Mr. Fix-It Steps In
October 1 2001 by Jennifer Pellet
Bob Nardelli’s early career as a do-it-yourselfer got off to bumpy start. He and his wife Susan, newlyweds, teamed up to take on their first home improvement project: applying stucco-a fashion must in the 70′s-to a wall. “I brought the stuff in from the porch and Susan, who was mixing it, said, €˜I think it’s too cold; maybe it should be room temperature,’” he recounts. “Well, I insisted on putting it up, and, of course, when it dried there were cracks everywhere. I spent the next day scraping it off so we could start over.”
By all accounts, Nardelli has made few missteps since. During nearly three decades at General Electric, he racked up a string of successes in its appliance, lighting, and transportation systems businesses, then topped them all with a visionary overhaul of the mammoth company’s 100-year-old power systems arm. Tripling revenues and logging annual operating profit growth of 39 percent at a division once dismissed as a “yesterday” business with low to no growth potential placed him among the three favorites in the race for Jack Welch’s job.
When one of the most-watched corporate succession races in business history ended, and Nardelli was a runner-up, the founders of Home Depot, Bernard Marcus and Arthur M. Blank, were waiting on the sidelines. Even as Jeff Immelt took his bows in the winner’s circle the Monday after last Thanksgiving, Marcus and Blank were plotting to throw one of their signature orange aprons around Nardelli’s neck and claim him as their CEO. “I met with him on Wednesday, that weekend we called a special meeting of the board and he was hired on Dec. 4,” says Marcus, who describes the rapid pairing-breakup to remarriage took Nardelli precisely one week-as the happy ending to a three-year talent search. “We were really after him. We had several candidates, but he looked like the best one out there. So it was not hard. When two people want to fall in love, they fall in love.”
“It’s a perfect match,” adds Welch, who played matchmaker. “I told Bernie he would be the luckiest guy in the world to get Bob Nardelli.”
But the marriage came with a mission. While Atlanta-based Home Depot was hardly in dire straits, the founders of the $46 billion home improvement chain knew it had problems. The economic boom that had fueled years of 30 to 40 percent earnings gains-and allowed climbing operating expenses to go unchecked-was on the wane. The company’s entrepreneurial structure, the decentralized model on which its successful warehouse-style store format was founded, was proving a hindrance as emphasis shifted from expansion to cost control. Meanwhile, Lowe’s, a fast-moving home-improvement chain based in Wilkesboro, N.C., had begun infiltrating Home Depot markets. In October 2000, after Home Depot issued its first profit warning in five years, the signs of impending trouble sent its share price tumbling to a 52-week low of $34.
“What the market discovered about the time Nardelli came on is that there are a lot of flaws at this company,” says Gary Balter, a managing director at Credit Suisse First Boston. “He walked into a company that everybody at the outset thought was great-and it’s a superior company-but which turned out to need a lot of internal fixings.”
Charged with making the necessary repairs and setting Home Depot back on a growth track, the 55-year-old Nardelli lost no time. The honeymoon was a three-day session with company officers followed by a whirlwind meet-the-CEO store tour: eight cities in eight days, then on to Argentina and Chile, with daily back-to-back meetings with employees, vendors, and the chain’s professional contractor customers at each stop.
“The challenge coming in is to not cause the company to pace your learning curve,” says Nardelli, who spent the downtime on his tour poring over old data “to understand the thinking behind decisions” and quizzing Marcus and Blank. “It’s your responsibility to accelerate your learning curve so that the company is not waiting on you.”
Waiting was not an issue. Six weeks into the job found Nardelli chopping a layer of management and reassigning five group presidents so that divisions reported directly to him. Next he cut new store openings planned for 2001, signaling a shift away from traditional retail growth strategy that put 1,134 dots on the Home Depot store map, including locations in Canada, Argentina, and Chile.
“People have always looked at new store growth based on square footage,” he explains. “I’m looking at new store growth relative to top-line revenue. The fact that we will open 200 versus 225 stores this year is a change in square footage, not a change in top-line growth, because I’m opening more stores sooner and they will be more efficient, so we’ll get the equivalent amount of top-line growth anyway.”
Reaching into his General Electric toolbox to deliver on the promise of greater efficiency, Nardelli is taking a hard look at the “vitality” of the products on Home Depot’s shelves, seeking to oust low-turn items and tailor the assortment in individual stores. Efforts to boost same-store sales include installing “pro desks” that cater to professional contractors, who spend $3 for every $1 spent by do-it-yourselfers. Nardelli is also reconfiguring Home Depot’s distribution system, shifting from decentralized ordering and vendors delivering direct to stores to a central system where merchandise can be routed through transfer centers.
The plans appeased investors, who bid Home Depot’s stock back up to its current $48 neighborhood, despite a 20 percent drop in earnings in fourth quarter 2000, followed by a disappointing first quarter that had the company reporting negative comparable store sales for the first time in its history. Second quarter results proved slightly more promising, with sales up 16 percent for the quarter ($14.6 billion from $12.6 billion). Although comparable store sales remained sluggish, up just 1 percent-indicating that the 115 new stores opened in the first half of 2001 accounted for most of the sales increase-a bump in profits of 10 percent for the quarter suggests that Nardelli’s cost-cutting efforts may be paying off. But even as analysts applaud Nardelli’s efforts, they note that hurdles lie ahead.
“This company will be made or broken based on its ability to change what has been a very successful entrepreneurial culture up until now,” says Balter. “As a small chain you can give a lot of autonomy to your managers. Letting them order merchandise creates an entrepreneurial spirit, which is good. But when you get to a certain size you can boost efficiency by buying a full truckload and shipping it to central distribution.”
Yet in calling for centralized buying and distribution Nardelli is treading on what has long been the sacred domain of Home Depot’s regional merchants. “Wal-Mart tussled with the same stuff and it was not easy,” notes Balter. Already, several long-time Home Depot merchants have departed. Most recently the merchandising executive vice president, Mark Baker, left in June.
Such turnover is a necessary side effect of Nardelli’s GE-style approach to management, says Donald Trott, a Jefferies and Co. analyst. “With [founders] Bernie and Arthur, the approach culturally was, €˜We’re part of the troops like you guys and we’re going into battle with you.’ But Nardelli does not look comfortable in that orange apron. His body language is more €˜I am the general up on the hill with the binoculars; you guys go take on the enemy.’”
“Certainly that’s not the best thing in the world for employee morale,” adds Trott, “so accomplishing his agenda without undermining the culture of the company will be a major challenge.”
Marcus and Nardelli are quick to assert that there is no friction in the ranks at Home Depot. “We have to change a lot of things, and I think only somebody objective who came from the outside can change those things,” says Marcus. “But our culture is very unique and unusual, and it’s the thing that got us where we are. Bob understood that instantly and knew he was going to work within the framework. He’s doing that, and when he gets finished with this company it will be more productive and efficient.”
“Every time I see him I kiss him on top of the head,” Marcus adds, “and tell him I’m just happy he’s here.”
If head smooches from the chairman and bear hugs from store employees are disconcerting after nearly 30 years at the more buttoned-up GE, Nardelli isn’t letting on. “The apprehension you have with such a tight family when you are an outsider is, €˜How will I be accepted?’” he says. “But these associates are marvelous. There’s no hoarding of information. They are sharing and very willing for strategic direction.”
Nardelli holds a two-hour “market intelligence” conference call for his senior staff members every Monday. He also writes a biweekly e-mail distributed companywide that talks about “where we’re going.”
There’s much to talk about, including new store formats and an ambitious plan for a nationwide rollout of Expo Design Centers, an upscale format that the company has been tinkering with for nearly a decade. “Expo provides a holistic solution-20 kitchen sets, 50 bathroom sets, lighting, cabinets, flooring, and fixtures under one roof,” says Nardelli. He promises 12 new Expos by year-end-an expansion of nearly 50 percent for the 26-store division-and is enthusiastic about the one-stop design-shopping concept.
Nardelli also sees potential in a floor-covering store format, asserting that the success of its Home Depot Floor Store test in Dallas has the company exploring expansion possibilities. “Last year, we sold enough carpeting to pave a two-lane highway from Atlanta to New York to Atlanta, but we only installed enough to get to St. Louis,” he says. “So a shift from d.i.y. [do-it-yourself] to do-it-for-me gives me an opportunity to pull in more work, from kitchen and bath remodeling to carpet and insulation installation.”
The fate of the company’s four Villager’s Hardware stores, a format geared toward smaller markets that pre-dates Nardelli and has met with mixed success, is less certain. “It’s hard to get leverage in four stores,” says Nardelli, who adds that no new Villagers are planned. “We’ll make a decision about the format by year-end.”
On the drawing board in the meantime are plans for a new hybrid store for urban locales: scaled-down versions of the traditional Home Depot. Test units in Chicago and Brooklyn, NY, will open by year-end. Nardelli will also look for opportunities for “adjacencies,” by which he means acquisitions like the recent purchase of Total Home, Mexico’s second-largest home improvement retailer.
The cutback in traditional Home Depot store openings coupled with this push toward new store formats have analysts speculating that Home Depot is in the midst of an identity crisis. “Home improvement is a great growing sector, but is it growing on the d.i.y. side?” asks Balter, who sees the new formats as Home Depot’s attempt to gain ground in the more lucrative installation business. “There’s growth in b.i.y., or buy-it-yourself and have it installed, which is an older and richer demographic. But if you move into installed sales, and that becomes your growth, do you need as many stores?” asks Balter.
Nardelli describes the new store formats as incremental rather than replacement growth. “We must look at alternative means of bringing the brand to an ever-increasing customer base,” he says. “These are investments in the future. This is our R & D.”
That’s not going to stop Home Depot from building for the future, he is quick to add. “We are staying on strategy. We will invest $3.6 billion in capital and we will hire, not fire, 40,000 new associates this year. It’s anyone’s guess when the market will turn, but when it does we will come out bigger, stronger, and better positioned.”
Tapping new markets, installing processes, streamlining operations, expansion through acquisition-it’s a classic GE blueprint that worked for Nardelli before. But will it play at Home Depot? “They’re going to have to figure out how to blend some new disciplines like Six Sigma without losing the wonderful entrepreneurial spirit and the human touch that was in that culture,” says Noel Tichy, a GE alumnus and author of The Leadership Engine, published by HarperCollins in 1997. “Nardelli has gotten in there and done a very fast Act I, but he’ll have to continue crafting a vision and re-architecting the organization to fit that vision.”