The announcement this month that The Home Depot has made its biggest foray yet into wholesale distribution with plans to buy Hughes Supply has created a stir. Will Home Depot Supply succeed and do to a largely fragmented wholesale market what it and the other big-box giant Lowe’s did for do-it-yourself markets? Should industrial distributors be worried as HD inches closer to their market?

With many of Home Depot Supply’s acquisitions happening in just the past year, distributors have yet to see much of an impact from HD’s moves into waterworks, building materials and plumbing/HVAC distribution. And it’s too early to tell how Home Depot will handle its increasingly diverse offerings.

The only thing that is sure: Home Depot Supply’s growth in all distribution sectors is part of HD’s long-term game plan. The Atlanta-based retailer wants to become the nation’s No. 1 diversified wholesaler, with plans to grow the supply division to between $23 billion and $27 billion in the next five years. "The strategy of Home Depot Supply is to repeat in the professional space the same type of market transformation The Home Depot executed in the do-it-yourself space," says Joe DeAngelo, who leads Home Depot Supply.

Immediate Effects
The move probably won’t have many immediate effects, distributors say. The acquisition is just another step on the road toward increasing consolidation, says Marshall Jones, president of Marco Supply Company, Roanoke, VA, and past president of STAFDA. Marco Supply distributes power tools, construction fasteners, accessories and safety supplies in the Southeast.

Before HD bought White Cap Construction Supply, for example, White Cap was already on the acquisition trail. Same with Hughes Supply – Hughes has acquired more than 90 companies in the past 20 years, and 40 in the past two to three alone.

Still, "whenever you have two large objects colliding, there’s an effect on the marketplace," says Ernie Coutermarsh, senior vice president of industrial sales for F.W. Webb, a national distributor of plumbing, heating, cooling and piping products.

Coutermarsh says the merger will affect three groups: Hughes employees; manufacturers who must decide what it means for Hughes to be owned by a company with retail at its core; and Hughes’ customers. "Our business is a fairly intimate business," he says. The level of customer service HD Supply is able to maintain will likely determine whether it succeeds in wholesale distribution, he says.

"A lot of people are stepping back and assessing, waiting for the dust to clear," he says. Customer service is the differentiator, not the product, and so it is yet to be seen whether Home Depot Supply can deliver on a local level. "As you get bigger, I would think it would be harder to stay close to the customer," Coutermarsh says. And that is also what it will take for smaller distributors to stay competitive against growing companies like HD Supply, Coutermarsh believes. That means looking at ways to stay viable, such as expanding into other product channels or implementing value-added services, he notes.

Aggressive Growth Strategy
HD Supply’s growth strategy is to continue moving into distribution markets tangential to their current product and service offerings, says DeAngelo, the supply division’s head. "We have established platforms that cover the continuum, from heavy infrastructure through construction to lifetime maintenance," he says.

Hughes Supply will open three new platforms for HD Supply: electric utilities (transmission and distribution equipment), electrical (wire, cable and lighting), and industrial PVF. DeAngelo says Hughes also adds scale to its offerings in waterworks, plumbing, construction materials and MRO for the multifamily property market.

For perspective, Hughes Supply breaks down like this: water and sewer, 27 percent; plumbing/HVAC, 24 percent; utilities, 11 percent; MRO, 10 percent; electrical, 10 percent; industrial PVF, 8 percent; and building materials, 6 percent.

In just the past year, HD Supply has grown 143 percent, according to numbers provided at HD’s annual investor conference. The supply division’s organic growth was 20 percent in 2005.

HD Supply’s sales before it announced it would buy Hughes Supply were about $3.8 billion, or 5 percent of HD’s 2004 revenues. The Home Depot expects the supply division will grow to 18 percent to 19 percent of its revenues by 2010. The acquisition of Hughes Supply is expected to double the supply division’s revenues in 2006. Even if the company meets its goals by 2010, Home Depot Supply will still have a relatively small chunk (5-6 percent) of a market it says is worth $410 billion.

Since HD announced its planned acquisition of Hughes, analysts have noted that profit margins in the professional sector are lower than in retailing. Some have even wondered whether it is a good idea to continue pushing into professional contractor markets at a time when housing starts are beginning to slow. But Home Depot executives say their diversified network of professional businesses should protect them from market downswings, and that their growing number of subsidiaries should give them the buying power and synergies to maintain growth.

Home Depot has growth plans beyond its supply division, as well. It plans to open 400-500 new retail stores by 2010, with 115 of those in 2006. It is also entering the convenience store/fueling station business. HD also plans to expand into more countries, with China top on its list.

Hughes’ Plans
After the acquisition, current Hughes CEO Tom Morgan will leave the company, and HD Supply’s DeAngelo will take over at the helm of the combined Hughes and Home Depot Supply, according to an SEC filing. Hughes will keep its name, which is consistent with other Home Depot acquisitions.

In the SEC filing, Hughes also explains why it sold to Home Depot: "Hughes has been performing very well, growing sales, improving profitability and executing its strategy. In addition, we have an enviable market position and product portfolio, but the landscape of the industry is changing rapidly. With larger and well-capitalized players entering the industry, the Board felt that acting from a position of strength it was an appropriate time to evaluate all strategic alternatives."