Home Depot’s total rehab


THE HOME DEPOT’S FRANCIS S. (FRANK) Blake has one of the biggest jobs in corporate America but one of its least famous faces. Which is what the CEO is counting on one weekday morning when he goes on an undercover mission in Riverside, N.J.: a secret walkthrough at one of his company’s 1,970 U.S. stores. He’s been taking the walks an average of four times a week, all around the U.S., since January 2007, when he took over as CEO after Bob Nardelli’s abrupt and painful departure. Blake wants to see for himself the way regular folks are treated when they shop at the big orange box. And he’s not sure what to expect. “This is going to be like a Cracker Jack box,” he says, a bit nervously. “You don’t know what you’ll get.”

Things get off to a promising start: Barely are we in the door when an orange-aproned associate asks brightly, “Can I help you find something?” A small smile plays across Blake’s poker face. “That’s always good,” he says, stooping to pick up some pink flower petals that have fallen to the ground. As he makes his way to the carpet section, which has been redesigned so that women customers can actually reach the rugs, the level of service begins to border on obsessive. “You need help with anything?” “How you doing today?” “Folks, you sure you don’t need any help?”

It should be a gratifying moment for Blake, who has bet the ranch on Home Depot’s quest to reclaim the $77.3 billion retailer’s once-vaunted edge in customer service. Instead he looks uncomfortable. He’s accustomed to walking freely through most stores; with his preppy clothes, thinning hairline, and lack of entourage, he resembles a suburban accountant who gets his jollies riding his power mower. Not this time. “You’ve been outed,” I tell him. And sure enough, the manager of store No. 919, Mike Pleskach, comes bounding over to say hello. (Blake says he should have worn a baseball cap; his bald head is too distinctive.)

A shopping experience where employees trip over themselves to help customers is the ultimate fantasy for anyone heading a retail company. But at Home Depot—the second-largest retailer in the U.S., after Wal-Mart—that fantasy has been a long way from reality for a long time. Over the past several years a trip to the big orange box has so often ended in frustration that the company once famous for its helpful employees became fodder for late-night TV jokes* and home to hundreds of blog rants about bad experiences with disengaged or scarce employees. (Type “I hate Home Depot” into Google and see what happens.) On the University of Michigan’s American Customer Satisfaction Index, Home Depot fell eight points in seven years, to 67 at the end of 2007. It was the largest drop for any retailer in the index, while rival Lowe’s remained steady at 75.

That kind of deterioration would be a challenge for any newly minted chief executive. (Blake, 59, is a lawyer by training.) But trying to recast the company’s image in the middle of the worst housing downturn in decades multiplies the challenge. Does service even matter when recession-spooked customers are avoiding shopping altogether? (In this third year of decline, Home Depot’s same-store sales dropped 7.9% in 2008’s second fiscal quarter; rival Lowe’s posted a 5.3% drop.) Blake, however, is not managing for the here and now, slashing jobs and expenses with quarterly earnings in mind. Instead, he’s doing something counterintuitive: He’s spending money on the folks in the orange aprons to prime Home Depot for life after hard times. Blake is quietly but aggressively presiding over radical change at the company, starting with a complete reversal of his former boss Nardelli’s strategy of dominating the wholesale housing-supply business.

Since Blake took over, he has sold off the supply unit, HD Supply, and slowed store growth to focus on quality over quantity, trying most of all to rebuild the sense of pride that employees once had in what they do. “It was a religion at Home Depot that customers had to be happy,” says Bernie Marcus, one of the company’s three founders. “Over a very short period [Blake] began to realize the malaise that was taking place in the stores.” Wall Street analysts have been surprisingly supportive, despite the company’s abysmal numbers and lousy reputation. “A lot of what he’s doing is very textbook,” says Citigroup analyst Deborah Weinswig. “Invest in a down market when you’ve got time. That makes sense to me.”

Whatever the economy does, Home Depot won’t fully recover until customers trust it again. And that’s why, back in Riverside, Blake is doing his best to inspire the troops. Rather than mentioning the flower petals on the floor or a few other infractions, Blake is supportive and encouraging. “Take us around,” he says to Pleskach, a 15-year Home Depot veteran. “Show us what you’re proud of.” Pleskach heads over to the garden area to show off his fleet of lawn tractors and then to the home-services tent, where Bob, an associate who has personalized his orange apron by writing a big smiley face inside the “O” in his name, tells Blake about his success generating leads for expensive jobs like roof installation and house painting. Suddenly a “pro,” a customer who’s a professional contractor, comes over to put in his two cents. “These guys are great,” the contractor says. “I’m trying to get a whole bunch of pallets of tiles, and they’re working their butts off trying to get it done. The problem is, I hope they can get it done.” “They’ll get it done,” says Blake, with the air of a doting dad. “I have total confidence.”

JUST 18 MONTHS AGO, CONFIDENCE IN ANY form was hard to come by at Home Depot. Nardelli, the GE executive who had been chosen by co-founders Marcus and Arthur Blank (who now owns the NFL’s Atlanta Falcons) to help bring scale and organization to a company that had outgrown its loose, entrepreneurial culture, had done that—and much more. Believing the home-improvement market would soon become saturated in the U.S. as rivals Lowe’s and Menards went on their own expansion drives, Nardelli concluded that Home Depot’s future lay in moving further up the chain to contracting and building supply. In just over six years he spent more than $8 billion to acquire 30 companies and create HD Supply, nearly doubling revenues. He also used his experience at GE, with its systems- and data-driven culture, to help centralize purchasing and merchandising, which had never been done. When Nardelli arrived, store managers didn’t even have the ability to send e-mail to one another.

For several years Nardelli’s strategy seemed to work. Earnings per share more than doubled, driven by cost savings from centralizing operations and by a blistering real estate market. But all that attention to growth and efficiency came at a price. Store managers were suddenly measured on a bewildering array of metrics, such as the average hourly labor rate; none related to customer service. By centralizing, Home Depot saved money—but robbed managers of the power they’d had to make decisions based on neighborhood quirks (more vacation rental units, say) or the regional popularity of small iridescent tiles. “There were beach chairs in Kansas City when it was snowing outside,” says a regional manager during a visit to a store in Southlake, Texas. “The focus was on the metrics below the sales line, but not sales itself.” Stores became dirty; employees, surly or scarce. The result: a company that looked better on paper but felt much unhappier in person. And in the retail business, where the customer experience is what matters most, that unhappiness eventually showed up at the cash register.

The data-driven Nardelli, who loved to say, “Facts are friendly,” didn’t really grasp what was going on, says Ken Langone, a co-founder of HD who had helped recruit Nardelli. Belatedly, in 2006, Nardelli agreed to increase slightly the percentage of employee hours devoted to the stores—but Langone says the CEO grudgingly predicted, “The company will get nothing for it.” Says Langone: “I think Bob didn’t appreciate the importance of a kid on the floor with an apron on. You just can’t measure productivity in a retail store.” Nardelli declined to comment for this story.

Nardelli made matters worse with a tendency to squelch dissent and dismiss criticism of his pay, which reached $30 million in 2005 as the company began to struggle. In January 2007, after the board asked to renegotiate his pay package, he instead stepped down and famously collected a severance payout worth—including comp from his original contract—$210 million. One of his favorite hires, vice chairman Blake, succeeded him. (In August 2007, Nardelli became CEO of Chrysler; the two haven’t spoken since he left.)

Blake was not an obvious choice. He had spent most of his career as a lawyer, working as a clerk to Supreme Court Justice John Paul Stevens, then moving to GE and also serving as a deputy counsel to George H.W. Bush when he was Vice President. Blake says he never aspired to be a CEO and in his previous job had spent more of his time thinking about retail locations than the products sold inside them. Nor is he a rally-the-troops type: Blake is soft-spoken, relatively free of platitudes, and refreshingly unscripted. He shares, without prodding, what his wife said when she saw a videotape of him speaking in front of Home Depot’s store managers in March: “‘That’s appalling.’ And actually looking at that, you say, ‘Yeah, that’s right. I do need to communicate better.'”

Blake may have lacked experience, but you wouldn’t know that from his first move as CEO, which carried symbolic weight: He placed a call to company founders Marcus and Blank, asking for their help and advice. Marcus, still among Home Depot’s largest shareholders, had become estranged from Nardelli; he hadn’t set foot in a store in 3 1/2 years. “I couldn’t take it emotionally,” he says. But when Blake reached out to him, he responded immediately, agreeing to speak at the company’s March 2007 store managers’ meeting and taking Blake on store walks to teach him the ropes. “My advice was to get into the stores,” Marcus says. “Get the associates to talk to you, to trust you. Get them to understand that if you see something wrong in the store, you’re not going to have them fired.” Blake, whose son Frank Jr. is a store manager in North Carolina, did so—and rapidly decided that the company was involved in so many initiatives that it wasn’t succeeding at any of them. At the first meeting of his management team in early 2007, he got his point across. “You know that sign in the lobby that says improve everything we touch [HD’s internal slogan under Nardelli]?” Blake asked. “Please don’t.”

Blake has boiled his strategy down to a few priorities, all of which revolve around stores (engaging employees, making products readily available and exciting to customers, improving the store environment, and dominating the professional contracting business, an area in which Home Depot’s closest rivals trail far behind.) “To me, it just makes more sense to have one integrated business,” he says by way of explaining why he sold off the wholesale business. (The sale price, originally agreed upon at $10.3 billion, was renegotiated down to $8.5 billion in August 2007 as the M&A market collapsed—an embarrassment at the time that today actually looks good.)

To spruce up the stores, Blake restriped the parking lots and improved lighting. He bulked up his merchandising team, headed by Craig Menear, which has, in turn, empowered the field merchants, whose job it is to understand local markets. Menear wants to make sure that the focus is on the customer’s project rather than the product being sold. “Our whole job is to help customers solve their problems,” he says. “You need to make sure you think about that from a project standpoint. If not, you can fall into the trap of selling commodities.”

But the people who work inside those orange boxes have seen the biggest changes. Instead of assessing store managers on 30 metrics, the company today uses only eight, including each store’s improvement in customer surveys. Blake now gives assistant managers restricted stock, has boosted the number of associates eligible for annual bonuses, and has reinstituted merit awards, which make associates who go beyond the norm eligible for a spot bonus. He also returned some of the decision-making to the stores: About 75% of the end caps (promotions at the end of an aisle) are now the choice of local and regional managers, who can use their experience to promote locally popular items., like pool salt in the Southlake, Texas, store. (Saltwater pools are popular in the Sunbelt.)

For Blake, it’s obvious that employee morale is a more sensitive issue in retail than in some other industries. “Whoever was in the factory manufacturing the Styrofoam cup,” he says, “if this person had a good or bad day, it’s not going to impact my enjoyment of the cup. But part of your experience of our company is determined by whether an associate feels valued. So investing in our associates is the right thing to do.” Probably the most significant demonstration of Blake’s store focus is the company’s “aprons on the floor” program. The goal has been to boost in-store employee hours without increasing overall costs. So when Blake decided to cut the corporate staff by 10% and shuttered a call center, the savings was earmarked for putting more employees on the floor. Blake also abolished the pay ceilings that existed under Nardelli to hire 3,000 specialized in-store experts, called master trade specialists, whose job it is to provide professional-quality advice to customers. David Schick, managing director and retail analyst at Stifel Nicolaus, applauds the move: “You can either say the housing market’s the worst it’s been in 30 years, and we’re gonna fire everyone, or the housing market’s the worst in 30 years, so I’m gonna go out and hire every plumber I could never have hired.” Finally, Blake has tackled the company’s shockingly low-tech supply chain, which—even today—has stores receiving 80% of their own merchandise directly. So far, the company has opened three regional distribution centers, and the plan is to reach 20 within the next two years, with 75% of goods coming through the centers.

Blake has warmed hearts at Home Depot partly because he seems so genuine, even awkward at times. During his store walk, he hesitates before walking over to greet the cashiers; it’s not that he doesn’t want to talk to them, but more that he isn’t quite sure what to say. “I’m a New Englander by upbringing,” he says. “You don’t touch people, you’re not emotional, you’re kind of just not all about connecting with people.” He is also far from a good ol’ boy. I wonder why he’s not hanging out with Tony Stewart, the NASCAR driver of the Home Depot racecar who is visiting the Atlanta headquarters. “Is that not your sport?” I ask. Blake thinks I’ve said the word “forte” instead. “Congratulations for pronouncing that the right way!” he says, sounding like the Harvard-educated guy he is, before realizing he’s misheard me. “No, no, it’s not my sport,” he says.

For all the goodwill, however, Blake’s efforts have yet to pay off in terms of, well, traditional metrics. The stock (HD) has fallen 26% since he took over, though it’s up 12% this year; earnings fell 24% in 2008’s second fiscal quarter, following a first-quarter charge of $547 million to close 15 stores—the first time that’s happened in Home Depot’s history. I point out that Nardelli was criticized for not moving the stock. “Right—well, the stock has moved.” He laughs ruefully. “I finally have moved the stock.”

And Blake still has a huge task ahead of him. Claes Forrell, director of the American Customer Satisfaction Index, notes that squandering a service advantage is in some ways worse than never having one, because expectations remain higher. “Once you destroy a strong service culture,” says Forrell, “it’s very difficult to get it back.” Indeed, for all the love we got in Riverside, things were different when I went shopping without a Home Depot exec by my side. In one trip to the Manhattan store on 59th Street, I was greeted warmly, then wandered around for more than 25 minutes—purposely looking lost—before someone finally asked me whether I needed help. At one point, I pressed the red service button—only to hear, after waiting five minutes, a tape-recorded voice announcing the obvious: There was no Home Depot associate available to help me. In the meantime, I saw plenty of employees chatting. There were, indeed, aprons on the floor.

If Blake’s timing is right, however, he’ll have service up to par just as the economy improves and more consumers decide to give Home Depot a second chance. There are some positive signs. In early September, Blake told a Goldman Sachs retail conference that “we’re getting awfully close to the bottom,” sparking a rally in the stock. Home Depot is also closing the same-store sales gap with Lowe’s, posting the smallest gap in four years in 2008’s second quarter. And in terms of customer satisfaction, analyst Schick says that his own proprietary survey, called Stifel Nicolaus R.E.A.D., sees a positive shift. “It had been losing, losing, losing on customer satisfaction,” says Schick, who has a buy on the stock. “What we saw in the first quarter of last year was that it stopped its multiyear slide and started to pick up.”

Back in Riverside, Blake, now wearing an orange apron, tries to do his part to move the needle on customer service, stopping to coo at a 7-month-old baby and listening sympathetically to a tale about a bunch of pesky mice that have eaten through the rubber of a garbage can a family is using to store birdseed. Blake steers them to a metal can, then congratulates manager Pleskach about the effort being made in the pro department. “Mike, your pro desk was cranking to close out that enormous tile order,” he says.

Marcus, meanwhile, thinks he’s seeing a difference. “As I go into stores,” he says, “I see old faces who have become rejuvenated. I’ve watched the tempo go from a slow walk to a tango.” But Blake knows better than most that it takes two to tango—customers included.

*Example of late-night ridicule: “Stockholders of Home Depot are upset because after the board of directors fired Home Depot’s CEO, they have decided to give him a $200 million retirement package. Even worse, they gave the Home Depot CEO his $200 million in the form of a gift certificate to Ace Hardware.” —Conan O’Brien on Jan. 4, 2007


Video CEO Frank Blake talks about Home Depot’s strategy at fortune.com/video

FEEDBACK jreingold@fortunemail.com

This story appeared in the September 29th 2008 issue of Fortune magazine.

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