Question

Three days before Hurricane Harvey hit Texas, hardware retailer Home Depotreceived an alert from a weather service and activated its disaster-response plan to get supplies to those in the storm’s path, while turning a profit, too.

Over the next three days—as Harvey gained power and made landfall early on Saturday—the world’s largest home improvement retailer set up a temporary hurricane command center at its Atlanta headquarters. It told managers to freeze prices and move plywood, generators, chainsaws and other storm-related merchandise to the front of stores. By Aug. 31, Home Depot had sent about 700 truckloads of supplies to its Texas stores in the path of the hurricane.

As the streets began to flood over the weekend the command center began ordering stores to shut down. But trucks still rolled out of a dedicated warehouse, stocked with hurricane defense and recovery products, located in Baytown, just 30 miles from downtown Houston.

In its response, Home Depot followed a plan honed over many hurricane seasons, which aims to minimize disruptions and ensure that it can continue to deliver essential materials and equipment to the affected areas. It is also designed to allow the retailer to capitalize on a surge in demand for its products once repairs begin.

Before the hurricane season begins each summer, the retailer stocks everything from flashlights to shovels in dedicated centers. It pre-loads trucks so they can leave for stores as soon as a hurricane alert comes from a weather vendor.

“As each natural disaster goes by, we hone our processes already in place so we can react quicker and faster the next time this happens,” said Pete Capel, a 26-year Home Depot veteran and merchandising executive in charge of the hurricane command center.

Moody’s Analytics estimates Harvey, which since has been downgraded to tropical storm status, could cost southeast Texas $51 billion to $75 billion in losses, ranking it among the costliest storms in U.S. history. Private forecaster Planalytics on Monday said Harvey could cost retailers $1 billion in lost sales. However, with planning and preparation, Home Depot (HD, +0.73%), its rival Lowe’s (LOW, +0.89%), other home improvement retailers like Menards, Ace Hardware, True Value and their online counterparts like Wayfair could see a sales boost.

After Hurricane Sandy barreled into the New Jersey shoreline in late October of 2012, Home Depot attributed $242 million of fourth quarter sales to a boost in business arising from the repairs.

Swift Response

Much depends on a quick response to big storms. By Saturday up to 200 employees drafted from merchandising, logistics, supply chain and human resources teams were marshaling people and goods from Home Depot’s buzzing five-room command center filled with monitors tracking the storm and maps of the hurricane region pasted on walls.

On Sunday, 80 employees arrived from Austin, Texas capital far from the danger zone, to stock stores in Corpus Christi, a coastal city hit by the storm and by Tuesday more workers from San Antonio were moving to Victoria, another affected city.

At the Corpus Christi store, Home Depot workers placed pallets of bottled water, flashlights, gas cans and batteries near the cash registers.

One of those brought in, Bethany Grams, traveled 300 miles from Waco, Texas, to work 12-hour shifts. “It’s been really heartening,” she said, brushing back tears. “It’s just good to get to help.”

Along with the hardware sellers, railroads, trucking companies, logistics firms and others that make up the supply-chain of the economy also faced the challenge of providing essential goods to Texas, the second-largest U.S. state.

Home Depot said it was too early to compare the scale of this year’s operation with earlier efforts or to estimate how much Harvey would cost it.

Burt Flickinger, managing director of retail consultancy Strategic Resource Group estimates it cost the retailer about $50 million to deal with hurricanes Rita and Katrina in 2005 and expects Harvey’s costs to top that.

“They are a clear leader with disaster response and their strategic planning during such times is better than any retailer globally,” he said.

While discount chains or department stores would bear the costs while missing out on revenue because of lost business, what Home Depot spent was an investment that would eventually bring “10 to 15 times more in sales,” Flickinger said.

Planning for Disaster

Home Depot’s storm plan shows how preparing for natural disasters has become over the years an inherent part of the retailers’ business.

The company, with annual sales of $95 billion, first identified hurricane response as a strategic need after Hurricane Andrew, 25 years ago. It has refined its tactics since. Just over a decade ago it has established four distribution centers with hurricane-specific goods within easy reach of hurricane-prone coastal areas – in Baytown, Texas; Lakeland, Florida; Cranbury, New Jersey in the Northeast and one near company headquarters in Atlanta.

For Harvey, Home Depot used Baytown, a warehouse in Dallas and one in Winchester, Virginia. Texas contributes about 10% to Home Depot’s revenue, according to research firm Global Data.

Thanks to upgraded inventory tracking technology, store managers now know when to expect emergency shipments. Such precise information was not yet at hand at the time Hurricane Sandy struck almost five years ago. Now it helps retailers to limit losses by re-opening stores as fast as possible.

Out of the 48 stores Home Depot had to shut, six remained closed as of Thursday morning, but ensuring timely deliveries to the rest is a challenge and retailers are counting on vendors to help out.

West Fraser, a supplier of lumber to Home Depot, said it was ensuring deliveries to its customers were as regular as possible. Other suppliers, such as Weyerhaeuser (WY, +0.03%) , USG (USG, +0.06%), Jeld-Wen, and Masonite (DOOR, -0.81%) did not respond to requests for comment.

By Tuesday, Home Depot had lined up shipments ready to go into Houston, Capel said. As of Thursday, some of those shipments had started to make their way in.

Rival Lowe’s, which has its own disaster-response strategy, had closed 27 stores as of Monday, but by Wednesday had opened all but four. Workers were restocking, pushing to have all stores open in the next few days, said Rick Neudorff, the retailer’s emergency command center operations manager.

Lowe’s has dispatched by Tuesday 700 trucks from warehouses around the country that can get goods to Texas in two days or less, diverting many directly to stores rather than distribution centers. Lowe’s also is asking vendors to ship directly to stores, Neudorff told Reuters.

“Some stores are practically selling generators off the back of the truck because people have been waiting in the stores for the generators to arrive,” he said

1) Consider the market for "Hurricane Preparation Materials in the Hurricane-Affected Area", such as plywood to board up windows, etc. Draw a properly-labelled supply/demand diagram for this market, using black ink, that shows the original equilibrium before there is any news about an incoming hurricane. Now suppose that there is news that a hurricane is approaching. Before analyzing the responses of stores such as Home Depot/Lowe's as discussed in the article, what do you expect to happen to demand for these materials as a result of this news, other things equal? Show this shock on your diagram using blue ink, being careful to explain which curve you are shifting (and why), what happens to the quantity supplied and demanded at the original (pre-hurricane) market price, and the mechanism that will bring us to a new market equilibrium. Be clear in stating what happens to equilibrium price and quantity as a result of this shock.