Many articles have been written about Home Depot's expansion into this industry through acquisitions by its HD Supply business unit. The authors are concerned about the new competition this initiative represents. But I think they and some other industry folks are overlooking a significant opportunity with what they perceive as a major problem.

Home Depot makes money in its electrical department. Take a look at Home Depot's prices. Many electrical distributors are particularly upset about what Home Depot charges. The company often offers special sale prices for building wire below market value. Even with the blowout prices, a Home Depot location's electrical department makes more money than a typical electrical wholesaler. That's because using building wire as a loss leader is smart merchandising. Customers go into the store to buy the building wire, but they invariably buy other products (priced higher) while shopping.

A recent distribution report stated that Home Depot's operating margin was 12 percent, which isn't too shabby. The report went on to say that before Home Depot acquired Hughes Supply, Orlando, Fla., that distributor's operating margin was 5 percent. That's a big difference. One would think Home Depot's management team would want to improve the 5 percent level of this acquisition to compete with the established 12 percent factor, not the opposite. Remember, we are talking about a public company. Wall Street and today's investors are not going to be happy with lower profits related to investments made with acquisitions of electrical distributors.

The opportunity exists to improve margins whenever Home Depot Supply buys an electrical distributor. You can compete profitably with them. Home Depot changed the face of retailing, but I do not believe the same thing will happen to the distribution market if distributors do their homework and develop action plans.

Don't allow the Home Depot gloom being reported to become a self-fulfilling prophecy. Everybody is talking about the dire consequences of Home Depot's interest in the distribution world, but no one is suggesting what to do about it. Here's how electrical distributors can compete with Home Depot.

  1. Keep the subject in the proper perspective and be proactive within your business and in the community you serve.

  2. Remind your contractor customers that Home Depot's installation plan competes with contractors.

  3. Train your counterpeople not to send customers to Home Depot for items you don't carry. If a customer needs an item you don't stock, take the order and send one of your people to Home Depot or another source to buy it and deliver it to the customer — even if you do not make money on the transaction.

  4. Make your counter area a pleasant place to visit.

  5. Create a checklist of products that all contractors need in their trucks and on the job sites, regardless of if it's an electrical product or not. Merchandise these products at your counter with displays. By stocking these products, you are offering a value-added service to contractors.

  6. Don't give contractors reasons to shop elsewhere. Make it easy to do business with your company at all levels.

  7. Learn from Home Depot and use some products as loss leaders.

  8. Establish a marketing program to attract new customers such as painters, carpenters, plumbers and apartment maintenance personnel. They buy extension cords, trouble lights, ladders, wiring devices, motion detectors, tape, fasteners, lamps, screwdrivers and other tools.

The “short” dollar costs of these strategies are a high-return investment; if you do nothing, you will be in a high-risk situation. Every problem with Home Depot should be viewed as an opportunity. You can beat them at their own game if you think retail but sell wholesale.


The author is vice president of Equity Electrical Associates/EDN, Bluffton, S.C. He can be reached by telephone at (781) 844-3408 or by e-mail at bob@equity.org.