RETAILING



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 long-sleeved 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 . .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 wholesalers as intermediaries in the channel of dis- tribution. Each 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 wholesalers.

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-to-own industry? What consumer education programs could be developed to assist lower-income 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.

Such anxiety may seem odd for Japanese coffee retailers, given that Japan is already the world’s num- |ber three coffee consumer, after the United States and Germany. With so many coffee shops and coffee vending machines already in place—Coca-Cola alone has more than |eight hundred thousand vending |machines that sell canned coffee—Japan’s market looks saturated. Meanwhile, the Japanese haven’t developed a taste for espresso drinks like caffe latte and caffe mocha; instead, they drink a lot of instant coffee or ready-to-drink coffee in cans, as well as American-style hot coffee.

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.

Some Japanese coffee-chain operators admit they lack Starbucks’s sophistication in what they call “packaging the store”: meshing such elements as store design, package design, and other merchandising techniques into a compelling identity.

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

Hand Technologies, an Austin, 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 for helpful study aids.

marketing miscues

Planet Hollywood Theme Restaurants

Consumers are demanding more from their dining experiences: They want to be entertained. Res-taurateurs 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 celebrity-themed 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, and Nike. Among the celebrities with big investments in Planet Hollywood are Arnold Schwarzenegger, 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 do-it-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 how-to 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, seems 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 $462. 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 experimenting with twenty-four-hour operations 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 flexible 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-it-yourselfers 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 Gap 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 out 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 Warehouse’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 .

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 at The Home Depot’s Web site, . . 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

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