Home Depot's international expansion strategy and market performance

¶ … Home Depots' involvement in international trade, the tradeoff considerations that Home Depot faces in the international marketplaces, and the strategies the company is using to minimize risk. In addition, the comparative advantages Home Depot relies on in international markets, and their response to domestic and international environmental concerns regarding their products and services.

Evaluating Home Depot's Growth Internationally

At the center of Home Depots' growth into international markets continues to be their reliance on the supply chain planning and execution systems. Having expanded into Latin America, Mexico and most recently China, Home Depot is learning where their strengths and weaknesses are when it comes to global expansion strategies. Table 1 provides a timeline, based on their initial entry into Canada in 1994 through their most significant global growth initiative into China in 2005.

Table 1: Timeline of Home Depot's Global Expansion

By most investment analysts' estimates, the market size for global spending by consumers on the Do it Yourself (DIY), Build it Yourself (BIY) market of $250B (Wachovia, 2007).

In a recent investment analyst day sponsored by the company, Frank Blake outlined the key priorities for the company globally, including the current state of international market position, growth and concerns (Blake, 2007). Key points from the CEO's discussion are provided here.

First, it is clear that one of the greatest international strengths that Home Depot has is the successful development of their Canadian and Mexican subsidiaries. Despite the increasing growth in these markets and the fact that Home Depot is the #1 home improvement retailer in Canada with 155 stores, there is still major upside potential for the company in this market. Home Depot employs 27,000 associates, generates $5B in Sales and has posted a 17.5% compound annual growth rate in sales within Canada alone. Still, the major variations in cultural values between French-dominated Canadian provinces and the U.S. have at times made the development of new super centers problematic. Home Depot relies on subsidiary managers, all of whom are bilingual in both French and English, to manage government, regulatory and legal requirements for expansion.

Home Depot expanded into Mexico in 2001 with the acquisition of Total Home, and has since grown the Mexican operation to over $1B in revenues (Blake 2007), increasing the total number of stores to 62, and enabling the chain to operate in 37 new markets. Today Home Depot has over 4.4M square feet of selling space and 7,000 associates in Mexico. Home Depot was also able to generate a 59% compound annual growth in revenues for 3 years, and also is now the number 1 DIY/BIY retailer in the country.

In both Canada and Mexico, Home Depots' growth was initially started through the acquisition of a local chain, and to penetrate the Chinese market, the company recently acquired retailer Home way (PR$ Newswire 2006). Home Way operates 12 stores in 6 cities, with concentrations in the key growth cities of Beijing and Tianjin, and has successfully migrated into the services area of the DIY/BIY market by offering delivery, installation, design and remodel services. The average store size is 90,000 square feet and there are at present 3,000 employees in the Home Way subsidiary. Of the three geographies Home Depot operates in today, China has the most potential for growth with a market size of $50B according to (Blake, 2007). Yet at the same time this country will challenge Home Depot's abilities to grow globally through acquisitions, and the successful strategy of relying on in-country executives to manage the complexities of government, regulatory, and legal relationships with a communist-based government.

Starting with China entering the World Trade Organization on December 11, 2004 the retail and wholesale sector of the Chinese economy was opened to foreign retailers. As a major shift in economic policy, it has taken retailers literally years to actually gain access into the country, with joint ventures being critical to in-country success. In addition to this change in policy, geographic restrictions have also been removed. These more favorable conditions have increased market entry by foreign retailers who did not previously have a presence in China and increased investment from retailers who were already active there.

In terms of domestic and international environmental concerns regarding their products and services, Home Depot's approach to managing their supply chains includes an Oversight Office and Ethical Sourcing Task Force that is responsible to acquiring products that meet the company's ethical standards including an evaluation of the production methods used. The requirements in Canada in terms of ergonomics and product safety are significantly higher than those in Mexico, Latin America or China. Home Depot relies on their supply chain specifically for aligning product requirements to suppliers, delivering products to nations that approve of them from an ergonomic, safety and ethical standpoint.

Strengths and Weaknesses of Home Depot entering China

Home Depot estimates that the Chinese home improvement market is approximately $50 billion and growing at a compounded rate of 20% (Blake 2007). In addition, Home Depot's research has shown that approximately 70% of home improvement spending in China is for completion of interior space in new homes. Home Depot's major competitors in China will be the same here in the U.S.; namely Wal-Mart, SAM's Club, and the many smaller chains and local hardware stores. Home Depot's supply chain however is much more attuned to the needs of the DIY/BIY market, and this is already becoming a significant competitive advantage for the company globally, with specific strength in China.

Home Depot Success Factors for Chinese Expansion

The following factors are critical to Home Depots' successful expansion into the Chinese market. These factors also apply to any nation that has a significantly different culture than the U.S. In this respect, Home Depot faces the exact same challenges as Wal-mart in successfully expanding into the Chinese market:

Assets being claimed by the communist party. There is a risk of the communist party deciding to size assets of foreign-based corporations. While the threats of this subside as the Chinese government seems committed to market reform. In many ways, the communist party is merely a ruling party that has inherited its name from history.

The risk of land ownership. Land in China is state-owned and as a result foreign companies can only buy the right to use the land, which is a concession or lease of 50 years. It is currently unclear what will happen at the end of the 50-year concession, and what the specific status of assets placed on that land will be at the end of that period.

Most economically attractive locations nearly overbuilt already. China's cities have a high proportion of their incomes in specific cities, including Beijing and Shanghai. As expansion in these cities has been rapid, Home Depot could potentially find it difficult to find store locations to drive up organic growth. This is another reason for the company's focus on growth through acquisition.

Complexities of Government Relationships. Establishing relationships with the Chinese government is still very important at both the central and local levels. Given the perceived increase of corruption in China, our belief is that retailers will likely need to employ the services of "lobbyists," who will facilitate or expedite the required approval procedures.

Plenty of governmental red tape and restrictions. Governmental red tape (as with all countries) is an issue in China. Foreign retailers entering the Chinese market will need to deal with multiple administrations.

Significantly different practices in Human Resources. Locating and retaining local talent at the middle management level may be increasingly difficult and Home Depot will need to specifically address this issue for continued growth in China. Laws affecting the worker are significantly different in this nation relative to India, another market the company is looking into today. For Home Depot to be successful, they need to address this issue quickly.

Acknowledging and selling to diverse Chinese consumers. Tapping into consumer needs, wants, and purchasing tendencies could present a challenge due to the country's size and diverse population in terms of taste, preferences, and purchasing power. The need for more interior home products is going to be critical to the company's growth

Driving up square footage growth globally. According to DataMonitor (2006) Home Depot's weaknesses include a declining sales per square foot, which is forcing the company to look at smaller-store footprints during acquisition strategies. The focus on driving up same-store sales internationally is critical for Home Depot, and this is another major motivation for the company to pursue a more joint-venture based approach to acquisition than a pure buyout.

Accentuating global strength in supply chain and logistics. Third party logistics service suppliers are still relatively underdeveloped in China, and as a result, Home Depot will need to focus on bringing their significant expertise in supply chain management, planning and execution within China. To its credit, the Home Depot has put major effort behind rationalizing and improving its logistics model as well as developing its Centralized Automated Replenishment (CAR) strategy which is paying dividends globally. The company's growth globally will be directly influenced by their performance with CAR-based expansion into China. Home Depot has an unparalleled logistics system that continues to deliver outstanding performance. Home Depot was the first retailer to develop drop shipping processes for moving products directly form manufacturers to distribution center, a practice that saved millions of dollars in distribution center charges. In addition, the company has invested in over 3,500 company-owned trucks to get goods from its over 100 distribution centers in the United States alone to nearly 5,000 stores. The focus on safety and reliability in logistics is also reflected in the high standards for drivers Home Depot has, which requires any driver to have 300,000 accident-free miles with no major traffic violations to get hired.

Summary

Home Depot's international growth has followed a consistent model of first acquiring nationally-based DIY/BIY retailers in the countries of interest, then working to increase organic growth. Implicit in this strategy is a high level of integration with the specific systems, processes, and people at Home Depot's Corporate facilities. This growth-by-acquisition strategy significantly minimizes the company's total risk, as it often treats these acquisitions more as joint ventures than buyouts. The role of Home Depot's supply chain and its ability to manage its own logistics requirements is also a major competitive advantage when expanding into China, and other potential nations in the future.