(FORTUNE Magazine) – HERE IS the service conundrum: In the cutthroat, cost-conscious, globally competitive 1990s, how do you get customers to love you? Visit a Home Depot store, a retail Disneyland for residential fixer-uppers, and you may pick up some answers. The arena-size emporiums are packed to the rafters with plywood, paint, power tools, and 35,000 other pieces of whatever you might need for your home. The people who operate this star of the Service 500 have crafted a model of low-price, low-frills, low-hassle, high customer- coddling service. Chief Executive Bernard Marcus, 63, and President Arthur Blank, 50, who built their first store in Atlanta just 14 years ago, are so good at mixing low prices with high-grade service that Wal-Mart CEO David Glass says, ''They're running the best retail organization in America today.'' Except one, of course. Right, David? ''No, the best,'' says Glass. Bernie Marcus resembles a hip, urban Sam Walton. The son of a Russian cabinetmaker, he is one of those walk-the-stores, press-the-flesh, kibitz- with-the-customer merchants. A gung ho, sometimes shameless showman, he describes Home Depot's service philosophy this way: ''Every customer has to be treated like your mother, your father, your sister, or your brother.'' Good service is even more important in the 1990s than it was in the last decade, because in a slow-growth marketplace, companies survive by keeping the customers they've got. Studies by Boston Consulting Group and others show that customer retention results in above-average profits and superior growth in market share. Home Depot illustrates the payoff: Typical shoppers spend only $38 per visit, but since they drop in 30 times annually, year after year, they end up shelling out $25,000 each throughout a lifetime. Among the Service 500, Home Depot ranks No. 1 in ten-year growth in earnings per share -- an average 42.5% annually. Last year the company's net income rose 45.6%, to $362.9 million, on $7.1 billion in revenues. Home Depot, with 224 stores in 21 states, has delivered to investors the second-best ten-year return among the Service 500: 45.5%, just behind Circuit City Stores' 50.5%. A $1,000 stake bought when Home Depot first sold shares to the public in 1981 is worth $283,416 today. In retailing, Home Depot serves you best, but 13 other companies profiled in the boxes below -- Midwest Express Airlines, Waterhouse Securities, and United Parcel Service, to name just three -- lead in their respective industries. FORTUNE selected the best service providers on the basis of interviews with some 75 industry consultants, leaders of consumer groups, and corporate executives. These top companies have all learned to satisfy consumers in an economic environment that has become much harsher since FORTUNE published the first ''Companies That Serve You Best'' story six years ago. Richard Whiteley, vice chairman of Boston-based Forum Corp., a training and consulting firm, explains the change: ''You have limited resources to deliver 100% satisfaction, so you have to target customers and aim your service better than ever.'' He adds, ''Consumers are saying they want honest, straightforward service.'' American Express lost cachet, not to mention more than two million cardholders, because management failed to understand that consumers preferred value to prestige and wanted plastic that could be used anywhere, not just in fine restaurants. The card company satisfying customers best today is AT&T Universal, according to 75,000 consumers represented by the Bankcard Holders of America. Last fall, Universal won the Malcolm Baldrige National Quality Award. The middle-market contender crashed the card party four years ago with an enticing value pitch: no fee for life on its Visa and MasterCard, low interest rates on unpaid balances, and discounts on long-distance phone calls charged on the card. What makes Home Depot a service standout? Low prices? If customers defined service strictly in terms of lowest price, any discounter would be right up there. What Home Depot offers is value, a concept that goes beyond price, and it delivers that value in a cost-effective way for the company. For example:

-- It spends only on what directly benefits customers. The value ethic permeates the culture and is understood by consumers. They shop in cement- floored, warehouse-style outlets with the ambiance of airplane hangars, but the prices they pay are 20% to 30% below those of old-style hardware stores and guaranteed to be the best in town.

-- It encourages employees to build long-term relationships with customers. Workers are trained in home-repair techniques and can spend as much time as it takes to educate shoppers. There are no high-pressure sales tactics. Employees are on straight salary. Says Marcus: ''The day I'm laid out dead with an apple in my mouth is the day we'll pay commissions. If you pay commissions, you imply that the small customer isn't worth anything.''

-- It pays its people as partners. To satisfy customers consistently, you must have a committed work force. Every salesperson's bright-orange apron reads, ''Hi. I'm -----, a Home Depot stockholder. Let me help you.'' Instead of receiving discounts on merchandise, workers get shares in the company. Scores of the 224 store managers have each accumulated $1 million or more in Home Depot stock. Says Tim Sparks, 31, who started out loading customers' cars in the lot at the age of 19 and now manages a store in Jacksonville, Florida: ''My father was a peanut farmer in Alabama. Dirt poor. Where else could a son go from that to being a millionaire?'' In 1977, Marcus and Blank were fired from Handy Dan, a now defunct home- center retailer in California, by the new owner, turnaround artist Sanford Sigoloff. Newark, New Jersey-born Marcus, who had been Handy Dan's president, had spent his early career in drug retailing, having graduated from Rutgers University with a BS in pharmacy. Blank, an accountant with a degree from Babson College in Massachusetts, had been Handy Dan's vice president of finance. They had an idea for a low-priced, large-volume, high-service hardware chain, and nearly cajoled $2 million from Ross Perot. But Perot refused to allow Marcus to keep a two-year-old leased Cadillac at the company's expense. The deal fell apart because Marcus reasoned, ''If this guy, a passive investor, is already so involved in the company, down to this detail, I can't run the business.'' He did recognize that Perot had a point: A company car is an irresponsible expense if you're preaching value to customers. Though he didn't invest, Perot shops regularly at the Home Depot on North Central Expressway in Plano, Texas, and says it is his favorite store. The idea of a discount hardware chain was not new, but Marcus and Blank's strategy for dealing with the customer was. They were the first to take ham- handed homeowners who lacked the confidence to do more than screw in a light bulb and transform them into Mr. and Ms. Fixits. By running free clinics for shoppers on plumbing, construction, and tiling, the two men created their market. Says Marcus: ''The same guy who didn't know how to change the washer in his faucet is now redoing the water system in his house.'' And returning to Home Depot for his supplies. Success has produced a high-class problem for Home Depot: too many customers. Analysts estimate that some outlets in the densely populated Northeast have been raking in annual sales of more than $600 per square foot, a stunner in the world of retailing. But shoppers faced clogged aisles, endless checkout lines, and too few salespeople. To improve the service, the stores have added workers to the sales floor and shifted shelf-stocking and price-tagging to nighttime, when the aisles are empty. The changes are worth the expense because now those orange-aproned employees are free to sell during the day. Salespeople are trained not to let customers overspend. ''I love it when shoppers tell me they were prepared to spend $150 and our people have showed them how to do the job for four or five bucks,'' Marcus says. Last fall after Hurricane Andrew, Home Depot stores in South Florida sold plywood at a loss, $ declining to raise their prices even when some suppliers quickly jacked theirs up as much as 40%. This endeared the retailer to local citizens like Kerry Herndon, a flower grower in Homestead. Says she: ''If they had spent $50 million on advertising, they couldn't have bought the good will they got by doing this.'' TO KEEP UP with shoppers' ever-changing needs, Marcus spends at least a quarter of his time prowling the stores. His favorite question to customers: ''Did you find what you want?'' The company had problems keeping items in stock back when it ran seasonal sales. Do-it-yourself repairers poured in for the discounts, and Marcus explains, ''We could never stock enough merchandise. We were feeding the sales instead of taking care of the customer. It was stupid.'' Then a few years ago he visited the Wal-Mart shrine in Bentonville, Arkansas, where Sam Walton and David Glass convinced him that offering the same low prices every day -- without any disruptive sales -- was the way to go. Now Marcus has a policy of consistently underpricing the competition. Meanwhile, investments in electronic hookups with suppliers, allowing Home Depot to order and pay for merchandise through linked computer systems, enable the stores to have the product on the shelf when the customer needs it. Marcus tends to be pretty aw-shucks about his consumer research, saying that Home Depot employees do it every day by talking to shoppers. In fact, Thompson Associates, a retail research firm in Ann Arbor, Michigan, interviews more than 5,000 customers annually for Home Depot. Says Thompson President Bob Buckner: ''They keep closer track of customer satisfaction than any other company we work for. Unlike a lot of clients, they always react to what they hear.'' Lately, homeowning baby-boomers have been telling the researchers that their lives are so crowded with work and kids they have no time for do-it-yourself home repair. Many have switched to buy-it-yourself, but they fear being bilked by sleazy contractors. So Home Depot has started recruiting independent handymen to install its cabinets, wallpaper, and flooring in customers' homes. The workmen the stores hire must undergo a rigorous screening process that includes a half-day of customer service calls accompanied by a Home Depot manager, plus drug tests and other background checks. Last January, Peter Fernandez, a vice president of Fink Baking Corp., a large wholesale bakery, planned to renovate the kitchen and two bathrooms of his New York City apartment and solicited Sears Roebuck to do the work. Fernandez, 51, recalls that the Sears representative who came to his Upper West Side home told him that simply refacing his old kitchen cabinets would cost close to $5,000 and began pressuring him to sign on the dotted line. Fernandez balked and took a friend's advice to try a nearby Home Depot in Elmont, New York. There he bought most of what he needed for all three rooms -- including new, top-of-the-line kitchen cabinets -- for $7,400. In addition, salesman Edd Maxwell devoted about 20 hours to the project, even sending a licensed interior decorator to the apartment at no extra charge. Says Fernandez: ''I never had such a positive service experience in my life.'' To build a work force committed to service, the company hires only two people for every 100 who apply and, unlike most retailers, shuns part-time workers. ''The connotation of 'part-timer' is that your career is not here,'' Marcus says. ''Therefore, your involvement with the company is going to be less.'' He looks for extroverts who like to deal with people and then invests heavily to drill them in corporate philosophy as well as saw blades and ceiling fans. All store employees attend ''product knowledge'' classes, held weekly at each location, to acquaint them with all facets of home repair. Thus the folks who sell sinks and toilet seats learn about painting and grouting, and those who peddle lumber are illuminated about lighting.

The two at the top are evangelical about training. Both devote a full day every month to instilling their service credo in every new store manager and assistant manager. ''It's time-consuming, but it's essential,'' Marcus says. ''When they hear it from us, it means a lot more.'' Four Sundays a year, the duo don their orange aprons and stage Breakfast with Bernie and Arthur, a 6:30 A.M. pep rally/revival program broadcast live over Home Depot's closed- circuit TV network to most of the company's 45,000 employees. Bernie regularly rouses his disciples with the following: ''Where do you go if you want a job?'' They yell back: ''Sears . . . Lowe's . . . Builders Square.'' ''Where do you go if you want a career?'' ''HOME DEPOT!'' they roar. At times when the excitement becomes feverish, Marcus has been known to grab a resisting Blank, plant a noisy kiss on his cheek, and exclaim, ''Arthur, I love you!'' The bosses don't expect the employees to be inspired by showmanship alone. Wages typically start at $8 to $10 an hour, above the retailing average. Says Blank: ''If you really believe that your people drive your business, paying a good electrician $11 an hour instead of the standard $8 is smart. And better for the customer.'' Store managers earn bonuses of 50% of their base compensation, and assistant store managers 25% if they hit sales and profit goals. As a result, store managers earn $40,000 to $100,000 a year. The biggest incentive by far is stock ownership. Everyone from assistant store manager on up receives options. Except the CEO and president, that is. ''We have enough stock,'' says Marcus, whose 16 million shares are worth almost $700 million. ''It's a matter of gluttony,'' he says. Even those who do not get options share the wealth. Full-timers receive at least 7% of their annual salary in company stock, on top of their regular pay. Twice a year they can spend up to 20% of their annual gross income to buy stock at a 15% discount to the market price. Says Larry McClanahan, 53, a lumber salesman in the Roswell, Georgia, store: ''Every time we sell a dollar, we feel we make a dollar.'' A retired contractor who joined the company in early 1992, McClanahan hopes to work ten more years and then retire with $1 million in Home Depot holdings. Top management's ambitious plan is to have 516 stores in 35 states by 1996, and expand internationally as well -- presumably into Canada, maybe Mexico, and then Europe. But Home Depot confronts challenges. One is heightened competition from outfits like Lowe's, which is building Home Depot-size outlets in the eastern U.S. Employee enthusiasm is a fragile thing too. Burnout hits overworked store managers, many of whom scurry around their ten- acre emporiums from 5:30 in the morning until after dark six days a week. Moreover, Marcus, the indefatigable and inspirational leader, is nearing the usual retirement age, although he tells co-workers that he will come to work in a wheelchair at age 90 if they allow him. If he ever does leave, his successor most certainly will be Arthur Blank. A trained accountant and a meticulous Type A, he is criticized by some industry observers and ex-employees for being too practical and profit driven to pamper customers as his partner has. But he doesn't sound like it. ''There's no gap between Bernie's and my beliefs,'' he says. ''All of our people understand what the Holy Grail is. It's not the bottom line. It's an almost blind, passionate commitment to taking care of customers.'' +

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