The rise and fall of Robert Nardelli.

March 1, 2007

“The most-overpaid CEO in America” is the epitaph often applied to Robert Nardelli, the former chief executive of The Home Depot. After six years, he left the home-improvement chain with an ex ]]>

After six years, Home Depot investors were left holding a bag of stock that had lost 8 percent of its value. (During the same time period the stock of Lowe’s, the No. 2 home-improvement chain, was up 188 percent.)

If you just look at Home Depo ]]>

But compare Home Depot to Lowe’s. When Nardelli took over, Home Depot had revenues that were 2.4 times that of Lowe’s. When Nardelli left, Home Depot had revenues that were only 1.9 times that of Lowe’s.

There’s still plenty of room for growth at both chains. Lowe’s estimates the U.S. home-improvement market is $700 billion. If that’s true, Home Depot and Lowe’s combined have less than 18 percent of the market.

Big brands usually outperform their smaller rivals. McDonald’s is growing faster than Burger King. Budweiser has Miller on the ropes. Gillette is outperforming Schick.

Why did Home Depot fail to keep pace with its smaller rival? I believe it’s because the chain violated one of the fundamental laws of marketing. The law of focus.

What was Nardelli’s strategy? It was a concept he called “The three Es.”

• Enhancing the core.

• Extending the business.

• Expanding the market.

Enhancing the core? How can you enhance the core when you are running around extending the business and expanding the market?

In the past two years, The Home Depot spent more than $6 billion to acquire some 25 wholesale suppliers to bulk up Home Depot Supply, its major effort to get into the building-supply business.

The grass is always greener on the other side of the fence. Why is it that a company like The Home Depot keeps looking for other businesses to get into when it still hasn’t dominated its existing business. (Keep in mind that 18 percent market share for both Home Depot and Lowe’s.)

Furthermore, building supply and home supply are two different businesses. “Contractors rely on longstanding relationships with suppliers and trained salespeople,” The Wall Street Journal pointed out. “Many associate the Home Depot brand with do-it-yourselfers and soccer moms pushing shopping carts, and avoid the stores.”

In my experience, Home Depot is typical of many companies that keep looking to increase their business by (1) line extension, (2) diversification or (3) synergy. None of these strategies can compare with the power of a simple focus.

You might think that Home Depot would have learned a lesson from its previous experience with one of the Es, “extending the business.”

In 1991, the company introduced Expo Design Center, a kitchen and bath project-based business. Today there are just 34 Expo Design Centers and it’s my guess they’re not very profitable and a big distraction for Home Depot management.

In 1995, the company introduced The Home Depot CrossRoads, a concept intended to service rural markets with products like tractor tires. The concept died an early death.

In 1999, the company introduced Villager’s Hardware, a mom-and-pop-style store, one-third the size of a typical Home Depot. Why would anyone try to launch a hardware brand (with a weak name) in a declining market dominated by two major chains, TrueValue and Ace? Villager’s Hardware is no longer with us.

Marketing is a difficult discipline because the answer to every marketing question is: “It all depends.” For example, should a brand never change? Or should a brand constantly innovate?

Answer: It all depends.

It all depends on the category. Some categories cry out for brands that never change. Soft drinks and liquor, for example. Jack Daniel’s Old No. 7 brand looks the same and tastes the same today as it did a hundred years ago. Typical ad headline: “Not subject to change. Not now. Not ever.”

On the other hand, look what happened when Coca-Cola tried to innovate with a product called “New Coke.”

In high-tech and retail, the opposite is true. Brands that don’t constantly innovate are in danger of being left behind. Robert Nardelli should have focused all his efforts on his Home Depot brand. Instead of an aggressive campaign to cut costs (not generally a good idea in retail), he should have poured money and effort into keeping the Home Depot ahead of the pack.

“Mr. Nardelli moved to cut back on higher-paid full-time employees with experience as plumbers or handymen,” reported The Wall Street Journal, “and to rely more on part-time workers with less experience answering home-improvement questions from customers.”

Nothing lasts forever. In many categories, brands need constant attention to keep them up-to-date and “with it.”

Take Toys “R” Us, for example. It may be hard to remember, but in its glory days Toys “R” Us was the hottest chain in the retail industry. Forbes magazine called founder Charles Lazarus “without question one of his generation’s most brilliant retailers.”

Headline in a recent issue of The Wall Street Journal: “Toys ‘Were’ Us?” According to the newspaper, “Toys ‘R’ Us is indicating it may get out of the business.”

What happened to Toys “R” Us? The same thing that happened to Home Depot. Management took its eyes off its core business. In addition to toys, the company tried to conquer babies, kids and books. So they opened Babies “R” Us, Kids “R” Us and Books “R” Us. No wonder Toys “R” Us is in trouble.

A retail chain needs constant evolution to stay ahead of competition. The standalone single-screen movie theater is now a multiplex. The standalone convenience store is now attached to a gas station.

There are dozens of things Toys “R” Us could have done to make its stores a magnet for kids. Toy demonstrations, toy playrooms, exclusive toys, preview of coming toy attractions, birthday parties, contests, etc. 

What happened to Dell? The same thing that happened to Home Depot. The first company to sell personal computers direct, Dell built a powerful brand and a powerful company by building PCs from scratch so it could tailor them to the needs of the business community. (Headline of Dell brochure: “New computers custom built to do your business your way.” Not very poetic, but certainly very definitive.)

Then Dell jumped into the consumer market with both consumer electronics and consumer PCs. Remember the Steven character played by Benjamin Curtis on TV: “Dude, you’re gettin’ a Dell?” (After Curtis was arrested with marijuana in his possession, he and the campaign were scratched.)

But the consumer buyer is a different customer than the business buyer. Tailor a computer to the consumer’s needs? How many consumers knew what they needed? Furthermore, the business buyer didn’t particularly care what a computer looked like; they were much more concerned with how it performed.

But most consumers liked to touch and feel a PC before buying. In spite of massive advertising campaigns, consumers represent only 15 percent of Dell’s sales today. (In 2005, Dell was the seventh largest advertised brand in the U.S. in terms of measured media, spending an estimated $776 million.)

In spite of broadening its line, Dell’s share of personal computer sales fell to just 14 percent of the worldwide market from a high three years ago of 18 percent. And CEO Kevin Rollins met the same fate as Robert Nardelli.

What’s happening at your company? The talk in most boardrooms of America is about expansion. How do we increase sales by expanding into new products, new services, new distribution, new price categories?

In most boardrooms, focus is something you do with a camera, not a corporation.