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Home » Less Than Meets The Eye
Columnists

Less Than Meets The Eye

March 11, 2006
Jim Olsztynski
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As these words cascade from a keyboard during the last week of January, the industry is still buzzing about Home Depot's acquisition of Hughes Supply a few weeks ago. You can't get into a conversation without it coming up. The drift of these conversations reminds me of people craning their necks at big city skyscrapers. Normal persons can't help but take a moment to marvel at their grandiosity, but we dare not gawk too long because there's heavy traffic buzzing all around us. Soon it's time to put heads down and watch where we're going. The buildings have no lasting impact on our lives.

This was Home Depot's largest acquisition ever, costing around $3.5 billion. Hughes is a distribution giant with around 500 locations in 40 states and $4.4 billion in annual sales. They ought to shoot Home Depot Supply's revenues past $12 billion this year.

Awesome, dude!

Then you talk with PHCP distributors and manufacturers about how it's going to impact them, and shoulders shrug. Many tossed the question right back at me, asking how I think it will affect the industry. “I dunno.” I can quote me on that.

This acquisition lacks the sense of mystery and foreboding that accompanied Homey's buy-out of Apex Supply six years ago. That came out of nowhere. Some thought it the beginning of the end for many distributors in our cozy little industry. How could independent distributors compete against Home Depot's buying clout? Was this the first step toward a plumbing supplies empire?

Except nothing much happened after that. Apex continued operating more or less as before. More eyebrows were raised when Homey bought Your Other Warehouse the following year, but no grand strategy emerged after that purchase either, at least not as concerns PHCP supplies.

Home Depot's strategic vision is about getting into the wholesale-distribution business horizontally. The Hughes deal comes on the heels of an energetic year and a half in which Home Depot purchased nine large distribution firms in a variety of fields ranging from municipal water systems to commercial lighting to industrial supplies to hardware. For several years, rumors have been circulating about Home Depot's interest in Hughes, but let's not forget that Hughes Supply itself is an uncommonly diversified distributor with a significant presence in the electrical, building materials and utilities sectors. These acquisitions are all about acquiring trade customers as a hedge against an expected downturn in the saturated building supplies market and, longer term, to compensate for Home Depot's demographically challenged DIY customer base.

Home Depot and Lowe's both have been trying for years to diversify their business toward the contractor market with various trade sales initiatives. Results have been disappointing. You, dear readers, are to blame. Try as they have to entice contractors with segregated counters, expanded hours, credit terms, loss leader specials and various other incentives, the fact remains that the vast majority of trade professionals prefer to buy from wholesaler-distributor supply houses rather than the big boxes. That's because you folks have deeper and broader inventories, better services and better pricing across the board. Plus, you don't compete as much against the trade for merchandise sales. At any given time you can spot a handful of plumbing trucks in most Home Depot parking lots, but the vast majority of them belong to small contractors buying filler materials. Mostly they end up there because of convenient location. They go elsewhere for bulk purchases.

So, Home Depot has concluded that “if you can't beat 'em, join 'em” by expanding into the distribution business. Yet, the skyscraper bearing the name of Home Depot Supply casts little shadow on our industry at-large. $12 billion sounds like a lot of revenue, but it's spread across an array of building products. My educated guess is that plumbing accounts for about a quarter to a third of it, maybe $3-4 billion. That's substantial but hardly market-changing. Most estimates of the wholesale plumbing supplies market peg it at between $50-60 billion, so we're looking at between 5-10% of the total now coming through Home Depot Supply. It's business as usual for the hundreds of smaller distributors who collectively sell more than 90% of our industry's goods.

Home Depot Supply's big challenge will be to find whatever synergies might exist in the distribution of plumbing-PFV-HVAC-electrical-roofing-waterworks-hardware-fasteners-lighting and various other building products they now are charged with selling at wholesale prices. How many can you think of?

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Jim is the former editor of Supply House Times.

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