Big Boxes – What’s the big deal?

Gary Klos shops at The Home Depot, but it isn’t always his first option. Klos, of Victorian Casting & Restoration in Galveston, Texas, tries to do most of his business with McCoy’s Building Supply Centers, a regional player with locations in five southern states. But every so often, Klos needs an item McCoy’s does not have in stock, and he turns to Home Depot. “I am forced to go there,” Klos says. “It’s not by choice.”
Many rural builders are in the same boat as Klos. Building supplies for post-frame, metal frame, and home building are still readily available from a large number of sources, either from local lumberyards, regional distributors, or directly from manufacturers.
But more and more, major home improvement retailers — Home Depot and Lowe’s nationwide, Menards in the Upper Midwest — are taking aim at the contractor market. While do-it-yourself home improvement customers are the Big Boxes’ bread and butter, they are increasingly targeting the $400 billion professional contractor market, with varying degrees of success.
As the Big Boxes expand into smaller and smaller markets, rural contractors are giving them a try, for a variety of reasons. Sometimes they offer a product that can’t be found elsewhere locally, at a better price, in a more convenient location. Sometimes local alternatives have closed up shop. Sometimes, contractors will not patronize the Big Boxes at all.
However you look at it, Big Box home improvement companies are impacting the way rural builders do business.

DIY flying high
It may be hard to remember, but there was a time when the Big Boxes were not as ubiquitous as they are today. Home Depot was founded in 1978, and as recently as 1988 had fewer than 100 stores nationwide. Today, it has become the second largest retailer in the U.S. with 2004 sales of $73.1 billion and more than 1,800 stores.
Lowe’s has not achieved the same measure of nationwide coverage, especially in the West and Upper Midwest, but remains a giant nonetheless. The North Carolina-based company operates approximately 1,100 stores and did $36.5 billion in sales last year.
Menards, the nation’s 43rd-largest retailer, has acknowledged it is the third horse in a two-horse race, but remains dominant in its home region, and continues to methodically add stores to its 200-plus location roster in the heart of post-frame building country.
All three compete for the coveted do-it-yourself customer, and with good reason: it is a lucrative market. According to a study from the Home Improvement Research Institute, home improvement product sales were expected to reach a record high level of $271.4 billion in 2004, representing an increase of 12.8 percent over the revised estimate of $240.6 billion for 2003. The National Retail Hardware Association says Home Depot, Lowe’s, and Menards control about two-fifths of primary home improvement sales.
But contractors represent a large opportunity for growth. According to a Home Channel News report, Home Depot data show that professional contractors spend three times as much at their store as the average customer. While lucrative, this audience is also more demanding. “That is the toughest one — there’s got to be a relationship there,” says Rik Gagnon, vice president of sales and marketing for White Cap Construction, a construction supply distributor that was purchased by Home Depot last year. “We have to show them our service can be of value to them, and it’s not an easy sell.”

The whole package
Contractors are not an easy sell, but the Big Boxes are trying their best to bring them in. All three have contractor-specific programs, but there are distinct differences among them.
For instance, for post-frame builders Menards is the only Big Box to consistently offer complete building packages. Through its Midwest Manufacturing arm, Menards is able to provide the key components of post-frame building — light-gauge steel panels, pressure-treated lumber, trusses — efficiently through its distribution network. Menards’ capabilities have been a big boon to Zach Sobaski of Eastern Iowa building in Fairfax, Iowa.
“I’ve only been in business for two years now, and I started going there right away,” he says. “At first I was looking at other lumberyards, but no one had everything that I needed all the time. Their big advantage is promptly-shipped trusses. They stock from 20 to 60 feet wide, and if I order them on a Monday, I can have them by the end of the week. Going through a lumberyard, I might wait two, three, four weeks.”
Sobaski also has the type of relationship with his local Menards staff that is typically found between contractors and local lumberyards. “I’ve got a really good relationship with the guys at the contractor desk at Menards — I know who they are, they know who I am, I couldn’t be happier,” he says. “Before I was doing it on my own, I was selling for another company and thought Menards and the Big Box stores were the enemy. Now I don’t see it in quite that same light.”
Bob Lee of Gambrel Construction Management in Yorkville, Ill., also uses Menards extensively. Lee says the guys he deals with behind the counter aren’t always experts in what he’s looking for, but he maintains a good relationship with the engineers who help design the buildings he orders. A recent inductee into the Rural Builder Hall of Fame with more than four decades of experience, Lee has worked with several building package companies and put materials together himself, and sees one big advantage from working with Menards: lower freight costs. A load of 40-foot trusses might cost $1,000 to ship by itself, but Menards can throw the order on the regular daily delivery to Lee’s local store, and he pays about one-tenth as much in shipping.
All three Big Box stores have operations near Lee, and as far as professionals are concerned, he thinks Menards is geared more toward post-frame builders, while Home Depot and Lowe’s are more home builder-oriented.

The Bigger Boxes
Home Depot also recognizes the difference between professional and DIY customers, and aims to provide a format where builders can get the products and services they need that are unique to their business. “A lot of times the products aren’t necessarily unique, but a professional customer wants to get in and out quickly,” says John Gordon, Home Depot’s director of pro business. “We work with our pro desks to allow them to get products in the most efficient manner possible. We offer convenience that is unmatched where they’re located, and we have the depth and breadth of products.”
Gordon says Home Depot’s pro desks are staffed with industry veterans, some of whom may be licensed in their trade. “And we make sure we have that caliber of person on the floor during pro hours, midday to late afternoon, not just behind the sales desk, he says.
Claude Thayer, who runs an eponymous insulation installation company in Thomasville, N.C., was drawn to Home Depot by a 10 percent discount on his first order — a savings of more than $500 — and has found good service at local Home Depot and Lowe’s stores.
Klos, on the other hand, has found the service at his local Home Depots to be lacking. “They rely on people to come in there and find products themselves,” says Klos, who nevertheless listed Home Depot as one of his top three suppliers on his Gold Key of Excellence ballot. “That’s what they’re banking on, and for the average Joe Blow contractor, that makes it tough.
“I’ve complained, and other people have complained, and nothing. If I need an item, I’m going to go to another supply house before I go to Home Depot, I don’t have the time to play around trying to find someone.”
Much of Home Depot’s contractor efforts stem from its Home Depot Supply division, which focuses on business-to-business customers. There are Home Depot Supply retail locations in Arizona, California, Texas, and Colorado, carrying around 130,000 products, including job-lot quantities of building materials and supplies to renovation contractors and custom builders. Supply also targets new plumbing, HVAC, and mechanical contractors, new home builders, and landscapers.
Home Depot’s acquisition of White Cap Construction also was aimed at growing the company’s contractor base. White Cap is a distributor of specialty hardware, tools, and materials targeting large- and medium-sized contractors.
Lowe’s seemingly made a move away from professional builders last year, when it sold 26 Contractor Yard lumber stores along the East Coast to The Strober Organization. The move was said to be made so Lowe’s could focus on its warehouse home-improvement sales initiatives. But the company continues to tout its services available for builders, including: a blueprint/material takeoff service; call-ahead or fax ordering service; a fully staffed commercial desk dedicated to helping pro customers; and early and late store hours seven days a week. This spring, Lowe’s also unveiled an online lumber purchasing program, making structural lumber and plywood decking materials available over the Internet, with delivery included.
John Anderson of JSA Engineers in Paris, Ky., included Lowe’s, Home Depot, as well as the local Lexington Building Supply on his Gold Key ballot. Anderson uses Big Box stores as a one-stop shop to pick up odds and ends. One big difference between LBS and the Big Boxes is product availability and presentation.
“When you walk into those big stores, you can see what you’re going to get,” he says. “At Lexington Building Supply, what you want may be across the counter, you can describe it, and most of the time it comes out right, but at the big stores it’s laid out in front of you.” But with all the products offered at the Big Boxes, it sometimes takes Anderson time to find what he’s looking for. “I’m an old man — when you have to walk 14 miles to get something, to hell with that!”
He has enjoyed a long, friendly relationship with locally-owned LBS. “When you walk in, they know who you are, they say ‘Hi,’ and that means a lot,” he says. “Lowe’s and Home Depot still miss the personal attention in some cases.”
Anderson says Lowe’s holds a slight advantage on its Big Box competitor in the personal attention department. “Lowe’s has a leg up on Home Depot on being ready to help you,” he says. “I think somebody told them, ‘Hey guys, they’re the customer, they’re spending the money.’ When you can stand there in the store and somebody says, ‘Can I help you?’ God, that means a lot.”

Small town sales
Gaining the trust and loyalty of smaller contractors in rural markets also can be a tough task. These markets are more likely to have smaller lumberyards that are institutions to local contractors — often referred to as “Mom and Pop” outfits — making it difficult for large chains to enter a market and build loyalty. Menards is no stranger to big cities, but smaller towns have been integral in the company’s growth. (A company representative declined comment for this story.)
Lowe’s plans to open 150 new stores in 2005, continuing its emphasis on cities with populations greater than 500,000. But the company hopes to balance its expansion into metro markets with the opportunities presented by smaller markets.
“We’re confident there are hundreds of smaller, single-store markets Lowe’s is uniquely positioned to enter, thanks in large part to our world class centralized distribution infrastructure,” the company said in its 2004 annual report.
Home Depot plans to open 175 new stores in 2005, and many of its recent new locations have a decidedly small-town flavor: Magnolia, Texas, population 1,111; West Branch, Mich., population 1,915; Ponderay, Idaho, population 692; Jasper, Ga., population 2,381; and Littleton, N.H., population 4,431.
But the store format that works in Chicago or Pittsburgh might not necessarily work on Main Street, USA. In small markets, Lowe’s employs a 94,000-square foot format, as opposed to its 116,000-square foot store for larger markets.
Finding a product mix that works in a rural location also is a difficult task. For instance, about 10 years ago Home Depot opened rural market prototypes called CrossRoads in Quincy, Ill., and Waterloo, Iowa, and the stores did not fare well. The company concluded that it could do just as well by converting the stores into standard Home Depot formats with a product offering tailored to the Quincy and Waterloo markets.
Gordon says this regional flavoring could lead to product offerings like post-frame building components in Indiana and Michigan stores. For instance, at Home Depot’s store in Mishawaka, Ind., a potential customer asking for 29-gauge steel panels was informed that the product could be obtained from Fabral within a day or two. (The store does not sell building packages, per se.) The product mix is not determined solely by executives in Atlanta. “Customers influence that a lot,” says Gordon. “The smartest people in our stores frequently don’t wear aprons.”

Living with the locals
When the Big Boxes do successfully set up shop in a rural-oriented location, it can come at the expense of a local lumberyard or hardware store. Anecdotal evidence from Rural Builder readers suggests that when Big Boxes move in, some Mom and Pop operations go out of business. It’s a criticism Gordon has faced before.
“Home Depot will never threaten a business — customers threaten businesses,” he says. “We will be extremely responsive to what our customers ask us to do. If we always do that, our business will thrive. We say the same thing to people in small markets we’re going into: take good care of your customers and good things will happen.”
Indeed, rural builders who noted the closure of local establishments after the arrival of a Big Box also conceded that the Mom and Pops in question were flawed, either taking their regular customers for granted or failing to stay competitive in product offerings or pricing. The good Mom and Pops will always have a place in rural building, says Anderson.
“I don’t think they’ll ever replace the corner hardware stores, just because of the personal relationships,” he says. “At the Big Boxes you can’t always get a person who knows who you are, they don’t have the time of day. You better have a hunting license to find what you’re looking for.”
The personal relationships are key. Big Box representatives acknowledge that it is difficult to gain exclusive shopping loyalty from contractor customers.
“In some markets we do provide the major share of our customers’ construction materials and supplies,” says Mike Horn, vice president of commercial sales at Lowe’s. “In other markets we supply portions of the materials. We also have contractors who use us for fill-ins and punch lists. Still in other cases we are used as the builder’s show room and the builder’s customer takes his/her allowance and purchases upscale and designer products from our in-stock and/or special order selections.”
Yet another twist on the Big Boxes’ relationship with local professionals comes when the Boxes offer customers products installed. Menards used to employ its own crews to erect post-frame buildings, but got out of that business a decade ago and has been successful selling its packages. Home Depot and Lowe’s are still in the installation game, partnering with local subcontractors to provide in-home services ranging from roofing and siding to various interior jobs. Some critics see the practice as Big Boxes competing with their customers, but Gordon disagrees.
“Every time I go into a new market, there is a range of reactions, from intense hostility to an intense desire for a new relationship,” he says. “One group can’t wait to be a partner — Home Depot represents do-it-yourselfers of the last 25 years demanding remodeling services going forward. Those who have misunderstandings or misconceptions are tougher to deal with. We explain to them that our desire is not to put them out of business, but to work with them. But there’s no doubt about it, I get the love and the hate.”
Love them for their prices, selection, and convenience, or hate them for their customer service and competitive nature, Big Boxes are not going away, and may be coming to your town soon.

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