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HOME DEPOT HAMMERS AWAY ON NEW IMAGE

By Rodger Brown

Hit by the slowdown in the housing market, it seemed like the pioneer retailer in home improvement had seen the worst of it. But then this past January, the company was embarrassed by the departure of CEO Robert Nardelli, who floated away from the floundering chain on a $210 million golden parachute, raising complaints about mismanagement at the top while the stores themselves were falling apart.

Then in March a financial writer named Scott Burns wrote an essay that ran on MSN.com and in papers around the country bemoaning the end of a once-passionate love affair. The piece, titled “Is Home Depot Shafting Shoppers?” resounded like a manifesto among critics of the home improvement giant. Describing himself and his wife as “house freaks,” Burns wrote how they had spent the 1990s enraptured with Home Depot.

But then something happened. The knowledgeable orange-aproned workers disappeared, replaced by lower-paid employees whose ignorance of the tools and tricks of the home improvement trade prompted them to dodge the hapless customers wandering the aisles. “We don’t shop much at Home Depot anymore,” Burns wrote. “Indeed, we generally try to avoid it.”

The response to Burns’ screed was overwhelming. Thousands of messages echoing the disenchantment clogged the message boards, and the editors received more than 10,000 additional e-mails citing examples of poor customer service that drove consumers away from the store that for years was a one-stop fantasyland for home fix-it buffs.

The din was so loud that Home Depot’s new CEO, Frank Blake, was forced to respond personally. “There’s no way I can express how sorry I am for all of the stories you shared,” Blake wrote on MSN at the end of March. “I recognize that many of you were loyal and dedicated shoppers of The Home Depot ... and we let you down. That’s unacceptable.”

What a difference a decade makes. Back in the early 1990s, Home Depot was the pioneer in the warehouse store format. The no-frills layout and heaps of inventory gave the stores a certain authenticity, and the veteran tradespeople in the distinctive orange aprons were founts of reliable advice. Home Depot soared to success as the housing market boomed and renovating fixer-uppers became a hot fad. It was an era when the TV show This Old House made a star of handyman Bob Vila, and one of the biggest network hits was Tim Allen’s takeoff comedy, Home Improvement.

But now there is less to laugh about, though for sure Home Depot is still making money. Sales in fiscal 2006 were up 11 percent to $91 billion, Blake told investors in February. But at the same time, “in 2006, we felt sustained pressure from the housing market,” he said, noting that the housing slowdown was “one of the reasons why I tend to the pessimistic side and think that 2007 will be another tough year.”

A few weeks after his mea culpa on MSN and an exhaustive presentation detailing his strategies for addressing everything from merchandising to supply-chain issues, Blake took his story on the road to the Merrill Lynch 30th annual Retailing Leaders Conference, in New York City. There the sometimes weary-sounding CEO got straight to the point.

“The [2006] market was a difficult market,” he said. “And we also had our own issues internal to Home Depot.”

He recited the litany of challenges the company faces, including a glut of new and existing homes on the market, and a decline in mortgage equity withdrawals and home improvement loans. Combine vacant rental units with vacant single home units, Blake said, and “you’ve got nearly a billion unit overage.”

But he insisted that this did not matter. “Despite that, we feel very confident about the long-term fundamentals of our market.” He pointed out that forecasts indicated continuing steady growth in the number of households in the U.S., all needing paint and plywood. The real challenge would be to persuade the legions of disenchanted Home Depot shoppers to give the chain another chance.

One thing Blake said he won’t do is beg. When asked during his presentation at the conference if he expected to do anything special to “introduce customers to the new, improved Home Depot,” Blake chafed slightly. There had been internal discussions with some of his marketing team arguing for such a campaign. He didn’t agree, basically because the new, improved Home Depot does not exist yet. “I personally resisted that,” he said. “I don’t think that’s a good idea. This is not something that is going to change overnight. It is a long process … and I think it would be a mistake to get too far out and ahead of ourselves.”

In addition to the usual operational issues, such as merchandise, supply chain logistics and the company’s move into international markets, Blake acknowledge during his Merrill Lynch presentation that the key to Home Depot’s strategy is quality customer service delivered by knowledgeable professionals.

During the early ’90s, the retailer was able to capitalize on a slower housing market and attract well-informed professional tradespeople to join its team. The Home Depot experience became as much about learning “how-to” as it was about purchasing a product.

Then the housing boom took off and became a mixed blessing for the company. It created a demand for home improvement products, but it also sucked the skilled associates back into the building trades and out of the store, leaving only inexperienced employees, who in turn generated a poor customer experience. Decisions to cut wages made things worse. “We paid a lot of attention to wage rates and have had metrics around wage rates, and sometimes you get unintended consequences,” Blake said at the conference. “That acted as a bit of a disincentive.”

Blake has recently launched a new program to attract skilled pros back to Home Depot as “master trade specialists,” offering up to $30 an hour for experienced associates. But, again, Blake said it would take time for that strategy to work. The company has some 1,800 stores in the U.S. and over 300,000 associates. “I think it’s a little soon yet,” he said. “We just kicked that off.”

In addition to hiring professionals, Home Depot is also putting renewed emphasis on training. It’s that lack of training among its lower-wage employees that eroded the retailer’s reputation among consumers.

“Think about our business model,” Blake said. “We may not be entirely unique, but there is more significant associate-customer interaction in our stores than in most retail models. And for our associates, the feeling of confidence that they are well-trained is important.

“One of the things that leads to lack of engagement is that you might not know the answer,” Blake said. “When you know the answer, when you’re well trained, you’re more likely to engage.”

Clean, uncluttered, well-stocked stores with friendly, knowledgeable clerks to help walk you through your home improvement project — that’s Blake’s vision of the once and future Home Depot. Haunting his every step on the way to fulfilling this vision is the nightmare of how catastrophic it can be when longtime loyal customers feel spurned.

“The real judge of all of these changes we’re making is you,” Blake concluded in his open letter to the MSN readers. “All I ask is that you please give us the opportunity to win you back. When you enter our stores, you should receive a personal greeting. After that, you should encounter a helpful associate who will walk you to find the tools, material or service you need. If you don’t, please let us know...just like Scott Burns did.”