Home Depot Buys HD Supply…Again
I have to be honest — this particular story came as a shock to me, and I’ve been digesting it and trying to figure out what to write since it broke. Last week, multiple news outlets reported that HD Supply was being purchased by Home Depot for $8.7 Billion.
On the surface, Home Depot is getting a good deal, considering they sold most of their stake in HD Supply in 2007 for $10.3 billion. Home Depot kept 12.5% of HD Supply stock as a passive investment until 2015, selling it just prior to purchasing Interline Brands.
So, what does this mean for the MRO supply market? What does this mean for current customers of HD Supply? What about customers of Interline Brands (now Home Depot Pro)? How will this impact Lowe’s and their turnaround efforts led by Home Depot alum Marvin Ellison? Well, I have some opinions — and many of them won’t be popular.
If you had asked me up until this was announced I would have told you that there was a zero-percent chance of this particular acquisition happening. In fact, 3 hours prior to this news being published, someone asked — and wow was I wrong. Why? Well…it’s a long story. Buckle up.
A Brief History
Back in 2007, I was recruited away from my ten-plus year career at 84 Lumber by Home Depot to take over the Rochester NY market as a District Pro Sales Manager. At this point, Frank Blake had been in position for about 9 months and change (for the better) was happening. For a while, I worked side-by-side with local and regional team members from HD Supply — cross-selling products and services to mutual customers. We cut ties with HD Supply’s field team shortly after the sale was complete and became competitors.
The word on the street was that we were selling or closing anything that didn’t make enough money. We were closing stores and company owned businesses across the nation and eliminating or consolidating functional teams. Despite all that, the mood in the stores was positive and we thought the company was making the right calls. The sale of HD Supply didn’t surprise anyone, being largely seen as subsidized by the stores.
Over the next three years, we continued seeing the focus on the core business — DIY retail — pay dividends. Meanwhile, Home Depot analyzed their Pro (B2B/Commercial) business and created some focus on improvement there as well.
Winds of Change
Fast forward to late 2014, when Frank Blake stepped down and Craig Menear took over as CEO. Home Depot was in a much better position now, thanks largely to Franks’ efforts to turn the business around. With a new hand on the helm, the focus again shifted to improving and expanding infrastructure and offerings, including Pro.
Over 40% of Home Depot’s volume comes from Pro customers — defined as any B2B or government purchaser. While this comes as a shock to many who see HD as a DIY-only box store, the company’s commitment to expanding support for Pro is clear. In 2015, Home Depot announced the acquisition of Interline Brands, a conglomerate of catalog companies selling to Pro customers — and a direct competitor to HD Supply.
Bill Lennie, former President of Home Depot Canada, was selected to lead the effort. Over the next five years, Home Depot worked feverishly to consolidate and integrate Interline Brands into their Pro offerings. They built new and expanded existing back-end distribution hubs to improve inventory depth and delivery lead time. They consolidated Interline down from many companies to three, and rebranded those to Home Depot Pro in 2018. Streamlined and retrained Interline sales and support teams worked side-by-side with the rest of Home Depot’s Pro operations to complete the integration in late 2019.
Market Competition
In July of 2018, news broke that Marvin Ellison was heading over to Lowes to take over as CEO. Personally, I think this was a huge win for Lowes, as Marvin was the face of the Home Depot turnaround in the stores. He worked hand-in-hand with us over in Pro and collaborated with J.T. Rieves to make sure we had the support we needed in the field. Unsurprisingly, shortly after Ellison’s arrival at Lowe’s, Home Depot saw a mass defection from their Pro team. The prevalent rumor in spring of 2019 was that Home Depot sent a cease & desist letter to Lowe’s to stop the poaching.
From the outside, turnaround efforts at Lowe’s seem to be following the Frank Blake playbook. With so many members of the leadership team being Home Depot alumni, it really shouldn’t surprise anyone. Go with what works.
In late 2019, HD Supply announced a split into two companies, one focused on construction and industrial supply (now White Cap) and Facilities Maintenance (MRO). This opened the door into future M&A operations for both companies. White Cap sold in August 2020 and merged with Construction Supply Group, making HDS ripe for acquisition.
On November 9th, 2020 Bloomberg reported that Lowe’s was in talks to buy HD Supply — which did not come as a shock considering their effort to close the Pro gap with Home Depot. Lowe’s had already purchased Central Wholesalers and Maintenance Supply Headquarters, both MRO suppliers selling to Pro customers. Later that same day, Lowe’s issued a statement to Bloomberg denying any such talks taking place.
Exactly one week later, the news broke that Home Depot was purchasing HD Supply (again!) for $10.8 Billion. Coincidence? I don’t think so.
HDS vs HD/Interline
During my 10+ years at the orange box, I had one job — District Pro Sales. Over time that role changed a little bit and my store count expanded from 7 to 9 stores during the consolidation period of 2007–2010. Eventually I picked up another 9 stores, bringing my total to 18 and my drive time to over 5–1/2 hours between the farthest points of my territory. Over time, I learned the hard way what Home Depot was good at and bad at.
Towards the end of my journey at Home Depot, I was competing with HD Supply every day. I managed to build the largest property management-based key account portfolio out of all my peers in the US. It was also the largest volume portfolio in my region. HD Supply was not on my radar for HD to buy because they just weren’t good at keeping their promises. Fill rates were a struggle, pricing was all over the board, terms, discounts and deals were inconsistent between apartment complexes owned by the same parent company. All things that gave me the edge I needed to take business away from them.
I was still in the mindset that they weren’t making money and just looking for the next investors to sink cash into them. I was 100% wrong — since being sold by Home Depot, they managed to double their operating margins and EBITDA vs when Nardelli’s Home Depot owned them. While they still have issues with individual regions and the performance of individual contributors, they seem to be moving in the right direction.
Looking Forward
I personally think that Lowe’s missed an opportunity of mammoth proportion to both increase sales to Pro customers and to align themselves to the new, covid-laden reality we find ourselves living with for the foreseeable future.
Online ordering and direct shipment via FedEx and UPS already make up a significant portion of MRO sales. In our post-covid world, this makes meeting operational goals easier with lower risk. My best guess is that Lowe’s will make a bid to purchase another MRO distributor (or two) in the next year. Below is my take on where I see things heading.
Impact on Lowe’s
With this latest move by Home Depot, Lowes is now at an even larger disadvantage. Lowe’s revenue from Pro Customers sits at just over 30%, a number that lags significantly behind Home Depot. This number has held steady since Ellison took the reins at the blue box, but times change. As with the turnaround efforts in the stores, there has been a renewed effort in the field selling to Pro customers.
Marketing for Maintenance Supply Headquarters has apparently become a focus. A little over a month ago, I couldn’t remember their name if I was asked. Now their name comes on every Lowe’s for Pros email blast. New credit terms on the LAR and the ability to shop in stores with a Maintenance Supply account are big changes. Lowe’s has also become more aggressive with “buying business” away from competitors. My clients have noticed a big improvement in customer service and overall buying experience over the last year.
HD Supply has always competed with Maintenance Supply HQ, and to some extent Lowe’s as well. With Home Depot’s beefed-up distribution network, chances are strong that HDS will integrate quickly and gain leverage to widen the gap. Lowe’s needs to act quickly to stay in the MRO game.
Impact on Home Depot Pro
Interline Brands was a great buy for Home Depot — and with the integration complete, they have a blueprint to copy with HDS. Currently, Home Depot Pro consists of three parts — Multifamily, Institutional, and Specialty Trades. These are all that remains of Wilmar, SupplyWorks, and Barnett, respectively. The Pro Desks in the stores have access to cross-sell between them as needed.
Let’s be honest — HD Supply was one of the largest competitors for MRO business that Interline or Home Depot faced in the market. This purchase both expands the Home Depot’s capabilities and talent bench while eliminating a threat. All in all, it was a great move (and like I mentioned, one Lowe’s should have made first!). I predict improved product breadth and service level increases across the board for current clients already using the combined inside/outside the box offerings. Physical storefronts already existing in top 40 markets and yet another delivery and distribution network being integrated can only help.
Impact on HD Supply
The upcoming HD Supply integration should correct one of the most frequent complaints I hear — fill rates below 85%. The aforementioned upgraded distribution infrastructure that Home Depot has been working on since 2017 continues and will only benefit HDS. I anticipate that by 2022, we’ll see HDS absorbed into the three Home Depot Pro buckets as appropriate.
The downside — I predict that current HDS customers will see some shifts they won’t like. In the past Wilmar customers could buy from both Wilmar and HD Supply, now they will be buying everything from HD Pro Multifamily — eliminating price comparisons and service model differences. I don’t think this will be an immediate change, but I 100% believe it’s going to happen.
The completion of the Interline acquisition brought some things under more strict control than prior. Many current clients are unhappy with how Home Depot Pro has limited their discounts, special pricing, and other perks. Many of them had recently started turning to HD Supply for more competitive pricing and service. So what does this mean for HD Supply’s customers? Fast and loose pricing and special deals will be whittled down and only given to their largest clients. This could create an additional opening for Lowe’s and other competitors to step in and take market share.
Also, with the sale of White Cap and now this, customers have had a lot of recent changes. Change might be the only constant in life, but that doesn’t mean people like it. I expect growing pains and customer attrition until HDS proves they can still deliver.
More Changes Are Coming
2020 is the strongest year for DIY sales at the box stores in a long time. I expect to see some of that capital spent getting deeper into MRO by Lowe’s. With rental demand poised to skyrocket from economic instability in 2021 and beyond, MRO is a good place to be. I never would have predicted Home Depot snatching up HDS like they did, but if Lowe’s was really in the marketplace looking, it makes perfect sense. No matter what Home Depot says publicly, there is some bad blood at the upper levels from the mass defection. Beating Lowe’s to the punch with HDS is just the tip of the iceberg.
Bill Lennie’s master plan for Pro in 2018 was to split the customers into 4 buckets and to have them buy from the team that best fit their needs. HDS will add a lot of horsepower into the Multifamily bucket, as well as giving the teams from all 4 some extra tools.
What are your thoughts on how this is going to work out for HDS customers? Send me a note and let me know!
Originally published at https://andymcquade.com on November 23, 2020.
