Online Extra: Home Depot Calls the Plumber

As the retailer moves aggressively into the contractor-supply business, Joe DeAngelo must make the connections

By Brian Grow

Joe DeAngelo doesn't take his new job lightly. The first thing the executive vice president of Home Depot Supply (HDS), the fast-growing unit of Home Depot (HD ) hawking pipes, trusses, and industrial cleaners to professional contractors and repairmen, asks new members of his team is, "Are you in or are you out?" That's because he likens the gargantuan task of running HDS to NASA's bid to put a man on the moon. On the wall of a conference room connected to his office a sign puts the challenge in stark relief: "The will to win. Losing is not an option." There's a reason for Joe DeAngelo's ultra-seriousness. Arguably, his Home Depot Supply group holds the key to the future success of the entire Home Depot empire. Plucky upstart Lowe's (LOW ) has become the darling of the home improvement crowd with its 1,237 female-friendly stores and, according to a recent survey, better customer service.


  Faced with an increasingly saturated retail market, DeAngelo's boss, chief executive Robert L. Nardelli, is dialing back expansion in Home Depot's big orange boxes from more than 180 stores per year to about 100 through 2010. To jump-start new growth, Nardelli plans to move beyond retail in part by conquering the fragmented contractor-supply business. It's a market worth $410 billion per year, according to Home Depot, with no competition so far from Lowe's or retail juggernaut Wal-Mart (WMT ).

Already, Nardelli has spent $4.1 billion to snap up 35 companies to bulk up HDS. He plans to drop an additional $3.5 billion on Hughes Supply, an Orlando-based contractor-supply company when the deal is completed this year. The upshot: By 2010, HDS sales are expected to reach $23 billion, 18% of Home Depot's total, up from 5% in 2005.


  But the leap from retail to industrial supply holds big risks, say analysts. With the big box retail business maturing, Nardelli needs new markets to spark growth. But the history of retailers who stray from their core business is full of sad stories.

In the early 1990's, for example, K-Mart (SHLD ) acquired retail chains such as OfficeMax and Sports Authority. But K-Mart lost its focus on its core mass merchandising business and eventually plunged into bankruptcy. "Home Depot is at a strategic decision point that has led a lot of retailers into dangerous territory," says Darrell Rigby, head of the global retail practice at consulting firm Bain Inc. Certainly the potential profits from the contractor-supply business are huge. The market is twice the size of the $200 million home-improvement retail segment, according to company estimates. And DeAngelo likes to talk about the simple ways he can make money.


  There are 700,000 miles of pipes in the U.S., he says, a network longer than the nation's highway system. Half of it will fail in the next 15 years. To be ready, Home Depot spent $1.4 billion last year to acquire National Waterworks, a top distributor of water and sewer supplies, which has a 14% share of the market. "We're all about growth," says DeAngelo, 44. Still, Home Depot's big-time goals for HDS will utilize every ounce of his skill. The former executive vice president of tool company Stanley Works (SWK ) and General Electric (GE ) alumnus must knit together 36 companies under the Home Depot umbrella.

Already, a project is underway to "digitize" those businesses to integrate them with Home Depot's information systems and launch a Six Sigma quality-control program. And DeAngelo has begun the prickly process of meeting with those once-independent firms' staffs. "Nobody's guaranteed a job. But everybody's guaranteed an opportunity," says DeAngelo.


  Indeed, the rapid ascent of HDS up the priority list -- and the dollars that Home Depot is pouring into it -- rankles with some among Home Depot's loyal retail specialists. Some aging stores still do not have new signage, even as Home Depot spent $3.5 billion to acquire Hughes Supply in January. Says one former Home Depot executive, "The concern is how much you invest in a growth business versus in the core business."

The man running Home Depot's more than 2,000 stores in the U.S. and Mexico, Carl C. Liebert, acknowledges that HDS represents a competing interest. "We have to continue to prioritize," he says. "There will always be internal squabbles over money." DeAngelo doesn't plan to be deterred by internal politicking. The same sign on his conference room wall holds another of his guiding mantras: "The humility to execute intense team work." Building out Home Depot Supply is certain to be intense.

Grow is a correspondent for BusinessWeek in Atlanta

Edited by Phil Mintz

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