Moving In On Southland's Home Improvement Market


The home improvement binge has turned Southern California into one giant construction site, with the nation's biggest remodeling chains hauling out their heavy machinery in a fight for control of the region's multibillion-dollar business.

Top dog Home Depot Inc. is pitted against rural-bred Lowe's Cos., which entered California this year. And in this latest round of the warehouse battles, what might get left in the home improvement dust are California's own players, Irvine-based warehouse chain HomeBase Inc. and smaller independent stores.

Each of the players is eager to prove it has the right mix of merchandise, service and store locations to lure do-it-yourselfers flush with stock market windfalls and positive views of a growing economy.

This week, Home Depot will up the ante with the first Expo Design Centers in California, opening Thursday in Monrovia and Huntington Beach.

The Atlanta-based company hopes its new Expo chain will do for interior design what Home Depot and its warehouse competitors did for home improvement: reinvent the industry by offering do-it-yourself possibilities not available in the old world of contractor- and decorator-led remodels.

Lowe's, based in North Carolina, comes to California trumpeting that it offers everything under one roof, and boasting of a softer, more welcoming environment that holds everything from cappuccino machines to materials for making the kitchen counter upon which they would rest. Lowe's hopes to grow here by attracting an underserved portion of the home improvement customer base: women.


HomeBase stresses its home field advantage, remodeled stores, an increase in staffing and a rapport with customers who've stayed loyal because of its low price structure. The independents are left to market their small-store service and attention.

The dramatic expansion in the home improvement industry has paralleled the country's economic boom, with record stock market highs and interest rate lows fueling a runaway housing market. New homes mean fix-up projects for new owners; those who stay put, meanwhile, often compensate by redoing their current homes.

Both trends mean big dollars for the giant home improvement centers, an increasingly large part of the nation's $152-billion home improvement products business.

In Los Angeles and its four adjacent counties, residents--faced with a housing supply at historic lows that is limiting their trade-up options--pumped more than $9 billion into the home improvement business in 1998, according to Lowe's.

What's more, Californians, late to recover from the recession of the early 1990s, are likely to still be making over their homes after the din has died down elsewhere in the country.

For consumers, analysts say, more warehouse stores are likely to mean lower prices and better selection in the short term. "They keep each other honest," one analyst said.

The newcomers, however, threaten a broad scope of small retailers and the services they provide. When Home Depot and some of the other warehouse chains moved in over the last 20 years, it was local hardware stores that suffered and often failed. With the entry of Lowe's and Expo, the pain is likely to be more widespread, with independent paint, rug, tile, appliance and lighting stores feeling pinched.

Analysts say a broad-scale industry battle is inevitable because the home improvement business, although not near saturation now, cannot grow indefinitely.

Indeed, Home Depot, now with 832 regular stores and pursuing a fast-track growth plan, appears to be counting on new formats such as Expo to sustain growth by moving into new market segments.

In five years, Expo, with its higher-ticket merchandise, could account for as much as 10% of Home Depot Inc.'s overall sales, said Wayne Hood, retail analyst with Prudential Securities in Atlanta.

"I've always felt Lowe's was better in home decor and Home Depot was always stronger in the core building materials," Hood said. "Expo makes Home Depot more competitive."

None of the companies releases annual per-store sales averages, but an analyst who covers the industry estimated the average Expo brings in between $30 million and $35 million, compared with Home Depot's average of $45 million per store, Lowe's $40 million and HomeBase's $20 million.

Expo President Bryant Scott said that rather than stealing sales from Home Depot, the company has found over several years of testing with a handful of stores that Expo increases main store sales, although the company said it could not say by how much. The company will locate Expos as close as possible to Depots because customers undertaking remodeling projects with the design store often find they need more basic items available at Home Depot, Scott said.

The company promises 200 Expo stores over the next several years, and plans to almost double the number of Home Depot stores nationwide by the end of 2002. On the East Coast, Home Depot is testing its other new format, Villager's Hardware, a small store developed to compete with small local hardware shops.

"Home Depot is determined to own the world," said David Strasser, a retail analyst with Salomon Smith Barney Inc. in New York. "They probably won't get there, but they'll continue to make progress at it."


Expo is designed to start where Home Depot's utilitarian cabinets, shelving and light fixtures leave off. Instead of forklifts, warehouse shelving and concrete flooring, Expo features low, painted ceilings; track lights; and individually designed display rooms. The rooms are dedicated to specific themes, highlighting possibilities for kitchens, baths, lighting and appliances once available only through a decorator.

Certified designers are on staff and ready to assist for a fee. Expo will also handle installation, which it warrants for as long as the buyer owns the home--promising to fix anything from cracked tile to separated carpeting.

The target customer range for Expo starts at $60,000 in combined family income, Scott said. About 75% of Expo customers are women, he said, with many small-scale professional decorators and custom home builders rounding out the mix.

With Expo's softer approach, Home Depot takes a page from the Lowe's playbook. Rather than industrial-looking concrete floors, Lowe's tints theirs a color it calls dove gray. The store is based around a series of room displays only slightly less polished than Expo's, and claims to have the widest aisles, best lighting and most accessible shelves in the industry. It also offers designers and installers, and though it does not offer Expo's bold warranty, it does promise "customer satisfaction."

For that, Lowe's has earned a reputation as a store more friendly to women, and it boasts of a male-to-female shopper ratio of about 53% to 47%; as opposed to the home improvement warehouse average of 60% men to 40% women.

The chain began in 1921 with a family hardware store in North Wilkesboro, N.C., and stayed true to its small-town roots until about two years ago, when it began rapidly moving into the nation's cities.

Lowe's began its urban march in tough markets, Home Depot's hometown of Atlanta and Dallas, another city with plenty of Depots and a couple of new Expos as well.

"We are very pleased with their success," said Lowe's spokesman Brian Peace. "We think the consumer certainly benefits from more competition, and competition has not slowed the growth of Lowe's."


By 2002, Lowe's said it will add more than 100 stores nationally--30 of them in the Los Angeles region--for a $500 million investment in this area alone. It laid stakes in California in April, when it completed its merger with Eagle Hardware & Garden Inc., bringing its total number of stores to 533 in 37 states. The company has said it will convert its five California Eagle stores to the Lowe's format by this fall.

For the most part, analysts say, a market can support two competing home improvement warehouse stores.

"The problem comes in when you have a third player in a market," one Wall Street analyst explained. "Within a 12- to 18-month period, only two of the three will remain standing."

That could be a problem for HomeBase, analysts said, with its smaller stores, a perception of poorer service and fewer resources with which to compete.

Of the three contenders, HomeBase has the rockiest recent past. Sales in stores open at least a year fell during fiscal 1998 and 1997. The Irvine-based chain now numbering 87 stores launched one new store in the fiscal year that ended in January, plans to open 14 stores by the end of January 2001.

Michele Feller, the company's director of investor relations, said the chain's strong presence in the Western U.S. will give the company a solid hold--even if it proves true that most markets can only support two "big-box" home improvement stores.

"Competition is certainly not new to us," Feller said. "We're here already. I guess the question is: Is there room for Lowe's in these markets?"

HomeBase only has to look as far as Hechinger Co. to see an example of what the market's competitiveness can do. Hechinger, once the country's third-biggest home improvement warehouse retailer--operating Builders Square, Home Quarters and Hechinger--filed for Bankruptcy Court protection in June. At that time, the company, controlled by Los Angeles investor Leonard Green, announced that it would close 89 stores.

The other question is: Will the looming battle of the biggest home improvement businesses wreak havoc on the littlest ones?

Seven months after an Expo opened just down the road from his Plano, Texas, tile shop, Henry Munoz already is feeling squeezed.

"It's taken a lot away from my business," Munoz said. "They have a lot of displays that are real nice, and they can put a lot of low prices for materials because they buy by the thousands." We're just a small, individually owned business."

Some small-store owners, however, said that hiring knowledgeable salespeople gives them an edge over "big-box" home decor chains.

For Wendy Fried, the fourth generation of her family to be president of G. Fried & Sons Inc. carpeting in Westbury, N.Y., Expo has been a blessing in disguise. Although Expo is just three minutes away from the flagship in her chain of six higher-end stores, business there has increased since Expo arrived in the fall of 1995.

"Their sales people are not super-knowledgeable, so we have an edge in that we give good service to the customer," Fried said. "I can't say I'm not losing some customers, but you're going to lose that to anybody, any time."


The Players

The three biggest companies vying for a share of the Southern California home improvement market:

Home Depot: 832 stores in 44 states, plus 9 Expo Design Center stores in five states; headquartered in Atlanta; 184,000 employees; fiscal 1998 sales: $30.2 billion; fiscal 1998 net income: $1.6 billion.

Lowe's/Eagle Hardware & Garden: 533 stores in 37 states, headquartered in North Wilkesboro, N.C.; 70,000 employees; fiscal 1998 sales of $12.2 billion; fiscal 1998 net income of $482 million.

HomeBase: 87 stores in 10 Western states, headquartered in Irvine; 10,000 employees; fiscal 1998 sales of $1.4 billion; fiscal 1998 net income of $22 million.

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