The transformation begins

In the 1980s, when Lowe’s decided to change from a chain of southeastern contractor yards to a nationwide big-box retailer, the company knew it wouldn’t happen overnight. But a steady vision, stable leadership and good relations with Wall Street made the goal a reality. Today, the North Carolina-based company has more than 1,725 warehouse-sized stores in all 50 states plus Canada and Mexico. 

Now it’s time for another change. 


“We have taken [steps] to begin the transformation from a home improvement retailer to a home improvement company,” Robert Niblock, Lowe’s chairman and CEO, told analysts on Feb. 23 at the company’s fourth-quarter earnings conference. These “steps” involve the introduction of services that go well beyond installed sales: Think appliance repair, outdoor power equipment servicing and Internet partnerships. 


Another Lowe’s strategy is to bring the company right into people’s homes whenever possible. Last year it offered free installation of Stainmaster carpeting, and while soft flooring sales were off for other retailers, Lowe’s customers responded enthusiastically, according to the company. Lowe’s also had good results with its project specialist exterior (PSE) project, a 2010 rollout that sent sales reps into people’s homes to measure, estimate and write up orders for roofing, siding doors and windows. The company attributed its improved fourth-quarter comp performance in tickets over $500 to the PSEs.


In January 2010 Lowe’s launched a complete redo of lowes.com, with improved search capabilities and better product information. In mid-2011, Lowe’s plans another lowes.com redesign, this one sounding a lot like social networking. 


Speaking at the company’s annual investors’ meeting last November, Niblock explained it this way: “[It will be] a more personalized lowes.com experience we’re calling My Lowe’s.” 


Larry Stone, Lowe’s president and chief operating officer, elaborated at the company’s February 2011 earnings conference. “Our Internet sales are a small percentage of our business,” he noted. “[But] overall it’s a growing part of our business. Certainly we think the way that customers shop in the future is going to really tie in to how we start thinking out beyond the four walls of our stores.” 


Stone, however, will not be leading the company into the new frontier of mobile apps, Internet partnerships and a service-oriented business model. He is retiring in June after 42 years of serving as Lowe’s No. 2 executive. Also leaving is 37-year veteran Nick Canter, who spent the last two years as executive VP merchandising. (See sidebar on page 18.)


117,000 versus 103,000


Will the “new” Lowe’s look that much different than the old one? Anyone who has followed the company knows that it changes only incrementally. One thing is for certain though: The size of Lowe’s stores is already starting to shrink, and the amount of merchandise will also contract. Lowe’s executives believe this change will be invisible to its customers. As for the vendors, well, a few may sit up and take notice.


Lowe’s goal over the next five years is to improve its inventory turns by 25%. The retailer got a jump-start in 2010 by reducing its overall inventory, a process it plans to continue this year. “We expect to continue that progress in 2011 as we review the depth and breadth of our assortments,” said Niblock at the last analyst conference. Building smaller stores — the new prototype is 103,000 sq. ft., down from 117,000 sq. ft., a 10% to 15% reduction — has taught Lowe’s how to get by on less merchandise. The company even has a 94,000-sq.-ft. store for urban markets, a format it hopes will help progress toward a second company goal: growing sales per square foot to $304 in 2015. 


Better sales training for its sales associates — another strategy mentioned during the fourth-quarter earnings conference — seems to be at odds with Lowe’s recent decision to replace more experienced employees with 50,000 seasonal workers and 8,000 to 10,000 weekend sales associates. But this decision was one of many made in 2010, according to Stone. Speaking at the RBC Capital Markets Consumer & Retail Conference on June 4, Stone said, “If there’s any good to come out of a slowdown like this, I think for companies like ourselves that were growing so rapidly, it does give you time to go back and really do some examination of what you’re doing, take a hard look at everything.” 


Store resets were another area of scrutiny. “At our peak, we were doing about 150 stores a year,” Stone said. “Last year [in 2009] we did 50 stores. So it’s north of a million dollars per store if we go and do what we call a major remerchandising project. I don’t think in ’11 we’re going to ramp it up and go back to 150. But certainly, we’d probably increase it maybe 25 more stores next year.”


Store openings have been slowed down considerably. Lowe’s opened 42 stores in 2010, down from 62 in 2009 and 115 in 2008. The company said it expects to open 25 to 30 new stores during the current fiscal year, which ends Jan. 31, 2012. 


Beyond the store


Yet the company seems to be expanding in other ways, most of them connected, one way or another, to the Internet. In late March, Lowe’s began courting online affiliates, asking them to start referring customers looking for home improvement products to lowes.com for a fee. The brick-and-mortar retailer also released, earlier in the year, a mobile app for people who want to shop from their cell phones. Consumers have access to all the products on lowes.com and can ask product-specific questions and receive answers from Lowe’s employees, manufacturers or other consumers who have registered with Lowe’s site. 


Web-savvy shoppers aren’t the only target. Lowe’s retail trade area covers more than 83% of U.S. households, but by its own calculations, it only has a 20% market share. Opening up new stores is not going to move the needle that far for Lowe’s; it needs more spending from its better customers.


“Using our database of over 80 million homeowners and commercial customers, we’ve identified the profitable customer segments with the largest opportunity to improve share of wallet. We’ve used this understanding to prioritize the opportunity for becoming an experience-focused home improvement company,” Niblock told investors and analysts last November. 


The other part of the equation, Niblock said, is converting the 8 million weekly customers who visit Lowe’s stores without buying anything, and the Internet visitors who never make a purchase, either online or in a store. The goal: acquiring new customers without building new stores. 


In the final wash, Lowe’s wants to do what every Star Trek fan will recognize as the “Vulcan Mind Meld.” It wants customers to think of Lowe’s every time they need something for their home. 


In appliances, for example, Lowe’s conducted a 100-store repair service pilot for a year. The results were improved customer satisfaction, repair part sales, additional extended protection plan sales and reduction of the appliance return rate. The company plans to roll out appliance repair services to other stores and start testing a similar program for outdoor power equipment.


“We’ve reached another point in our life cycle where we must adapt to maintain our growth in the home improvement business,” Stone said after explaining the pilots to analysts. “We will not be satisfied in simply holding our position as a big-box home improvement retailer.”