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Home Depot eschews global growth in favor of increasing U.S. sales

| Saturday, Oct. 6, 2012, 12:01 a.m.

ATLANTA — When the chief financial officer of Home Depot looks around the world, she doesn't see an endless universe of potential stores.

Instead, Carol Tome sees country upon country where the home improvement retailer just doesn't belong — because of competition, demographics or simply a cultural mismatch.

“If we look around the world, there aren't very many places in the world that are very interesting” for expansion, Tome said. “We have an obligation, first, to deploy capital in the highest returning way. We don't have an obligation to look for growth outside the U.S.”

Home Depot has made several forays outside this country, but only those in North America have been successful. The $90 billion company expanded into Canada with 180 stores and Mexico with 94. But earlier this month, it announced that it was closing its seven big-box stores in China, having entered the market with 12 in 2006.

It's not the first time Home Depot has pulled out of a foreign market. In 2001, Home Depot sold four stores in Argentina and five in Chile. It entered South America in 1998.

“It's very tough growing outside your own market,” Tome said.

In addition to differences in culture, there are logistics to consider, time zones, currency rates, and a simple understanding of the calendar. Thanksgiving and its subsequent Black Friday sales do not translate into other cultures, said Mike Matacunas, CEO of The Parker Avery Group in Atlanta.

Still, Tome said, Home Depot continues to be aware of opportunities around the globe.

Home Depot has plans for six stores in Mexico, and Tome sees a market for 25 stores. And in Central America, Tome said she sees the possibility for 18 to 20 stores, if Home Depot chooses to expand in that region.

While there are no plans to open any stores in Brazil in the next three years, Home Depot's current planning cycle, Tome said it is the “most interesting” area in South America.

Brazil is a good fit for Home Depot, said Steven Kirn, executive director of the Miller Center for Retailing Education and Research at the University of Florida. But, because China and India make up such a large portion of the global population, companies like Home Depot are simply throwing away potential customers if they don't entertain the idea of operating in those markets, he said.

Tome said the company will study India, a large market with a lot of growth and newly loosened trading restrictions, “because we should.”

In China, Home Depot is keeping two pilot stores open - one focused on paint and flooring, the other on its Home Decorators Collection. The company has short-term leases and specific milestones for its pilot stores in China to ensure that they are successful.

“The China market is too big to be ignored,” Tome said.

While Home Depot is experimenting with some nontraditional stores in China, Tome said, it has learned that building stores is expensive, and Home Depot is better served by increasing sales without sinking large amounts of money into a country.

To that end, the company is trying to improve its online offerings in China. Rather than creating its own website for Chinese customers, Home Depot is effectively putting a page up in an online mall. Customers in that country don't want to watch how-to videos, or participate in remodeling forums. So, for Home Depot, it's not worth the expense to create those options, when it only wants to sell products there.

If the China model works, Tome said, online sales may be added in other countries.

Home Depot analysts and experts in international retail say Home Depot's China closures are not surprising.

“The company's big box stores in China were never as productive as what the company initially expected, given the significant differences that exist in shopping behavior between U.S. and Chinese consumers,” RBC Capital Markets analyst Scot Ciccarelli said in a research note. “Further, if the company couldn't get the stores to work during one of the biggest real estate build outs seen in the last 50 years, it is unlikely they would work in what appears to be a cooling property market in China.”

When Home Depot entered China, Tome said, there was a sense that the retailer could change Chinese shopping habits from “do-it-for-me” to “do-it-yourself.” That never came to pass. In a research note, International Strategy and Investment Group analyst Greg Melich estimated the Chinese Home Depot stores did less than a third of the annual sales of stores in the United States.

Those results show how a retailer can get it wrong when it comes to international expansion, said Robert Gregory, research director at Planet Retail in London. It has been a learning experience that Home Depot can use in its future expansion plans.

“When you try to import directly to a different market without understanding how it's different, it's sort of asking for trouble,” Gregory said.

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