Wednesday, February 14, 2007

Home Depot Fails at HVAC Wholesale Distribution

Carl made note a month or two ago about how the stock price of a company can be affected in a GOOD way upon the death or departure of a CEO. After Nardelli left/got fired the stock price rose.

Yesterday the stock price of Home Depot rose again. They have decided to look at spinning off its wholesale division, called Home Depot Supply. This division consists not only of HD Supply, but a very large HVAC (Heating, Air Conditioning and Ventilation) distributor called Hughes Supply, which they just bought last year for $3.2 billion.

Several years ago HD bought Apex Supply, an Atlanta based HVAC distributor. It was with this acquisition that everybody in my industry (HVAC) started talking about Home Depot.

With the acquisition of Apex, Home Depot now was playing in "our" sandbox. There were meetings scheduled with the heads of many HVAC distribution businesses to try to understand where HD was going with this and how it was going to work. I predicted way back when that it would fail and fail it has. But why?

First background. Wholesale distribution is a fairly new concept, just starting about one hundred years ago. We are middle men, nothing else. Our customers, in general, are contractors and facilities. That's it. We buy as low as we can and sell as high as we can. The HVAC wholesale distribution business is extremely competitive. Typically the margins on equipment (furnaces and air conds) are quite low (15-25%) and we need to make up for it with the sales of tools, accessories and, most importantly, replacement parts where you can make up a lot of margin IF you have good service, do things correctly and follow through.

Many of the items we sell are extremely technical in nature. If you don't know what you are doing you can really take it in the you-know-what on a job, especially in the commercial and industrial fields. Almost everything we sell requires at least a base level of technical knowledge. We need to know about electricity, air movement, fluid dynamics, mechanics, etc. After all, our business is selling machines and things to fix those machines. There is a tremendous installed base of old and getting older equipment out there. Every day I run into something new.

So our business in the HVAC wholesale distribution field is to provide contractors with the right equipment or parts at the right price at the right time. Home Depot with their immense resources couldn't manage to do it well. Why the heck not?

My answer is quick and easy - margins. Retail margins are astronomical on things like gloves, fasteners, paint and the like. The margins are much thinner for the wholesale distribution field because contractors, for the most part really don't care too much about your showroom or any of the rest of your overhead. They just want good service at a decent price. Most of the time they know what they want (not all) and simply call us and order the stuff for delivery or shipment. There is zero value in your overhead to them at that point. With a place like HD you need a well stocked, large store where people can shop - happy homeowners who want to try on gloves, need a picture hanger and maybe a smoke alarm. There is a lot of value to the homeowners who typically shop there for things like a large selection of gloves. Hence margins go up.

Another reason to explain HD's failure in the field may be because when they acquired Hughes Supply they did what every corporation does - slice off the high paying managers. The problem with this in the HVAC distribution field is that when they did this, these managers (the talent pool is VERY small in HVAC wholesale distribution) took their customers with them. Personal relationships are very important in our field. We are, at times, like bartenders, listening to the personal stories and problems of our customers. It is like we are on the same team. Friendships and favors go a LONG way in my industry. HD figured they could run Hughes like any of their other acquisitions - they were dead wrong. Hughes flopped almost as soon as they unveiled the orange awning. Hughes was a powerhouse in my industry and were gutted.

In short, my industry, HVAC wholesale distribution requires many things for success:
  • Accuracy in order picking, shipping and billing
  • Friendly, competent, technically savvy personnel
  • Aggressive pricing on some items to be made up on others
  • Knowledge of the market you are in
  • Proper inventory
  • Attention to detail (very important)

There are, of course more things that help make you successful, such as buying power, advertising and all the rest, but these things above are where HD failed, in my opinion.

I am sure somebody will try to consolidate my industry again, and may be successful. Wolseley, parent of Ferguson, has been swallowing and attempting to swallow small regional players lately. Time will tell if they do the same thing as HD, or do as I would recommend - LEAVE IT ALONE, leverage the vendors with buying power and collect the money.


Annie said...

Being someone who sells safety equipment, this info certainly doesn't break my heart.
Home Depot is a "WalMart" of sorts. Big employee turnover, workers who don't really know the product, etc. (None of that is the fault of the average Joe or Jane just trying to earn a living - but is the fault of the training they receive).

I have a whole rant about yanking grandma from the craft department to work the ammo counter, but I'll save that for another day...except to say: "buy a pen style laser pointer! It's priceless for being able to avoid the "hot/cold" game (no,'re other left...down...the green, GREEN...*sigh*, your other left...)"

sk8 said...

Youd think that HD could leverage their large size, technology and use JIT to keep inventory / overhead down. If its just widgets at the best price and on time, the situation seems managable.

You need to get big enough for HD to buy you out as a regional whloesale guy. Then spend the rest of your life with the family sipping margaritas in the Bajamas. When this happens, remember the little people!