Category Killers: The Retail Revolution and Its Impact on Consumer Culture

By Robert Spector

Look at all ... this ... stuff.

Outside the Home Depot store, a green and fuschia sea of little boxes of geraniums, impatiens, and pansies are surrounded by garden tools manure forks, grass edgers, cultivators, and thatching rakes. A large sign proclaims free instructions on deck installations, with the choice of ten different styles and shapes.

Inside the store, shoppers are surrounded by massive floor to ceiling shelves crammed with windows, hammers, drills, table saws the list is virtually endless. Amid the buzzing of power saws, the beep beep beep of forklifts, and the jingle jangle of nails, nuts, and bolts, there is a swarm of do it yourselfers of all shapes, sizes, ethnicities, desires, and aptitudes gathering their tools and materials like an army of insects constructing a shelter. Unlike the insects, if these workers have a question, they can get the answer from a man or woman clad in a bright orange apron.

Meanwhile, down the road at Toys 'R' Us, a four year old Korean American girl squeezes her mother's hand, as she edges closer to a box holding a Bratz Girl doll. With her index finger, she lightly touches the clear plastic that separates her from the doll. A few aisles down, an eight year old cranes his neck to gaze up at three levels of bicycles from Huffy, Mongoose, and Schwinn dangling from metal display beams. In another part of the store, a ten year old boy is begging his father for a Home Depot Tool Box and Twelve Piece Tool Set. We know where he will one day be spending his Saturday afternoons.

And so it goes: dozens of wide screen flat panel plasma television sets at Circuit City; rows of printers, copiers, and fax machines at OfficeMax; a parade of puppy food and toys at PETsMART; hundreds of thousands of books at Barnes & Noble. Today's shoppers are-depending on your point of view-either blessed or cursed by an overabundance of stuff, amassed under one roof, in a retail concept that has had a profound impact on the consumer culture: category killers. Over the past two decades, category killers have dramatically altered our buying experience, becoming the most disruptive concept in retailing--and in everything that retailing touches.

Also known as "big box" stores because of their mammoth footprint- twenty thousand square feet to more than one hundred thousand square feet-these retailers specialize in a distinct classification of merchandise such as toys, office supplies, home improvement-while offering everyday low prices and wide and deep inventories. They earned the sobriquet "category killer" because their goal is to dominate the category and kill the competition-whether it be mom and-pop stores, smaller regional chains, or general merchandise stores that cannot compete on price and/or selection.

Category killers and Wal Mart have helped expand and upscale the "mass market" by aggressively driving down the prices of goods and services, and making affordable what were once upscale products such as laptop computers, big screen TVs, or designer apparel. 'today, virtually every one of us-regardless of income-is part of the ever-expanding mass market, where the differences among stores-Dollar Stores to Kmart to Macy's-are measured in slight gradations.

Loyalty to a particular store has become a casualty of our changing consumer culture. At one time, shoppers used to identify with a store, just as they identified with the make of the car they drove. Today, many of us simply want more and better goods, and we will shop the retailer that provides those goods at a price that we consider "affordable."

As they fight to insure their own survival in a world of retail Darwinism, category killers have gone through their own evolution.

In the beginning, because they required literally acres of parking, pioneer category killers such as Toys 'R' Us and Home Depot located in undeveloped or underdeveloped areas with plenty of open space. For many years, the interiors of these stores were devoid of inviting design and amenities; they were no frills zones in cookie cutter, single floor buildings. In exchange for Spartan surroundings, these retailers offered low prices and convenience for busy time starved shoppers. The strategy was simple: Pile it high and sell it cheap.

Toys 'R' Us created the template for category killers. The company presented to consumers big box stores with an emphasis on self service, big selection, low prices, and lots of parking. It conditioned baby boomers to a different kind of retail experience. The kid whose parents were buying toys at Toys 'R' Us in the 1950s and 1960s eventually grew up to buy books at Barnes & Noble, power saws at Home Depot, printers at Staples, and pet food at Petco, and the shopping experience felt perfectly natural. Although the product categories were different, the approach was very much the same.

In recent years, spurred by competition both within and without the category, the best category killers have become more consumer centric, adjusting their look and feel to better serve and sell to the customer. Even the most barebones big box store has had to upgrade signage, product presentation, and even (gasp!) customer service. Most have added related product lines, such as Home Depot's move into the home appliance business.

PETsMART, which was founded for the purpose of selling food and other pet related products, has evolved, in the company's view, into a tool to assist owners in providing total lifetime care for their pets. Key to this strategy has been rethinking and redesigning the physical store itself.

Originally, the company merchandised its goods in various sections such as food or hard goods. Today, PETsMART stores are built around pet categories (i.e., a cat section, a dog section, etc.) and feature a more open layout that is consumer friendly and reflects how today's pet owner thinks, shops, and lives.

The nature of the specialization has changed, from products with similar characteristics of distribution or usage to products grouped around a lifestyle characteristic. For example, bookstores compete against Amazon.com and Wal Mart by transforming themselves into browsing rooms and coffee shops with wireless Internet sites. They offer an experience that appeals to a highly mobile, higher income consumer.

A discussion of the transformation of consumer culture would be incomplete without considering the impact of WalMart Stores, Inc., the giant general merchandise discounter (and its rival Target), and Costco, the member warehouse chain (and its antagonist Wal Mart's Sam's Club). Each take huge bites out of category killers-Wal Mart sells more toys than Toys 'R' Us; Costco moves more books-particularly deeply discounted bestsellers-than Barnes & Noble. As the biggest corporation in the world, with $256.3 billion in sales in 2003 (close to 2.5 percent of America's gross national product), Wal Mart has an impact either directly or indirectly on virtually every other type of retail and retail vendor business on the planet.

Home Improvement

Although The Home Depot was not the first home improvement category killer (that honor goes to 84 Lumber, a chain started in 1956 by Joseph A. Hardy in Eighty Four, a town near Pittsburgh, Pennsylvania), The Home Depot is now indisputably the dominant player.

In 1978, Bernard Marcus and Arthur Blank were fired from their executive positions at Handy Dan Home Improvement Center. Marcus, the son of a cabinetmaker who had emigrated from Russia to Newark, New Jersey, was a pharmacist by education and training. While working for the Handy Dan Home Improvement division of Daylin, Inc., he met Blank, a New York accountant working for Daylin's drugstore division.

Marcus was debating whether to sue Handy Dan over his firing when he ran into an old acquaintance, Sol Price, the founder of the Price Club member warehouse retailer. Price, who was involved in a lawsuit of his own, talked Marcus out of suing because, he advised, a lawsuit would consume time and whatever money Marcus had left. Soon after, Marcus and Blank came across a 120,000 square foot hardware store in Long Beach, California, called Homeco, which offered wide and deep inventory at discounted prices. Although the store was essentially bankrupt, Marcus and Blank saw great potential in the concept. They convinced Homeco's owner Pat Farah to join them in Atlanta, where they were about to establish what would become The Home Depot.

Their concept was to appeal to the do it yourself consumer with vast warehouse like stores with concrete floors, where the lumber and hardware were stacked high on palettes, at low prices, and sold by knowledgeable, customer service oriented employees. They wanted to create an authentic experience. As they described the operation in their book, Built from Scratch:

The idea for our stores was that they looked shopped. That is why we didn't originally put in a separate, rear entrance for the lumber buyers. It is why we had contractors and professionals go to the front registers, alongside the do it-yourself customers. That creates action. We wanted the big stuff going out the front and loaded in the parking lots so that everyone saw it.

On top or that, the do it yourselfers saw that the contractor buying two units of sheetrock paid the same price as they did. There was no secret back door or discount for contractors. We were priced right for everyone-not just a select group.

Buying directly from manufacturers enabled Marcus and Blank to offer dramatically lower prices that were supported by large sales volumes. The idea was for their competitors to "choke on our sawdust," as they wrote in Built From Scratch. Changing the whole concept of home improvement retailing, they grew the company quickly and aggressively, adding stores in Georgia, Florida, Louisiana, Texas, and Alabama within the first five years.

In the early 1990s Charles Lazarus advised Marcus and Blank on how to reach their ambitious goals for expansion.

Lazarus said that when he was expanding Toys 'R' Us, the most difficult thing he had to do was to "look at the people who have helped me build this company, get to a half a billion, then a billion and so on, and recognize that at some point along the way, they ran out of steam." Lazarus believed that recognizing that those same people "did not have the capacity to take me from a billion to $5 billion, from $5 billion to $10 billion" was his greatest challenge and would be their greatest challenge as well. Marcus and Blank concluded that an expansion minded company can't "outgrow the ability of people to take you to the next level."

During the 1990s, profits zoomed at an average annual rate of 35 percent. Home Depot became the world's largest home improvement retailer, and the youngest retailer ever to break the $50 billion mark in annual sales. For seven years in a row, it was voted by Fortune magazine as "America's Most Admired Specialty Retailer." In 2003, Home Depot had sales of more than $64 billion-of that amount, 35 percent had come from professional contractors.

The prototype of a Home Depot store is approximately 100,000 to 130,000 square feet with forty thousand to fifty thousand stock keeping units of merchandise in eleven departments (lumber, building materials, flooring, paint, hardware, plumbing, electrical, lighting, garden, kitchen and bath, millwork, and decor). The newer stores usually include a 15,000 to 25,000 square foot garden center. (This feature is not in its prototype urban stores, because few city dwellers have gardens of a significant size.) The stores offer a wide selection of services, such as in store clinics to help customers do projects themselves, complimentary design and decorating consultation, truck and tool rental, home delivery, and free potting.

Lowe's, the other major player in the home improvement sector, has about a thousand stores (all in the United States), more than half the number of Home Depot, and annual sales in 2003 of $30.8 billion. Three quarters of Lowe's locations now are within ten miles of a Home Depot.

Lowe's started out in 1946 as North Wilkesboro Hardware, in North Carolina, and was renamed Lowe's in the 1940s when H. C. Buchan bought out his partner and brother in law, James Lowe, and created a chain of small and medium sized hardware and building materials stores that sold to the trade as well as directly to consumers.

After a successful run of several decades, Lowe's was virtually on life support when it was resurrected in 1996 by Robert L. Tillman, a Lowe's employee since 1963. Tillman took an anti Home Depot strategy. Rather than offering shoppers a warmed over version of Home Depot's rough hewn, steeltoed work boot, dusty floor aesthetic, he redesigned and brightened up the stores to make them more appealing to women, who initiate the majority of home improvement projects. (Home Depot would later take the same approach.)

New stores were built larger (115,000 to 150,000 square feet) with wider aisles so that two shopping carts could easily pass each other. These stores, which were cleaner and neater, featured departments that were believed to attract women: lighting, accessories, paint, and flooring. Lowe's also added more appliances and high end designer decorator lines.

Both Home Depot and Lowe's run free how to clinics and workshops on home improvement projects from installing door locks to building a retaining wall which create a sense of community among their customers and help to sell products. Home Depot earmarks the first Saturday of every month for a kids' workshop where young people, accompanied by a grownup, learn how to build small projects, such as a memory box for precious possessions. Home Depot emphasizes this approach with its advertising tag line: "You can do it, we can help."

As retail consultant Paco Underhill has written, do it yourself stores "stripped hardware of its arcane side, rendering it unintimidating, even friendly, to the greenest tyro." Instead of merely hanging lighting fixtures on a rack or shelf, Home Depot and Lowe's display how the lights will appear and complement a room ensemble. Context has become important in interior decorating and display. This was accomplished by rethinking the stores' purpose as well as the merchandise they carried. Underhill further explains:

Stores that sold nuts and bolts gave way to stores that sold lifestyles. Under that vast umbrella, nuts and bolts and lumber and sheetrock could be sold alongside lighting fixtures and kitchen cabinets and Jacuzzis and frilly (and nonfrilly) curtains and everything else. These stores sold not hardware but homes. The retail hardware industry has gone from an "Erector set mentality to a 'let's play house" approach, from boys only to boys and girls playing together.

The combined sales of Home Depot and Lowe's now account for about 15 percent of the $500 billion home-improvement market.

Smaller Store Formats

In their constant quest to find places to add stores, most category killers are taking a two pronged approach. They are either building larger stores in areas with an abundance of available undeveloped property, or building smaller stores in small town downtowns or in densely populated urban communities.

Shoppers are spending less time at the mall-an average of 2.9 hours a month in 2003, compared with four hours in 2000, according to consultant Stillerman Jones & Co.

Because many shoppers are reacting negatively to dealing with big superstores full of jammed aisles and backed up checkout lines, they are turning to smaller specialty stores, where they can get in, buy what they're looking for, and get out. In response, category killers are opening small, easier to shop, neighborhood stores to attract these time pressed consumers. Although smaller stores translate to lower costs, the challenge for category killers is to find ways to extract the highest possible number of sales in a limited space.

Home Depot, which has about two thirds of its stores concentrated in the nation's fifty largest markets, has been opening stores in rural and secondary markets such as Iron Mountain, Michigan, (population 8,644), and Barboursville, West Virginia (population 2,742). Those moves are based on company research of areas that are underserved by neighboring Home Depot stores or competitors, but that have a population with above average household income and a high percentage of home ownership. In the mid 1990s, most Home Depot stores occupied 160,000 square feet; today, they are each about I 15,000 square feet.

Home Depot is also opening smaller urban stores, dubbed "Depot Life," in inner cities. (In fact, most of Home Depot's newer stores are being built in urban markets.) The first of these units-a two story, glass fronted emporium with escalators-opened in 2001 in the upscale Lincoln Park neighborhood of Chicago. In 2004, Home Depot opened two pedestrian friendly stores in Manhattan, including one on Third Avenue at 59th Street, near Bloomingdale's, and another on 23rd Street between Fifth Avenue and the Avenue of the Americas.

In its quest for additional viable retail sites, Home Depot, in 2004, acquired nineteen Kmart stores (many of them in urban areas) from Kmart Holding Corp., with the intention of converting them into Home Depot stores. The company has also been experimenting with new formats, such as its Landscape Supply stores and its upscale Expo home design stores, which offer do it yourselfers sharper prices on items such as granite countertops and window treatments.

Lowe's, which has just under a thousand stores-compared with Home Depot's 1,700-is expanding aggressively into metropolitan areas long dominated by Home Depot. Some industry observers maintain that if Home Depot and Lowe's keep up this same rate of growth, they soon will saturate the category's capacity for big box stores. Whether that happens in 2004 or 2010, the two chains will eventually be forced to cannibalize their existing operations-including closing old stores and replacing them with new state of the art venues, which will be influenced by changing market conditions, consumer tastes, lifestyle changes, and other factors. Wal Mart has been doing that for years by replacing its traditional stores with larger SuperCenters, which combine a massive supermarket component with the usual general merchandise.

In 2000, Home Depot founders Marcus and Blank were smart enough to recognize that it was time to bring in someone who knew how to manage a $60 billion plus company. The Home Depot board surprised a lot of observers with the selection of Robert L. Nardelli as chief executive making him the first executive without retailing experience ever to become CEO of a major nonfood retailer. A twenty seven year veteran of General Electric, and a disciple of GE Chairman Jack Welch, Nardelli had last worked at GE Power Systems, running lighting and power generation plants. He was thoroughly schooled in GE's legendarily high structured management culture, whose hallmarks are efficiency and discipline.

Efficiency and discipline were not the hallmarks of Home Depot, which reveled in a free wheeling, entrepreneurial culture that attracted independent thinking managers and employees who "bleed orange" (the company's signature color). After all, this was a company led by the inspirational Bernie Marcus, who once answered complaints from store managers about too much paperwork from the main office by telling them to "Get a rubber stamp that says 'Bullshit' on it, stamp it, and send it back to whatever bureaucrat sent it to you." In their 1999 book, Marcus and Blank wrote, "We hire people who couldn't work for anybody else, who might otherwise be well suited to being self employed or running their own shop, and many of them become store managers."

That kind of attitude worked for Marcus and Blank, but not for Nardelli, who put an end to Home Depot's decentralized operation, which encouraged a culture in which many of the decisions were made at the store and regional levels.

Nardelli folded ten regional buying offices into one centralized purchasing office to make the retailer more efficient, to increase its negotiating leverage with its vendors, and to get a better handle on inventory. With buying now centralized, Nardelli found a lot of redundancy of items in inventory, such as too many round point shovels.

While regional managers were given greater accountability, virtually all decisions on purchasing came out of the headquarters in Atlanta. Take charge store managers were no longer empowered to order whatever they needed for their store, whenever they needed it. This go-get 'em culture was similar to that of Nordstrom in its go go growth years of the 1980s and 1990s, when store managers and even some people on the sales floor could order goods directly from the vendor. But as the Seattle based retailer added more stores and hired more people to work in those stores, it couldn't get a tight control on its inventory. The trick was to control inventory without totally changing the culture. Home Depot employees had to deal with a similar shift.

To neutralize Home Depot's "cowboy" culture, Nardelli brought in from the outside a new corps of executives and managers-some from the military-who carried out the more disciplined plan of attack. Not surprisingly, Nardelli, who had the backing of the board, ruffled a lot of feathers among the old timers, who felt he didn't understand their entrepreneurial culture. But with Lowe's applying significant competitive pressure, Home Depot bad to make some changes including painful ones. Wall Street, initially was not pleased. Home Depot was the worst performing stock in the Dow during 2002, losing 53 percent of its value, experiencing its first ever overall sales decline. But by the end of 2003 and early 2004, Home Depot--greatly benefiting from the roaring real estate market that propelled the sales of home improvement products-was back on track. In fiscal 2003, sales rose 11 percent to $64.8 billion, and the company ended that year with several billion dollars in cash.

Still, Nardelli and company will continue to be faced with the chronic problem of where Home Depot will be able to find growth after it has saturated the United States with its stores. In May 2004, in an effort to extend its reach to commercial builders and tradesmen, Home Depot acquired White Cap Construction Supply Inc., a seventy store chain that sells a wide variety of professional building products, including industrial grade tools, jackhammers and other construction equipment, and concrete foundation forms. A few years ago, Home Depot had tried to lure home builders and contractors with a retail concept called "Home Depot Supply," but the idea didn't catch fire.

Indeed, all category killers will have to find other ways to expand, including creating new or small store concepts, exploring international markets, or acquiring other businesses.

That last direction is the trickiest because most large retailers are finding it difficult to run more than one retail concept not related to their core business. That's why J. C. Penney unloaded its Eckerd drug store chain, and why Target sold its 62-unit Marshall Field department stores to May Department Stores Co., and put on the selling block its 266 Mervyn's discount apparel stores. Even Wal Mart has not been able to make Sam's Club the equal of Costco.

Help Wanted

At a meeting of the International Mass Retail Association, executives of category killers and other big box stores were asked to name their greatest business concern. Then answer: hiring people. By 2010, there will be five hundred thousand more retail jobs than there will be people to till them, according to the National Retail Federation. Consequently, retailers will have to pay more attention to retaining their best workers, so there will be more competition among retailers for sales associates. This is going to be especially challenging at a time when entry level retail jobs are viewed as low paying, dead end positions. How are category killers going to find and keep good people by paying them a living wage at the same time that they are selling products at low margin, everyday low prices?

The average turnover rate among retailers in the U.S. is 66.1 percent, according to the National Retail Federation. At Wal Mart-where the turnover rate is about 55 percent-ambitious growth plans will be slowed by a lack of people. Wal Mart has plenty of capital for the expansion, but not enough warm bodies to work those new stores. By way of comparison, Costco is well known for taking good care of its workers, who, in turn, have been loyal to the company. Costco's warehouse workers start with an hourly wage of at least $10. After four years with the company, a cashier can earn around $44,000, including bonuses. Its turnover rate is just 23 percent.

The people challenge will be even greater for category killers in specialized areas. For example, Home Depot and Lowe's need people with product expertise and construction experience. As Home Depot moves farther and farther from its entrepreneurial roots, it will be difficult to find people who buy into their system and "bleed orange." Ever growing stock shares enabled the early employees of Home Depot and Wal Mart to get rich; that's never going to happen to a new employee at a mature company

In early 2004, when Home Depot wanted to hire thirty five thousand new employees, the do it yourself category Killer formed a partnership with AARP (formerly known as the American Association of Retired Persons) to hire skilled workers for a variety of in store positions, including plumbers, electricians, landscapers, and sales and customer sales representatives through the AARP Foundation Senior Community Service Employment Program, which will help to provide a pool of qualified low income workers aged fifty five and older. Older workers generally stay with a company longer and have a good understanding of customer service.

The Future

Category killers offer more products in their classification than could ever have been found in a general merchandise store or a department store. They have driven out the inefficient or uncompetitive retailers, and they have enabled virtually every consumer product to be affordable to middle class shoppers.

While critics contend that these retailers destroyed our mom and pop culture, there is more to the story. Granted, many mom and pops have gone by the wayside (for a wide variety of reasons). But, after all is said and done, Staples, Costco, and some of the other big box stores have also been a boon to small business owners because they offer every product and service required to run their companies. These category killers have leveled the playing field to enable even the smallest enterprises to extend their reach from around the corner to around the world.

As long as the American population remains restless and migratory, category killers-at least in the short term will continue to grow and be a part of the landscape, be it Mesa, Arizona or New York, New York. They will continue to thrive in their categories because of their enormous buying power, product assortment, and sharp pricing.

Ten years from now, will category killers be as dominant as they are today? The answer to that question will depend on how these retailers meet the challenges of the marketplace-and in what particular product category they operate. Like department stores in the early 1980s and traditional discount stores in the early 1990s, category killers will have to protect their market share from other channels of distribution, including the Internet, general merchandise discounters, warehouse clubs, existing retailers who have adjusted to the times, and upstart retailers within their existing category that have come up with fresh new ideas and approaches.

Take for example Metal Supermarkets, which sells all sorts of metals in small quantities (no minimum orders) to individual customers. The self proclaimed "convenience store of the metals industry" opened its first store in 1985 and attracts customers who can't find the particular stainless steel or aluminum piece they need at Home Depot or Lowe's, which can't equal Metal Supermarkets' commitment to depth and breadth of product inventory. Then there's the Container Store, a 30 unit chain that sells containers of all types, from boxes and bins to bottles and backpacks. Virtually every product category offered by the Container Store can be found at any number of category killers, such as Bed Bath & Beyond or Lowe's, but not in the depth of offerings or accompanied by its employees' product expertise. Concepts such as Metal Supermarket and the Container Store represent the beauty and the danger of retailing--the beauty of the unceasing resourcefulness of entrepreneurs, and the danger of ultimately destroying their competitors.

So category killers are not ensured of another tomorrow. To the extent that they adapt or tweak or fine tool or reorganize they will continue to be vital and important to the consuming public, who are the final arbiters of retail survival. Otherwise, like the retail dinosaurs that once ruled the American retail landscape-Montgomery Ward, Kmart, and others-they will slowly fade from the scene, replaced by newcomers who best capture the contemporary needs of the consumer culture.

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