The 2020 Mid-Year Economic Update_long

Home Depot: Thinking Outside the Big Box

Retailer's plan to acquire Interline Brands presents a new way to consider the future of distribution.

The world is thinking beyond verticals. Home Depot’s move to acquire Interline Brands is a likely sign of things to come in wholesale distribution sectors, which have historically self-defined by product mix and/or discreet B2B customer segments.

In its second dip into wholesale distribution markets, Home Depot’s strategy has some fresh elements to address its current growth ceiling into professional contractor and commercial markets. It’s a new model twist that could pose a growing competitive threat for distributors with focus into construction and facilities maintenance markets. (The Home Depot ended its first foray into wholesale distribution when it sold HD Supply to a trio of private equity firms in 2007.)

We are in the midst of an economic, generational and demographic shift away from single-family homeownership to multifamily dwelling. Where is the logical growth path for Home Depot if the DIY market flattens or declines? Their answer seems to be the markets served by Interline Brands, with some infrastructure benefits thrown in.

Home Depot serves the small-company professional contractor market with a retail-based loyalty program – dedicated checkout section, parking spaces to contractors, long hours, even commercial credit and jobsite delivery. Historically, it has taken smaller bites out of contractor/construction-focused distributors that provide more sophisticated levels of support and services.

The portfolio of companies Interline has built in recent years targets customer segments of multifamily and commercial real estate property managers; it also serves institutional maintenance professionals with MRO facility maintenance products. Home Depot gains the potential now to go up-market from its retail model.

A weakness for Home Depot has always been its customer service and product knowledge, whether it’s me on Saturday or their professional segment. With Interline’s infrastructure, Home Depot has the potential to address that weakness on the commercial side. It gets 1,500 direct salespeople who can expand the portfolio and service targeted growth customers more effectively.

Interline has built deep relationships with national customers to integrate into their workflow. That’s a very different model than retail. Part of the service package includes a dedicated national branch and jobsite delivery network that knows how to serve the larger customer market; Home Depot can move upstream from the pickup professional contractor market. Home Depot also gains the business-focused IT platforms of Interline for managing customer relationships and the online reorder process more conducive to B2B replenishment.

This deal complicates life for some manufacturers in terms of channel management, but that has been happening for a while now with e-commerce. Home Depot has typically carried a narrower selection of fast-moving "A" items. Distributors have differentiated by offering a more robust set of professional/construction-grade products. Will specialty distributors lose a few points of differentiation as this deal plays out?

But as Home Depot’s history in distribution proved, convergence can quickly change to collision. This time, though, the goal seems quite different than when the company was on a tear to roll up the entire construction/MRO products distribution industry on a large scale. This looks more like expanding a successful retail model to adjust to shifting markets, which happen to be transitioning to a different set of professionals and retail customers than what Home Depot built its business on in the past.

As always, the devil is in the integration details. It’s hard to find successful examples of mixing distribution models with either retail or manufacturing. But at the same time, we are now in the age of necessity, where successful companies have to adjust and transition to new business models. The move is getting the attention of execs in distribution, retail and e-commerce sectors. That in itself is noteworthy.

MDM will be watching closely as the details unfold. Watch and MDM Premium for more.

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