No one will argue that the "big box" retailers haven't changed the way consumers shop for and buy home improvement products. Today, however, these big retailers, notably Lowe's and The Home Depot, are also capturing more than $5 billion in installation business a year (see " By The Numbers"). That business relies on the ability to attract remodeling professionals as partners. How well are these partnerships working and how are they changing the way the rest of the remodeling industry prices and sells its services?

On March 23, 2002, history was made, and few noticed. John Gordon, then district manager at The Home Depot in Charlotte, N.C., was voted in as secretary of the National Association of the Remodeling Industry. This puts Gordon (since promoted to Depot's director of pro business), in line to head the 5,800-member remodeling association in as little as two years.

The slim three-vote margin Gordon won with was hardly a ringing endorsement of big retailers by the remodeling industry, but it does signal a trickle change of thought from five years ago. That's when Charlotte, N.C., contractor David Tyson brought Gordon's colleague, W.C. "Dub" Hope, to a NARI national board meeting. "He wasn't very well received," Tyson recalls.

That changed after remodelers got to know Hope, and then Gordon, the straight-shooting, dynamic past president and current chairman of the 170-member NARI of Greater Charlotte. Now, something similar appears to be happening in the relationship between pros and the big box retailers. From interviews with remodelers, big box installers, and retail company executives, it's clear that everyone has gotten to know these public corporations better -- at the store level and at the people level.

Stephen Webster

As remodelers have learned more about how these organizations work with installers (see " Boxed or Full Service?") and what types of customers they pursue, the fear of retailers swallowing remodeling markets has begun to dissipate. The attitude shift is apparent in the ambivalent relationships full-service remodelers have developed with the boxes. Many remodelers like the hours and broad choice of in-stock materials at these stores but believe the installation services are second rate (a claim disputed by installers themselves). They say that the same reasons that make it easy to differentiate themselves from retail installation -- materials delays and damages, overrun schedules, poor sales-to-production hand-offs because of high employee turnover -- also contribute to home improvement's overall bad reputation. Plus, remodelers have had to change their procedures to manage new risks. Many now have exclusions in their contracts, for example, because they don't want to warranty products purchased by homeowners from big box retailers.

Friend or foe?

The shift from thinking of home improvement retailers as adversaries to recognizing them as potential allies, has been gradual. While some remodelers won't ever be convinced that the corporate giants could help their business, for others, it's another story. Gordon's Greater Charlotte market, while not representative of the overall climate, is a good example of the inroads The Home Depot has made. There, Home Depot employees hand out 15,000 NARI directories annually and refer customers to NARI remodelers when their projects require more than the company's typical rip-out-and-replace installs. And Tyson has seen Gordon go beyond what was called for to resolve Depot customer complaints brought to NARI's ethics committee, which Gordon chairs.

Many smaller contractors, particularly those who favor the big retailers not only for materials but also as a source of work, say the boxes have helped their companies. Pros now make up 30% of The Home Depot's business. Many are contractors who first discovered the big retailers as product selection resources. Today, for example, The Home Depot's Expo Design Center has 2,700 dedicated partners using its 27 Trade Services offices. This initiative formalizes a practice remodelers surreptitiously engaged in before the program's inception in 2000: They used Expo as their showroom. Now, Expo Trade Services welcomes contractors and their clients, even opening their doors early if they need to.

All these remodelers are learning how to use the boxes -- and to be used in return, though not roughly, as they once assumed they would be. They're building businesses alongside the "800-pound gorillas." As Tyson told remodeler colleagues years ago, "No matter how big or small you are, Home Depot is not going away. The sooner we learn to work with them, the better off we're going to be."

Shaping the industry

Both Lowe's and The Home Depot, the two major home improvement chains, view product installation as a business they have to be in to develop consumer ties and grow sales. And 55% of lumberyards surveyed by ProSales, a magazine for pro lumber dealers and a sister publication of Remodeling, say they offer or plan to offer installed products to consumers.

Larry Stone, a Lowe's executive vice president, sees a shift in consumer buying habits. "As consumers have less time, less experience, and more disposable income, we continue to see a shift in some categories from 'do it yourself' to 'do it for me,'" he told analysts. "It's no longer an option to be in this business. It is one you must offer to be competitive in home improvement retailing."

More important, increasing numbers of consumers are purchasing turnkey services from big box retailers. The reasons are simple: Financing is easy, design is fast, and selection is broad.

That development is starting to affect contractors who deal in upscale jobs and whose clients, they say, wouldn't think of doing business with the stores.

It's a subtle shift, but it's changing the way remodelers do business. Consider an observation of Charles J. Wheeler, president of the National Kitchen amp; Bath Association: "Home centers are giving customers a rendering of their kitchen before they leave the store. That's setting a standard. As an independent, if you want to compete, you have to approximate that."

Markup shakeup

The debate is less cordial surrounding issues of price and markup. Consumers have always been price conscious, but the big home improvement retailers have now provided direct access to most construction materials -- at very low cost. That, along with the availability of price comparison via the Internet, has made consumers more attuned to what's in remodeling contracts.

"What these builders and remodelers are having to face is, historically, they've been able to hide price," says Steve Chesnut, Expo's business development director. "And being able to bundle price with service." He says Expo sees more contractors abandoning traditional fixed-price contracts and substituting cost-plus agreements that show products at cost and include an added 15% to 20% fee for services.

Gordon has a more radical suggestion. "Still lay down the same price tag [as The Home Depot], but it's your labor, your expertise, your prowess that makes you of value. Instead of whacking away and hacking up your labor, counting on a markup on product, why don't you count what you're better at?"

This is the heart of an issue that will come to a head as a result of the big boxes becoming more entwined in the remodeling market. It's ironic, in a sense, because the boxes are departing from what they're best at -- selling materials -- and taking on the labor portion of the job, getting a markup on something that has long been the remodelers' domain.

Suppliers used to get markup on materials, and nothing on labor, while remodelers got both. Those like Gordon want to swing the pendulum the other way.

The kind of price hiding Chesnut mentions is partly an exchange between suppliers and remodelers. Above a set volume of business, many suppliers offer pros a discount as well as an incentive -- 2% or more -- to pay within 10 days.

Remodelers also expect top-notch service from suppliers -- easy returns, quick treatment on special orders, easy pickup, and free delivery. Many remodelers have no problem doing business with the boxes, but many are used to the kind of service they get from traditional suppliers.

Stephen Webster

A more important consideration with Gordon's proposal is that when labor rates are raised beyond a certain point, they look unreasonable. Remodelers traditionally spread overhead costs equally over all parts of the job -- labor, materials, and subcontractors. As the value of the job goes up, so does the risk to the remodeler -- and the corresponding margin goes up with it. Gordon wants remodelers to leave product failures to The Home Depot, which has clout with manufacturers and can enforce warranties in ways individuals can't. The Home Depot spokesman Don Harrison says while there are no surveys on Depot's warranty enforcement record, vendors understand the store's reputation is on the line along with their own on every product sold, "and we will do whatever is necessary to safeguard that reputation," he says.

Speaking with remodelers and industry experts, it's clear that responsibility for product failures and the need for markup to cover them will be a long debate. Tom Kelly of the $13 million-a-year Neil Kelly Co., Portland, Ore., who has a showroom across the street from a Home Depot, says his product markup covers helping select a product, making sure it gets to the site, installing it, warranting it, and removing it if it breaks. "If I took the markup away from products our company installs, if I didn't adjust the labor markup significantly, I'd go out of business," he says.

Les Cunningham, a NARI past president who deals with hundreds of remodelers through his peer-review company Business Networks, respects Gordon and his NARI contributions but considers his markup proposal bunk. "The remodeler has to stand behind the product," he says. "And the reality is you can't just make it on your labor unless you use retail labor rates, like in the insurance restoration industry, which specifically takes everything away from the materials and puts what it takes to run the business on labor." Cunningham says most remodelers don't know about retail labor rates, and it's difficult to charge them, particularly if remodelers don't have a grasp of all their costs. Even if remodelers charged retail labor rates, Cunningham says, they need to know what's being charged in their markets, so they can be competitive.

"He's probably right, right here and now," says Gordon of Cunningham's take. "Because that's how business is done. ... If the climate continues to change and it becomes more difficult to make a profit on product, then if they would like to keep their same margins, they're going to have to find profit somewhere else.

"If I try to get the industry to make that switch today, they'd laugh me out of the place," Gordon says. "But you know, they laughed us out of the place 20 years ago when we said we could make this big box concept work. So things change."

Building relationships

Lowe's installed sales are driven by kitchen cabinets and countertops, floor covering, and millwork. Since 1998, the company has increased installed sales of cabinets and countertops by 423%, of flooring by 468%, and of millwork by 616%.

The Home Depot's At-Home Services designs kitchens and installs cabinets and countertops. On a store-by-store basis, it refers customers to contractors or subcontractors who can do jobs outside the store's scope of work. (Not all stores make referrals, for liability or reputation-related reasons.) Both stores install a slew of products, including doors, water heaters, roofing, siding, and replacement windows. But none offers full-scale remodeling, such as moving walls or extensive electrical work.

Walt Stoeppelwerth, a Remodeling columnist and long-time industry observer, says the big boxes fill the needs of the middle market, the 91% of population that makes up 48% of the remodeling business. "The Home Depot is No. 1 in the country in flooring -- product and installation -- and Lowe's is No. 2, with Sears third," Stoeppelwerth says. "They're all doing a relatively good job on installation on that. In roofing, siding, and windows, they do a first-class job. But neither Home Depot nor Lowe's will touch a bathroom."

Stoeppelwerth says that the retailers are selling kitchens at a good rate but adds that "Nobody thinks they're doing a good job in installation."

Stoeppelwerth is convinced, however, that the boxes will capture more segments, and he looks at their success in carpeting and roofing, along with The Home Depot's prediction of quadrupled growth, as evidence that they're relentless and will succeed. By 2005, Stoeppelwerth believes The Home Depot will offer to install every product it sells.

It won't be difficult for the big boxes to build on relationships with pros on the materials side to recruit installers. "Installers know retailers are in this business," says Jim Denny, Lowe's installed sales VP. "They actually seek out the retailer."

But executives from Lowe's, The Home Depot, and Expo, while divulging little about installed sales operations or the difficulties they've faced, acknowledge the game's hazards. "There are always inherent problems," Denny says. "Installed sales is probably the most complex business in retail." Lowe's is working with a consultant to improve installed sales production.

Current and former big box installers are more forthcoming, describing problems with materials delivery delays, delays in replacing damaged goods, and employee turnover at the stores, all of which affect project management.

Some of the complexity of installed sales is reflected in a tale of frustration told by an Expo installer in California. A remodeler for 18 years, he loves the Expo concept and has done about 25 Expo kitchen and bath installations, but he isn't as thrilled with the store in practice. He's stalled on four jobs -- one for as long as six months -- because of problems caused by Expo employee turnover, Expo employees' uncertainty with local building codes, and long lead times on replacing cabinets delivered damaged.

"I'm not perfect," he says. "You're going to run into problems in remodel work no matter what. But my attitude is, there's a problem, let's get it fixed." He asked that his name be withheld so as not to jeopardize his relationship or payments, all frozen until the jobs are finished. He says the problems have wreaked havoc with job scheduling and, consequently, his margins. He says once these jobs are done, he'll quietly quit his run with Expo. (For a contrasting perspective, see " An Installer's View".)

"We're managing relationships, not only with customers, but with individual installers," says Michael Baugus, Expo's divisional installation merchant for the West Coast. "We learn every day how tough this business is. And our ultimate goal is to provide great value, competitive price, and world-class service. That's a pretty lofty goal. We don't hit it every day. I don't think anybody does."

It's difficult enough for a single remodeling company to manage these issues for employees and customers. But the boxes seem to believe they can do it for what amounts to hundreds -- eventually thousands -- of individual businesses.

Denny says a typical installer for Lowe's does about $100,000 in annual business with his company, but larger companies also partner with them. For replacement products, they use the same labor pool as siding and window companies. "They do a good job," Denny says. "At times it can even be more profitable than [installers] running their own companies, with less attrition than in the overall remodeling business. We take a lot of cost out of it."

As for claims by those like Stoeppelwerth that big box installers aren't doing certain jobs well, "it depends on what 'well' is," Denny says. "I know what a lot of the satisfaction rates are in the remodeling business, in my installed sales, and in other companies. I've got to tell you, when I'm looking at the overall industry and I'm looking at our numbers, we're doing fine."

"I wouldn't say they're better than the high end of the industry, but they're comparable," he says. "We've made a lot of progress in the last five years," Denny adds. "I know [The Home Depot] is really working on this program as well. They've been through a lot of changes. Will we get better at it? Absolutely."

Executives from both retailers say they're educating personnel and, in The Home Depot's case, providing educational and pay incentives to reduce employee turnover. They're also instituting systems to better manage projects. Chesnut says an information management system set to begin rolling out this year, dubbed NextGen, will catch mis-orders and capture and track information throughout a job. Tied to NextGen are project consolidation centers -- a pilot is under way in Atlanta -- where products are warehoused by job and confirmed in good condition.

Great expectations

So are the big boxes making money at installed sales? There's little in public record to gauge success in this portion of their business, and company officials decline to discuss financials or growth plans. But Denny gives some indication of how Lowe's is doing: "Are there different points we can leverage that [remodelers] can't? Absolutely. Do we have margins as high as the most successful remodelers today? No, we don't. Is this a profitable business for Lowe's? I can tell you, yes, it is."

The points Denny refers to include marketing, product cost, and the time it takes to make a sale. Because the company is selling product, the time to convert an order to an installed order is incremental, as is the cost.

Is it profitable for big box installers?

Depot installer Ernest Girard of Pineville, N.C., and Lowe's installer Aaron Zindars of Decatur, Ill., say they each net $80,000 in wages alone. They don't worry about sales or marketing or materials. All they need is tools and know-how. "That's pretty good money," says Girard, a former independent contractor.

While The Home Depot has made installed sales a priority, the company has made apparent in various announcements and filings that Expo hasn't met expectations. Chesnut says the effort to capture the pro as an Expo Trade Services partner is designed to boost results. "We think this is an avenue and a growth side that's a natural extension of where we can take Expo," he says.

Mike Porter, a retail analyst with Morningstar of Chicago, says The Home Depot has made it clear that Expo has been a disappointment and that sales haven't met expectations due, in part, to the economy. In 2000, Expo announced plans for 200 stores nationwide by 2005, but it appears that projection won't be met, with just 52 stores open to date.

Sears, whose The Great Indoors is seen as an upcoming Depot and Lowe's competitor, has slowed down the pace of store openings, with 20 stores nationwide.

According to Sears spokesman Willy Medina, Sears will open two Great Indoors stores this year and will reassess, based on the economy and success of existing stores, how many more stores are in its future. Meanwhile, its Sears Home Improvement subsidiary has exited some market segments, such as flooring.

By the Numbers
The Home Depot Depot's Expo Lowe's Sears Sears Great Indoors
Total revenues $53.6B n/a $22.1B $41B n/a
Installed sales volume $3B1 n/a $1.2B $1B2 n/a
Total stores 1,4493 52 859 * 20
Contractor-only stores 3 -- 27 -- --
Contractor/trade desks 1,100 27 818 -- --
1 The Home Depot CEO Robert L. Nardelli has made it known he plans to grow the company's installed sales (At-Home Services) to $10 billion by 2005. Analysts have predicted he will succeed. The company's 2001 annual report says At-Home Services has grown at 30% a year.
2 Estimate based on industry sources
3 A new Home Depot store opens every 43 hours
* Sears' Home Improvement subsidiary uses 6,000 installers to put in windows, siding, doors and kitchen and bath products.
n/a: not available

Remodelers' Perspectives

Remodelers -- even those who don't compete directly with the big boxes' services -- all have opinions about how the stores have affected business.

Wheeler says the boxes are offering credit terms -- financing with no interest for six months, for instance -- that are hard to match. This may not be how a client with a high-end remodel funds projects, but for smaller jobs, say $20,000 kitchens, it's enticing.

He says independents, even in buying groups, can't match mass merchandisers' buying clout and, therefore, pricing. He says mass merchandisers have agreements with manufacturers to sell a tight set of products, steering customers that way, while still offering special orders.

Tom Swartz of J.J. Swartz Co., Decatur, Ill., says the boxes have the brand name edge. "There's a lot of people who have a hard time ordering out of catalogs," he says. "And what they have done is they've brought in these huge showrooms for easy access, seven days a week. And that's where the big change in the industry is, where they've taken it. They've taken it to a completely higher level."

At the same time, Swartz says The Home Depot didn't quite meet that high standard on a $21,000 kitchen remodel contract for his vacation home. It took more than a year to complete and he was credited $11,000 when it was finished, which covered mostly expenses for trips he had to take to Florida to resolve snafus. But he adds that it's not anything he or another remodeler hasn't been through. "Any remodeling contractor either learns from it or they go out of business."

Lori Bentley of Bentley Design amp; Remodeling, Hanford, Calif., is an investor (she owns 600 shares of The Home Depot stock and 200 shares of Lowe's), a customer (she buys drywall and electrical supplies from a store 15 miles away), and a soon-to-be competitor (The Home Depot is building a store in Hanford). She's also trying to get local store managers involved in her Central San Joaquin NARI chapter.

Bentley is not a Depot installer, but she does field calls to install products that homeowners buy directly from the store. When that happens, she has disclaimer to protect her company from delays or problems. It covers any materials she doesn't select and protects her markup on handling and warranting those materials.

Kelly acknowledges the impact home improvement retailers have had on remodeling, both in do-it-yourself and "buy-it-yourself," saying they've made remodeling "sort of an all-American pastime." He has lost designers to The Home Depot, and one of his best designers came from the store. He buys about 5% of his materials there. Although the reputation of Depot installers in his market is mixed, he says his image of the "fairly well-managed company" is positive.

Tyson appreciates that he can now purchase HVAC materials from The Home Depot. Before the store's arrival in his market, if he wanted duct materials, there weren't many suppliers that would sell them to anyone but HVAC subcontractors.

But the arrival of a big box still can bring trepidation to a market. Marc Ridenour of Natural Breeze Remodeling, Lawrence, Kan., says The Home Depot is set to open there soon. He sends clients to Kansas City's Expo, although he hasn't been able to convince the store that he should be their Lawrence installer. He suspects with the new Home Depot, he'll lose price-driven clients and some kitchen and bath business, "but I'll always appeal to the people who don't want to deal with anything but one person." Ridenour is advertising more, to gain share in the top-of-the-mind awareness that The Home Depot has in his market. His ambivalence with the store encapsulates much of the mixed feelings remodelers expressed with boxes overall: while he swears he won't set foot in the store for years, he worries that if Remodeling printed his true thoughts on Home Depot, it would jeopardize any chance he has of getting an account there.

Bringing it all home

Bryan Bennight of New Moon Builders and president of NARI of Greater Charlotte (N.C.) says Gordon goes out of his way on his weekly radio show to refer people to NARI remodelers. "He will always say, if you don't have a NARI directory, get one," Bennight explains. When Gordon was a district manager, he directed his six stores to distribute the directories, amounting to more than half the 28,000 the chapter prints each year.

"Nowhere else in the country does that happen yet," Bennight notes, but he recognizes that with Gordon's new position at Depot and influence, "knowing John, that will happen."

If The Home Depot can duplicate nationally what it has done through Gordon in Charlotte, it will not only help sell more materials but will build relationships with companies intent on improving themselves and committed to good business practices and a code of ethics.

Gordon, interviewed when he was district manager, says his NARI efforts, as well as steps to help stores nationwide become involved in their chapters, has company brass support. But he has an eye on reality when it comes to the future of some of these relationships.

"There are always going to be people who we will take business from or who won't find a way to be a partner with us," he says. "No. 1, we will continue to grow, and No. 2, the remodeling business is not going away because of Home Depot. There will always be remodelers out there. And some of them will be with us, and some of them won't be. We just hope to supply the ones who don't happen to install for us."

From these interviews, it's clear the industry's embrace of the big boxes will be slow and restrained. The impact of these companies on the remodeling market, however, is certain. As the boxes raise their standards -- and work with the industry to help raise its own -- and as contractors become convinced of these retailers' legitimacy, perhaps the embrace will grow into a hug. Perhaps.

An Installer's View

One contractor happy installing for The Home Depot is Ernest Girard of Pineville, N.C. He says he satisfies 95% of his customers on the 150 cabinet change-outs he does annually for two stores. He's been a Depot installer for seven years.

The material and labor on typical jobs averages $20,000. His installation charge, set by Depot, is marked up about 20% by the company, and he grosses about $120,000 a year, just on labor, because he has no materials charges and little overhead other than tools, vehicle, and home office expenses. He estimates he nets $80,000 annually.

Girard is a former GC who moved from Connecticut for warmer weather, worked in a Depot store, then went into installation. He's paid a set rate per linear foot of cabinet or trim installed.

He likes the work because he doesn't have to sell it. He schedules jobs on a three-week lead. Materials are delivered right most of the time, with about 10% of deliveries problematic, he says. He has never had jobs refunded to customers because of problems, though he's heard about that happening.

He believes The Home Depot has established credibility in his marketplace, particularly in the area of customer care and response, that far exceeds anything typical of a small remodeler with an answering machine.

He admits typical big box installers in his territory don't share his credentials. But if they don't do a good job for The Home Depot, they don't last. On their own, they could really damage the industry's reputation, he says.

Girard believes competitors will always harbor animosity. He mentions local remodelers who complain that big box products, which are often less expensive than apparently identical products from their supplier, seem inferior. Girard says that's just bad-natured competition.

"All The Home Depot does is negotiate the price of the product," he says. "And they're going to go in and buy a million faucets. A supplier will buy 200."

He sees a long future for himself with the company. "When I first started doing work for Home Depot, I did kitchens, doors, countertops. I did windows. Now all I can do, all I have time for, is cabinets."

Boxed or Full Service?
Contractor's Perspective: Sell Direct or Sell Through a Big Box?
Selling Direct Selling Through The Box Difference
Price $6,881 $5,386 $1,495 (22%)
Labor & Materials $4,568 $4,568 $0
Sales Commission $688 (10%) $269 (5%) $419
Marketing $825 (12%) $107 (2%) $718
Admin./Finance $250 (4%) $100 (2%) $150
Overhead Subtotal $1,763 $476 $1,287
Net Profit $550 (8%) $342 (5%) $208 (3%)
This example shows costs for a company selling a job on its own compared with selling the same job through a big box store.
While working with a big box removes profit, it also removes cost. The box marks up the $5,386 price 15%, for a total of $6,330. While the cost appears less than what the remodeler sells the job for direct, the box still has (undisclosed) sales, marketing, administration, and financing costs.