By Maria Saporta
Published in the Atlanta Business Chronicle on October 19, 2012
When Home Depot announced on Sept. 14 that it would be shutting its remaining seven stores in China, craziness and employee unrest followed.
Carol Tomé, chief financial officer of The Home Depot Inc., who has been overseeing the company’s Chinese investment for 18 months, provided Atlanta Business Chronicle an exclusive inside account of what happened, and she also shared her insights about doing business in China.
Home Depot entered China in 2006 when it acquired 12 Home Way stores.
“We bought our way in,” Tomé said. “Getting established wasn’t so difficult. Exiting has been nightmarish.”
When word got out that Home Depot was closing its stores in Tianjin, employees took over four of them — locking the doors from the inside and squatting inside the stores for the whole weekend.
That happened despite Home Depot offering the 850 affected employees severance packages and outplacement services.
But that wasn’t all. Home Depot also had a team of trained home décor installers who weren’t happy with the news of the stores closing.
“They decided they would take matters in their own hands,” Tomé said. “They took three of our people hostage — our head lawyer, the head of human resources and our head of operations. They came in and stormed our Store Support Center in Tianjin. Eighty hours later our hostages were freed.”
And then on Oct. 8, after the stores had been closed, a few Home Depot officials were liquidating inventory and completing some outstanding sales.
“The vendors came and stormed one of the stores and captured the head of operations; he had a broken foot, so he couldn’t run,” said Tomé about Ben Lv (pronounced Loo), the same person who had been one of the hostages a few weeks earlier.
“You need to understand that doing business in China is unusual,” Tomé said. “In China, you have to expect the unusual.”
In the hourlong interview, Tomé described the company’s experiences in China and shared what Home Depot has learned. Its experiences can serve as lessons for other American companies interested in entering the world’s most populous country with 1.3 billion people.
The bottom line, Tomé said is that “China is too big to ignore.”
Home Depot now has scaled back its operations to a couple of small retail spaces in malls, one selling only paint and flooring, and the other home décor and furniture. They provide an opportunity for Home Depot to keep a toehold in China as the market develops.
Unlike some other companies, Home Depot had done its research before entering the China market. The 12 stores it acquired had been owned by a company that had been modeled after the Atlanta-based retailer. Home Depot (NYSE: HD) also had helped train Home Way’s executives, who were native Chinese.
“We shared the same vision — that there could be a thriving home improvement market in China because there was this growing middle class,” Tomé said. “We could ride the wave of a growing middle class.”
Home Depot thought it could replicate what it had done in the United States — change the distribution channels, get rid of the middlemen and get products directly from the manufacturers.
“Six years later, yes the middle class is growing in the market but it’s not a ‘do it yourself’ market,” Tomé said. “They don’t live in houses with garages for tools. They wanted to hire someone to do it for them.”
Plus it was a lot harder for Home Depot to bust up the distribution network, get rid of the middleman and leverage its worldwide supplier network.
It had long established relationships with Chinese vendors for its North American stores, but once in China, Home Depot realized that its Chinese vendors were not licensed to sell their products in China.
Asked why, Tomé simply answered: “This is China. You have a culture that is different from the Western culture. Their way of doing business and their way of interacting with others is different.”
For example, the Chinese are used to “haggling” when they go shopping. And that’s not part of Home Depot’s business model.
Also when Home Depot realized that the Chinese were not “do it yourself” customers, Home Depot decided to hire tradespeople to “do it for them.” But that also was challenging because those “skilled” tradesmen needed to be trained to meet Home Depot’s standards.
“The other thing that we found in our stores is that the vendors have their own selling rights inside the store,” Tomé said.
That meant that there may have been 100 Home Depot employees in each store but as many as 200 vendor reps all trying to hawk their particular products.
“We thought we understood the cultural differences, but I can tell you we didn’t understand it as well as we do now,” Tomé said.
One problem area was communications. The Chinese would often say yes to be respectful and helpful, but Tomé said they did not always follow through. It’s important to know how to ask the right question to get a true answer, she said.
Home Depot closed five of its 12 Chinese stores between 2009 and 2011, primarily because of real estate costs. Since one can’t get rights to property in China, all the stores were leased. Home Depot had inherited below market leases. But when those leases came up for renewal, the increased costs made it hard to keep those stores open.
Making a profit in China also was challenging. “The only year we had growth in the stores was in 2008 during the Beijing Olympics,” Tomé said. Sales have been declining ever since.
In early 2011, Tomé was tapped to figure out how Home Depot should tackle the Chinese market and what steps the company needed to make to improve its business model. Although the losses in China really amounted to “a rounding error” for Home Depot, the company needed to know it was on the right track.
Specialty stores working
Over time, Tomé realized that the trend in China did not favor big-box retailers.
“What happened was a move away from big boxes to small specialty retail stores in specialty malls,” she said. “There has been an explosion of specialty retail.”
When Tomé went to China in June, she began to accept that Home Depot’s big-box stores probably were not going to work out.
“This model simply won’t work,” Tomé said. “We sold mops. We sold charcoal. We sold light switches. And we sold a lot of paint.”
So Home Depot has decided to try a different model. It has established a stand-alone paint store totaling about 1,300 square feet selling high-quality Behr paint in a mall. It then added flooring to the store. Quickly the company realized that the smaller store would be more productive and would be profitable, especially when compared with the 100,000-square-foot stores.
“There’s a higher profit margin there than in the United States,” Tomé said of the company’s initial results in its specialty store selling Behr paint and flooring.
Home Depot also opened a Home Decorators Collection store in June, which reaffirmed one of the problems of doing business in China.
“When we went to Chinese manufacturers they would say: ‘We aren’t licensed to sell in China.’ We had the product shipped to the United States and then shipped back to China so we could sell it in our Home Decorators store,” Tomé said. “It’s not ideal. It’s China.”
The last six years in China has been tumultuous for Home Depot as it has tried to find its niche in the Chinese market.
Tomé said that as Home Depot planned to close the seven stores, it was committed to treating the affected employees fairly — offering the same packages it does in the United States.
“We will do the right thing because we are Home Depot,” Tomé said. But the Chinese employees were skeptical because “not all business had done the right thing.”
That could explain why the Chinese employees took over four Home Depot stores and why the vendors and tradesmen took executives hostage.
While reflecting on Home Depot’s experience in China, Tomé said it will not dissuade the company from seeking opportunities in other international markets.
And in China, the focus will be less on bricks and mortar and more on e-commerce.
“We tried to do everything we could to make it work,” Tomé said. “We were prepared for tangles. It’s just got a little bit more tangled than we expected.”
And then Tomé repeated the refrain: “China is too big to ignore.”