Lowe's: New, Smaller Stores Reflect The New Normal

Lowes parking lotLowe's Cos., buffeted by three years of weakness, says it is adjusting to the new normal, and will restructure all its business plans to better give consumers the three things they want more than ever: Value, simplicity, and control. What's more, it says, they are happy to get that in smaller packages, and the store will intensify its store-size downscaling, opening new stores as small as 66,000 square feet.

In a Web-based presentation to investors, the Mooresville, N.C.-based home improvement store reaffirmed its previous earnings estimates, but conceded that the harsh economic realities of the housing business meant a sharp reduction in its growth plans.

But executives also painstakingly painted a picture of a vastly different consumer landscape. Acknowledging that its problems are closely linked to falling home sales and the troubled mortgage business, it says the third leg of its problems are the consumers, determined to pull back spending in face of Wall Street debacles, higher grocery prices, increased job insecurity and higher fuel costs.



"Consumers continue to shop for the products they need, but are now demanding value, and not for three days only, and not just now through the end of the month. They want dependable everyday prices," says Gregory M. Bridgeford, Lowe's EVP of business development. "They perceive their lives as too busy, too complicated and too demanding. Work and life are usually out of balance. Consumers expect retailers to make things simple."

Lowe's--which has been trying to beef up its "do it for me" business, as have its competitors--has seen clearest evidence of this trend in the project sector. "Consumers want to turn part of their projects over, but they have a very clear need for control," he says. While things like gas prices and job loss are out of their realm, "humans compensate by controlling what they can. They need and want to control their shopping and their planning. We don't see that changing in the next three years."

At one point the company had said it would open about 135 stores per year in 2008 and 2009. Now it says it will open 120 in fiscal 2008, when it expects total sales to gain about 1%, while same-store sales fall about 6%--and just 75 or so in 2009, when it expects total sales to gain anywhere from 2.5 to 6.5%, while same-store sales are expected to land in the range of a 3% decline to a 1% gain.

But more important, executives say, are the types of stores they open. Not only will new stores be more evenly dispersed in terms of geography--including openings in Mexico and Canada--but they will open earlier in the year, to take advantage of the spring selling season.

And stores will likely be much smaller. While Lowe's is testing three different size prototypes--117,000-square feet, 103,000 square feet, and 90,000 square feet--it's finding that small stores, which are both cheaper to build and heat, score just as well in consumer satisfaction.

And the chain may go even smaller. "In January, we opened an 80,000-square-foot store with a drive-though lumber yard, and it's been a proven winner," says Larry D. Stone, Lowe's president and COO. "And we're testing a 66,000-square-foot store, also with a drive-through lumberyard, in a small North Carolina market." Its new urban stores will be 117,000 square feet, he says, but it will also build many of the smaller stores. And Lowe's is also playing with "more flexible prototypes, including those with two levels and rooftop parking."

Meanwhile, the forecasts in the home-improvement business continue to be grim. The Home Improvement Research Institute recently reported that it expects 2007 numbers to show a 0.7% decline--its first downturn since 1991. And 2008 sales will fall 3.1%, to $296.8 billion.

And even as Lowe's executives were at the podium, the National Association of Realtors announced a record 9.5% drop in home prices, with the price of a median price of a home hitting $203,100 in August--down from $210,300 in July, and $224,400 in August of 2007. Home resales in July--critical to companies like Lowe's since so much of the home-improvement is move-related--fell 2.2, to 4.91 million.

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