Tuesday, March 5, 2024

Lowe’s CEO Ellison remodels the home-improvement giant

Lowe’s Cos. CEO Marvin Ellison is banging out a major improvement plan at the Mooresville-based home-improvement retailer. Since arriving in July 2018, the Tennessee native has overhauled the executive team, instituted big changes in how Lowe’s operates its stores and initiated a technology push highlighted by plans for a 2,000-employee office in Charlotte’s South End neighborhood.

The University of Memphis graduate knew Lowe’s intimately long before he showed up, having served as executive vice president of rival Home Depot Inc.’s U.S. stores from 2008-14. When the Atlanta-based industry leader picked Craig Menear over Ellison as its CEO in 2014, Ellison took the top post at J.C. Penney Co., the struggling Plano, Texas-based department store chain. He had limited success turning around that company, but he says he learned key lessons that are paying off at Lowe’s.

Ellison, 54, discussed his first year with the company in an interview with Business North Carolina’s David Dykes and David Mildenberg that is edited for clarity.

►What’s been the biggest surprise in the first year? What’s been most satisfying?

Retail is notorious for being a very high-turnover environment where people change companies and jobs a lot. But it’s not uncommon to be in one of our stores and meet someone who’s been with the company for 35 years, 40 years, and they really care a lot about the company. They are committed. That sounds like a cliche, but you just can’t take for granted that in 2019, you’re going to find people that truly love the company and are committed to it.

Second, Lowe’s commitment to the community in every market we serve has just been incredibly impactful. That really shows itself following a natural disaster, whether it’s a flood event or hurricane or tornado or fire. We’ve had a little bit of everything in the year. Our stores just rally. And our associates rally.

What’s been a surprise — and something that we’re working on — is that from a technology standpoint, we’re way behind. I knew we had some catch-up to do, but we’re further behind than what I anticipated coming in.

The good news about that is we’ve hired a fantastic chief information officer [Seemantini Godbole from Target]. We made a large commitment to set up our global [information technology] center in Charlotte. We think that sends a message that we’re serious about modernizing Lowe’s as a company that really understands the importance and power of IT. It also sends a message that we’re committed to North Carolina — and to the city of Charlotte — to make it a beacon of IT growth and to be one of the companies that’s going to be committed to trying to continue to help Charlotte evolve into a major market for talent.

►Wilkesboro is losing jobs to the Mooresville headquarters. What have you told the staff there?

I think we tell them a couple of things. No. 1, we will always have a presence there, whether it’s with stores or distribution centers that will touch people and residents in that county. But any public company has to ask the most important question: How do you create shareholder value for the company? Because at the end of the day, you have to make decisions that allow the company to run better.

When you look at the economics of having two separate campuses with functions split between two locations, it just doesn’t make a lot of sense from a communication or a coordination standpoint.

We brought in a lot of new leaders over the past 12 months — a new chief financial officer and heads of supply chain, stores and merchandising — and my question to each leader was [to] look at organizational structure and give me ideas and suggestions on what we need to do to make your organization more efficient and to improve your level of execution.

One of the first things most of them said was it is really difficult to run teams in two separate campuses and it hurts the efficiency of the team. We would like to try to find ways that we could put the teams under one roof so we could have better continuity, better collaboration, better execution. That’s what we’re doing.

►You’ve cited a three-phase approach to improvement. Has your timetable changed based on what you’ve learned?

We’re on schedule. We talked about the first phase being just retail fundamentals and getting the foundation of the business shored up. Again, that sounds like just a classic corporate statement, but in retail, there are a couple of fundamental things that you have to do well, whether it’s 2019 or 1919.

You have to have good customer service. You have to have product on the shelf to sell. You have to have an efficient supply chain. You have to leverage your space in your stores or online efficiently. And lastly, you have to make sure you’re allocating your capital to the places that are going to grow your company.

When you look back at the last seven years, you can argue that one of the reasons why the company lost market share relative to other companies in this retail sector is because we fell behind on all of those things.

After we’ve gotten those fundamentals in place, the next phase is going to be to create efficiencies so you can start to have consistent, sustainable growth both on the top and bottom line. After that consistency starts, we think we can start taking market share. And that’s phase three.

Where companies tend to make mistakes, and we made it here, is that we were so eager to try to take market share that we wanted to go out and bring in a lot of innovation and new ideas. But as I described to the team, that’s like having a bowl of frosting and no cake. The cake is the foundation. And if you’re not in stock, if you have poor service, if your supply chain doesn’t work, if your space is nonproductive, if you have poor capital allocation — meaning that you’re spending money on projects and initiatives and adjacent companies and you’re not spending money on cloud technology and improving delivery capabilities — then you’ll fall behind.

►It’s been noted that higher wholesale prices squeezed your profit margins. How are you addressing that?

We have 13 merchandising vice presidents over departments like garden tools, plumbing, kitchen and bath, etc. In the first eight months of the year, we replaced 11 of the 13. We replaced them because we wanted to go out and find merchandising leaders that had more depth of home-improvement experience and that could help us transition our merchandising strategy more aggressively.

Anytime you change that many people, it’s disruptive. But we also dealt with — at the same time — unprecedented cost increases due to tariffs, direct [on goods manufactured in China] and indirect [on goods manufactured in the U.S. with components from China].

We’re dealing with that, and we’re also dealing with pretty rudimentary systems that allow us to have visibility to cost increases happening and how those cost increases impact the business. So you take unprecedented tariffs, you take a lot of personnel changes, and then you take limited systems where you don’t have visibility. What ultimately happened is … the system had such poor visibility that the new leader came in and had no idea those decisions had been made six months prior to them taking the role. Then, as the product flowed through the system, the cost went up, retail [pricing] stayed the same and your margin went down. We’re literally flying blind.

We have now built better tools. We have better visibility in place, and now the merchants are operating with more streamlined reports and tools. They now can understand cost increases taken, pricing actions to offset it, etc.

We also went out and acquired a retail-analytics platform from a company called Boomerang Commerce. We will be including that in our new pricing-management system later this year, and we think we will go from having a very rudimentary, primitive pricing system to … one of the best systems in retail.

►How do you compare Lowe’s with Home Depot?

When you have a competitor, and the competitor is outperforming you in a significant way, it’s not too hard to convince yourself there’s something different between the two companies. We had leaders here that honestly and genuinely believed that even though we were two companies in the same retail sector, there was something distinctly different between the two companies.

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The main structural difference between the two companies is that [Home Depot] has more retail store density in urban areas. If you go to New York City, if you go to Los Angeles, if you go to Miami, if you go to Chicago, within those urban settings, you’re going to have more of our competitor’s stores than ours.

We tend to be a more rural-suburban company. That is a true structural difference that gives them some level of advantage, because if you have more people to shop in a certain area, you’re going to drive higher volume.

But the data tells you that’s, maybe, one-third of the financial gap. There’s two-thirds out there that is not really structural. It’s more tit-for-tat competitive. We’ve just taken a hard look in the mirror and say in the areas where there are no structural differences, what are we doing to run a better company so we can drive better returns for our shareholders and more efficiency?

►Isn’t the home-improvement market much larger than the two leaders?

Our data tells us that the addressable home-improvement market in North America — the U.S. and Canada — is anywhere between $750 billion and $900 billion. When you combine us and our competitor’s revenue from last year, it’s about $200 billion, which means there’s a lot out there that neither one of us has.

If you think about all the True Values, the Ace [Hardwares], all the paint stores, all the mom-and-pop hardware stores, all the lumberyards, all the nurseries out there — that is a market that equals up to $900 billion.

This isn’t like Boeing and Airbus: I win the contract. You lost the contract. To me, this is more of a Target versus Walmart, Sam’s versus Costco, where you’ve got two companies that can easily be world-class in the same space.

►What are the stores of the future going to look like?

We’re not going to get so caught up in the prototype design of a store that we’re going to walk away from a good location because we can’t fit a store there. We’ve done that in the past. Lowe’s has been very disciplined on its prototype design, meaning if they couldn’t get one of their prototypical stores on a site, then sometimes they would walk away from the site. We’re not going to be that rigid.

You’re going to see stores where we’re going to have more holding capacity for e-commerce delivery because the only way traditional brick-and-mortar retailers can compete with pure play e-commerce companies is to leverage their physical stores to ship products to customers. You have to leverage the proximity of your stores to your consumers because that is a built-in advantage over a pure play e-commerce company.

You’re going to see us leverage technology better. The reason we’re going to do that is to make the job of the associate easier and to make the customer shopping experience better. Technology, at its best, is invisible.

We think this is the best retail sector to be in.

►Why is that?

It provides the greatest barrier to entry for a pure play e-commerce company to try to come in and take market share. No. 1, the sheer nature of what we sell is big, bulky and hard and expensive to ship. No. 2, a lot of the products we sell have a real-time need. Next-day delivery sounds great unless you’ve got a pipe that’s leaking, unless you’ve got a refrigerator that’s not working.

The need to have it right now, not next day, not even same-day, but same-hour, drives customers coming in and leveraging those brick-and-mortar stores.

The other thing is we sell what is easily classified as hazardous material such as fertilizer and paint. That’s not something that is easily, or inexpensively, shipped.

We also sell a lot of categories that are highly researched like an appliance or a riding lawn mower. But after the research, the customer wants to come in and touch it. They want to feel it. They want to sit on it, and they want to talk to someone who has a degree of expertise to make sure they’re making the right purchasing decision.

It doesn’t matter how great your online site is. You’re not going to have the ability to open that refrigerator, look in it, touch it, make sure it fits, and then have a chance to browse around and talk to somebody. All of those things point to the brick-and-mortar physical component of home improvement being a priority that’s not going away anytime soon.

►J.C. Penney has reported net losses since 2012, So Lowe’s must be a snap?

No, not at all. That’s an easy assumption. When people ask me what’s the difference between a turnaround and a transformation, the answer is the balance sheet. That’s really it. It’s equally as hard because there are so many things that need to be done. The ability to prioritize is critical.

There’s a lot of pressure, rightfully so, that this company should improve because we’re in a good retail sector, we have a good brand, we have an outstanding balance sheet.

For us, we’ve done a really good job of assessing what’s driving any gaps in our performance and then putting initiatives in place to go out and deliver upon it.
There is a place in America for a brand like J.C. Penney. I believe that wholeheartedly. But these are two different companies, two different sets of challenges. They are equally as complex and equally as challenging.

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