Watch out electrical world — Home Depot Supply plans to be No. 1. The nation's top home improvement retailer wants to become a national player in the electrical industry in the next two years and the biggest distributor in the business within five years, according to Steve Margolius, president, HD Supply Electrical.

Home Depot Supply's 2006 acquisitions of Hughes Supply, Orlando, Fla., and Edson Electric Supply, Phoenix, rocked the electrical wholesaling industry. But the company's senior execs have even bigger ideas, and say they will use the lessons they learned in these purchases as a foundation for a national position in the electrical business.

While HD Supply does not break out specific numbers for its electrical segment, Big Orange's distribution arm is gunning for annual sales of $12 billion this year and told Wall Street it wants to grow to $25 billion by 2010. During the third quarter of this year, HD Supply's total sales grew by 159 percent to $3.5 billion. Overall, Atlanta-based Home Depot had estimated 2006 sales of more than $90 billion and 2,117 locations.

Arleen Quiñones, vice president of marketing, HD Supply, was in charge of investor relations for Hughes when Home Depot acquired it. Before the acquisition, she says Hughes Supply was watching Home Depot closely and knew it was a formidable competitor when it bought National Waterworks in August 2005. She says that acquisition was “a game changer.”

“That confirmed how serious they were about their entry into the professional world,” she says. “They bought White Cap and some smaller distributors, but when they bought National Waterworks, that was a clear signal to us that they were truly going to be the consolidator in the industry. That turned out to be the case with the 30-plus acquisitions they have made in the last two years or so.”

To lead the charge at HD Supply Electrical, in April 2006 Home Depot hired Margolius, a former GE veteran who held several senior leadership positions at Arrow Electronics, one of the world's largest electronics-component distributors. Margolius says HD Supply's strength lies in its ability to supply a project end-to-end — from infrastructure to construction to maintenance, repair and remodel.

In an exclusive interview with Electrical Wholesaling magazine and Electrical Marketing newsletter, Margolius said HD Supply Electrical plans to be “the nation's No. 1 distributor of choice, the No. 1 employer of choice, and a real magnet for talent in the electrical industry.” He says HD Supply is also looking beyond North America, and plans to build an international presence in Asia and Europe within the next five years. “My goal is to grow HD Supply Electrical by at least a factor of seven within the next five years,” he says. “It's massive growth. We have a pipeline of very interesting companies that we will continue to talk with.

“But there is something more important to us than just size. It's critical that we become the absolute best in the eyes of our customers, associates and supplier partners. As HD Supply Electrical increases in size, we'll also increase our product depth and breadth, the types of services we provide, and the number of convenient locations we have to serve customers. Significant growth is a key element of our overall strategy, and providing the most reliable service to customers and helping them drive success are our most important objectives.”

HD Electrical is part of HD Supply, a business launched in 1997 with the acquisition of Maintenance Warehouse, a direct-mail marketer of maintenance, repair and operations (MRO) products. HD Supply serves business-to-business customers such as homebuilders, municipalities and contractors in the construction, commercial, industrial, MRO, utility and public works markets. The company was built largely through acquisitions of established distributors in these trades, but its future strategic plans call for organic growth and an aggressive acquisition campaign.

Interestingly, it made one of its first-ever distributor acquisitions in the electrical market with its 1999 purchase of Georgia Lighting Supply, an Atlanta-based residential lighting specialist that was then the largest residential lighting showroom in the United States. Since that time, the company's electrical acquisitions have included Hughes Supply, Edson Electric Supply and Litemor Distributors. HD Supply's stable of distributors acquired through acquisition include National Waterworks, White Cap Construction Supply and Apex Supply. (See sidebar on page 25 for a complete list.)

With the Hughes Supply acquisition the HD Supply division doubled in size. HD Supply now has more than 1,000 locations in North America and more than 26,000 employees. Its HD Supply Electrical business unit has 70 branches in North America, including 50 former Hughes locations, 11 locations from its acquisition of Edson Electric Supply, Phoenix, and nine locations that joined the electrical group that were formerly branches of TVESCO Inc., Memphis, Tenn. The TVESCO branches, which Hughes Supply acquired in 2005, were part of HD Supply Utilities business, but are now in HD Supply Electrical, which also has an estimated 15 electrical branches in Canada.

Margolius wants HD Supply Electrical to have a presence in every major metropolitan market in the next five years. “We look at the fastest-growing markets, the projections for commercial and residential growth and for population expansion. We have a pretty detailed process for determining where geographically it makes sense to build new branches or look at acquisition targets,” he says.

Margolius says HD Supply Electrical plans to grow organically and by acquisition to achieve its goal of being the largest electrical distributor in North America, He says he would like to grow “at least four times the GDP rate of growth or four times market growth, and to do it organically through better execution, better service to customers, and by opening new branches adjacent to existing branches or infills.” However, he expects most of the future company's growth in the electrical market to be through acquisition. “It would follow a similar path to what you have seen overall from HD Supply,” he says.

Margolius says HD Supply Electrical will be looking for distributors that share the same cultures and values as Home Depot and Home Depot Supply. “Obviously, they have to have very strong financials,” he says. “We're always interested in companies that have financial performance equal to or superior to ours. Another very key factor — and this came into play in the Edson acquisition — is assessing the talent. We have a very rigorous human resource process, where we go in and assess management talent, the next layer down, and the next layer down below that.”

Margolius is also looking for distributors that can teach HD Supply about the distribution industry, as was the case with Edson Electric. “They do many things from a supply chain standpoint better than our core business does, and we're taking some of their best practices and adapting them to what we do,” he says. “The four keys we look at are culture, financials, talent and the ability to translate best practices back and forth.”

Since its acquisitions have made it a major player in so many different construction and industrial trades, some industry observers have speculated that HD Supply could sell to a diverse mix of contractors out of the same branch locations. The company is analyzing this strategy in the regional markets that it believes could support a multi-industry branch.

Before being acquired by Home Depot, Hughes Supply was refining its “megacenter” strategy in Atlanta and Miami. The three-year-old Miami branch sells products from multiple businesses, including building materials, waterworks and MRO. HD Supply is now evaluating whether it makes sense to include the electrical products at this location, too, says Quiñones. The HD Supply Atlanta branch sells product lines from building materials, tools and fasteners, plumbing and MRO.

In December, HD Supply opened a 300,000-square-foot facility in Orlando that houses plumbing and electrical products. “In markets where there's enough customer concentration and where there are the growth opportunities, we will continue to do that,” says Margolius. “The sharing and partnering between businesses within HD Supply is something where we get a lot of power from. We shared best practices to seamlessly implement paperless order picking enabled by radio-frequency (RF) technology. The electrical and plumbing teams shared best practices with each other with the result being continuously improving service levels to our customers.”

Although the branch sells products from two distinct HD Supply businesses, the plumbing and electrical operations operate for the most part independent of each other as stand-alone businesses, says Quiñones. “They share warehouse space, but they are pretty much segregated from each other,” she says. “It's the back-end processes we try to leverage so we can get the synergies from the facilities being co-located, the facilities, the fleet and the people. With back-office activities, we're trying to learn from each other and share best practices.”

HD Supply is implementing RF technology across its electrical and plumbing platforms at the location and is sharing the facilities costs between the two business segments. When asked if HD Supply would consider serving both groups of customers on the same delivery routes, Quiñones says the company is still evaluating this element of its service strategy. She says that HD Supply realizes many back-end efficiencies from the combined facilities, but is evaluating the cost effectiveness of doing business out of one facility versus two facilities that might be across the street from each other.

The Wall Street Juggling Act

HD Supply Electrical's distributors would love to learn how Home Depot's retail business operates at such high profit margins. The electrical industry's average net-profit margins of approximately 4 percent are just a fraction of the profit margins Home Depot enjoys in the retail industry. While net profit figures for Home Depot's retail business were not available, according to a company release, in the Home Depot's retail segment, the retail gross margin rate is 33.6 percent for third-quarter 2006.

HD Supply's management team knows improving profit margins for the business will be an important challenge to overcome because the company's shareholders and Wall Street investment analysts expect Home Depot's venture into the distribution world to quickly pay back the cost of an expensive acquisition strategy.

Margolius says Home Depot “is not there yet” in terms of achieving the margins it needs in its electrical businesses, but he says it's the goal of HD Supply's Executive Vice President Joe DeAngelo to “be fully accreditive to the margins and the profitability of the overall corporation.” That includes the electrical business. As HD Supply continues to grow as a percentage of Home Depot's business, Margolius says, “It will be imperative for us to have margins that are ahead of the retail side. There is a lot of focus on that. We work very hard on the whole supply-chain equation from the way we purchase to the way we sell to be sure that we're not only bringing value to the customers, but bringing value to our shareholders.”


HD Supply's Acquisitions

HD Supply has grown from a single- line division to a $12 billion organization largely through the acquisition of leading supply houses with decades of experience serving professional customers. Following is a timeline of acquisitions made by The Home Depot to grow the HD Supply division:

1997

  • Maintenance Warehouse Corp.
  • Apex Supply Company
  • Georgia Lighting Supply

2000

  • N-E Thing Supply Company

2003

  • Economy Maintenance Supply Company

2004

  • Access Fasteners & Supply Inc.
  • Boss Construction Supply
  • Concrete Foundations Supply
  • Creative Touch Interiors (CTI)
  • White Cap Construction Supply Inc.

2005

  • Brafasco
  • Brock Tool & Supply
  • Contractors' Warehouse
  • Crown Bolt Inc.
  • CTF Supply
  • Greenwald Supply Inc. and Greenwald Industrial Products Company Inc.
  • Lakeside Contractors Supply Inc.
  • Litemor Distributors
  • Magnum Pipe LLC
  • National Waterworks
  • SESCO Inc.
  • Southwest Rebar Fabricators
  • Traditional Floorcovering of Florida Inc.
  • USABluebook
  • West Tool Inc.
  • Williams Brothers Lumber Company
  • Wire Products of Hawaii Inc.

2006

  • Cox Lumber Company
  • Forest Products Supply Inc.
  • Hughes Supply Inc.
  • Rice Planter Carpets
  • Texas Contractors Supply
  • Western Fasteners
  • Edson Electric Supply
  • Heartland Waterworks Supply
  • Burrus Contractors Supply
  • Grafton Utility Supply

What's in a Name?

One of the best-known distributor names in the electrical wholesaling industry will be phased out as part of HD Supply's new branding strategy. Hughes Supply, a well-known electrical name since 1928, will no longer be used after early second-quarter 2007.

The company is now switching to the HD Supply logo on its business forms, customer invoices and business cards, and will soon start changing the signage on stores and trucks.

When Home Depot did a branding project following the Hughes Supply acquisition, it learned about customers' perceptions of the Home Depot and Hughes Supply names. It discovered customers were a little confused and felt the company needed to differentiate the Hughes Supply business from Home Depot's retail offering,” says Arleen Quiñones. “Our focus is on the professional space,” she says. “It's not retail; it's wholesale distribution. So we didn't want to lose that.”

Home Depot chose the HD Supply name to differentiate Hughes and HD Supply's other professional businesses from its retail sector, but to still establish a clear link to the parent company. The HD Supply logo is different from the Home Depot logo because of its yellow-and-black color scheme versus the parent company's familiar orange. Part of the link back to the parent company is the “HD” in “HD Supply,” because “HD” is Home Depot's stock ticker symbol.

Quiñones says people often ask what the small circle means that appears between the “H” and “D” in the logo. “It represents what we feel is the market differentiator for us — that we can serve a project from end-to-end,” she says. “HD Supply believes the breadth of its product line enables it to supply a project from infrastructure to construction to maintenance, repair and remodel. We are really the only ones in the industry that can serve the entire project life-cycle.”

In September 2006, the distribution businesses that Home Depot has acquired over the past few years united under the common name and brand, HD Supply. The businesses will transition to the new brand over the next several months, but the company says it plans to draw on its combined strength and best practices to provide professional customers an unmatched supplier relationship.

Quiñones says the change has been rather transparent and there has been no reaction from Hughes customers to switching to the HD Supply name. “We personally wanted to give enough time between that happening for the sales force — the front line to our customers — to understand the rationale for the change, and to be able to explain to customers that really Home Depot buying us doesn't change a lot of things.”

Each brand under the HD Supply banner will have its own timeframe for converting over to the HD Supply brand. Despite the change to the HD Supply logo, Quiñones says nothing has really changed for the customers of Hughes/HD Supply. “We're owned by the Home Depot, but that one-on-one customer relationship, which is so critically important in the wholesale distribution space, doesn't change at all.”