The big orange box woos Uncle Sam

Home Depot Supply targets MRO and government sector business.

by Oliver Ardery

It comes as no surprise to distributors that The Home Depot (HD) has been targeting the maintenance, repair and operations market (MRO) over the last decade. The acquisition in 1995 of Maintenance Warehouse, now known as Home Depot Supply, clearly indicates the Big Orange Box is seeking new revenue streams beyond the do-it-yourself (DIY) segment. To diversify its revenue base, HD has aggressively sought growth opportunities within the facilities management and MRO market, including most recently within the government sector.

The government market is approximately a $10-12 billion market based on HD’s comments to Wall Street, but remains highly fragmented with numerous distributors serving the customer. This provides a great opportunity for industry consolidation, potentially allowing the Big Orange Box to become the 900-pound gorilla within the MRO government market.

HD made the right first step by securing two General Services Administration (GSA) Schedule contracts in 2003, making it the largest retailer and first home improvement company with a GSA Schedule contract. The GSA Schedule contract is a critical first step to seizing government revenue because it streamlines the federal procurement process by enabling customers to purchase MRO products from HD’s retail stores or catalog.

The GSA contracts signal HD’s focus on the government market, but how important is the government market to HD’s business? According to HD, its market share within the government market is a little less than 1 percent. Going forward, it is likely that HD’s government revenue will increase significantly, especially considering HD Supply’s recent growth. While HD Supply comprises a small percentage of HD’s total sales, it is growing at a faster rate than the retail business, experiencing 25 percent yearly growth. It is foreseeable that HD’s government market share could experience significant growth.

Home Depot’s government strategy
To increase its MRO revenue within the government market, HD has focused its strategy on the following:
• improving government relationships;
• acquiring companies to improve its MRO product and service offering;
• leveraging retail;
• upgrading its supply chain capabilities; and,
• leveraging its construction service and supply capabilities.

After receiving the GSA Schedule contracts, HD created the Government Solutions Group, an organization dedicated to increasing business with the federal government, and hired retired Major General John Phillips, former Deputy Under Secretary of Defense Logistics, to lead it. This is significant because of Phillips’ expertise, credibility and, more importantly, contacts within the government that will drive significant sales opportunities. Hiring former military personnel to increase sales to the government is not unique. All the major defense companies – Boeing, Lockheed Martin and Northrop Grumman – hire former military personnel to increase their acquisition opportunities with the government.

HD is taking the necessary steps to improve its relationships within the government. As any distributor knows, it is critical to know the customer and understand their needs to provide excellent customer service and maximize sales opportunities. Given the federal government’s unique procurement environment, developing a sales force that understands the purchasing processes and needs of the government customer is imperative to developing successful relationships.

The Government Solutions Group has trained hundreds of sales personnel to understand the unique sales and procurement processes within the government. According to Phillips, HD trained more than 1,000 sales employees near military facilities to ensure they understand the nuances of government procurement.

HD continuously tries to attract the hearts and minds of the military sector through outreach programs. For example, HD’s Operation Career Front is a hiring program that works with the U.S. Departments of Labor, Defense and Veterans Affairs to provide military personnel and their spouses with part-time and full-time jobs. In 2003, HD hired approximately 10,000 veterans and likely surpassed that amount in 2004.

HD also uses outreach programs to influence the MRO purchasing behavior of government customers. In 2003, HD launched Project Home Front to help military families with home repairs while a family member served in the war in Iraq. HD donated $1 million in tools and supplies and employees volunteered one million hours in support as part of the program. These types of outreach programs, coupled with HD’s recognized brand name, may influence government customers’ MRO purchasing behavior to increase HD’s government sales.

HD’s acquisition strategy
Over the last 16 months, HD utilized its $2 billion-plus in cash for acquisitions to improve its opportunity within the MRO market. Some of the major acquisitions include:
• White Cap Construction Supply, a distributor of specialty hardware tools;
• Greenwald Supply, a distributor of construction, building and specialty materials;
• Economy Maintenance Supply Company, a distributor of MRO products;
• Litemor Distributors, a distributor of commercial lighting products.

These acquisitions significantly increase HD’s MRO product offering and, in some cases, develop new relationships within the government by leveraging the existing customer base of the acquired company. 

Leveraging retail
HD’s more than 1,800 locations across North America is a major asset in maximizing MRO sales. Customers, including the government, often purchase MRO products via the retail channel and will select a distributor that is nearby. With its vast retail footprint, HD is well positioned to capture the MRO spend of government personnel seeking a quick purchase.

Phillips says HD offers the government customer more than 55,000 items, many of which are likely sold across multiple customer segments (D-I-Y, property managers, professional customers, etc.) The product overlap across the different customer segments likely increases HD’s purchasing power and ability to drive down costs for the MRO customer, which is a major differentiator for the government when selecting vendors.

Upgrading its supply chain capabilities
Over the last few years, HD put a major emphasis on upgrading its supply chain capabilities. For example, by increasing the number of distribution centers and delivery vehicles, HD now offers government customers free next-day delivery to 95 percent of the U.S. This is extremely appealing for customers with immediate delivery needs when purchasing MRO products.

In terms of improving its logistical IT infrastructure, HD implemented some major IT platforms that consolidate procurement information to increase its purchasing power and offer customers lower prices. In addition, HD is one of the leaders in leveraging Radio Frequency Identification (RFID) technology to replace bar codes for inventory management, a key initiative of the Department of Defense.

Leveraging construction service and supply capabilities
According to Phillips, HD is leveraging its civil engineering construction capabilities to win government contracts. For example, HD works with a major contractor to renovate and rebuild homes and barracks at military bases. HD hopes to use teaming arrangements to become a major construction service provider to the federal government. As it gains traction with the government as a construction service provider, HD will develop stronger customer relationships, which will increase its opportunities as an MRO distributor. Furthermore, this provides greater MRO sales opportunities because of the tools and equipment required for construction projects.

This article appeared in the May/June 2005 issue of Progressive Distributor. Copyright 2005.

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