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Home Depot Letting the Online Game Come to It

Katherine Hobson

Home Depot (HD Quote), the bolts-to-nuts home-improvement retailer, soon will roll out its much-anticipated e-commerce unit.

While the company isn't saying much, except to confirm that it will launch e-commerce efforts in the Las Vegas market next month, analysts already are buzzing about the site, which they say will offer all of the 40,000-plus products available in the typical Home Depot store, along with a range of delivery options.

The e-commerce push likely won't goose Home Depot's stock, which is 29% off its highs amid fears that the economy is slowing. And the entire online home-improvement market -- worth only about $100 million this year, according to Jupiter Communications -- is a mere pittance compared with Home Depot's $38 billion in sales last year.

Yet the launch demonstrates the company's dedication to being wherever its customers want to shop. Moreover, Home Depot is signaling that it intends to create an e-commerce presence without spending too much or incurring the steep losses that have weighed on other retailers.

Contentment

At first glance, Atlanta-based Home Depot appears to be an e-commerce laggard. Until now, it has gone the content route with its Web site, offering company information, calculators to estimate supply needs, and a bunch of project information. For example, someone wanting to install a ceiling fan can obtain a how-to diagram, a list of necessary materials and tools, and a skill-level rating (a high rating suggests it's best left to the Bob Vilas of the world).

A number of sites already sell tools and home-improvement supplies, including Amazon.com (AMZN Quote), Sears.com, TrueValue.com (part of the TruServe store cooperative), CornerHardware.com and OurHouse.com. And Home Depot is rolling out its e-commerce slowly, over a number of years -- after Las Vegas, only five more markets are expected by the end of this year.

So the company is by no means desperate for the first-mover advantage. Perhaps that's because it doesn't need it: Home Depot's name alone will make it an immediate big fish in the online home-improvement pond. And because the potential sales gains are so tiny compared with its overall sales, the company has moved cautiously to ensure that its reputation for customer service and bottom line both are preserved.

Synergies

Here's how it will work, according to Bonnie Tonneson, analyst with Chase H&Q: The company will use ZIP codes to provide customers with an up-to-date picture of the merchandise available at their local stores. That way, customers will have the option to pick up orders at the store, take same-day delivery at home, or get the order through the mail. (Tonneson rates Home Depot shares a buy, and Chase hasn't done recent underwriting for the company.)

Because all the inventory comes from the stores themselves, there's no need for the sort of warehouse model used by other e-tailers. That saves money. Returns are easier, and store managers don't get testy about Web purchases eating into their own sales figures. And because sales are made through local stores, incremental Web sales will boost monthly same-store sales, making the whole company look good -- not just its Web unit.

The system also will piggyback on Home Depot's existing Pro Services program, which reaches out to professional contractors who order big quantities and don't like to wait in line behind weekend warriors buying surge protectors and a couple of houseplants. Pro Services will be in 28 markets by the end of the fiscal year, which ends in January. Rolling out e-commerce with Pro Services already in place means stores are prepared to handle phone-in orders, delivery and will-call areas. "The logistical infrastructure is in place," says Tonneson. "It's prudent to follow the path that is already built." It saves money, and the gradual rollout allows for retooling if costs are more than initially expected.

And, importantly, Home Depot already charges for delivery, so customers are used to paying for it, says Margaret Gilliam, an independent researcher who runs retailing consultancy Gilliam & Co.. Charging for delivery and other options will help keep down costs. Sure, that risks losing a few customers to start-ups promoting free delivery, but because this market isn't a major revenue source, Home Depot can afford to lose them. Keeping charges in line with costs also will ensure that e-commerce is rolled out without hurting the company's bottom line; Tonneson estimates that Home Depot's e-commerce spending won't be material to the company's finances.

Competitors

There already are some Internet start-ups jockeying to gain loyalty among do-it-yourselfers. Evanston, Ill.-based OurHouse.com sells products -- some in tandem with marketing partner Ace Hardware, which also owns 20% of the company -- but also features services such as gardening, appliance installation and contracting. CEO and founder Philip Airey says Home Depot's entrance will add legitimacy -- and a larger audience -- to the category, but maintains that its slightly different focus keeps the two distinct.

Meantime, privately held CornerHardware.com, backed by investors including Homestore.com, now has 35,000 items available, and says that by the end of this year, that will jump to 200,000. Fulfillment is handled through outside distributors, and for now, the company says it is sticking with the virtual model.

Richard Takata, chairman, CEO, and co-founder of the San Francisco-based company, says CornerHardware.com also is focusing on women. Nevertheless, Home Depot is "obviously going to become a viable competitor," says Takata.

In Home Depot's case, late may be plenty good enough.