Home Depot's Web Improvement

The latest acquisition by the world's No. 1 big-box home-improvement retailer shows it's serious about the Internet

On Apr. 25, Home Depot (HD ), announced that it will acquire Home Decorators Collection, an online and catalog retailer of furniture, rugs, and lighting. The move is part of the big-box chain's increasing emphasis on the Web. Home Depot (HD ) wouldn't provide figures, but it says Internet sales doubled in 2005 after it expanded the assortment of products sold online that aren't available in all of its stores to include electronics and furniture.

Need further proof that Home Depot is cozying up to the Web? Last year, it launched two specialty catalogs on outdoor living -- 10 Crescent Lane and Paces Trading -- targeted at affluent women. Both have their own Web sites. And starting this summer, Home Deport will offer streaming video of online commercials from vendors such as LG Electronics as well as customer reviews of products.

HOME PAGES. CEO Bob Nardelli has said that the goal is to achieve $1 billion in Internet sales by 2010. "Based on the size and momentum I see today, we will not only be able to achieve but exceed the ambitious goal set by our CEO," says Harvey Seegers, president of Home Depot Direct, the division that handles online and catalog sales.

Seegers believes that the online market for home-goods shoppers is big -- and likely to get bigger. Some 60% of U.S. households have broadband Internet capability. Plus, home décor Internet and catalog sales in the U.S. amount to some $18 billion annually, with 20% annual growth expected. And Home Depot, which didn't focus aggressively on Internet sales until last year, is eager to get its share. "Only within the last probably 12 to 18 months have we really embraced that technology in a meaningful way," Nardelli said in Home Depot's latest earnings call in February.

Indeed, online sales currently make up just 3% of the overall home-improvement market, in large part because many of the products are bulky and difficult to perceive online, according to Vikram Sehgal, senior analyst at Jupiter Research. "People don't shy away from paying for shipping of large appliances like washers and dryers, because you pay for delivery in the offline universe as well," he says. "[But] people like to figure out how a furniture looks or how a certain color would look in person." He also points out that home-improvement buyers usually need the hand-holding, advice, and knowledge offered by sales associates at retailers such as Home Depot and Lowe's.

FULL HOUSE? However, Sehgal believes Home Depot and Lowe's could boost business if they started focusing on the in-store pick-up model used by consumer electronics companies such as Circuit City (CC ) and Best Buy (BBY ). He notes that sales of housewares and appliances on the Internet grew 38% last year. "The average ticket value of these items is quite high, and the market trends are distinctly upward," says Seegers.

Not everyone shares Home Depot's optimism or enthusiasm. Research firm Mintel Intl. says that rising interest rates and the concurrent slowdown in home sales will affect overall home-improvement sales. While Home Depot and chief rival Lowe's (LOW ) plan to continue building more units, the market is nearing saturation, the report says.

Nor were investors swayed. Home Depot closed the day down 12 cents, to $39.96. "The acquisition is immaterial to [Home Depot's] earnings and cash flow," David Strasser, an analyst at Bank of America, wrote in a research report. He estimates that online sales make up less than 1% of Home Depot sales, which totaled $81 billion last year (see BW, 5/1/06, "Home Depot: One Foot In China").

BUILDING BLOCK. However, Strasser noted that Home Decorators adds scale to Home Depot's direct-to-consumer business. Home Depot's latest acquisition will not only add 65,000 new products to its Web site, but it will also give the retailer new technology that will help it run its own business. "Home Decorators has been so successful because its merchandising selection is based on very solid data analysis," says Seegers.

Clearly, Home Depot believes it's important to run on all cylinders now -- and its purchase of Home Decorators Collection isn't just window-dressing.

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Gogoi is a reporter for BusinessWeek Online in New York

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