Home Depot looks for space to grow

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For many US homeowners, visiting Home Depot at the weekend has become almost as much a part of American life as going to church. It is Home Depot, more than any other retailer, that keeps the country’s cherished suburbia looking smart and running smoothly through its huge range of home improvement products.

But 28 years after opening its first store in Atlanta, the company is running out of fresh locations for its warehouse-style outlets. Last month, Home Depot opened its 2,000th store and the rate of expansion has been slowing in the US. As the domestic market draws closer to saturation, finding fresh sources of growth has become an increasing priority for Bob Nardelli, chief executive.

Tuesday’s $3.47bn deal to buy Hughes Supply, a large distributor of construction and maintenance products, marks the company’s boldest step away from its core retail operation.

The acquisition, if approved by shareholders and regulators, will further expand Home Depot’s reach beyond amateur do-it-yourself enthusiasts to large-scale building and maintenance contractors.

Mr Nardelli has long trumpeted the attractions of the $410bn professional market, which is more than twice the size of the home improvement sector. For every dollar spent by consumers on home improvement, professionals spend three.

But however great the opportunity in business-to-business supplies, Home Depot knows it must find ways to maintain growth in its core retailing business if the company is to remain healthy. Even after the Hughes Supply deal, at least 85 per cent of revenues will still come from consumers.

As new store openings slow, the company is shifting its focus to increasing revenues from existing stores. It has widened its range of products and introduced more high-value items, such as home appliances. The strategy helped boost average spending per customer by 5.6 per cent to a record $58.21 in the first nine months of last year.

Rapid growth in home installation services, such as flooring and kitchen fitting, has also helped maintain momentum, as time-starved consumers seek help with home improvement projects. Revenues from home services increased by 21 per cent to $1.2bn in the third quarter.

On Monday, Home Depot announced plans to expand its range of consumer services through the acquisition of Chem-Dry, which operates 4,000 carpet and upholstery cleaning franchises.

Another source of fresh growth is overseas expansion. Home Depot has already opened dozens of stores in Canada and Mexico and is planning to enter China.

There has also long been speculation that the company could expand into Europe through the acquisition of UK-based Kingfisher, the dominant European home improvement retailer. But, following Tuesday’s deal, analysts questioning whether Home Depot had the financial strength or management capability to conduct another large acquisition any time soon.

In addition to generating growth, Home Depot’s expansion overseas and diversification at home has another important advantage – reducing exposure to the cyclical US housing market. The company has benefited from several years of surging house prices and new home building, which has encouraged increased spending on home improvements.There have been signs, however, that the real estate market is slowing, raising fears that 2006 could be a tougher year for the home improvement sector.

Lowe’s, the second largest US home improvement retailer, has shown no interest in following Home Depot into professional supplies. But with less than 1,200 stores compared to its rival’s 2,000, the company has more growth opportunities remaining in its core business.

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