Home Depot to Add 170 DCs: Rise of the Hybrid Retailer/Distributor Continues - Modern Distribution Management

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Home Depot to Add 170 DCs: Rise of the Hybrid Retailer/Distributor Continues

The rise of the hybrid retailer/distributor continues.

The Home Depot earlier this week announced a $1.2-billion initiative to build 170 new distribution centers over the next five years. Home Depot CEO Craig Menear discussed the company’s plans and offered some detail around the DC expansion initiative at the recent Bernstein 34th Annual Strategic Decisions Brokers Conference.

According to Menear, this will include “40 flatbed distribution centers to handle building material-type products that need to go direct to a job site for a Pro,” along with 100 “market delivery operations centers” to deliver large products like grills and appliances. The rest – approximately 30 – will be “local direct fulfillment centers” to deliver products direct to customers at “an office, job or a home.”

 “And when we’re done with that,” Menear continues, “we’ll basically end up with the same-day, next-day network for 90 percent of the population.”

All of this is in addition to the retail Home Depot bricks-and-mortar store network. Menear claims that “90 percent of the U.S. population lives, give or take, within 10 miles of a Home Depot store.”

As you can tell, the company’s not just going after the retail market. Home Depot’s 2015 acquisition of Interline Brands took the company back into the MRO market – which they had exited by spinning off HD Supply in 2007.

Menear says Home Depot is targeting a subset of the MRO industry – multifamily, hospitality and institutional – probably because their product needs have quite a bit of overlap with Home Depot’s existing assortment. However, he points out that Home Depot’s “orange box” business couldn’t serve this market effectively because “delivery is an important element of that in terms of same-day, next-day.”

It’s getting crowded in this neck of the MRO woods. Amazon Business is aggressively pursuing “tail spend” across many sub-segments of MRO but appears to be making big strides in institutions (particularly higher education) and government. Costco isn’t a big online player compared to other leading retailers, but lots of small businesses get their janitorial and kitchen supplies there. Of course, the same is true for Walmart.

The big advantage all of these companies have versus distributors is that they sell to the retail market as well as to other businesses. That allows them to bring in a lot more revenue to support working capital (inventory) and capital expenditures like distribution centers and stores because they simply sell into a larger addressable market. To the extent these markets consume the same SKUs, the aggregated demand from businesses and consumers means faster turns, “B” and “C” items becoming “A” items, and more reliable forecasting.

So what should distributors do about this increasing convergence between wholesale and retail? You could make the case that they should pursue retail customers to become mirror images of Home Depot, Amazon, etc. But in my view, that’s a dubious strategy; the competition is fierce, it’s very often price-based and it’s so different from B2B that it would be a longshot for any distributor to become a serious competitor to established retail players.

I think it all comes back to adding value for business customers. Let the hybrid retailers/wholesalers compete for the lowest price while you use your expertise about your products and your market to find ways of serving customers that are very difficult for new industry players to match.

I spend quite a bit of time on distributor websites reading about the services they offer customers. It’s a breathtaking range! If you haven’t looked up what your competitors are offering, you should. From kitting and assembly to energy audits, training, troubleshooting, rentals and vending, there are dozens of ways you can embed your company into your customers’ core processes that would be hard for the retailers to match. Combine that with terrific and well-trained people and you have a recipe to keep growing for a long time.

In any case, distributors are still thriving and there’s no reason to think they can’t defend their market share going forward. Read through the first-quarter announcements from major distributors and you’ll see them growing rapidly, even though these new entrants are no doubt taking some share.

The fatal move is not to move. You need to incorporate information about all competitors – traditional, digital and brick-and-mortar retailers – into your strategic planning process. Every distributor can develop strategies to dig moats around the business. Knowing what competitors are doing, understanding customer needs in detail and then developing your plan in the context of this information is essential.

Like other hybrid retailers/distributors, Home Depot sees enormous potential in wholesale trade. They have developed a plan to pursue this opportunity and they are investing in their plan. Are you doing the same?

As always please feel free comment below or email me at ian@mdm.com.



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