The big aim to get bigger

HD Supply, the wholesale distribution arm of The Home Depot, aims to become a $25 billion giant in less than four years

by Rich Vurva
 

When it acquired Hughes Supply for $3.5 billion in early 2006, HD Supply more than doubled its annual sales. Since then, it has continued on a torrid acquisition pace, buying Cox Lumber, Western Fasteners, Forest Products Supply, Texas Contractors Supply, Grafton Utility Supply, Edson Electric Supply and Burrus Construction Supply. Who’s next?

With about 1,000 locations and a projected $12 billion in 2006 sales, executive vice president Joe DeAngelo says the company should easily hit its target of 1,500 locations and $25 billion in sales by 2010. That means the supply segment would represent about 18 to 19 percent of The Home Depot’s overall sales, compared to about 13 percent today. He says the increase will come from a mix of organic sales growth and acquisitions, and suggests that future blockbuster announcements like the Hughes deal are possible.

But can the company simultaneously take care of existing customers, integrate recently acquired companies and future acquisitions into the fold, and build a new corporate identity without losing touch with local customers? Is it possible to grow too fast, too soon?

“I don’t think you can ever grow too fast because I think momentum builds momentum,” DeAngelo says. “Growth is very healthy.”

He believes the recipe for success requires assembling the best team of people with operational expertise, acquiring market-leading companies with a proven track record for profitably serving customers, knowing how and where to apply corporate resources to add value at the local level, and giving business units the freedom and authority to take care of their customers.

Other companies failed in their acquisition strategies, he says, for very simple reasons.

“Most did not assemble world class operators that had deep, global experience in multiple disciplines. Their processes for integration were either non-existent, meaning they just tried to roll up what they integrated, or they tried to integrate things that created a customer experience that was less acceptable,” he says.

It’s often difficult for acquirers to run day-to-day operations while also reviewing potential acquisition targets, conducting due diligence and integrating new companies into existing systems. DeAngelo says HD Supply has avoided that problem because the company assigns dedicated resources to the acquisition and integration efforts, allowing other employees to focus their attention on serving customers.

“When we did the Hughes acquisition, for example, we used dedicated resources from the Hughes business and from The Home Depot to do the acquisition and integration,” he says. “The amount of expertise we have available to us is a big advantage compared with other folks in the marketplace. We have plenty of bandwidth.”

Prior to joining The Home Depot in May 2004, California-based White Cap Construction Supply borrowed employees from existing departments to integrate businesses and were very short-staffed, says division president Brian Etter. “Now that we have dedicated teams, it’s a much smoother process and much more effective.”

Blending cultures
One of the most important jobs in any acquisition effort is blending disparate cultures into a unified, stronger entity. Reaching this goal requires taking the best characteristics of the old companies that made them attractive takeover targets, and adding greater buying power and supplier relationships, efficiencies of scale and better processes. But DeAngelo says it’s dangerous to take a heavy-handed approach.

“Our model is very simple. Find the best players in each of the verticals, acquire them and then work with them to add value where you can add value and get the heck out of the way where you can’t,” he says.

Before acquiring a business, DeAngelo not only meets with top executives but also visits with salespeople to open up channels of communication and learn what they believe makes their companies successful. “We agree up front we’re not going to change those things,” DeAngelo says.

When the acquired companies have expertise in areas not found elsewhere in the company, it opens up growth opportunities.
“We’re very focused on the big being able to learn from the small. When we bring folks in, what we want to do is take all of those great personal touch processes and local specialty capabilities and see which ones we can extend across other markets,” DeAngelo says.

Etter points to White Cap’s acquisition of Prime Construction Supply as an example of how to pick up a new competency — in this case, rebar fabrication — and leverage it across the entire platform. Etter views rebar fabrication as a major growth area for the company.

“We have learned that it’s important to approach each acquisition as a learning opportunity to take the best practices of that business and integrate them so that together you’re stronger,” he says. “Yet it’s important that you don’t approach it with a heavy-handed style that says our way is the best way, which can drive out good people.”

In September, the company announced that all of its acquired businesses will be united under the common brand HD Supply. Over several months, each HD Supply business will transition to the new brand identity.

“We’re very aware of the risks of becoming a national player and losing focus locally. That local presence is the key to success.
We compete in marketplaces that are very fragmented bases of competition. It is very important for us to harness the things that a national company can bring to the table that are benefits to our customers, without losing the local touch,” says Etter.

One of the biggest benefits HD Supply brings acquired companies is access to a $69 billion supply chain.

“We carry the largest on-hand inventory in the market. It’s one of our greatest strengths and one of the most immediate benefits that our acquired companies enjoy. They have the ability to go online in our computer system and source product that may have taken them much longer to procure in the past, or they may not have had availability at all,” Etter says.

Big box mentality?
Some outside observers question whether The Home Depot will give HD Supply the independence it needs to serve the professional marketplace. Running a big box retail operation is not the same as serving professional contractors. DeAngelo says that’s why the company allows each of the businesses within its four major platforms — infrastructure, construction, maintenance, repair/remodel — to operate as a standalone entity with profit and loss (P&L) accountability.

“Each platform stands on its own and is focused on a specific market segment and has specific characteristics that make it the best in that segment. Each of those business presidents, working with their customers, defines what that business model should look like,” he says.

So far, adds Etter, the Atlanta-based retailer has not imposed a retail model on the supply side of the business.

“We’ve been afforded the latitude to run our business and operate our model. We are not being pushed to try to cross the channel between the retail and the pro distribution side. I strongly believe that we will be successful operating both businesses because there’s a mutual understanding that the models are different,” says Etter.

As HD Supply continues to grow, does it run the risk of losing touch with the local customer? DeAngelo doesn’t think so. He calls it having the heart of a small company but the brawn of a beast. Associates at the local level maintain their one-on-one relationships with local customers but also have access to the back office systems, logistics and processes they need to be successful.

“Driving organic growth is simply a function of how much customer success you can deliver. We don’t talk about it in terms of customer satisfaction, we talk about how do we really get into the workflow of customers and make them successful in their mission. We do an analysis of each and every market we participate in and we agree that for planning purposes, we’re going to grow at least twice as fast as the market is growing,” he says.

The company plans to reach its growth targets by providing a 360-degree solution for customers for every phase of a building project. It starts literally from the ground up as companies build the infrastructure by laying water and sewer pipe and utilities. Then the relationship moves to the construction phase, serving plumbing, electrical, mechanical and general contractors, homebuilders, industrial companies, original equipment manufacturers and commercial businesses. The relationship continues as customers enter the maintenance phase, performing routine maintenance, repair and operations (MRO) tasks and ultimately transitions to the repair/remodel phase.

“So for us, it’s relatively easy to have a customer and hand that customer off to each of the business units that matches the marketplace they’re serving,” DeAngelo says.

If HD Supply grows to $25 billion as planned, it would command about a 6 percent share of the estimated $410 billion business-to-business market. Whether the company has the horsepower to repeat the success story that The Home Depot achieved in the do-it-yourself retail space remains to be seen. But DeAngelo believes HD Supply has assembled the right team to manage its fast-paced growth trajectory.

This article originally appeared in the November/December 2006 issue of Progressive Distributor. Copyright 2006.

back to top                                   back to cover story archives