Green building product manufacturers learn to play the big-box game.

Most spring Saturday mornings at The Home Depot, a steady stream of customers comes to peruse cabinets, countertops and showerheads; rose bushes, tomato plants and compost; barbecues, lawn chairs and weed whackers. Trying to be all things to all do-it-yourself-ers, The Home Depot (NYSE: HD) introduced its Eco Options label in 2007 as a way to meet a growing demand from customers that had begun adding “energy-efficient,” “low-VOC,” and “organic” to their home improvement shopping lists.

Through a reportedly stringent process of elimination, the company pinpointed about 3,000 items ranging from compact fluorescent light fixtures (CFLs) to organic plants it deemed had less impact on the environment than their conventional counterparts. The campaign paid off. In 2007, Eco Options products sold as well or better than similar products, exceeding sales goals and reaching $3 billion, according to Ron Jarvis, The Home Depot’s senior vice president of environmental innovation.

With a goal of increasing the number of products in the Eco Options line to 6,000 by 2009, the company is scrambling to find products that fit the green mold. But not all manufacturers of green building products are viewing the big-box retailer or its largest competitor, Lowe’s (NYSE: LOW), as a silver bullet.  

As U.S. home sales and the value of the dollar continue  to decline, market analysts are predicting more homeowners will opt to stay closer to home in 2008, spending more than $170 billion remodeling their homes. Even more, spending on home improvements is likely to increase 44 percent between 2005 and 2015, according to “State of the Nation’s Housing 2007,” published in June 2007 by the Joint Center for Housing Studies at Harvard University. The center cites U.S. homeowners’ growing desire to invest in energy-efficient retrofits as a key factor driving such spending.

Despite an increasing number of environmental building supply stores opening up along the West Coast, most homeowners end up at big-box retailers to meet their home improvement needs. A 2007 survey conducted by Germantown, Tenn.–based Consumer Specialists showed customers slightly prefer shopping at Lowe’s. However, with a total of 2,234 retail stores worldwide, The Home Depot ranked significantly higher for its convenient locations, which was the strongest factor in determining where respondents chose to spend their money.

The world’s largest home improvement retailer, The Home Depot reported net earnings of $4.4 billion in fiscal year 2007. While a significant drop from its 2006 net earnings of $5.8 billion, the figure was almost double that of Lowe’s, which reported 2007 net earnings of $2.81 billion. Its buying power makes the retailer highly regarded by manufacturers vying for prominent shelf space, including companies serving the green building sector.

For Tom Sullivan, co-founder of Totally Bamboo, a San Diego-based manufacturer of bamboo cutting boards and countertops, The Home Depot would serve as a key distributor. The company, which currently ships most of its countertops to homeowners and contractors via FedEx (NYSE: FDX) freight, currently has just one distributor, which is located in Canada. Securing a contract with a company such as The Home Depot would enable Totally Bamboo to offer a price point that appeals to more mainstream consumers.

“I pay $2,500 to ship a container from China to California,” Sullivan says. “Home Depot pays about $1,600 for a container from China to California.” If Totally Bamboo secured a contract with The Home Depot, it could ship a container of standardized “drop-in-place” countertops directly from its factory in China to a Home Depot distribution center. The agreement would help ensure the cost of the countertop was competitive with those made of more conventional materials.

With just 14 employees and two salespeople, Totally Bamboo worked with Portland-based Green World Now, a sales and marketing firm aiming to meet the growing demand for green building materials in mainstream markets, to get its product in front of The Home Depot’s countertop merchant. It wasn’t an easy task, says Cristen Chambers, founder and CEO of Green World Now. The process—from initial meetings to line review to sale—can take months. “It’s the equivalent to buying a city block,” she says, referring to the amount of meetings and negotiations that must take place before a company as massive as The Home Depot will agree to carry a product.

A former lumber broker, Chambers sold multi-million-dollar lumber contracts for wood certified by the Forest Stewardship Council (FSC) to The Home Depot and Lowe’s. Today she acts as the sales arm for manufacturers of green building products, providing detailed market analysis for merchants at The Home Depot, Lowe’s and Ace Hardware, who are experts about the industries in which they buy.

Sullivan says he is prepared to meet increased demand that would arise from a large contract with The Home Depot, but he is not relying on it. The company recently doubled the capacity of its manufacturing facility in China to 150,000 square feet, and it set a goal of establishing 10 new distributors in 2008. Sullivan said he projects Totally Bamboo will achieve $30 million in sales by 2010.

While distribution remains one of the biggest puzzles facing companies such as Totally Bamboo, some say they are tentative about pursuing contracts with The Home Depot, regardless of its buying prowess. Carol Baumgartel, co-founder and vice president of sales and marketing at American Enterprises, which manufactures American Clay Plasters, an alternative to cement, gypsum, acrylic and lime plasters, says her company has the capacity to fill orders from large retailers. However, she says, “We’re not ready to go there,” hinting that her resistance is more emotional than practical.

“The demand for our product was initially captured by small green materials dealers like the Environmental Home Center [ecohaus] in Seattle,” Baumgartel says. She says some manufacturers, including American Enterprises, feel it’s almost unfair they have to “share the stage” with more mainstream brands that are entering the green building space. But she also says she questions whether she and her counterparts at other manufacturing companies will achieve true market transformation if they limit themselves to local green building supply stores. “Then we’re not really spreading the gospel per se. We walk a tight line.”

Outfits such as the Northwest’s ecohaus [see pg. 11] and Green Building Exchange in the Bay Area have been serving green home remodelers for more than a decade. Some store owners view competition from mainstream retailers as a positive sign for business: For one, it offers clarity about how they can better serve their own customers. “It gives us a clear competitor to push against,” says Matt Freeman-Gleason, founder and chief knowledge officer of ecohaus.

“We’re of a scale that we’re actually quite successful in sourcing materials, so we’re actually quite price competitive,” Freeman-Gleason says. “But materials are only one part of what is needed for success.” He notes that good customer service plays a huge role in helping move product—and that’s one way his company strives to set itself apart from mainstream players that are working to compete in the green building space.

With 350,000 sales associates, The Home Depot cannot provide the detailed training that smaller outfits such as ecohaus can. The store uses what it calls “Rapid Web-Based Training” to speed up the delivery of training to new sales associates, according to Training magazine. New workers, regardless of their age or English-speaking capabilities, learn about products by watching videos and PowerPoint presentations where customer interaction is simulated rather than practiced. While Web-based training might be more efficient, it is not always effective.

Many customers report having to return to The Home Depot multiple times before finding all they need to complete a project, often citing receiving misinformation from the company’s sales associates as the reason why. When Consumers Union sent science and policy analyst Kristi Wiedemann to test sales associates’ knowledge of Eco Options products at a Home Depot store in Yonkers, N.Y., she reported getting “more blank stares than help.” She provides tips for choosing green remodeling products at GreenerChoices.org.
 
But The Home Depot’s Jarvis says it was pressure from the company’s own sales associates—not just environmental groups and concerned customers—that led The Home Depot to phase out the sale of wood and wood products from old-growth trees beginning in the late ’90s. Jarvis says the associates didn’t feel they were informed enough about where and under what circumstances the store’s wood was being grown.

“Associates were asking me, ‘I hear we are not buying sustainable wood. … How can we say we’re doing the right thing if we are destroying old-growth forests?’ ” says Jarvis, who was vice president of merchandising for lumber and building materials in 1999. “At the time, we didn’t have the answers.”

Led by the Rainforest Action Network, an estimated 1,200 people showed up at 150 Home Depot stores across the country on March 17, 1999, to protest the company’s timber purchasing practices. The demonstrations came weeks after The Home Depot became the first major retailer to join the Certified Forest Products Council, a buyer’s group that provides information about forest management, forest certification and responsible wood and paper purchasing practices.

The company, which at the time reported selling about $5 billion of wood products annually, made a commitment to determine where all its suppliers’ wood was harvested as well as what species they were harvesting. The company passed a landmark wood purchasing policy, giving preferable treatment to wood and wood products originating from third-party certified, well-managed forests.
 
It also stopped accepting wood products made from the 40 suspect tree species listed by the World Conservation Monitoring Centre as potentially endangered, unless the supplier provides the export permit. The policy, which applied to all wood products from plywood to broom handles, sent a wave through the timber industry.

Pressured by The Home Depot’s merchants, large vendors such as Columbia Forest Products and Weyerhaeuser (NYSE: WY) began sourcing FSC-certified wood. Sales of FSC-certified wood at Home Depot outlets totaled about $15 million in 1999; total sales of FSC-certified wood in 2007 is expected to total more $400 million, Jarvis says. “When you include other certifications, it’s way up in the billions,” he adds.

Lowe’s followed The Home Depot’s lead, passing a wood policy in 2000. The company reported in 2006 its certified-wood-product volume increased by 41 percent from 2003 to 2005. While it claims it also sells more Energy Star-qualified appliances than any other retailer, Lowe’s has no plans to initiate an internal marketing campaign to match the Eco Options label, says Lowe’s spokeswoman Karen Cobb. This could make the road to Lowe’s a difficult path for smaller manufacturers of green building products.

“Home Depot wants to be a global leader,” Chambers, of Green World Now, says. “They know they will lose market share if they don’t.”

She says she has been more successful getting her clients noticed by merchants at The Home Depot than those at Lowe’s because Ron Jarvis, who she says has made the company’s commitment to sustainable products a priority, is a leader among the company’s merchants. “It’s not difficult to get an audience when you can say Ron Jarvis asked you to call them,” she says. “At Lowe’s, the question comes at the end of the conversation rather than at the beginning,” she says, referring to queries about the environmental impacts of products.

When initiating the Eco Options program, Jarvis says The Home Depot chose not to hire 100 new “eco” merchants to evaluate sustainable products, but instead asked its existing merchants to stay well-informed about environmentally preferred materials and technologies. “These people are probably, in most cases, the experts in their category in the world,” Jarvis says. “The paint merchant knows 1,000 times more about paint than I’ll ever know. When we start talking about VOC and no-VOC paints, they end up educating me pretty quickly about what is available and what roadblocks might be out there.”

He notes the expansion of the Eco Options program is dependent on both manufacturers’ research and development and on consumers’ spending habits. Jarvis says when the price of Eco Options-labeled products is about the same and the quality is equal or better, customers will continue choosing the more environmentally preferred product.

Other industry veterans agree. 

“There is a growing recognition of the value of green,” says Tom Kelly, president of Portland-based Neil Kelly Co. The company’s construction division built the West Coast’s first home certified by the U.S. Green Building Council’s Leadership in Energy and Environmental Design (LEED) for Homes program. Kelly says that when he sold the house, he was “blown away by the appraisal.”

About 90 percent of Neil Kelly’s construction business comes from home remodels, with just 10 percent coming from new construction. The company recently launched a new division—Neil Kelly Performance—to fill a growing demand for home energy-efficiency improvements. “We believe that, over time, that will become a very important part of the industry,” Kelly says.
Neil Kelly Cabinets’ Naturals Collection was the country’s first FSC-certified cabinetry made with low-VOC finishes [see “Top Ten Green Building Products 2005,” supplement to SI, August 2005]. The collection was also the company’s first line to incorporate formaldehyde-free agriboard case/drawer material, which is now used in all Neil Kelly cabinets. 

While many homeowners will contract companies such as Neil Kelly Co. to remodel their kitchens this year, millions more will attempt such projects on their own. Neil Kelly Cabinets has about 30 distributors—mostly located in the Northwest and in California—including ecohaus. But the company is researching new ways to meet increased national demand for its Naturals Collection. “We would otherwise be a Portland-region-only cabinet company,” Kelly says. “But because we are building a green product, our network has expanded.”

Working with MBA students at the University of Oregon, Neil Kelly is developing a business model to license its cabinets to manufacturers across the country. “From both a cost and sustainability perspective, manufacturing a cabinet here that we ship to Florida is nuts,” Kelly says.

While business has slightly suffered due to a slowdown in the U.S. economy, many expect to see homeowners’ spending on green building materials continue to increase, forcing mainstream manufacturers to meet the demand. Jarvis says the Eco Options label will likely become unnecessary in 10 years. “On a long-term basis, I think sustainability will be built into almost every product consumers buy,” Jarvis says.