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9-512-036 M A R C H 2 2 , 2 0 1 2 ________________________________________________________________________________________________________________ Senior Lecturer Jose B. Alvarez, Visiting Assistant Professor Zeynep Ton, MIT Sloan School of Management, and Research Associate Ryan Johnson of the Global Research Group, prepared this case. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2012 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to www.hbsp.harvard.edu/educators. This publication may not be digitized, photocopied, or otherwise reproduced, posted, or transmitted, without the permission of Harvard Business School. J O S E B . A L V A R E Z Z E Y N E P T O N R Y A N J O H N S O N Home Depot and Interconnected Retail In November 2011, just days before the holiday shopping rush, the senior leadership team of The Home Depot, Inc., (Home Depot), the world’s largest home improvement chain, discussed how best to navigate the new interconnected world of retail. Founded in Atlanta, Georgia in 1978 by Bernie Marcus and Arthur Blank, Home Depot opened its first stores in 1979 and grew rapidly and successfully for two decades. But by 1999 performance had waned and shareholders and investors urged a leadership transition. In late 2000, Bob Nardelli was named CEO, inheriting an organization that was decentralized and lacked discipline. In response, Home Depot’s leadership focused on centralization, standardization, and performance metrics. However, by late 2006 customer service and employee satisfaction had plummeted, and Home Depot had lost market share to rival Lowe’s. Many felt the focus on profits and performance management distracted associates from delivering top customer service and hurt the bottom line. In 2007, Frank Blake, Home Depot’s then-vice chairman of the board of directors and executive vice president of business development and corporate operations, was named CEO. Blake and his senior leadership team led the firm through a global recession and revitalized the firm’s once central culture of customer service. While Blake’s tenure saw a decline in sales attributable to the global recession, it was marked by gains in market share, strong alignment across business units, and improvements in information technology (IT) systems, merchandising, supply chain and operations, as well as renewed employee excitement. By 2011, Home Depot had been restored to stable yet modest growth, but much was left to be done and new challenges loomed. (See Exhibits 1, 2, 3, 4 and 5 for Home Depot performance data, income statement and balance sheet, corporate fact sheet, senior leadership bios, and organizational charts.) Retailers across the board faced a rapidly changing environment with the growing acceptance of on-line retailing that empowered customers by providing greater price transparency and more options. Marketing channels and communication touch points continued to shift. Home Depot’s leadership grappled with the challenges of operating in an interconnected world, how best to leverage Home Depot’s brick-and-mortar success in the new environment, and continuing to build and sustain lasting emotional connections with customers. The Early Years After being fired from executive positions at Handy Dan Home Improvement Centers in the late 1970s, Marcus and Blank dreamt of creating a store that would offer “one-stop shopping for the do-it- This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 512-036 Home Depot and Interconnected Retail 2 yourselfer.”1 Marcus and Blank envisioned large format stores mimicking warehouses that staffed knowledgeable experts to assist customers in home improvement projects.2 Partnering with investment banker Ken Langone and merchandiser Pat Farrah, the team raised capital and opened their first two stores in Atlanta.3 The initial stores were approximately 60,000 sq. ft. each, and had over 25,000 stock keeping units (SKUs), much larger and more comprehensive than the competition’s at the time.4 Products included lumber, doors, windows, masonry supplies, cabinets, countertops, patio furniture, hardware, tools, plumbing supplies, electrical supplies, lawn and garden products, paint, and appliances.5 Throughout the 1980s, Home Depot helped to popularize and facilitate a growing interest in do-it- yourself (DIY) home improvement. DIY customers were typically home owners who, after purchasing the products and tools necessary, built, repaired and renovated part of their own homes. In addition to DIY customers, Home Depot targeted professional customers (pros), who were typically local general contractors, electricians, plumbers, carpenters and other tradesmen. Pros made up a small percentage of customers but a significant portion of volume and revenues, spending more per trip on average and visiting stores more frequently than DIY customers. From 1979 to 1999, Home Depot developed a reputation for its customer service, entrepreneurial spirit, and rapid growth. The founders adopted an inverted pyramid organizational model, Carol Tomé chief financial officer and executive vice president of corporate services remembered, “When I started in 1995 it was very clear that corporate was at the bottom of the pyramid and our stores, store associates and customers were at the top. We were here to support the stores.” (See Exhibit 6 for the inverted pyramid and Home Depot’s values.) Furthermore, Marcus and Blank regularly visited stores and were revered by store associates who knew them as Bernie and Arthur. Their book, Built From Scratch, was considered “the bible” by many in the firm, Tomé recalled, “Our people would have followed Bernie and Arthur off the cliff.” Home Depot’s largest competitor was Lowe’s. Founded in 1921, Lowe’s grew steadily, largely on sales to pros, and went public in 1979.6 In 1980, as the housing market slowed and profits suffered, Lowe’s embarked on a massive store redesign aimed to make stores friendly for DIY customers. By 1982 DIY customers made up half of Lowe’s customers.7 The redesign of existing stores kept Lowe’s committed to a smaller store format throughout the 1980s. Eventually Lowe’s moved to large-format warehouse stores, opening more than 140 stores in the 1990s.8 Customer Service Marcus and Blank had immediately emphasized customer service. The founders felt Home Depot was in the “people business” and preached a “whatever it takes” customer service mentality focused on building relationships with the customer rather than simply completing a sale.9 Home Depot associates held workshops and clinics on projects such as roofing, laying tile, or wallpapering, and provided one-on-one personalized service during the shopping experience. Store associates were largely full-time personnel, often with a background in home improvement. They were committed, productive and knowledgeable enough to deliver a high level of customer service,10 but the full-time profile could limit scheduling flexibility and efficiency. Training was largely informal but intensive; company leaders, including Marcus and Farrah, taught customer service and merchandising and associates were encouraged to use and understand tools and products. Home Depot associates consistently outscored the competition on customer service and product knowledge surveys. Marvin Ellison, executive vice president of U.S. stores, remembered his first This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresasy Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. Home Depot and Interconnected Retail 512-036 3 shopping visit as a customer to a Florida Home Depot. At the time, he was working for the retailer Target and needed a faucet: I took my old faucet with me to make sure I got the right size and color. An associate approached me and asked, “Can I help you.” I told him what I was looking for and he asked what was wrong with the faucet I had. I told him it was leaking and showed him where and he said, “You don’t need a new faucet.” Next thing I knew he opened up a box, took out a part, put it on my faucet and said, “Here you go.” When I asked how much I owed he said, “Nothing, just come back and see me next time.” From a retail perspective I’m sitting there thinking, this guy created shrink1; he has to take a markdown, I’m going through all the negative things in my head. But to him it was, “you don’t owe me anything but next time you need anything for your home, remember me and come back and see me again.” Not only did I do that, but I told the story over and over and over again. I’m still telling it 20 years later. Entrepreneurial Spirit The founders wanted their entrepreneurial spirit to shine across the organization. As a result, stores were largely autonomous and store managers had nearly complete control over merchandising, displays, promotions, employee wages, store operations and vendor management.11 Given their autonomy and independence, store managers and associates took pride in their stores, and thought of them as a part of the local community rather than as part of a chain retailer. All hiring, firing and promotions at the store level were left to the store manager’s discretion. Corporate headquarters provided centralized administrative support, including legal, finance, and the planning and development of new stores. If stores felt directives or plans from headquarters were wrong or burdensome, they were encouraged to send them back or ignore them. Merchandising was decentralized, broken into nine regional purchasing offices. These offices handled approximately 25% of the product ordering for stores. The other 75% was handled in the store itself, with orders based on store managers’ knowledge and intuition about the local market and placed directly with vendors who delivered to the store. The firm never developed a national supply chain or logistics because each store acted as an individual buyer and receiver for most items. The founders supported decentralization, believing that meeting local needs drove sales as much as 15% to 20%.12 While decentralization ensured stores met each local market’s needs, it also meant Home Depot could not capitalize on its potential buying and bargaining power as a national concern. Nationwide in-store deals were rare, and even when they were agreed upon at corporate headquarters, they were often ignored by local store managers. Product mix, store experience and displays differed from store to store. “In the early days it was an entirely entrepreneurial culture,” one senior leader recalled. “In other words, the stores just basically did whatever they felt they needed to do to drive sales at the local level.” Rapid Growth By 1999, with revenues of $40 billion, Home Depot was the fastest growing retailer in the world. It also became the youngest retailer to hit revenue milestones of $50 billion, $60 billion, and $70 billion.13 Growth was largely fueled by new store openings. Tomé remembered, “From 1995 to 1999 we were on this incredible growth platform. At one point during my career we were opening a new store every 48 hours. It was all about serving the stores and opening up square footage just as fast as we could.” She recalled the positive atmosphere, “By 1999, basically, we could do no wrong, 1 Shrink was a measure of the loss of merchandise in a retail store through theft, damage, or misrouting. It represented the difference between ordered inventory and actual inventory on-hand plus sold inventory. This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 512-036 Home Depot and Interconnected Retail 4 everything we touched seemed to turn to gold. We were trading at a 70 price-to-earnings ratio (p/e) and were the darlings of Wall Street. We’d go into a shareholder meeting and people would applaud and cry because we created so much wealth, not only for our associates but for so many people. It was an incredible time.” Cracks Begin to Show Despite rapid and profitable growth, by the late 1990s shareholders and board members worried about the firm’s further growth without centralization and standardization. Analysts noted that the firm lacked the discipline of other big box chains and that the company’s vaunted customer service had begun to slip. Insiders agreed.14 Marc Powers, senior vice president of operations, noted that Lowe’s seized on this opportunity: “We had a competitor that came in that we should have crushed, but because we were so disorganized it grew and started to put pressure on us because it could execute, had all the infrastructure, had the foundation, and were out-executing us.” In October 2000 Home Depot missed its earnings target of $0.31 per share by more than $0.03 per share, “a big miss,” according to Tomé—and Home Depot’s stock price dropped 28% in one day as a result. She recalled, “I was sitting in Arthur Blank’s office on the phone with one of our largest shareholders and they were screaming at us. Arthur kept saying it was going to be okay but I was thinking this is not going to be okay and it wasn’t. We had a fabulous culture but we had grown so quickly and without a lot of infrastructure, without systems.” Shifting Leadership and Strategy In December 2000, citing a need for better efficiency, better use of resources and more operational discipline, the board hired Bob Nardelli as CEO of Home Depot. Home Depot’s leadership developed a three-part strategy: extend the business into new lines; expand into new markets and new customer segments; and drive efficiency, eliminate waste, and ensure safe, clean stores in existing operations.15 To expand globally, Home Depot pushed into Mexico. Hoping to grow sales to pros and diversify Home Depot’s portfolio, in 2004, a wholesale building supplies business was started, Home Depot Supply (HD Supply), through a series of acquisitions and investments. HD Supply targeted pros as well as large real estate developers, maintenance staff, industrial contractors and construction crews. HD Supply grew quickly, and became a $12 billion business by 2006. To support HD Supply, Home Depot pulled back store growth, adjusting down from opening 180 new stores a year to 100. Centralizing Merchandising In an effort to centralize merchandizing, Home Depot closed nine existing regional merchandising offices and hired 12 merchandising vice presidents to work out of the Atlanta headquarters. Centralized merchandising leveraged Home Depot’s purchasing power and enabled the firm to arrange exclusive deals and negotiate better pricing and terms across the board, including extending payment terms, all of which contributed to the firm’s bottom line. Home Depot hoped centralization would improve ordering and reduce inventory inefficiencies at the store level. However, the company lacked the infrastructure needed to support centralization. Merchants had no specific data about store sales or customer preferences and were forced to order the same product for all stores nationally. Executive Vice President of Merchandising Craig Menear, then a Home Depot merchant, remembered, “Those were some trying times. We hadn’t made the investments in systems to make it easyfor the merchants to manage in that environment. We had This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. Home Depot and Interconnected Retail 512-036 5 lawn tractors sitting in Phoenix, Arizona. There isn’t a whole lot of grass in Phoenix. There were some real challenges.” Purchasing centralization created new requirements of the supply chain. Home Depot had a small network of warehouses to which centralized orders were shipped. However, the warehouses lacked automation, and receiving and tracking software, leaving room for human error, inefficiency, and significant inventory issues, which often left stores overstocked, or out-of-stock on key products. Centralization was also unpopular at the store level. Store managers were resistant to giving up control and wary of having a product mix that was not locally tailored. One senior executive recalled, “When the centralization came in, it took away the store manager’s freedom, and basically said, ‘We’re going to tell you exactly what your store looks like from Atlanta. We are going to send you a merchandising action plan to follow to the letter and you have no flexibility.’” Efforts to Improve Operations Improving labor productivity To improve labor productivity, Home Depot looked to standardization and technology. In-store logistics activities, from the moment merchandise arrived at the store until its sale, were standardized. Additionally, over $1 billion was invested in IT initiatives. Stores were equipped with point-of-sale terminals with touch screens, allowing associates to find un- barcoded items faster. Over 1,000 self-checkout registers were installed in more than 800 stores to drive faster, more accurate check-out, and cordless scan guns were introduced in all stores. However, the software running behind this hardware was outdated and lacked flexibility. Additionally, store servers were not linked to headquarters or to a central database, limiting company-wide access to data. While analysts applauded the investments, few inside the company, both at the store level and at headquarters, saw real benefit from them. Many systems and software packages fell short of their promised impact due to mismanaged rollouts, lack of user training, and misaligned fit with in-store needs. “At one point they unveiled a $150 million custom order management system,” Powers remembered, “but all it let us do was manage carpet installs.” Metrics To drive productivity, store managers were assessed on 30 metrics and all associates were ranked on four performance metrics: financial; operational; customer; and people skills. However, communication around metrics was unclear; store managers often misunderstood the motives behind them, leading to unforeseen inefficiencies. Associates complained of being overwhelmed with paperwork, analysis, and metrics to track, claiming these took up most of their time and kept them from providing top quality service. Ellison agreed, “I can’t believe our service was as good as it was based on all the tasks that we had our associates focused on that had absolutely nothing to do with service. We couldn’t take care of the customer because we had so many other things to worry about.” Metrics also became a focus in merchandising. One metric that was stressed at a corporate level was average ticket, or the average amount of each purchase. While trying to increase this metric made sense in theory, over time, a laser focus on this drove merchants to only stock higher-end products, which drove up average ticket numbers but decreased overall purchases. Human Resources On the personnel front, Home Depot increased the number of part-time employees, to allow for more flexibility in scheduling and coverage, and to gain significant cost savings. With few operating standards, however, training part-time employees became very difficult. In the past, long tenured employees trained new employees in the “Home Depot Way.” One store manager commented, “We built the entire company around the idea that a customer could come in and ask us how to do anything—fix a toilet, build a deck, whatever—and we’d tell them how to do it. This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 512-036 Home Depot and Interconnected Retail 6 Now we’ve got kids who don’t even know what the products look like.”16 Staffing levels were reduced at the stores, dropping the number of full-time employees (FTEs). By December 2002, 22 of Home Depot’s 29 top-rated store managers had left.17 Between 2001 and 2006, 98% of the top 170 positions at Home Depot turned over, with more than half of the replacements coming from outside the company.18 Performance From 2000 to 2005, profitability improved but customer service began to suffer. In 2005 Home Depot was the lowest ranked major U.S. retailer in the University of Michigan’s annual American Customer Satisfaction Index. It was 11 points behind Lowe’s and three points behind Kmart (see Exhibit 7). One analyst said of Home Depot, “They’ve got people in there working for less money and are less knowledgeable and less experienced. It’s all about profitability at the cost of serving the customer.”19 Ellison recalled a watershed moment that revealed the underlying issues: When I started with the company I was devastated that I didn’t find that service culture that I loved so much. When I became a division president I pledged to call every customer back when there was an email or a complaint and follow up personally with them. I remember having a conversation with a customer who had tried to return a lawnmower but had been refused by the associate and the store manager. I had a conference call with the manager, and asked, “Just tell me why you didn’t take care of the customer, what prohibited you from doing the right thing the Home Depot Way.” Then the manager asked me the fateful question, “Are you aware of the power equipment return report that comes out each Monday.” I said “I have no idea what you are talking about.” And she said, “We get it every single Monday and if we accept power equipment returns, we are on this list and we get a call from the district manager and he challenges us because he does not want to be on this list because it is a negative metric.” Right then I realized the issue was about us, the company, not the associates. Consistent with the decline in customer service, same store sales declined. Although the company had an average annual sales growth rate of 12%, growth was largely fueled by HD Supply. Tomé commented, “In the core retail business, we were losing serious market share, at the height of the housing market. We had taken our eye off the core retail business and we lost our focus in a bunch of different ways—from a customer’s advocate for value or from a service perspective.” At the same time, Lowe’s had gained market share and grew sales at 19% annually between 2000 and 2007, without a foray into wholesale distribution. Home Depot’s share price fell slightly over the same period, while Lowe’s share price rose more than 200% (see Exhibits 8, 9 and 10). Onlookers commented that Home Depot seemed to lose its way, miscalculating the importance of customer service and especially the need to ensure that store associates had customer service as their top priority. Tim Crow, executive vice president of human resources, commented, “Some of it came down to the difference between manufacturing and retail philosophies. In manufacturing, with enough focus and processes like Six-Sigma and lean, and enough time focused on an issue, you can eliminate almost any flaw. With retail, you wake up every morning and hope that 300,000 other peoplewoke up that morning on the right side of the bed and that when they put on the orange apron2 they feel good about the place, because they will create the brand image for us that day.” 2 The orange apron was part of the uniform that in-store associates wore at Home Depot. This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. Home Depot and Interconnected Retail 512-036 7 Blake Takes the Reins In January 2007 Home Depot’s board of directors replaced Nardelli with Blake. Reactions to the announcement were mixed: many inside the company had not met him and Wall Street questioned the wisdom of hiring a first-time CEO with little previous retail experience. On the second day of his tenure, Blake addressed the company in a speech broadcast to all Home Depot stores. He pulled out a copy of “Built from Scratch,” the founders’ book about Home Depot and read a passage describing their commitment to an entrepreneurial culture and top notch customer service. Blake told associates he was reinstating the inverted pyramid with, “associates and customers at the top, and me as CEO at the bottom.”20 Tomé remembered Blake’s first weeks, “He immediately met with Bernie, he immediately met with Arthur, he just spread his wings out and said ‘I don’t know anything but I’m going to learn,’ and he did. He was brilliant in his leadership in that he spent his time in the stores.” Blake immediately established himself as humble, modest, intelligent and diplomatic. He rarely granted interviews, rarely spoke publicly and quickly garnered a reputation for listening and being sincere. Ellison said: There is not a week that goes by that Frank does not have lunch, dinner or breakfast with a group of hourly associates somewhere in the country. His intent is not to walk out of the session with a list of concerns or issues that he is going to hand out to his leadership team. He wants to understand what associates see as important, what resonates with them, how they view the world, and make sure those things connect with the strategic vision at headquarters. Blake sought a pay cut for himself and instituted rules that made it hard for him to receive raises. He replaced many of the top executives and filled open spots with retail veterans. Blake began to build authentic credibility with all company associates, something Tomé saw as crucial, “Our people will follow Frank off the cliff just like they would have followed Bernie and Arthur off the cliff. In this industry, if you don’t have the associates with you, you are toast.” Blake’s Vision Blake immediately made clear that he was set on improving the customer service in Home Depot stores, “We set the standard for customer service in home improvement retail, if not in all of retail. That is the legacy of Home Depot, and what I think will define my tenure. Also, we’ve got to be a place where our associates are proud to work.”21 He also urged his executive team to step back and examine where foundational retail building blocks were missing. He set simple, big picture goals of catching up in IT, merchandising, supply chain and store operations, and returned the local feel to Home Depot stores. Blake relied on operations to refocus on the customer and to make it clear to the associates that their job, first and foremost, was to serve the customer. Tomé commented on Home Depot’s growth strategy, “Once we understood that growth would no longer be defined by square footage we started investing in other parts of our business, like systems, IT, supply chain and our people. We started to focus on increasing sales per square foot, getting more out of what we’ve already got.” Blake was committed to rebuilding store experience, regaining customers’ trust and appreciation, and returning Home Depot to positive growth. Home Depot also sought growth through an increased presence in Mexico and China, and through increased forays into installation, repair, contracting and maintenance work. This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 512-036 Home Depot and Interconnected Retail 8 Within his first three months, Blake put HD Supply, which accounted for nearly 15% of revenue, up for sale. Tomé explained “HD Supply initially had some linkage back to our core because we had a common vendor base but then we bought into areas where we didn’t have those synergies. For example, we bought a waterworks company that sold huge pipes and fire hydrants, things you just don’t find in our stores. It worked under the wholesale distribution umbrella, but in terms of linking back to our core it was hard to piece that together.” HD Supply sold for $8.5 billion, a price criticized at the time, but it allowed Home Depot to refocus on its core retail business. Reinvestment in Hard Times In 2007 the U.S. housing market began to stagnate and Home Depot’s sales showed signs of weakness. Its stock price fell from $40 per share in July 2007 to less than $25 per share by the end of the year, and year-over-year retail sales declined by 2.1%, with same store sales down 6.7%.22 With the collapse of the housing market, a global financial crisis and the beginning of a recession in the U.S., 2008 was no kinder to Home Depot. Sales declined 7.8%, with same store sales down 8.7%. The firm closed 15 underperforming stores and scrapped plans to open 50 new stores. In his annual letter to shareholders, Blake acknowledged that 2008 had been a hard year and 2009 was likely to be tough as well. He again turned to history as his guide, writing, “The Home Depot was founded in 1979 when the U.S. was in the middle of a recession. Our values—taking care of our customers and taking care of our associates—speak even more powerfully in difficult times.”23 Home Depot continued to support its associates, increased its pay-out of success sharing checks to associates more than three-fold to over $88 million in success sharing checks to associates, adding additional merit pay increases and bonuses and maintaining a 401k retirement plan match. Blake wrote, “It is a source of pride that we can take care of associates in economically difficult times like these […] Taking care of our associates is an important part of taking care of our customers.”24 Blake saw the downturn as an opportunity for Home Depot, “It’s easier for everyone to understand the need for change when things are tough and the risks are lower.”25 During the downturn Home Depot invested over $3 billion in IT systems, merchandising tools and supply chain to improve stores, customer service and customer experience. Operations In 2008, Blake promoted Ellison to run Home Depot’s U.S. stores. Ellison focused on three key goals; top customer service, stocked shelves, and clean stores. Simultaneously the operations team set out to simplify store operations by eliminating tasks and develop tools and training that associates needed to achieve these three key goals. 60/40 initiative In 2008, Home Depot determined that only 45% of store hourly payroll time was allocated to service and selling, while 55% was focused on tasking—doing reports, stocking shelves, and dealing with requests from headquarters. The goal of the 60/40 initiative was to flip that ratio, dedicating 60% of associate time to customer service and 40% on necessary in-store tasks. To help associates meet the 60/40 goal, Home Depot’s operations team took to the stores, listening to associates to understand what tasks could be eliminated. Ellison commented, “We stripped everything away from the stores that took them away from the customers. We killed over 200 reports. We reorganizedand redesigned job descriptions and we made it virtually impossible for people in the stores not to understand that customer service was the most important thing. Service became the number one measure.” The effort was also supported by IT and systems developments and increased This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. Home Depot and Interconnected Retail 512-036 9 centralization of inventory and distribution, which saved time in stores. By 2011, the ratio had reached 50/50 and more tasks were being eliminated each month. Home Depot instituted “power hours” from 10:00 a.m. to 2:00 p.m. on weekdays and all day on weekends (the times when stores experienced their greatest customer traffic). During “power hours”, regardless of an associate’s role, their only job was helping customers. To improve customer service the operations team also focused on making sure customers found and purchased what they were looking for by having stocked shelves, and clean, safe, easy to navigate stores. Learning The learning team was challenged to make part-time, non-career path associates experts in the products and projects that Home Depot sold. The firm had over 300,000 associates many of which were part-time hourly workers. Tom Spahr, vice president of learning, commented: What makes our business so difficult and exciting from a customer service standpoint is that you don’t come to Home Depot to buy just a thing; you are buying a dream, doing something to your home. So it’s not just, “Here let me take you over to the aisle and here’s the item,” but it’s “Let’s spend the next 30 minutes together talking about all the parts, pieces and tools you need and how to use the tools and the techniques you need to do this project.” It can be scary sometimes as an associate if you are dealing with plumbing, or electrical; you may not have the expertise and you don’t want to say the wrong thing. To help drive product knowledge, the learning team facilitated distance learning, where product and project experts worked with associates in certain departments to become experts on all the different products and projects a customer might want. The sessions included 16,000 associates in 2011 and were broadcast live via webinars, which allowed participants to chat and ask questions via computer or on the phone. (See Exhibit 11 for more detail on learning programs and initiatives.) At Blake’s request, every associate in the company, starting with the CEO, received position- specific customer service training. Over 300,000 associates were trained in 10 weeks. Spahr commented, “In the past we had tons of customer service programs, we were talking about service and we were training service, but behavior wasn’t changing because associates had all these reports and metrics they were chasing, so service remained on the bottom of the list. The 60/40 initiative and our investments in IT, merchandising and supply chain to support the stores, was instrumental in making our learning programs a success by taking tasks out of the store.” Merchandising In merchandising, Home Depot looked to centralize with more nuance, building definitions for product categories and developing the tools and systems necessary to ensure regionalization of product mix. The merchandising team created a portfolio strategy in which it defined the roles that different product categories played in the store. The roles were: destination—categories that you stand for as a business; core—categories that help complete projects and increase average ticket; traffic—products that attracted customers to stores; impulse—products that help drive average ticket; and emerging—categories that reflected a new business line. Menear explained, “These definitions then drive your assortment decisions, your marketing decisions, your pricing decisions and your product allocation.” The merchandising team also began to address regionalization. Home Depot created an assortment management tool that clustered products and stores based on customer purchasing patterns and inventory turnover, ensuring that a store in Phoenix would not order a lawn tractor. Ellison commented: This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 512-036 Home Depot and Interconnected Retail 10 We decided to create a hybrid of the early entrepreneurial culture and centralization. Now we tell the stores that we will dictate 70% of your merchandising, but once they have reached that 70% we encourage them to go above and beyond at the local level to further drive sales. The beauty of that is that it creates the eclectic Home Depot feel that is hard for the competitor to replicate and hard for us to create from Atlanta. Our store managers understand the local communities and local philosophy well and can make their Home Depot feel like the local hardware store. At the same time we ensure that we are consistent on the efforts and events that matter most across the whole company. To support regionalization, Home Depot merchants had to have their finger on the pulse of the departments and regions across the company. Home Depot developed a weekly business review, which brought together a cross functional team that met within a specific merchandising department. Menear explained, “The hardware department would sit and you’d have the merchants, the finance team, the inventory planning and replenishment team, and the marketing team all together doing a weekly business review in terms of what was actually happening inside of the business, what was working well, and what wasn’t working well. This got us into a weekly cadence of running the business from a centralized location in a much more detailed and nuanced fashion.” Supply chain Mark Holifield, the senior vice president of supply chain, characterized Home Depot’s supply chain challenges when he arrived at the end of 2006, “The first week I got here I learned that we were $1 billion over budget in inventory. At the same time we had a lot of out-of- stocks; 37,000 people had the ability to order product from suppliers and 75% of the SKUs were being sent directly from suppliers to stores. Associates were burdened with supply chain tasks.” Hollifield worked on two initiatives to reduce logistics costs and increase in-stock levels with less inventory. The first initiative was to increase central distribution by building rapid deployment centers (RDCs). The RDCs—warehouses that were strategically placed in different regions around the country—aggregated merchandise for 100 to 130 stores and distributed to the stores as needed. This allowed Home Depot to take advantage of scale and remove vendor minimums for individual stores. The RDCs allowed Home Depot to better manage spike sales, or high quantity sales of one item, often driven by large purchases by professionals. The firm invested $250 million to design, build and open 19 RDCs across the U.S., which took three years, from January 2007 to January 2011. By 2011, central distribution penetration was up to 75% of SKUs. The second initiative was to build an effective central inventory management tool that would give merchants and supply chain managers at headquarters the ability to closely track the needs of each individual store and ensure products were being delivered on time. The central inventory management system allowed for more effective forecasting, automatic replenishment of product, and enabled central distribution to better serve stores and ensure they had product on shelves. By 2011, the central inventory management system was used for over 85% of store SKUs. IT In 2008, Blake hired Matt Carey as executive vice president andchief information officer. Carey quickly brought Cara Kinsey, a former colleague, on board as the senior vice president of IT. Carey and Kinsey brought with them over 20 years of experience in retail IT, mostly from Wal-Mart. When the two landed at Home Depot, they sensed a cultural distrust of the IT group. They also realized that Home Depot was decades behind its competitors in terms of systems, hardware and software. Carey remembered, “Six months into the job Cara and I sat down and compared the Home Depot systems to the Wal-Mart systems we were familiar with. The conclusion of that exercise was that we [Home This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. Home Depot and Interconnected Retail 512-036 11 Depot] were about where they [Wal-Mart] was in 1991. So basically we built a roadmap to get from 1991 to 2007 in five years. There was low-hanging fruit but there was a ton of work to do.” (See Exhibit 12 for the tape measure slide.) He added, “It’s amazing that the company got as big as it was as fast as it did, without the technology most firms use to scale. It says a lot about the people. You realize you just can’t get in their way. You have to empower them.” One of the biggest challenges the new IT team faced was buy-in and support from the associate and management level. Believing that system designers needed to understand Home Depot’s day-to- day operations, Carey sent his team to the stores. “Our folks all work in the stores,” he said. “We require them to be a store floor sales associate before they start a design for a new product. We have a formula that says credibility = empathy + track record.” One example of IT improvement developed in partnership with the operations team and associates on the floor was the First Phone. The First Phone was a mobile device given to store associates combining the functionality of six tools into one: phone, walkie-talkie, mobile register, rapid register, inventory management and business analytics. (See Exhibit 13 for details on the First Phone.) Additionally, the IT team worked to make the implementation speed and training reasonable, Kinsey explained, “I think that previously they tried to do everything at once, - now we are feeding things a little bit at a time, instead of big bang.” Early Results Reflecting on systems, IT, and people investments, Ellison noted, “Numbers don’t turn around overnight. You are basically depositing into an investment that you hope will pay off long term. Frank [Blake] allowed us to do this. He didn’t look at the numbers every week and say you better show me something in the next month or I’m going to kill this stuff. He bought into it 100%. He said, ‘I believe to my core this is the right thing to do. We are going to have to stick with it.’” Eventually, key customer service indicators started to swing in the positive direction. There was modest but steady sales growth, increased customer transactions, improved market share, and improved gross margin as percentage of sales. Ellison recalled, “The first positive result that started to show up was that the internal Voice of the Customer (VOC) 3 survey started to go up and we started to sustain the higher number. Then we saw customer transactions go up in 2010 and that’s when we knew we were on to something. Every time we rolled out another phase of training, a few months later you would see the numbers go up. We were able to identify a clear correlation.” An important indicator in the VOC score was the net promoter score (NPS)4, which increased 450 basis points in 2010 and had risen to over 73% from a low of 52.9% in 2008. Home Depot’s 2011 score in the University of Michigan American Customer Satisfaction Index rose to 75, equivalent to its 2001 score and up significantly from its low of 67 in 2007. (See Exhibit 7.) Changing Home Improvement Landscape While Home Depot was working on its cultural and operational transformation, the retailing landscape in general, and home improvement retail in particular, was changing. 3 VOC stood for "Voice of the Customer" and was the metric by which Home Depot measured its own customer service offerings, and was based on customer satisfaction surveys on a scale of 1 to 10. 4 Net promoter score calculations took the percentage of customers who are promoters—loyal enthusiasts who will keep buying and refer others—and subtracts the percentage who are detractors, unhappy customers who can damage your brand and impede growth through negative word-of-mouth. This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 512-036 Home Depot and Interconnected Retail 12 Home improvement industry In the early 2000s, home improvement was one of the highest performing retail sectors in the U.S. and hit its peak in 2006, with industry sales eclipsing $300 billion.26 With the global recession in 2008 and the dramatically deflated real estate bubble, sales retracted to $255 billion in 2009 before stabilizing at $264 billion in 2010.27 In 2011, the housing market remained highly stressed and private fixed residential investment (PFRI) as a percent of GDP was at a sixty year low of 2.2%.28 (See Exhibit 14 for PFRI over time.) But analysts were optimistic about the future. Positive demographic trends, including the aging of homes and the retirement of baby boomers, would likely lead to increased home improvement expenditures; analysts projected market growth to $344 billion by 2015.29 Growth of online retail In 1999 Amazon announced its intention to sell approximately 6,000 home improvement goods.30 The move targeted both contractors and DIY customers. From 2000 to 2010, Amazon and other e-commerce competitors continued to expand their offerings and grew market share in the home improvement space. (See Exhibit 15 for trends in online retail.) Tomé commented, “Of course we talk about Lowe’s as a competitor but the competitor we are really petrified of is Amazon. We are constantly thinking about what will be our points of differentiation.” Some large retailers had struggled to integrate stores with their Internet offerings and failed to adjust to the new retail environment, leading to their demise. Inconsistencies in pricing, service and inventory from the website to the store caused headaches for both in-store employees and customers. Almost every large retailer was reevaluating their business models in light of these developments. New technologies Smartphones, which allowed customers to check prices, compare similar products and immediately purchase an item from another company, all from inside the store, offered new opportunities for shoppers and new concerns for brick-and-mortar retailers.31 Applications (apps) for phones offered quick price transparency and vast choices; in 2011 46% of American adults had downloaded an app to assist their shopping.32 Smartphone apps also served as a marketing tool; retailers could offer both in-store coupons, and coupons tailored specifically for the individual. Additionally, social networking programs such as Twitter and Facebook, along with other digital marketing routes, offered traditional businesses a new marketing channel to reach customers. Smaller formats Smaller home improvement retailers, such as Ace Hardware and True Value Hardware, also seemed poised to compete. These firms had small-format stores and close interaction with customers. They quickly changed product offerings, displays, layouts and marketing based on customer preferences.33 Recognizing the advantages of small-format stores some big box retailers announced plans to open small-format stores, including Walmart.34The Road Ahead The senior leadership team felt that Home Depot had rebounded from a slip in performance and from the global economic recession as a stronger, more focused and better aligned firm. Menear commented, “What we have demonstrated and what we have learned is how to get aligned behind something organizationally and when we do that it is pretty spectacular. But this is a journey and there’s not an endpoint. How many retailers our size have made it past 40 years? There are not many. You have to continue to evolve and change with your customer base as they change.” But the reality for Home Depot was that there was little growth, if any, in their industry. The firm also had $25 billion of hard assets on the balance sheet and over 300,000 people, “You’ve got to figure out how to leverage those assets to create a competitive advantage,” Carey commented. Home Depot’s leadership felt that its competitive advantage could come from interconnected retail. Tomé commented, “We’ve got to be there to serve the customer when, where and how they want to be This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. Home Depot and Interconnected Retail 512-036 13 served.” In order to do this, Home Depot set out to stitch its online business together with its stores and its associates, creating one interconnected, aligned company. Interconnected Retail Hal Lawton, president of online, had a large role to play in the emergence of Home Depot as an online presence and in the interconnectedness of its business. Lawton, whose group was rapidly growing, had hired his entire leadership team externally for a total of 80 external hires in 2011 alone. Lawton felt there were two battles to be won in e-commerce. The first was in offerings: who has the nicest website, the slickest app, the best digital marketing, and the largest presence in social media. The second was cultural integration and alignment: how well the online part of a retail business worked with the rest of the business to appear as, or become, a united front. Lawton explained: There is a lot of stuff that we need to catch up on and make improvements on but the thing I think we are the leader on is cultural integration. We give the stores credit for all the online sales in their local area. Merchants are the same way, they are responsible for the store and online. Then we have an online merchant that supports the merchant team. This online merchant is responsible for the very fringe stuff, the accessories on the patio furniture that will never be stocked in the store, and maybe custom-made patio furniture that we couldn’t have offered before. But they are a tight-knit team, complimenting each other. Lawton saw this kind of synchronization across its brick and mortar stores and online operations throughout the business units, IT, marketing, and even in the supply chain. He said: Holifield and I work together on online supply chain and it is a great yin and yang. He’s thinking about it from an operational efficiency point of view, whereas I come from more of a sales point of view. We strike a good balance across all the departments, everyone is looping each other in, brainstorming together, getting on the same page. I think other big retailers struggle with this. Some are more marketing oriented with their e-commerce side; while others are more centralized, basically their online group operates as a separate business unit, whereas we are trying to play it more down the middle. Home Depot had five direct fulfillment distribution centers that sent products direct to online customers. Holifield saw a need to continue to build a network of direct fulfillment distribution centers in order to better serve the online customer. Other online supply chain issues—such as how to handle items that had a low value-to-weight ratio such as dirt, as well as small and inexpensive items such as screws and nails—continued to challenge the team. Additionally, while solutions such as Fed-Ex and UPS existed for delivering small parcel items, bulkier items that required a larger truck, such as washers and dryers, countertops, and kitchen cabinets required more creativity and new solutions. Understanding the customer Home Depot’s leadership felt they needed to continue to build an understanding of the customer, Tomé commented, “We have had a pretty significant shift in spend to digital marketing. Everything is changing; how consumers research, how they shop, what type of emotional connection they want.” Home Depot had previously worked with customer insight firm dunnhumby but because Home Depot saw value in owning its own customer data the firm brought its customer database and analytics in-house and began to develop tools that could give it more understanding and actionable data around the differences in customer behavior. Key differentiation points included the pros vs. the DIY-ers, demographics, age, region, and zip code. (See Exhibit 16.) Home Depot’s leadership recognized that knowing, understanding and communicating more effectively with the customer was crucial, but also realized that Home Depot needed to stay This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 512-036 Home Depot and Interconnected Retail 14 focused on where growth and sales would come from and not get too caught up in the digital hype; “All of us are focused on Gen-Yers, Facebook, Twitter, and wondering how do we talk to those folks,” Tomé said, “But the people who really matter are the baby boomers. That is where the growth is, the money is with them. How are you going to take care of the baby boomers, especially when they don’t DIY anymore because they are too tired, too busy and too old? Maybe they hire someone to do it for them? How do we do that?” Being a destination Home Depot strove to be the destination for customers thinking about, planning or starting projects, whether that was in the store or online. Lawton commented, “If a customer is looking for anything related to home improvement online—products, how-to’s, plans, products lists—why wouldn’t they look at Home Depot first?” In order to become a reliable online resource, the firm selected a team of experienced and knowledgeable in-store associates and created an online forum for home improvement on its HomeDepot.com website. Lawton explained, “We put them [associates] through training on how to blog, how to do videos, how to create links back to the site and we give them a flip-cam to produce a little lesson and answer video. They spend real time on there [the website] and get very descriptive in their answers.” This type of effort, under a less interconnected model, would be hard to fund and support; Lawton explained he was willing to invest his budget dollars because the executive team was aligned around long term goals and understood the impact, “If we were viewing online offerings from a singular business lens, we wouldn’t be able to do that. There are expenses in my profit and loss statement that I have in there that support the greater good. IT is a part of the store experience for the customer and we can’t look at it in a disconnected way.” Category shift Home Depot was also constantly evaluating what products were being bought online and what products were sold in stores. Menear and Lawton felt that understanding these trends would help them to have both better online offerings and better space allocation, floor layout and product mix in the store. Menear explained, “We’ll look at how the trends in online purchasing affects our portfolio strategy and what we need to shift in the store. The customers are going to shop when, where and how they want and we haveto be positioned to be able to do that. We need to stay ahead of that and move with that and not become, candidly, a showroom for retail, which is a danger and what you see happening to some companies in retail today.” Similar to the product categories they created to better understand in-store merchandising, Home Depot began to create a category map of products shopped and purchased online. (See Exhibit 17.) Lawton explained: Based on this category map we should carry every single item in maintenance and repair in the store, if possible. If we don’t have it, our in-store associate needs to know how to get it to the customer quickly, whether it is ordering it for them online or educating them that we have an endless assortment online. Same thing in the complex projects side, you have to have great customer service. A lot of the project work starts online, but then migrates to the store and we need to be seamless at connecting that. The associate should be able to pull up their project work in the store, and be able to communicate back online after the customer leaves. The online team also worked to localize on-line offerings in concert with the merchandising teams’ effort to add a more localized assortment. Lawton explained, “The price you see in the store is the price you see online. If you go to JCPenny or Wal-Mart they explicitly say we have an online price and we have a store price. What we do is when you come on the website we sniff your IP address and map you to the closest store based on your IP address.” Home Depot hoped this strategy would avoid channel conflict and reinforce Home Depot’s everyday value. This also was important for associates, making sure that in-store associates had confidence that they were offering the best price and were not being contradicted by their own website. This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. Home Depot and Interconnected Retail 512-036 15 Building the Future The leadership team was aligned, confident and inspired, Tomé commented, “If we are aligned, nothing can stop us. We can do a lot with people power, bring us together and say take this hill and we’ll take the hill.” However, there was still much work to be done. The company had only just climbed back to the level of customer satisfaction that it enjoyed in 1999 and an entirely new class of competitors had entered the market and changed the expectations customers had of retailers, especially relative to assortment, pricing and service. Powers commented, “We’ve worked awful hard to get back to average but now we have to keep going. We can’t get complacent, we have to challenge each other, we have to be paranoid, and we need to maintain a sense of urgency.” The question of how to navigate the world of interconnected retail was on the minds of Home Depot’s executive team. How could Home Depot best translate brick and mortar success to interconnected retail? How would they grow market share in the interconnected environment? How could they move fast and stay flexible while ensuring that the firm’s 300,000 associates were motivated and believed in the company? What systems, training, and people would they need in place to stay ahead? How could the senior leadership team preserve and enhance Home Depot’s culture as they led the company through these tumultuous times? This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 5 12 -0 36 -1 6 - E x h ib it 1 H o m e D ep o t P er fo rm an ce D at a, 1 9 9 9 -2 0 1 0 ( $ a m o u n ts i n m il li o n s, e x ce p t a v er a g e cu st o m er t ic k et , n u m b er o f cu st o m er t ra n sa ct io n s a ls o i n m il li o n s) H o m e D e p o t 1 9 99 2 0 00 2 0 01 2 0 02 2 0 03 2 0 04 2 0 05 2 0 06 2 0 07 2 0 08 2 0 09 2 0 10 G ro s s M a rg in a s a % o f s a le s 2 9 .7 % 2 9 .9 % 3 0 .2 % 3 1 .1 % 3 1 .8 % 3 3 .4 % 3 3 .5 % 3 2 .8 % 3 3 .6 % 3 3 .7 % 3 3 .9 % 3 4 .3 % A m o u n t o f in v e n to ry 5 ,4 8 9 6 ,5 5 6 6 ,7 2 5 8 ,3 3 8 9 ,0 7 6 1 0 ,0 7 6 1 1 ,4 0 1 1 2 ,8 2 2 1 1 ,7 3 1 1 0 ,6 7 3 1 0 ,1 8 8 1 0 ,6 2 5 In v e n to ry p e r s to re $ 5 .9 $ 5 .8 $ 5 .0 $ 5 .4 $ 5 .3 $ 5 .3 $ 5 .6 $ 6 .0 $ 5 .3 $ 4 .7 $ 4 .5 $ 4 .7 N u m b e r o f s to re s 9 3 0 1 1 3 4 1 3 3 3 1 5 3 2 1 7 0 7 1 8 9 0 2 0 4 2 2 1 4 7 2 2 3 4 2 2 7 4 2 2 4 4 2 2 4 8 N u m b e r o f e m p lo y e e s 2 0 1 ,4 0 0 2 2 7 ,3 0 0 2 5 6 ,3 0 0 2 8 0 ,9 0 0 2 9 8 ,8 0 0 3 2 3 ,1 4 9 3 4 4 ,8 0 0 3 6 4 ,4 0 0 3 3 1 ,0 0 0 3 2 2 ,0 0 0 3 1 7 ,0 0 0 3 2 1 ,0 0 0 N u m b e r o f c u s to m e r tr a n s a c ti o n s 7 9 7 9 3 6 1 0 9 1 1 1 6 1 1 2 4 6 1 2 9 5 1 3 3 0 1 3 3 0 1 3 3 6 1 2 7 2 1 2 7 4 1 3 0 6 A v e ra g e c u s to m e r ti c k e t $ 4 7 .8 7 $ 4 8 .6 4 $ 4 8 .6 5 $ 4 9 .4 3 $ 5 1 .1 5 $ 5 4 .8 9 $ 5 7 .9 8 $ 5 8 .9 0 $ 5 7 .4 8 $ 5 5 .6 1 $ 5 1 .7 6 $ 5 1 .9 3 S a m e -s to re ( c o m p s to re ) s a le s g ro w th 1 0 .0 % 4 .0 % N /A -0 .5 % 3 .7 % 5 .1 % 3 .1 % -2 .8 % -6 .7 % -8 .7 % -6 .6 % 2 .9 % S o u rc e: A d a p te d f ro m H o m e D ep o t’ s A n n u a l R ep o rt d a ta f o r 19 99 -2 01 0, h tt p :/ / ir .h o m ed ep o t. co m / p h o en ix .z h tm l? c= 63 64 6 & p = ir o l- re p o rt sa n n u al , a cc es se d D ec em b er 2 0 11 . E x h ib it 2 H o m e D ep o t In co m e S ta te m en t a n d B a la n ce S h ee t D at a, 1 9 99 -2 01 0 ( in $ m il li o n s) H o m e D e p o t 1 9 99 2 0 00 2 0 01 2 0 02 2 0 03 2 0 04 2 0 05 2 0 06 2 0 07 2 0 08 2 0 09 2 0 10 S a le s 3 8 ,4 3 4 4 5 ,7 3 8 5 3 ,5 5 3 5 8 ,2 4 7 6 4 ,8 1 6 7 3 ,0 9 4 8 1 ,5 1 1 9 0 ,8 3 7 7 7 ,3 4 9 7 1 ,2 8 8 6 6 ,1 7 6 6 7 ,9 9 7 C o s t o f G o o d s S o ld 2 7 ,0 2 3 3 2 ,0 5 7 3 7 ,4 0 6 4 0 ,1 3 9 4 4 ,2 3 6 4 8 ,6 6 4 5 4 ,1 9 1 6 1 ,0 5 4 5 1 ,3 5 2 4 7 ,2 9 8 4 3 ,7 6 4 4 4 ,6 9 3 G ro s s M a rg in 1 1 ,4 1 1 1 3 ,6 8 1 1 6 ,1 4 7 1 8 ,1 0 8 2 0 ,5 8 0 2 4 ,4 3 0 2 7 ,3 2 0 2 9 ,7 8 3 2 5 ,9 9 7 2 3 ,9 9 0 2 2 ,4 1 2 2 3 ,3 0 4 O p e ra ti n g e x p e n s e s S e lli n g a n d S to re O p e ra ti n g 6 ,8 3 2 8 ,5 1 3 1 0 ,1 6 3 1 1 ,1 8 0 1 2 ,5 0 2 1 5 ,1 0 5 1 6 ,4 8 5 1 8 ,3 4 8 1 7 ,0 5 3 1 7 ,8 4 6 1 5 ,6 0 9 1 5 ,8 4 9 P re -o p e n in g 1 1 3 1 4 2 1 1 7 9 6 8 6 N /A N /A N /A N /A N /A N /A N /A G e n e ra l a n d A d m in 6 7 1 8 3 5 9 3 5 1 ,0 0 2 1 ,1 4 6 1 ,3 9 9 1 ,4 7 2 1 ,7 6 2 1 ,7 0 2 1 ,7 8 5 1 ,7 0 7 1 ,6 1 6 T o ta l 7 ,6 1 6 9 ,4 9 0 1 1 ,2 1 5 1 2 ,2 7 8 1 3 ,7 3 4 1 6 ,5 0 4 1 7 ,9 5 7 2 0 ,1 1 0 1 8 ,7 5 5 19 ,6 3 1 1 7 ,6 0 9 1 7 ,4 6 5 O p e ra ti n g I n c o m e 3 ,7 9 5 4 ,1 9 1 4 ,9 3 2 5 ,8 3 0 6 ,8 4 6 7 ,9 2 6 9 ,3 6 3 9 ,6 7 3 7 ,2 4 2 4 ,3 5 9 4 ,8 0 3 5 ,8 3 9 In te re s t in c o m e ( e x p e n s e ) I n te re s t a n d i n v e s tm e n t in c o m e 3 7 4 7 5 3 7 9 5 9 5 6 6 2 2 7 (7 4 ) (1 8 ) (1 8 ) (1 5 ) I n te re s t e x p e n s e (2 8 ) (2 1 ) (2 8 ) (3 7 ) (6 2 ) (7 0 ) (1 4 3 ) (3 9 2 ) 6 9 6 6 2 4 6 7 6 5 3 0 N e t in te re s t 9 2 6 2 5 4 2 (3 ) (1 4 ) (8 1 ) (3 6 5 ) 6 2 2 7 6 9 8 2 1 5 6 6 E B IT 3 ,8 0 4 4 ,2 1 7 4 ,9 5 7 5 ,8 7 2 6 ,8 4 3 7 ,9 1 2 9 ,2 8 2 9 ,3 0 8 6 ,6 2 0 3 ,5 9 0 3 ,9 8 2 5 ,2 7 3 In c o m e t a x e s 1 ,4 8 4 1 ,6 3 6 1 ,9 1 3 2 ,2 0 8 2 ,5 3 9 2 ,9 1 1 3 ,4 4 4 3 ,5 4 7 2 ,4 1 0 1 ,2 7 8 1 ,3 6 2 1 ,9 3 5 N e t E a rn in g s 2 ,3 2 0 2 ,5 8 1 3 ,0 4 4 3 ,6 6 4 4 ,3 0 4 5 ,0 0 1 5 ,8 3 8 5 ,7 6 1 4 ,3 9 5 2 ,2 6 0 2 ,6 6 1 3 ,3 3 8 S o u rc e: A d a p te d f ro m H o m e D ep o t’ s A n n u a l R ep o rt d a ta f o r 19 99 -2 01 0, h tt p :/ / ir .h o m ed ep o t. co m / p h o en ix .z h tm l? c= 63 64 6 & p = ir o l- re p o rt sa n n u al , a cc es se d D ec em b er 2 0 11 . This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 5 12 -0 36 -1 7 - E x h ib it 2 ( co n ti n u e d ) H o m e D e p o t 1 9 99 2 0 00 2 0 01 2 0 02 2 0 03 2 0 04 2 0 05 2 0 06 2 0 07 2 0 08 2 0 09 2 0 10 A S S E T S C a s h a n d C a s h E q u iv a le n ts 6 2 1 6 8 1 6 7 2 ,4 7 7 2 ,1 8 8 1 ,1 0 3 5 0 6 7 9 3 6 0 0 4 4 5 5 1 9 1 ,4 2 1 S h o rt T e rm I n v e s tm e n ts -- 2 1 0 6 9 6 5 1 ,7 4 9 1 ,6 5 9 1 4 1 4 1 2 6 -- A c c o u n ts R e c e iv a b le s 4 6 9 5 8 7 8 3 5 9 2 0 1 ,0 7 2 1 ,0 9 7 1 ,4 9 9 2 ,3 9 6 3 ,2 2 3 1 ,2 5 9 9 7 2 9 6 4 In v e n to ri e s 4 ,2 9 3 5 ,4 8 9 6 ,5 5 6 6 ,7 2 5 8 ,3 3 8 9 ,0 7 6 1 0 ,0 7 6 1 1 ,4 0 1 1 2 ,8 2 2 1 1 ,7 3 1 1 0 ,6 7 3 1 0 ,1 8 8 O th e r C u rr e n t 1 0 9 1 4 4 2 0 9 1 7 0 2 5 4 3 0 3 5 3 3 6 6 5 1 ,3 4 1 1 ,2 2 7 1 ,1 9 2 1 ,3 2 7 T o ta l C u rr e n t A s s e ts 4 ,9 3 3 6 ,3 9 0 7 ,7 7 7 1 0 ,3 6 1 1 1 ,9 1 7 1 3 ,3 2 8 1 4 ,2 7 3 1 5 ,2 6 9 1 8 ,0 0 0 1 4 ,6 7 4 1 3 ,3 6 2 1 3 ,9 0 0 P ro p e rt y a n d E q u ip m e n t a t C o s t 9 ,4 2 2 1 1 ,8 9 0 1 5 ,2 3 2 1 8 ,1 2 9 2 0 ,7 3 3 2 4 ,5 9 4 2 8 ,4 3 7 3 1 ,5 3 0 3 4 ,3 5 8 3 6 ,4 1 2 3 6 ,4 7 7 3 7 ,3 4 5 D e p re c ia ti o n -1 ,2 6 2 -1 ,6 6 3 -2 ,1 6 4 -2 ,7 5 4 -3 ,5 6 5 -4 ,5 3 1 -5 ,7 1 1 -6 ,6 2 9 -7 ,7 5 3 -8 ,9 3 6 -1 0 ,2 4 3 -1 1 ,7 9 5 N o te R e c e iv a b le 2 6 4 8 7 7 8 3 1 0 7 8 4 3 6 9 3 4 8 3 4 3 3 4 2 3 6 3 3 G o o d w ill , N e t -- -- -- -- -- -- 1 ,3 9 4 3 ,2 8 6 6 ,3 1 4 1 ,1 0 9 1 ,1 3 4 1 ,1 7 1 L o n g T e rm I n v e s tm e n ts 1 5 1 5 -- -- -- -- -- -- -- -- -- -- O th e r A s s e ts 6 3 9 0 1 4 9 1 5 6 2 4 4 1 2 9 2 5 8 2 0 3 2 2 3 6 2 3 3 9 8 2 2 3 T o ta l A s s e ts 1 3 ,4 6 5 1 7 ,0 8 1 2 1 ,3 8 5 2 6 ,3 9 4 3 0 ,0 1 1 3 4 ,4 3 7 3 9 ,0 2 0 4 4 ,4 0 5 5 2 ,2 6 3 4 4 ,3 2 4 4 1 ,1 6 4 4 0 ,8 7 7 L IA B IL IT IE S S h o rt T e rm D e b t -- -- -- -- -- -- -- 9 0 0 -- 1 ,7 4 7 -- -- A c c o u n ts P a y a b le 1 ,5 8 6 1 ,9 9 3 1 ,9 7 6 3 ,4 3 6 4 ,5 6 0 5 ,1 5 9 5 ,7 6 6 6 ,0 3 2 7 ,3 5 6 5 ,7 3 2 4 ,8 2 2 4 ,8 6 3 A c c ru e d P a y ro ll 3 9 5 5 4 1 6 2 7 7 1 7 8 0 9 8 0 1 1 ,0 5 5 1 ,0 6 8 1 ,2 9 5 1 ,0 9 4 1 ,1 2 9 1 ,2 6 3 S a le s T a x P a y a b le 1 7 3 2 6 9 2 9 8 3 4 8 3 0 7 4 1 9 4 1 2 4 8 8 4 7 5 4 4 5 3 3 7 3 6 2 D e fe rr e d R e v e n u e -- -- 6 5 0 8 5 1 9 9 8 1 ,2 8 1 1 ,5 4 6 1 ,7 5 7 1 ,6 3 4 1 ,4 7 4 1 ,1 6 5 1 ,1 5 8 T a x e s P a y a b le 1 0 0 6 1 7 8 2 1 1 2 2 7 1 7 5 1 6 1 3 8 8 2 1 7 6 0 2 8 9 1 0 8 C u rr e n t P o rt io n o f L o n g T e rm D e b t 1 4 2 9 4 5 7 5 0 9 1 1 5 1 3 1 8 3 0 0 1 ,7 6 7 1 ,0 2 0 O th e r A c c ru e d 5 8 6 7 6 3 7 5 2 9 3 3 1 ,1 2 7 1 ,2 1 0 1 ,5 0 4 1 ,5 6 0 1 ,9 3 6 1 ,8 5 4 1 ,6 4 4 1 ,5 8 9 T o ta l C u rr e n t L ia b il it ie s 2 ,8 5 7 3 ,6 5 6 4 ,3 8 5 6 ,5 0 1 8 ,0 3 5 9 ,5 5 4 1 0 ,4 5 5 1 2 ,7 0 6 1 2 ,9 3 1 1 2 ,7 0 6 1 1 ,1 5 3 1 0 ,3 6 3 T o ta l L o n g T e rm D e b t 1 ,5 6 6 7 5 0 1 ,5 4 5 1 ,2 5 0 1 ,3 2 1 8 5 6 2 ,1 4 8 2 ,6 7 2 1 1 ,6 4 3 1 1 ,3 8 3 9 ,6 6 7 8 ,6 6 2 O th e r L o n g T e rm L ia b ili ti e s 2 0 8 2 3 7 2 4 9 3 7 2 4 9 1 6 5 3 8 7 1 1 ,1 7 2 1 ,2 4 3 1 ,8 3 3 2 ,1 9 8 2 ,1 4 0 D e fe rr e d T a x e s 8 5 8 7 1 9 5 1 8 9 3 6 2 9 6 7 1 ,3 8 8 9 4 6 1 ,4 1 6 6 8 8 3 6 9 3 1 9 M in o ri ty I n te re s t 9 1 0 7 -- -- -- -- -- -- -- -- -- T o ta l L ia b il it ie s 4 ,7 2 5 4 ,7 4 0 6 ,3 8 1 8 ,3 1 2 1 0 ,2 0 9 1 2 ,0 3 0 1 4 ,8 3 2 1 7 ,4 9 6 2 7 ,2 3 3 2 6 ,6 1 0 2 3 ,3 8 7 2 1 ,4 8 4 C o m m o n S to c k 1 1 1 1 1 5 1 1 6 1 1 7 1 1 8 1 1 9 1 1 9 1 2 0 1 2 1 8 5 8 5 8 6 P a id -I n C a p it a l 2 ,8 1 7 4 ,3 1 9 4 ,8 1 0 5 ,4 1 2 5 ,8 5 8 6 ,1 8 4 6 ,6 5 0 7 ,1 4 9 7 ,9 3 0 5 ,8 0 0 6 ,0 4 8 6 ,3 0 4 R e ta in e d E a rn in g s 5 ,8 7 6 7 ,9 4 1 1 0 ,1 5 1 1 2 ,7 9 9 1 5 ,9 7 1 1 9 ,6 8 0 2 3 ,9 6 2 2 8 ,9 4 3 3 3 ,0 5 2 1 1 ,3 8 8 1 2 ,0 9 3 1 3 ,2 2 6 A c c O th e r C o m p re h e n s iv e I n c o m e -6 1 -2 7 -6 7 -2 2 0 -8 2 9 0 2 2 7 4 0 9 3 1 0 7 5 5 -7 7 3 6 2 T re a s u ry S to c k -- -- -- -- -2 ,0 0 0 -3 ,5 9 0 -6 ,6 9 2 -9 ,7 1 2 -1 6 ,3 8 3 -3 1 4 -3 7 2 -5 8 5 T o ta l E q u it y 8 ,7 4 0 1 2 ,3 4 1 5 ,0 0 4 1 8 ,0 8 2 1 9 ,8 0 2 2 2 ,4 0 7 2 4 ,1 5 8 2 6 ,9 0 9 2 5 ,0 3 0 1 7 ,7 1 4 1 7 ,7 7 7 1 9 ,3 9 3 To ta l L ia b il it ie s a n d S to c k h o ld e rs ’ E q u it y 1 3 ,4 6 5 1 7 ,0 8 1 2 1 ,3 8 5 2 6 ,3 9 4 3 0 ,0 1 1 3 4 ,4 3 7 3 9 ,0 2 0 4 4 ,4 0 5 5 2 ,2 6 3 4 4 ,3 2 4 4 1 ,1 6 4 4 0 ,8 7 7 S o u rc e: A d a p te d fr o m H o m e D ep o t’ s A n n u a l R ep o rt d a ta fo r 19 99 -2 01 0, h tt p :/ / ir .h o m ed ep o t. co m / p h o en ix .z h tm l? c= 6 36 46 & p = ir o l- re p o rt sa n n u al , a cc es se d D ec em b er 20 11 . This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 512-036 Home Depot and Interconnected Retail 18 Exhibit 3 Corporate Fact Sheet (FY End 2011) The Home Depot® is the world's largest home improvement specialty retailer, with more than 2,200 retail stores in the United States (including Puerto Rico, the U.S. Virgin Islands and the territory of Guam), Canada, Mexico and China. The Home Depot’s stock is traded on the New York Stock Exchange (NYSE: HD) and is included in the Dow Jones industrial average and Standard & Poor's 500 index. Incorporation: June 29, 1978 First Store: June 22, 1979 in Atlanta, Ga. Headquarters: Atlanta Store Support Center, 2455 Paces Ferry Road, Atlanta, GA 30339 The Home Depot retail stores: 2,252, including 1,974 stores in the U.S. and the territories of Puerto Rico, U.S Virgin Islands, Guam, 180 stores in Canada, 7 stores in China and 91 stores in Mexico Associates: more than 300,000 Fortune 500 rank: No. 30 in the U.S. (As of May 2011) World’s largest home improvement retailer An average store in 2011 measured 105,000 square feet and carried approximately 40,000 SKUs. Home Depot Flagship Store Layout – Store #121 Source: Company documents. Notes: Store layouts for all Home Depot stores are available at HomeDepot.com. This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. Home Depot and Interconnected Retail 512-036 19 Exhibit 4 Senior Leadership Bios Frank Blake Blake was the chairman and CEO of Home Depot. Prior to his appointment to that position in 2007, he served as vice chairman of the board of directors and executive vice president of the Company. He joined Home Depot in 2002 as executive vice president, business development and corporate operations, and was responsible for real estate, store construction, credit services, strategic business development, growth initiatives, call centers and the Home Services business. Blake previously served as deputy secretary for the U.S. Department of Energy (DOE), a role similar to that of chief operating officer in the private sector. There, he was a leader in departmental policy decisions and managed the DOE’s annual $19 billion budget. Prior to that, Blake served in a variety of executive roles at GE. As senior vice president, corporate business development, he led all business development efforts, including worldwide mergers, acquisitions, dispositions and identification of strategic growth opportunities. As GE Power Systems’ head of business development, he played a key role in expanding that business into new technology and global marketplaces. He also held the position of general counsel at GE Power Systems. Frank’s public sector experience also includes having served as general counsel for the U.S. Environmental Protection Agency (EPA), deputy counsel to Vice President George Bush and law clerk to Justice John Paul Stevens of the U.S. Supreme Court. Carol B. Tomé Tomé was the chief financial officer, serving since May 2001 and was named executive vice president of corporate services in January 2007. She provided leadership in the areas of real estate, store construction, financial services, strategic business development, and growth initiatives. Her corporate finance duties included financial reporting, financial planning and analysis, financial operations, divisional finance, internal audit, investor relations, treasury, and tax. Tomé joined Home Depot in 1995. Prior to that, she was vice president and treasurer of Riverwood International Corporation. Tomé began her career as a commercial lender with United Bank of Denver (which later became Wells Fargo) and then spent several years as director of banking for the Johns-Manville Corporation. In 2003, Tomé joined the UPS board of directors and served as chair of the audit committee. In January 2008, she joined the board of the Federal Reserve Bank of Atlanta and served as chair of the board. Carol was recognized with the 2009 Lettie Pate Whitehead Evans award by BDN Network and the 2009 CFO of the Year award by the CFO Roundtable. She ranked 16th in Forbes magazine’s 2008 list of the World’s 100 Most Powerful Women and was included in The Wall Street Journal’s list of 50 Women to Watch in 2007. Marvin Ellison Ellison was the executive vice president of U.S. stores for Home Depot, responsible for driving alignment and execution across the company’s retail divisions and overseeing operations of more than 1,972 stores in the U.S., Guam, Puerto Rico and the U.S. Virgin Islands. Ellison had nearly 30 years of retail experience and served in a variety of operational roles at Home Depot since joining the Company in 2002. Before his promotion to executive vice president of U.S. stores in August of 2008, Ellison was president of the Northern Division of Home Depot. He was responsible for the sales and operations of more than 650 stores in 21 Midwest and Northeastern states and led a team of more than 110,000 associates. Previously, Ellison served as senior vice president of global logistics for the company. Prior to his role in global logistics, Ellison was the vice president of loss prevention. Before joining Home Depot, Ellison spent 15 years with Target in a variety of operational roles. This document is authorized for use only in Jorge Tarzij?n M.'s PRE-2019 Direcci?n de Empresas y Estrategia - 2 at Pontificia Universidad Catolica Chile (PUC-Chile) from Aug 2019 to Jan 2020. 512-036 Home Depot and Interconnected Retail 20 Craig Menear Menear was the executive vice president of merchandising for Home Depot. In addition to being responsible for all merchandising departments, services and strategy, Menear oversaw the supply chain network, global sourcing and vendor management. He was also responsible for the company’s marketing and online business activities. Previously, Menear held several positions of increasing responsibility at the company, including senior vice president merchandising of hardlines, merchandising vice president of hardware, merchandising vice president of the Southwest Division and divisional merchandise manager of the Southwest Division. Menear had 28 years of experience in the retail and hardware home improvement industry. Prior to joining Home Depot in 1997, Menear held various merchandising positions within the retail industry with companies such as IKEA, Builders Emporium, Grace Home Centers and Montgomery Ward, as well as operating an independent retail business. Matt Carey Carey was executive vice president and chief information officer for Home Depot. He was responsible for all aspects of the information technology infrastructure, including communication networks and retail systems across the company’s 2,000-plus stores and store support centers in the U.S., Canada, Mexico and China. Carey was also responsible for the company’s IT strategy, including the development and execution of technologies used in stores, online and in the supply chain. Before joining Home Depot in 2008, Carey served as senior vice president and chief technology officer
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