Home Improvement

Home Depot is betting its $1 billion investment in IT infrastrucutre will boost growth and earnings, while fending off rival Lowe's. Can a strategy designed to improve efficiency also increase customer satisfaction?

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When Robert Nardelli took over as CEO in December 2000, he made some dramatic changes—including the centralization of merchandising, store planning and marketing—that shook up the company. Home Depot also faced increased competition from its closest rival, Lowe's, which was aggressively expanding. At a time when Home Depot should have been prospering (with mortgage rates reaching historic lows), at a time when consumers—scarred by the 9/11 attacks—were spending more time at home, the company went into a tailspin. For 10 straight quarters, from the second quarter of fiscal 2001 through the third quarter of fiscal 2003, same store sales and net earnings growth paled in comparison with Lowe's. Home Depot's stock dropped from $67 in December 1999 to $20 in January 2003. And Lowe's customer satisfaction ratings from the American Customer Satisfaction Index were higher than Home Depot's for both 2002 and 2003.

Something had to be done.

The question was, what?

Home Depot's answer was infrastructure, infrastructure and more infrastructure.

A Billion-Dollar Bet on IT Infrastructure

Now more than 25 years old, Home Depot is going through a late adolescence. CEO Nardelli and CIO Bob DeRodes, who joined the company in February 2002, assert that the company has outgrown its homegrown systems, that the IT that got it to its first $50 billion won't get it to its next; new technology is needed to support the company's expansion improve store operations and customer service (not to mention compete with Lowe's, the bogeyman across the street). To that end, Home Depot in 2002 announced an almost $1 billion overhaul of its IT infrastructure. The move is part of a massive, $7.7 billion modernization effort that includes remodeling existing stores and opening new ones. The transformation involves replacement of its more than 10-year-old point of sale (POS) system, including the installation of self-checkout counters (completed in 2003); a LAN upgrade; an IBM data warehouse for sales and labor management, which was launched in late 2002; price optimization software from ProfitLogic; SAP financials (went live in the end of May 2004); PeopleSoft ERP (went live in February 2004); two-way cordless scan guns (rolled out in April 2004); and other new applications designed to streamline price check and receipt lookup services.

The I.T. that got home depot to its first $50 billion won't get it to its next, say CEO Robert Nardelli and CIO Bob DeRodes.

While Wall Street largely has applauded Home Depot's IT initiatives (along with its recent sales and earnings growth), not everyone is convinced that it's out of the woods. In her February assessment of the company, Barbara Allen, an equity analyst with broker-dealer Natexis Bleichroeder, wrote, "We remain concerned about execution risk and competitive pressures during Depot's dramatic internal changes." She warned investors not to get too excited about Home Depot's recent comparable store sales growth, which was an important factor influencing analysts from Buckingham Research and Smith Barney to give Home Depot strong buy ratings. Allen noted that the fourth quarter fiscal 2003 growth figures were flashy only when compared to the previous year's dismal results.

And George Whalin, president of Retail Management Consultants, doesn't accept Home Depot's assertion that all this technology will improve customer service. In his view, the company is using technology to eliminate workers and cut labor costs, thereby improving profit margins. "Home Depot built their reputation, they built their business, on a customer being able to talk to a plumber or an electrician or someone who could answer questions for them," says Whalin. "That's not the case today. They're running these stores with fewer people than they've ever run them with." (In fact, based on a review of the company's annual reports, Home Depot went from 200 associates per store in 2000 to 175 associates per store in 2003.) Indeed, CIO DeRodes says that with the new self-checkout lanes, "One person can effectively clear four lanes much more efficiently, and that reflects in the cost of business."

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