TCS Daily


Home Disappointment

By John Baden - December 3, 2007 12:00 AM

Three Americans shared the 2007 Nobel Prize in Economics "for having laid the foundations of mechanism design theory." They owe an intellectual debt to Friedrich Hayek. His 1945 American Economic Review article, "The Use of Knowledge in Society," focused on the distribution of knowledge and the difficulty of coordinating behavior from a central location. While usually applied to governments' efforts, I find it applicable to any large organization, notably, Home Depot. It explains why my friends call it Home Disappointment.

I am blessed with a few friends who are really good at building and fixing things. Their standards for products and service are extremely high. Not similarly talented, I frequently ask their advice. Here's a piece uniformly
given: "Don't shop at Home Depot." Why? "Try it and you'll find out." Alas I have<and they are right.

How can this be? Last year Home Depot's revenue was over $90 billion and, according to the NYT, its CEO Robert L. Nardelli received $38 million in his final year and a $210 million exit package when fired. Can't they get good management at this pay? Apparently not.

Home Depot's slogan is fetching: "You Can Do It. We Can Help." Here's the gist of their vision statement: "Bernie [Marcus] and I [Arthur Blank] founded (The Home Depot) with a special vision<to create a company that would keep alive the values that were important to us. Values like respect among all people, excellent customer service...."

This implies competence. However, ex-CEO Nardelli replaced many thousands of full-time store workers with flocks of part-timers. This was part of a relentless cost-cutting program designed to drive gross margins from 30% in 2000 to 33.8% in 2005. The results, in my Bozeman experience, are compellingly obvious, and predictable by the economic logic of Hayek. Here are a few personal examples.

When Home Depot opened in Bozeman, Ramona and I were working with our contractor on a minor home building project. We went to Home Depot's design center, outlined our plans, left sketches, and were assured we'd soon be contacted with options for cabinets and plumbing. No response ever came.

Last summer I found some noxious weeds on our ranch and needed a small weed sprayer with booms to tow behind a four-wheeler. Neither Owenhouse nor Murdocks had one available so I went to Home Depot. They had one that came preassembled with a $20 setup charge. I was assured it was ready to run, so I paid, loaded it in my pickup, came home, filled the tank, and prepared to spray.

Not so fast. The hoses to the boom arms were too short for the boom arms to extend. I went back to town, bought new hoses (not from Home Depot), put them on, extended the arms, and went to the first field. Alas, the main hose from the pump flew off as soon as I turned on the pump. No clamp had been installed.

I hunted in our shop, found a clamp, put it on, refilled the tank with RoundUp, pulled onto our lawn to add water to the tank<and Ramona called me in for lunch. After a leisurely lunch I went back out only to find the tank had a hole in its bottom! Our lawn now has a bald patch that daily reminds me of Home Disappointment. Snow will soon cover it and next spring I'll reseed, again thinking of Home Disappointment.

Ramona recently decided a bathroom in our guest apartment deserved a new basin and cabinet. She spied a Home Depot advertisement and suggested we look there. We did and the quite friendly sales person found just what she wanted, oak with simulated marble.

And what about the faucet fixture? He told us this Delta faucet would be perfect for the cabinet. A plumber came for installation, and, unfortunately, the faucet drain stop would not work with this cabinet.

This litany explains why those who know call it Home Disappointment. Home Depot's stock price indicates my experiences are common. After languishing at around $40 for six years, it closed at about $33 on October 15. This provides a reality check hard to ignore. My friends will no doubt tell me if Home Depot gets it right.


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4 Comments

Markets punish
As long as the government doesn't restrict competition, Home Depot will have to get better or loose out to Lowes or Ace Hardware or many other local competitors.

It is the same for Wal Mart and any other business in the USA, except for the medical industry and cable TV.

Inflation...and Exceptions to Market Discipline
And...EDUCATION. The educational industry, along with the medical industry, have been the two most inflationary industries in the last two decades. This is primarily due to government supported practices that restrict and suppress consumer choice. Informed consumers with options and choices enhance overall value and stifle inflation. Some business principals would prefer/seek a minimally competitive environment where their profits are secured by Government policies. These restrictive Government policies are destructive in the long run, and should be opposed. But the government can do better than a “non-restrictive” policy. To optimally serve the common good, Governments should actively support competition and consumer choice.

what v.Hayek would think
I guess v.Hayek, the austrian school economist, would probably say, if you think HD is bad now, imagine what it would be like if it were nationalised and you had snivvelling beaurocrats in DC running it? Then he give examples of the the state sector schools, medicine, the post office, FEMA, etc.

Level of incompetence reached
The Peter Principle in full bloom. Never been anywhere like Depot where problems are always other's responsibility. They have driven many of my friends to Lowes. I still go to the closest to my job.

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