Home Depot eschews large-scale international expansion in favor of increasing U.S. sales

When the chief financial officer of Georgia’s largest company looks around the world, she doesn’t see an endless universe of potential Home Depot stores.

Instead, Carol Tomé 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, Tomé 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,” Tomé 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, Tomé said, Home Depot continues to be aware of opportunities around the globe.

Home Depot already has plans for another six stores in Mexico, and Tomé sees a market for 25 additional stores. And in Central America, Tomé 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, Tomé 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.

Tomé 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,” Tomé said.

While Home Depot is experimenting with some nontraditional stores in China, Tomé 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, Tomé 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, Tomé 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 U.S.

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.

Retailers are still experimenting with the best way to expand internationally, Matacunas said.

“You don’t pick up a cookie-cutter U.S. business and put it anywhere else,” he said.

Gregory said several retailers that made international pushes have started to scale back, deciding instead to focus on markets where they are a top player. While at one point, the focus was on being in as many countries as possible, some retailers are learning that they’re better off in some countries than others.

The global economic situation is playing a role in that, Gregory said. So is the Internet.

“It’s enabling retailers to become international without having the hassle and expense of establishing store networks in lots of different markets,” he said. “If it’s really successful, they can add stores at a later date.”

But Tomé and Home Depot see the biggest chance to increase sales in the country that already has the most stores: the U.S.

While the company will not build many new stores here, Tomé sees an opportunity to improve sales off of an existing base. In 2006, without the impact of HD Supply, which was sold the next year, Home Depot’s annual sales were $79 billion. The recession caused net sales to drop to $66.2 billion in 2009.

By the end of 2011, Home Depot’s sales were up to $70.4 billion. The allure of regaining the sales lost when the housing market collapsed is strong.

“It really drives a lot of our thinking, how to capture what we’ve lost,” Tomé said. “The opportunities that are still here are the richest opportunities.”