Sunday, February 26, 2006

Tough as Nails or Merely ‘Bobaganda’?


Tough as Nails!

That’s the headline on the cover of the new Business Week, over a photograph of a crew-cut, orange-apron-wearing Home Depot employee, crisply saluting with his right hand while his left holds a shovel, rifle-style.

“Skip the touchy-feely stuff,” the text informs us: “The Big Box retailer is thriving under CEO Bob Nardelli’s military-style rule.”

But what looks on the cover to be a glowing review of GE veteran Nardelli’s military-infused makeover of one of the most successful companies in American retailing history offers a cautionary tale about the downside to managing-by-numbers when it comes to the “touchy-feely” world of retail.

“Nardelli,” the article begins by telling us, “loves to hire soldiers.” And it’s not kidding: almost half the 1,100 store leadership trainees hired since 2002 have been “junior military officers.” One Home Depot manager actually describes Nardelli as “the general.”

Now, my nephew is a soldier. He just came back from Iraq. And I’d love to see him get into a training program like Home Depot’s when the time comes for him to transition to civilian life.

But if you’re wondering whether a military-style organization is the best way to run a home improvement retailer, the Business Week article will not entirely answer your question.

After starting out with the usual hoopla and glowing factoids of the Nardelli-inspired revival at the world's largest home center, the article describes the Nardelli culture as paralyzed with fear; quotes an ex-manager who calls the company “a factory”; and reports that “Home Despot” is the nickname given by some insiders. My favorite, “Bobaganda,” is what others call the television programming in the break rooms owing to “its constant drone of tips, warnings, and executive messages.”

Me, I have no insider’s knowledge of whether such “Bobaganda” is in fact helping the company "thrive." But I know at least one customer who’s seen the short-run impact of Nardelli’s “military-style rule” at the store level.

A friend called recently about a weird experience at the local Home Depot: he was looking for carpet, but when the sales lady pulled out those big rolling carpet-holders, there wasn’t much carpet on them.

“I’m sorry,” she told him. “We’ve been running low.” She blamed it on problems “with the trucking company,” and said new carpet inventory would be on its way.

I told my friend that knowing the problems truckers have been having holding onto drivers in this tight labor market, maybe that was in fact the problem—but just to make sure called a friend who used to run a Home Depot store and is now at a competitor.

Even before I finished telling the story, he began to laugh. “It’s not the trucks. It’s some bean-counter at corporate,” he said. The way he’d heard it, Home Depot’s fiscal year was coming up, and corporate had cut back store-level inventory—he supposed to show Wall Street's Finest how well the company was managing inventory.

“There’s only one problem with that,” he said with deep irony. “You run out of what you sell.”

Interestingly, just last week Home Depot reported its fiscal year end, and Wall Street’s Finest did indeed take note of the company's crisp inventory management. As Morgan Stanley wrote:

“Inventory levels…grew slower than sales…. We note that inventory growing slower than sales is consistent with comments from suppliers who cited strong sell-through but slower sell-in particularly towards the end of the quarter [emphasis added].”

Now, I’ve walked Home Depot stores with its founders, Bernie Marcus and Art Blank. It was their baby: they lived and breathed Home Depot. Bernie especially wore his heart on his sleeve—he’d get choked up just talking about how a particular employee had gone out of his way to help a customer install a sink.

And to their credit, both founders knew the business had outgrown the highly decentralized way they had managed the business—hence, the GE-trained, Six-Sigma promoting Nardelli.

But retail is not just about computer-generated numbers. Home Depot stores sell GE light-bulbs—they don’t manufacture those light-bulbs…and if a nearby Lowes does at least as good a job selling the same light-bulbs, not to mention carpets, then the Home Depot customer has a choice.

How that customer chooses in the future will determine the success or failure of “Bobaganda,” not whether the CEO and the soldiers carrying out their marching orders are “tough as nails.”



Jeff Matthews
I Am Not Making This Up


© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.

15 comments:

Its_strange said...

I just noticed the OSTK employee count on the Yahoo OSTK site now reads unavailable .

Friend just ordered a door from Home Depot . They called and said it was in and when he went to pick it up they said it wasn't. They blamed the vendor and than blamed the vendor some more.

I bet a Boylans the employees are laughing at Nardelli .

padawancowboy said...

Jeff,

You may have noticed that Ram Partners is mentioned in the Biovail complaint. Care to comment?

http://nakedshorts.typepad.com/nakedshorts/files/Biovail.pdf

"66. Maris undertook such actions because (a)he hoped to be credited and compensated by Banc of America Securities with bringing in or maintaining lucrative hedge fund business, including from, among others, S.A.C., Itros Capital, SuttonBrook Capital, Ram partners, and Ziff Brothers Investments, all of whom he understood were shorting Biovil; (b) these and similar short-selling hedge funds shared with him material non-public information they had secured by excercising their substantial financial leverage that he could use to make his recommendations appear more prescient; and (c) he understood that Biovail was about to be the subject of a concerted short attack by these and other powerful hedge funds and saw enlisting in this assault as an opportunity to repeat his career-making performances with Elan and further solidify his self-proclaimed title of "The Howard Stern of Wall Street."

~ pc

Jeff Matthews said...

"Padawan Cowboy"--or should I say, "Patrick Byrne, alias Padawan Cowboy?":

I never comment on legal matters. That's for our lawyers to handle.

Meanwhile, I'm still looking for that fourth quarter final income statement you promised...

csdorotoc said...

The problem with the military approach is that nobody in retail signs up for a five year tour.

padawancowboy said...

Jeff,

Haha... moi? A CEO of a publicly traded company? Sounds like more than I could handle. I doubt I am even in the same time zone as Dr. Byrne.

But thanks for dodging the question!

~ pc

Jeff Matthews said...

"Padawan Cowboy": you deny being Patrick Byrne? Come come--surely you make it up.

If not Patrick, who? A mere Star Wars character?

padawancowboy said...

I'm just a fella', Jeff. I ain't no different than anyone else.

Best of luck in the lawsuit!

~ pc

BelowTheCrowd said...

I had exactly the same experience looking for some indoor-outdoor carpeting last week. You know, the basic grey stuff that is great for using in the work area of a garage or other "made over" spaces where "real" carpet isn't a great idea.

They had virtually nothing -- nothing at all -- in the six-foot width I wanted. On the 12-foot wide racks, they had a few miscellaneous rolls of moderately-priced carpeting, but none of the indoor/outdoor or "astroturf" type stuff that I wanted.

None. Nothing. Not just nothing in the color I wanted, or nothing in the size I wanted. Out of four "revolver" type racks each capable of holding a dozen or so rolls of carpet, they had maybe 7-8 selections available, all of them quite clearly in the "not likely to be particularly popular" category.

Same with paint. I was looking for some "safety red" spray enamel. Pretty basic stuff. They sell it by the ton because you do tend to need it for marking certain types of items. None in the store. Maybe next week. They had a couple of cans of florescent yellow and orange. They didn't even have the proper red color in regular "brush on" paint either. If I really wanted, they could custom mix a gallon of indoor/outdoor latex for me, when I needed a fraction of that amount and really wanted it to be easily sprayable.

They didn't even do all that well with lightbulbs. My kitchen fixture uses two concentric circular florescent bulbs. 22w (8") and 32w (12") sizes. Both were getting dim. I wanted to replace both, but not surprisingly I wanted to replace them with similar bulbs, and have a definite preference for "warm white" color in the kitchen. They didn't have either of these fairly common items. In fact, the selections overall were rather random. Some colors in some sizes, others in other sizes, none of them particularly organized or well marked.

I got all those items elsewhere. They lost the sale. Next time I'll go elsewhere first.

"Elsewhere," in this case is a large, well stocked independent hardware store that almost went out of business several years back when HD first showed up in the area. Now their business is booming and they just expanded. Virtually all the local contractors, handymen and others who had abandoned these guys for HD seem to now be back. So am I.

-btc

Jeff Matthews said...

"Padawan Cowboy" or, should I say, "Patrick Byrne"?

For a guy who admires himself as much as you do, you can't seem to carry a debate very far.

How's that final final quarter coming?

ericR said...

As a mostly-retired self-employed remodeling contractor I've identified a personally increasing dissatisfaction with Home Depot. This started a few years back and manifests as a preference for other, usually smaller, retailers in my area. I wouldn't want to lose any more of the smaller suppliers here because I'd be cut off from certain things HD doesn't and wouldn't ever carry.
ps...enjoyed the Patclaptrap repartee.

Christopher said...

I've noticed in my experiences that Lowes is much more organized and the level of service is incomparable. I recently went to a Home Depot to have keys cut, and in the same aisle some employees were unloading boxes from a delivery. They were actually laughing. They had made requests and what they were sent had nothing to do with what they needed to stock the store. Wal-Mart's inventory management system is something that has righteously been praised by Wall Street. Home Depot is only beginning to learn the effectiveness of its inventory management system...

iron56 said...

csdorotoc said...

"The problem with the military approach is that nobody in retail signs up for a five year tour."

Indeed! The grunt can't tell the C.O. to take this job and shove it.

Salespeople sure can.

Anecdotal evidence, to be sure, but I have noted that this tends to be a blind spot with ex-military folks in business. It's not just a matter of "giving orders" and "running a tight ship."

Aaron Koral said...

I have a friend who recently went to HD and had some keys copied. HD didn't copy the keys correctly, so I took my friend's keys to a local hardware shop. The proprietor copied the keys perfectly and didn't charge an arm and a leg for the service like HD did. My friend learned the hard way that sometimes the big box retailers aren't necessarily better at doing the little things which some “mom and pop retailers” specialize in. I guess I'm not the only one disappointed with HD (but then, I could be wrong...)

DaleW said...

Jack Byrne is considering stepping down as Chairman of Overstock.com, according to the Wall Street Journal online. That didn't last too long.

CarterWho said...

I was in HD on D-I-Y procurement run this weekend. A entire section of screws stood bare but for stickers that said to ask a salesperson for help. The clerk told me the stock outs were due to Katrina re-building. He said they have re-routed all their inventory to NO to help rebuild. I asked him if he really believed that, he did.