Digital transformation progress report - Home Depot builds a digital future

Stuart Lauchlan Profile picture for user slauchlan September 13, 2015
Home Depot is combining the bricks-and-mortar inheritance of its present with an increased emphasis on a digital future.

Getting set

Last week we looked at the progress being made by retailer JC Penney in its digital transformation efforts, now led by CEO Marvin Ellison. Ellison had previously been in situ at home improvement firm Home Depot, where he garnered a lot of digital experience.

Now that Ellison has move on to his new challenge - and taken some of the digital experts from Home Depot with him - what do the prospects look like for his former firm, now under the auspices of new CEO Craig Menear.

Some idea of what to expect was highlighted at Goldman Sachs 22nd Annual Global Retailing Conference, where Menear talked about the need for the firm to continue to evolve its strategic framework, a sort of three-legged stool. The first leg of that involves customer services. Menear said:

We need to look at how that evolves as the customer changes and how we begin to connect labor with the changing customer needs as we go forward.

The second leg of our strategy is all about driving product authority in the home improvement space and there we have to continue to leverage the tools that we have built to connect local needs of the customers to our assortments. That becomes really important if you think about the digital impact in the space as well.

As part of this comes the most radical element of this strategic evolution, something that Menear called “an end-to-end thought process as it relates to driving product authority”. He explained:

This is a different approach for us from where we have been for the past eight years, really thinking from supplier all the way through customer purchase, including aftercare. In large part what we have had to do over the last eight years is fix a bunch of things in our business that were done within functional silos.

So for example, the store operations teams need to go out and fix service. Merchandising need to fix the competitive position of the company in the marketplace. Supply chain need to go build a new supply chain for the Home Depot. So for the past eight years, that's the hard work that we have been doing, mainly within functional silos.

Customers first

With that done, it’s now necessary to tie this up with the customer experience, he added:

As we move forward with this end-to-end thought process, it's about how do we actually begin to think about the customer experiences that we are creating and how does each area of the business then impact that experience? So it's a much more cross functional approach and a much more collaborative approach back screen into our vendor community as well.

The third leg of the stool is achieving the correct balance between bricks-and-mortar and online. Prior to 2007, Home Depot’s economic engine was built around growing new square footage offline. That’s started to change, said Menear:

We need to continue to focus on those opportunities as we look forward, as well as driving our capital allocation to make sure that we are connecting our stores to our web and our web to our stores. This is becoming a much more integrated, one-Home Depot as the customer views it, no matter which channel they may start their shopping experience in or end their shopping experience in.

That inevitably results in some degree of friction, he admitted:

There is no question that in our business, for example, we grew up obviously in a brick-and-mortar space and now we are layering in on top the digital impact. But having said that, I think it's something that we have been focused on for a while in terms of how do we actually disrupt ourselves.

Lessons have been learned, insisted Menear:

I think two great examples of what we have done in that type of area is really starts with our supply chain. We stepped back. We looked at our supply chain. We knew that we had to reengineer it and we actually created a supply chain that works very, very differently than traditional supply chains do in an asset light type approach.

The other one would be around our merchandising execution team. Again here is an area where we do it very differently than what most folks do. We have actually chosen to bring that in-house and believe that both of those have now become competitive advantages for us in the marketplace.

So it's something that we look at and look at the end-to-end value chain and how do you actually think about where you can engineer greater value in the process, which is what basically any startup does.

Professional approach

Home Depot is also experiencing a growth in interest in online purchasing among professional home improvement customers. Menear said:

The pro is coming along in the e-commerce space, maybe not quite as fast as the general population is, but clearly things that they have said is ‘Show me the ability to see the inventory for my entire job’. We have done that. We have gone out. We have created that as part of our app or on our web for the pro. And clearly it's a capability that they are looking for.

Pro customers also want to have the ability to create a list of things that they regularly buy, in the same way that online grocery sites will build and preserve a list of favourite purchases. If you’re a roofer or a plumber and you use the same products on job after job, having a similar favourites list is a big selling point when selecting a provider. It provides, said Menear:

the ability for them to be able to have a list of products that they purchase and be able to order those through the web, whether that be through their phone on the job site or at home at night. [If] they have that product available for pickup ready to go and/or have it delivered is exactly the kind of capabilities that we are working to build out.

All told, Menear increasingly sees digital as a starting point in Home Depot’s business model, driving footfall to the bricks-and-mortar operations:

The great news when we look at our business today is many categories start in the digital space and actually finish inside of our stores. Last year, about 40% of all the orders generated on actually finished in one of our orange box stores. Customers find it incredibly convenient to be able to pick up a product when they wanted to. They didn't have to worry about whether or not it was on their doorstep. And so that is a great opportunity not only to sell more product, but to drive traffic to our stores, sell them additional product when they come in and pick that product up.

To date though digital activity has been mostly limited to individual items by the non-pros. Menear said:

Within large part online purchasing, it leans more towards item purchasing than it does project purchasing. However there is, particularly in the pro space, more growth in the project purchasing.

The other trend is where things have the ability to be customized. So for example, in outdoor patio furniture, you can do things in the digital space that we could never accomplish inside of the physical space. So offering the customer the options to be able to select their own fabrics, we just couldn't make that happen in store, but we can do that in the digital space and offer them a customized experience.

All of this change demands a change in mindset and approach within Home Depot’s own ranks of course with a need for more digital-savvy store workers who can operate frictionlessly online and offline on behalf of the customer. That means training and eduction on the part of Home Depot management. This is underway, Menear insisted:

One of the recent investments we made is upgrading our FIRST Phone capabilities on the floor so they are connected obviously to the web. It allows our associates to be able to take care of the customer. If for some reason the customer doesn't find what they want in our stores, they can take them right there in the aisle on to the web and solve for that customer's need. The interesting part is, north of 10% of all of our traffic from is coming from inside of our stores. So I would say our associates are adapting to it very well.

My take

Progress report - building a solid foundation for digital transformation.

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