1%
1.0%
1.8%
-0.5%
2.0%
0.6%
Inventory Growth
-0.4%
0.0%
5.7%
2.0%
Total Sales Growth
Comparable Store Sales Growth
Source: “Home Improvement Retail Perspectives, Kanter Retail (August 2011)
Page 19
W&M-M-174
i
http://www.homedepot.com
http://www.theacsi.org
iii
Claus Fornell, The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference, (New York, NY:
Palgrave Macmillan, 2007).
iv
Claus Fornell, The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference, (New York, NY:
Palgrave Macmillan, 2007).
v
http://www.ajc.com
vi
Bloomberg Businessweek, November 5, 2010.
vii
The Home Depot - Annual Report FY 2007.
viii
The Home Depot - Annual Report FY 2010.
ix
The Home Depot - Annual Report FY 2010.
x
Dow Jones News Service, August 16, 2011.
xi
http://www.lowes.com.
xii
Dow Jones News Service, August 29, 2011.
xiii
Radio Sales Today, May 10, 2011.
xiv
http://www.theacsi.org
xv
http://www.theacsi.org
xvi
Kanter Retail: Home Improvement Retail Perspectives, August 2011.
xvii
Claus Fornell, The Satisfied Customer: Winners and Losers in the Battle for Buyer Preference, (New York, NY:
Palgrave Macmillan, 2007).
xviii
http://www.theacsi.org
xix
http://www.ajc.com
xx
http://www.ajc.com
xxi
http://www.ajc.com
xxii
http://www.ajc.com
xxiii
http://www.ajc.com
xxiv
http://www.ajc.com
xxv
http://www.moneycentral.msn.com, March 13, 2007.
ii
xxvi
Bloomberg Businessweek, May 7, 2009.
Bloomberg Businessweek, November 5, 2010.
xxviii
Bloomberg Businessweek, May 7, 2009.
xxvii
xxix
xxx
Marvin Ellison, Home Depot Investor and Analyst Conference, 2010.
Chris Roush, Inside Home Depot.
xxxi
http://www.homedepot.com
Bloomberg Businessweek, November 5, 2010.
xxxiii
Bloomberg Businessweek, November 5, 2010.
xxxiv
Marvin Ellison, Home Depot Investor and Analyst Conference, 2010.
xxxv
Bloomberg Businessweek, May 7, 2009.
xxxii
xxxvi
Bloomberg Businessweek, November 5, 2010.
Page 20
W&M-M-174
xxxvii
Bloomberg Businessweek, May 7, 2009.
Marc Powers, Home Depot Investor and Analyst Conference, 2010.
xxxix
Bloomberg Businessweek, May 7, 2009.
xl
Marc Powers, Home Depot Investor and Analyst Conference, 2010.
xli
Industry Guide: Retail Technology, March 2011.
xxxviii
xlii
Industry Guide: Retail Technology, March 2011.
xliii
Marc Powers, Home Depot Investor and Analyst Conference, 2010.
xliv
xlv
Industry Guide: Retail Technology, March 2011.
Marc Powers, Home Depot Investor and Analyst Conference, 2010.
xlvi
Marvin Ellison, Home Depot Investor and Analyst Conference, 2010.
xlvii
xlviii
Marc Powers, Home Depot Investor and Analyst Conference, 2010.
Bloomberg Businessweek, May 7, 2009.
xlix
The Home Depot - Annual Report FY 2007.
The Home Depot - Annual Report FY 2010.
li
Marvin Ellison, Home Depot Investor and Analyst Conference, 2010.
lii
The Home Depot - Annual Report FY 2007.
liii
The Home Depot - Annual Report FY 2008.
liv
Construction Industry News, August 16, 2011.
lv
Construction Industry News, December 8, 2011.
l
lvi
Construction Industry News, August 16, 2011.
lvii
The Home Depot - Annual Report FY 2007.
Construction Industry News, August 16, 2011.
lix
ProSalesOnline, May 17, 2011.
lx
Marvin Ellison, Home Depot Investor and Analyst Conference, 2010.
lviii
lxi
http://www.theacsi.org
lxii
Kanter Retail: Home Improvement Retail Perspectives, August 2011.
lxiii
Kanter Retail: Home Improvement Retail Perspectives, August 2011.
Dow Jones News Service, August 16, 2011.
lxv
Bloomberg Businessweek, November 5, 2010.
lxvi
The Home Depot - Annual Report FY 2010.
lxvii
http://money.msn.com/business (August 15, 2011)
lxviii
Bloomberg Businessweek, November 5, 2010.
lxix
http://www.ajc.com
lxiv
Page 21