Home Depot Deal With Hughes Supply Rocks Electrical Wholesaling Industry

Jan. 26, 2006
Industry executives are split on the potential impact of Home Depot’s Inc.’s anticipated purchase of Hughes Supply Inc. Some executives contacted for an upcoming article in the February issue of Electrical Wholesaling magazine think it’s a watershed moment for the electrical industry, while others believe the differences in running the retail and wholesale business may be a big challenge for Home Depot.

Industry executives are split on the potential impact of Home Depot’s Inc.’s anticipated purchase of Hughes Supply Inc. Some executives think it’s a watershed moment for the electrical industry, while others believe the differences in running the retail and wholesale business may be a big challenge for Home Depot.

The biggest question on the minds of many distributors, manufacturers and reps seems to be whether or not Home Depot will acquire more electrical distributors. Neither Home Depot nor Hughes Supply were available to answer this question at press time. At least one industry observer said if the Hughes acquisition goes well, Home Depot will buy more electrical distributors. Neil Gillespie, principal, Channel Marketing Group, Pittsburgh, believes Home Depot will buy more distributors if it can improve the profitability of Hughes Supply, and that because of the 12x EBITDA purchase price of the acquisition, many distributors would be interested.

"If you can get even close to that multiple, there would be a lot of people lining up to sell," he said. "I have no doubt they can raise the profitability of Hughes over the next three years. If they have good success with that, they are definitely going to be in the market for more. They’re going to be looking for bigger regional platforms with a minimum of $80 million in sales to an excess of $200 million in sales. There’s a real platform to grow out and make more acquisitions on top of."

Gillespie believes one of the big reasons Home Depot wanted Hughes is because of its Hughes One "megacenter" concept, where it sells many of its product lines from different distribution trades from the same branch location. The company’s megacenters in Miami and Atlanta (as well as a third one slated to open in Orlando this year) showcase products from multiple Hughes businesses, including MRO, water and sewer, electrical utilities, plumbing/HVAC, electrical and tools and fasteners.

"I think Hughes’ megacenter concept is something that really attracted Home Depot," said Gillespie. "You really increase logistical efficiencies."

Ed Miller of Strategy Development Services, Avon, Conn., former vice president of sales and marketing for Wiremold, West Hartford, Conn., was not surprised that Home Depot bought Hughes. "They always had ambitions to cater and expand more toward serving the pro," he said. "But if they want to continue in this game, they need to be and act like a wholesaler."

Home Depot first attempted to serve professional contractors through the electrical aisles of its retail stores. During his tenure at Wiremold, Miller believed this strategy wasn’t really reaching the type of professional contractor that electrical manufacturers wanted most. "It was just the ‘truck slammer’ and the small single-person contractor," he said. Miller had conversations with Home Depot at that time where he explained the differences in doing business with electrical contractors and told them that if they wanted to operate in that business, the margin equation would to be different, as would the method they used to serve and take jobs."

Miller believes integrating Hughes Supply into Home Depot will be a big challenge. "The markets that they serve really are different," he said. "It’s not as converging as communications and electrical have been over the last few years. With the consumer side, I don’t see that as converging even though they have ambition to overlap into the small commercial area."

Industry executives believe Home Depot will attempt to improve Hughes’ profits by negotiating for better prices through enhanced volume purchasing agreements and by improving shipping, logistical and warehousing efficiencies. Miller is taking a "wait-and-see attitude" on exactly how Home Depot will try to leverage prices with electrical manufacturers. He believes electrical manufacturers will have to be careful about giving Home Depot more rebates or other concessions than they would to other larger national or regional distributors that provide similar levels of sales for them. While at Wiremold, Miller had a good experience working with the company. "My relationship and Wiremold’s relationship with Home Depot at the time was not adversarial at all. It was very supportive. We did things together and worked on making it a win-win."

Hank Bergson, president, National Association of Manufacturers Representatives Association (NEMRA), Tarrytown, N.Y., believes the acquisition is a defining moment for the electrical industry. He believes the deal could have as much impact on the wholesale-distribution industry as Wal-Mart’s move into the retail food market several years ago.

"I think we’re sitting on the edge of the type of thing that happened to the retail food industry when Wal-Mart became the largest retail supermarket overnight," he said. "As that became clear, it sent shock waves through the food distribution industry and it impacted a lot of people, both positively and negatively. In the food industry, it gave rise to national brokers that covered all 50 states and handled everything. It gave rise to some very strong regional brokers that handled regional preferences. It created some problems so the broker population was significantly reduced, as was the supermarket population."

Hughes Supply will be part of The Home Depot Supply, a division that has built a position in a range of markets serving business-to-business customers, such as homebuilders, professional contractors, municipalities and maintenance professionals. The purchase of Hughes Supply more than doubles the size of The Home Depot Supply, with projected 2006 combined sales approaching $12 billion, the two companies said. Together, the two companies will serve a $410 billion market, supplying products for infrastructure, construction, maintenance, repair and remodel applications. By 2010, the unit is expected to account for 18 percent to 19 percent of Home Depot’s overall sales.

Home Depot said recently it would scale back new-store openings over the next five years as it hastens its push into home services and professional markets to drive sales and earnings.

Home Depot said it would open 400 to 500 stores through 2010, about half the number opened in the previous five years. The company did not say where it would open the new stores. Home Depot has more than 2,000 stores in the United States, Puerto Rico, Canada and Mexico.