Home Depot: Corporate Expansion and Image Improvement - Eric Aispuro Stuart Martin Ji Chong
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Home Depot: Corporate Expansion and Image Improvement
Eric Aispuro
Stuart Martin
Ji Chong
1Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03
Financial Analysis
Consolidated Statement of Earning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 04
Basic Fiscal Summary For 2002 Business Operations . . . . . . . . . . . . . . . . 05
Chart: Home Depot's Stock Price (Mar. 02-Mar. 03) . . . . . . . . . . . . . . . . . . 07
Stock Price History: Significant Developments . . . . . . . . . . . . . . . . . . . . . 07
Chart: One Year Stock Price Comparison of Home Depot and Lowe’s . . . . 09
Chart: Five Year Stock Price Comparison of Home Depot and Lowe’s . . . . 10
Summary Statistics (as of Feb. 03) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Current Investor Feasibility Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Five Forces Analysis
Market Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Internal Rivalry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Substitutes and Complements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Supplier Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Buyer Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Strategic Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2Executive Summary
Because Home Depot’s performance has deteriorated over the last three years, the
company has asked Blaisdell Consulting to assess its position and make
recommendations for improvement. From a high of nearly $70 per share in
January 2000, Home Depot’s stock price has declined sixty percent to just over
$40 today. Although many factors are to blame, much of this loss can be
attributed to the market share losses to rival competitor Lowe’s Inc. With newer
and more modern stores, Lowe’s has taken away business from many of Home
Depot’s aging stores. Because of the success of Lowe’s Inc., coupled with the
current downturn of the American economy, Home Depot needs to take some
immediate and substantial steps to right itself.
As the largest warehouse home improvement retail company in the United States,
Home Depot has three times more stores than any of its competitors. Based out of
Atlanta Georgia, Home Depot specializes in do-it-yourself warehouse retail stores
offering building materials, home improvement products and related furnishings.
Operating in 1,502 stores worldwide, Home Depot employs about 280,000 people
and is credited with being the innovator in the home improvement retail industry
by combining the economies of scale inherent in a warehouse format with a level
of customer service unprecedented among warehouse-style retailers.
Ranging in of about 114,000 square feet per store (with an additional 20,000
square foot garden center), Home Depot caters to do-it-yourselfers, as well as
home improvement, construction and building maintenance professionals. Selling
a complete spectrum of Home Improvement consumer goods from single bulk
items (i.e. carpets) to more extensive projects such as kitchen cabinets alongside
in- house design centers and a new At-Home Services program.
To help Home Depot not repeat the history of K-Mart, which got overtaken by
WalMart and Target, Blaisdell Consulting has identified a Home Depot strategy
that will allow it to stay competitive and hold back the challenge of Lowe’s.
Blaisdell Consulting believes that Home Depot can stabilize growth and improve
earnings with a combination of store improvements and customer service funded
by retained earnings, alongside a large advertisement campaign alerting customers
to the change. After stabilizing its primary consumer base in the U.S., Home
Depot will then be free to grow internationally.
3Financial Analysis
Elected Consolidated Statements of Earnings Data
The data below reflect sales data, the percentage relationship between sales and major
categories in the Consolidated Statements of Earnings and the percentage change in the
dollar amounts of each of the items.
IN PERCENTAGE
INCREASE (DECREASE)
FISCAL YEAR(1) IN DOLLAR AMOUNTS
------------------------------------- -----------------------
2001 2000
2001 2000 1999 vs. 2000 vs. 1999
---------- -------- --------- -------- --------
NET SALES 100.0% 100.0% 100.0% 17.1 % 19.0%
GROSS PROFIT 30.2 29.9 29.7 18.0 19.9
OPERATING EXPENSES:
Selling and Store Operating 19.0 18.6 17.8 19.4 24.8
Pre-Opening 0.2 0.3 0.3 (17.6) 25.7
General and Administrative 1.7 1.8 1.7 12.0 24.4
---------- ------- ------- ----- -----
Total Operating Expenses 20.9 20.7 19.8 18.2 24.8
---------- -------- -------- ----- -----
OPERATING INCOME 9.3 9.2 9.9 17.7 10.1
INTEREST INCOME (EXPENSE):
Interest and Investment Income 0.1 0.1 0.1 12.8 27.0
Interest Expense (0.1) (0.1) (0.1) 33.3 (48.8)
---------- -------- -------- ----- -----
Interest, net -- -- -- (3.8) 750.0
---------- -------- -------- ----- -----
EARNINGS BEFORE INCOME TAXES 9.3 9.2 9.9 17.5 10.9
Income Taxes 3.6 3.6 3.9 16.9 10.2
---------- -------- -------- ----- -----
NET EARNINGS 5.7% 5.6% 6.0% 17.9% 11.3%
---------- -------- -------- ----- -----
SELECTED SALES DATA (2)
Number of Transactions (000s) 1,090,975 936,519 797,229 16.5% 17.5%
Average Sale per Transaction $48.64 $48.65 $47.87 -- 1.6
Weighted Average Weekly Sales
per Operating Store $812,000 $864,000 $876,000 (6.0) (1.4)
Weighted Average Sales per
Square Foot(3) $387.93 $414.68 $422.53 (6.5) (1.9)i
(1) Fiscal years 2001, 2000 and 1999 refer to the fiscal years ended February 3, 2002; January 28, 2001;
and January 30, 2000, respectively. (2) Excludes Apex Supply Company, Georgia Lighting, Maintenance
Warehouse, Your "other" Warehouse and National Blinds and Wallpaper. (3) Adjusted to reflect the first
52 weeks of the 53-week fiscal year in 2001.
4Basic Fiscal Summary For 2002 Business Operations
FISCAL YEAR ENDED FEBRUARY 3, 2002 COMPARED TO JANUARY 28,
2001. Fiscal year 2001 consisted of 53 weeks compared to 52 weeks in fiscal
2000. Net sales for fiscal 2001 increased 17.1% to $53.6 billion from $45.7
billion in fiscal 2000. This increase was attributable to, among other things, the
204 new stores opened during fiscal 2001 and full year sales from the 204 new
stores opened during fiscal 2000. Approximately $880 million of the increase in
sales was attributable to the additional week in fiscal 2001. Comparable store-
for-store sales were flat in fiscal 2001 due to the weak economic environment
resulting from certain factors including, but not limited to, low consumer
confidence and high unemployment.
Gross profit as a percent of sales was 30.2% for fiscal 2001 compared to 29.9%
for fiscal 2000. The rate increase was primarily attributable to a lower cost of
merchandise resulting from product line reviews, purchasing synergies created by
a newly centralized merchandising structure and an increase in the number of
tool rental centers from 342 at the end of fiscal 2000 to 466 at the end of fiscal
2001. Home Depot expects to have tool rental centers in approximately 600
stores by the end of fiscal 2002.
Operating expenses as a percent of sales were 20.9% for fiscal 2001 compared to
20.7% for fiscal 2000. Selling and store operating expenses as a percent of sales
increased to 19.0% in fiscal 2001 from 18.6% in fiscal 2000. The increase was
primarily attributable to growth in store occupancy costs resulting from higher
depreciation and property taxes due to Home Depot’s investment in new stores,
combined with increased energy costs. Also, credit card transaction fees were
higher than the prior year due to increased penetration of total credit sales. These
increases were partially offset by a decrease in store payroll expense caused by an
improvement in labor productivity resulting from initiatives inside the store and
new systems enhancements.
Store initiatives include the Service Performance Improvement (SPI ) initiative
which was implemented in every Home Depot store in fiscal 2001. Under SPI
stores receive and handle inventory at night, allowing associates to spend more
time with customers during peak selling hours. In addition, the Pro program was
in 535 of our Home Depot stores at the end of fiscal 2001, providing dedicated
store resources to serve the specific needs of professional customers. Home Depot
expects to have the Pro initiative in more than 950 stores at the end of fiscal 2002.
SPI and Pro have resulted in improved operational efficiency, safety and customer
service.
Pre-opening expenses as a percent of sales were 0.2% for fiscal 2001 and 0.3%
for fiscal 2000. 204 new stores were opened in both fiscal 2001 and 2000. Pre-
opening expenses averaged $569,000 per store in fiscal 2001 compared to
5$671,000 per store in fiscal 2000. The decrease in the average expense per store
was primarily due to shorter pre-opening periods as Home Depot reengineered
their store opening process.
General and administrative expenses as a percent of sales were 1.7% for fiscal
2001 compared to 1.8% in fiscal 2000. This decrease was primarily due to cost
savings associated with the reorganization of certain components of general and
administrative structure, such as the centralization of merchandising organization,
and focus on expense control in areas such as travel.
Interest and investment income as a percent of sales was 0.1% for both fiscal
2001 and 2000. Interest expense as a percent of sales was 0.1% for both fiscal
2001 and 2000.
Home Depot’s combined federal and state effective income tax rate decreased to
38.6% for fiscal 2001 from 38.8% for fiscal 2000. The decrease in fiscal 2001
was attributable to higher tax credits and a lower effective state income tax rate
compared to fiscal 2000.
Net earnings as a percent of sales were 5.7% for fiscal 2001 compared to 5.6% for
fiscal 2000, reflecting the increased gross profit rate, which was partially offset by
higher store operating expenses. ii
6Chart: Home Depot’s Stock Price (Mar. 02-Mar. 03)
iii
Stock Price History: Significant Developments
March 20, 2002 The Home Depot, Inc. To Rapidly Expand its Presence in Mexico with
Acquisition
The Home Depot, Inc. announced that it has doubled its presence in Mexico by signing an
agreement to acquire Del Norte, a four-store chain of home improvement stores in Juarez, Mexico.
The financial terms of the transaction were not disclosed. In addition to acquiring Del Norte,
construction has begun on a newly acquired site in Mexicali, and work will be underway soon on
another in Tijuana. Both store locations are expected to open by the end of 2002.
July 12, 2002 The Home Depot, Inc. Shares Fall On Analyst Downgrade - DJ
The Home Depot, Inc. shares fell as Dow Jones reported that Merrill Lynch downgraded the
Company's stock, citing sluggish sales and depleted inventory.
July 15, 2002 The Home Depot, Inc. Announces $2 Billion Share Repurchase Program;
Confirms Q2 and Long-Term Guidance
The Home Depot, Inc. announced that its Board of Directors has approved a share repurchase
program of up to $2 billion effective immediately. The Company added that it is comfortable with
the second quarter consensus earnings estimate of $.47 per share, according to Multex. The
Company also reaffirmed its three-year guidance of 15 to 18% annual sales growth and 18 to 20%
annual earnings growth through fiscal 2004.
Nov 19, 2002 The Home Depot, Inc. Confirms Q4 EPS Guidance; Expects 3-5% Drop in Q4
Same -Store Sales; Issues Fiscal Year Guidance Below Analysts' Estimates
7The Home Depot, Inc. reaffirmed that it expects to earn $0.31 diluted earnings per share for the
fourth quarter. The Company also indicated that it expects to earn $1.57 diluted earnings per share
for the fiscal year. Wall Street analysts on average were expecting the Company to earn $0.31 per
share in the fourth quarter and $1.58 per share in the fiscal year, according to Multex. Reuters also
reported that the Company expects sales at stores open at least a year to fall 3% to 5% in the fourth
quarter. In the year earlier fourth quarter, Home Depot's comparable -store sales rose 5%. The
Company cited lower lumber prices and an aggressive campaign to roll out new products as the
primary reason for its same-store sales decline forecast, according to Reuters.
Jan 02, 2003 The Home Depot, inc. Revises Fiscal Year 2003 Outlook Downward
The Home Depot, Inc. announced that it is revising its diluted earnings per share guidance for the
fiscal year ending February 2, 2003 from $1.57 to between $1.53 and $1.55. The change in
earnings per share outlook is due to slowing sales during the month of December, which lowered
the Company's expectation of a decline in comparable store sales in the fourth quarter to as much
as 10% versus previously provided guidance of a decline of between 3% and 5%. The Company
said lower customer transactions and lower-than-expected performance in traditional gift
categories like hardware and power tools severely impacted December results. Reflecting this
quarterly guidance, The Home Depot expects total sales growth of 10% and earnings per share
growth of 21% to 23% on a comparable 52-week basis for fiscal year 2003. According to Multex,
analysts expected the Company to report fiscal year 2003 earnings per share of $1.57 on total sales
of $58.83 billion.
Jan 28, 2003 The Home Depot, Inc. Announces Divisional Consolidation
The Home Depot, Inc. announced plans to consolidate its New England division with its Eastern
division that is headquartered in Atlanta, GA. The expanded Eastern Division will support more
than 600 Home Depot stores and have over 110,000 associates. The consolidation, which is
expected to take place over the next 60 days, will result in the transfer of merchandising and core
support functions from the Company's Canton, Massachusetts office to its South Plainfield, New
Jersey office. The company also said the consolidation would not have any impact on its
customers or result in any store closings or reduction of store jobs. iv
8One Year (daily) Stock Price Comparison of Home Depot and Lowe’s
9Five Year (weekly) Stock Price Comparison of Home Depot and Lowe’s
10Summary Statistics (as of Feb. 03)
Competitive Landscape
As of Feb 25 2003 KEY: Best of Group
Key Numbers Top Competitors
Home
Depot Lowe's Menard1 TruServ1
Annual Sales ($mil.) 58,247.0 26,490.9 5,300.0 2,619.4
Employees 256,000 108,317 9,200 4,000
Market Value ($mil.) 53,125.8 30,160.1 -- --
Profitability Home
Depot Lowe's Menard1 TruServ1 Industry 2 Market 3
Gross Profit Margin 31.99% 32.17% -- -- 30.87% 46.94%
Pre-Tax Profit Margin 10.18% 8.26% -- -- 8.52% 4.43%
Net Profit Margin 6.29% 5.55% -- -- 5.26% 1.90%
Return on Equity 18.2% 18.5% -- -- 16.2% 3.8%
Return on Assets 11.7% 9.3% -- -- 10.0% 0.7%
Return on Invested Capital 17.1% 12.6% -- -- 13.4% 1.8%
Valuation Home
Depot Lowe's Menard1 TruServ1 Industry 2 Market 3
Price/Sales Ratio 0.91 1.14 -- -- 1.09 1.01
Price/Earnings Ratio 14.64 20.88 -- -- 21.00 55.61
Price/Book Ratio 2.64 3.79 -- -- 3.37 2.03
Price/Cash Flow Ratio 11.65 15.20 -- -- 15.69 12.43
Operations Home
Depot Lowe's Menard1 TruServ1 Industry 2 Market 3
Days of Sales Outstanding 7.78 2.54 -- -- 6.42 55.13
Inventory Turnover 5.1 4.5 -- -- 5.1 7.7
Days Cost of Goods Sold in
Inventory 71 81 -- -- 71 47
Asset Turnover 2.0 1.8 -- -- 1.9 0.4
Net Receivables Turnover Flow 50.0 137.8 -- -- 56.0 6.5
Effective Tax Rate 37.8% 37.3% -- -- 38.2% --
Financial Home
Depot Lowe's Menard1 TruServ1 Industry 2 Market 3
Current Ratio 1.52 1.59 -- -- 1.66 1.31
Quick Ratio 0.6 0.4 -- -- 0.5 0.9
Leverage Ratio 1.56 1.99 -- -- 1.63 5.75
Total Debt/Equity 0.07 0.48 -- -- 0.22 1.48
Interest Coverage 170.4 13.5 -- -- 28.1 1.6
11Per Share Data ($) Home
Depot Lowe's Menard1 TruServ1 Industry 2 Market 3
Revenue Per Share 25.04 33.92 -- -- 24.38 19.73
Fully Diluted Earnings Per Share
from Total Operations 1.56 1.85 -- -- 1.27 0.36
Dividends Per Share 0.21 0.11 -- -- 0.14 0.40
Cash Flow Per Share 1.96 2.54 -- -- 1.70 1.61
Working Capital Per Share 2.03 2.86 -- -- 1.98 1.67
Long-Term Debt Per Share 0.57 4.79 -- -- 1.66 10.79
Book Value Per Share 8.65 10.19 -- -- 7.92 9.88
Total Assets Per Share 13.48 20.25 -- -- 12.87 56.77
Growth Home
Depot Lowe's Menard1 TruServ1 Industry 2 Market 3
12-Month Revenue Growth 8.8% 19.8% -- -- 0.0% 0.9%
12-Month Net Income Growth 20.4% 43.8% -- -- 0.0% 2.6%
12-Month EPS Growth 20.9% 42.3% -- -- 0.0% 9.1%
12-Month Dividend Growth 23.5% 37.5% -- -- 0.0% (2.4%)
36-Month Revenue Growth 15.1% 18.5% -- -- 11.5% 7.1%
36-Month Net Income Growth 16.6% 29.4% -- -- 11.2% (31.5%)
36-Month EPS Growth 16.1% 27.8% -- -- 10.2% (41.3%)
36-Month Dividend Growth 22.2% 19.1% -- -- 11.5% (13.4%)
12Current Investor Feasibility Trends
Home Depot
Business Profitability trends over last 11 years
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
Sales per share 4.57 6.12 7.21 9.03 11 13.65 16.68 19.68 22.83 25.5 28.4
Earnings per share 0.22 0.29 0.34 0.43 0.52 0.71 1 1.1 1.29 1.54 1.8
Div'ds decl'd per share 0.02 0.03 0.04 0.05 0.06 0.08 0.11 0.16 0.17 0.21 0.24
Avg Ann'l P/E Ratio 42.3 33 27.9 26.5 30.8 40.1 45.8 46.6 35.6
Relative P/E Ratio 2.5 2.16 1.87 1.66 1.78 20.9 2.61 3.03 1.81
Avg Ann'l Div'd Yield 0.30% 0.30% 0.40% 0.40% 0.40% 0.30% 0.20% 0.30% 0.40%
Sales ($mill) 9238.8 12477 15470 19536 24156 30219 38434 45738 53553 58900 65500
Net Profit($mill) 457.4 604.5 731.5 937.7 1160 1614 2320 2581 3044 3650 4260
Income Tax Rate 37.90% 38.30% 38.80% 38.90% 38.90% 39.20% 39.00% 38.80% 38.60% 37.60% 37.50%
Net Profit Margin 5.00% 4.80% 4.70% 4.80% 4.80% 5.30% 6.00% 5.60% 5.70% 6.10% 6.50%
Working Cap'l ($mill) 994 918.8 1255.5 1867.30% 2004 2076 2734 3392 3636 4750 5425
Long-Term Debt ($mill) 842 983.4 720.1 1246.6 1303 1566 750 1545 1250 1300 1300
Return on Total Cap'l 13.10% 14.30% 13% 13.30% 14.20% 16% 18% 15.90% 16% 17.50% 17.50%
v
52-week stock high $52.6 52-week Stock Low $20.10
Financial Analysis Summary
Although not performing well in relative terms in the immediate present, Home
Depot is a company with a strong financial foundation. Higher retained earnings
have been reinvested to make material improvements on stores and to improve
sales techniques . Future plans call for the construction of 200 new stores and
implementation of an efficiency improving checkout system called the FAST
(Front-End Accuracy and Service Transformation). This system integrates
software that is designed to improve speed, accuracy, and service at the checkout
stations, improving customer satisfaction and lowering operation costs.
13Five Forces Analysis
Market Definition
Home Depot is a retail firm involved in the sale of products and services used for
building improvement and construction, including lawn and garden products.
Home Depot market definition would be any goods related to home
improvement/construction products through cross-elastic demand. Although this
defines a huge market, the limited number of direct competitors simplifies the
situation.
As of late, Home Depot has been selling increasingly to professional builders and
contractors, who now account for one-third of sales. Regardless of this trend,
Home Depot’s main target consumer is the general public. New ad campaigns
and investment products are catered to the average homeowner.
Internal Rivalry
Home Depot faces a myriad of other competing businesses. However, Home
Depot’s unique warehouse size retail store allows it to employ cost-saving
economies of scale characteristics, while maintaining the specialty product and
personnel service that is popular with smaller size home- improvement product
and service retailers. Therefore, while price competition is very fierce in the
home improvement industry, the economies of scale exhibited by Home Depot
allow it to act more as a dominant firm with many smaller price-taking fringe
firms.
Home Depot has faced some serious competition as of late from other new home
improvement warehouse retailers. Lowe’s Inc. in particular has launched an
aggressive growth plan with an existing base of 800 stores, second only to Home
Depot’s 1,400 stores. Although the market share competition between the two
stores will lower profit margins for both corporations, the rapid growth rate of
Lowe’s Inc. implies empty market space and that more entry is possible.
In order to remain the largest home improvement/construction provider, Home
Depot must now refocus its business strategy to deal with the new competition.
Dealing mainly with the internal rivalry created by Lowe’s Inc., Home Depot has
already initiated several plans. Home Depot plans to invest $500 million in new
inventory, focusing on products such as rugs, appliances, and bathroom hardware.
Secondly, Home Depot plans to remodel all older stores and bring them up to date
with newer technologies and operating procedures. By 2005, Home Depot also
plans to expand its tool-rental program to include over 80% of its stores and
expand its presence into Mexico by adding two new stores.
14In the more immediate future, Home Depot has unveiled a new national
advertisement campaign in order to gain a market edge amid growing
competition. The new advertisement motto reads, “The Home Depot is more than
a store. You can do it. We can help.” The Home Depot ad will play down the
role of price promotions and focus more on the services that home improvement
retailers have to offer. The role of service and contact with consumers will be
highlighted along with the emotional connection to consumers created at Home
Depot.
At the moment, Home Depot is the largest home improvement supplier in the
entire world. With the highest annual sales (58,347 mil), market value (53,125.8
mil), and largest number of employees (256,000), Home Depot has proven to be
the dominant firm in the market place. However, the question remains as to
whether Home Depot can maintain this dominant position. Lowe’s ga in in market
share over the past two years and aggressive growth plan is now becoming a
major threat to Home Depot’s continued existence. Lowe’s recent 4th quarter
earnings for 2003 rose 46% and created a six percent or two dollar increase in the
stock market valuation, while Home Depot reported lower earnings which
resulted in a standstill growth of two cents in its stock market valuation.
Alongside its growth, Lowe’s gross profit rates, return on equity and other
accounting figures are comparable, if not better, to Home Depot’s.
It seems clearly understood that Home Depot’s earlier and somewhat lethargic
corporate strategy is quickly changing in response to the intense competitive
challenge from Lowe’s Inc. It remains to be seen whether Home Depot’s new
strategies will work, or whether Lowe’s Inc. will continue to eat away at Home
Depot’s market share.
Entry
While it is easily possible for any business entrepreneur to open a home-
improvement store, it is much more difficult to build a warehouse size retailer
even closely comparable in size to Home Depot. Building such a huge warehouse
size retail store requires a large amount of capital and thus prohibits most from
being able to accomplish it. Due to this barrier to entry, most stores are smaller in
size and cannot extract the same type of cost-saving economies of scale from
business operation. This both blocks new entrants from entering the home
improvement/construction market and inhibit the growth of existing stores to
reach the required size to effectively compete by exercising economies of scale.
Although this capital- intensive barrier to entry prevents most entrants, it does not
prevent all. Newly created warehouse retailers and rapidly growing existing
15retailers have shown that the marketplace has displayed enough profit incentive
for new entrants to take the chance.
Substitutes and Complements
In terms of products and services, the Home Depot retailer can offer nothing that
cannot easily be sold by another retailer. Home Depot’s biggest asset is its size
and low cost. Only its comparatively lower prices can attract customers, since its
products and services are not at all unique. A substitute product can easily be
found in any other home improvement retailer. However, in terms of
complements, the Home Depot Corporation is now beginning to increasingly
offer service-oriented products. Most complementary services offered by Home
Depot are most likely going to be tied to basic bulk goods as a complement
(selling cabinets and installation, etc.) in order to extract the highest profit
possible.
Supplier Power
The Labor and Materials needed in order to operate a home improvement store is
comparable to other businesses. Most employee positions do not require
extensive training and the stock materials bought by Home Depot for sale can be
bought from many potential materials providers. In order to get the lowest costs,
Home Depot exerts an enormous amount of buyer power against its suppliers by
negotiating in bulk as an entire corporation. By buying bulk for an entire chain of
1,400 stores, Home Depot is able to demand much lower costs from most
suppliers by sheer volume of order. Each bulk supplier is then predetermined for
every good at each store by the head corporation in order to keep costs at their
lowest.
By following Standard Operating Procedures, individual Home Depot stores then
buy from these predetermined suppliers in quantities decided by the regional
manager. Therefore, while the regional manager determines the actual quantity of
each good, allowing the entire corporation to collectively exert buyer power
maximizes the money saved on the bulk goods.
Buyer Power
As for customers of Home Depot, business is attracted for the same reason as any
other warehouse/bulk retailer. Desirable pricing coupled with service (both
personal and product), attract any rational consumer who is trying to get more for
his money. The cost advantage inherent in Home Depot’s large warehouse
retailing allows it to simply sell the same products at cheaper prices than the
competition. Therefore the only reason that a rational consumer would shop
16somewhere other than a warehouse retailer would be for reasons other than price,
which is generally service quality.
Historically, one of the main advantages that smaller stores would generally have
is the benefit of customer service. However with the rapidly increasing
competition, Home Depot’s new focus is exactly that. With competitive price
promotion as a staple of Home Depot’s advertisement campaign, supportive and
helpful customer service has become Home Depot’s new focus. With this
advantage gone, competition with Home Depot and other warehouse retailers is
going to become that much more difficult if not impossible for smaller home
improvement suppliers.
17Strategic Recommendation
Corporate Expansion and Image Improvement
The last two years have been witness to an increasingly poor company
performance by Home Depot Inc. Although some of this financial downturn can
be attributed to a general economic slowdown in the wake of September 11, other
more serious factors are also at fault. Home Depot’s stock price has fallen from a
per share stock price of near $70 to under $25 in the last three years. It is clear
that Home Depot must quickly change its strategy in order to remain the world’s
top home improvement retailer.
Due to Home Depot’s unique retail configuration, it has had a specific advantage
over other retailers that were in direct competition with it. This advantage
allowed Home Depot to become a powerful, if not dominant, firm in the home
improvement retailing industry. However, new entrants are becoming an
increasingly dangerous threat to Home Depot. Lowe’s Inc. in particular has been
the most successful of Home Depot’s competitors and has increased its stock
price by 83% in the last two years, even in a poor economy.
While both Home Depot and Lowe’s offer relatively low prices because of their
cost saving economies of scale, Lowe’s has managed to build a very positive
service and quality reputation. Home Depot sells its bulk goods at prices
comparable to those of Lowe’s, but has been losing market share to competitors
because of its comparably worse service and customer care. While customers
would be indifferent to the similar prices of two stores, the bundled good of price
with service would cause home improvement customers to go to alternative stores
rather than Home Depot. In order to respond to the situation, Home Depot has
initiated a program to improve quality and service and launched a new national ad
campaign to call attention to these changes.
Home Depot’s ad campaign addresses the problematic issue of store image.
Much of Lowe’s’ success can be attributed to its positive reputation with
consumers. Home Depot’s new campaign is an attempt to assure consumers of
Home Depot’s commitment to improved quality and service-oriented focus.
Commercials and advertisements show “everyday people” receiving satisfaction
by accomplishing home improvement tasks with the help of Home Depot. Chief
Marketing Officer John Costello stated that Home Depot would continue to lead
the market by sticking to what it does best. vi Assuming Home Depot can improve
its image through marketing and real changes to improve store quality and in
customer service, Home Depot would have more than the capacity to resume the
pre-competitive corporate growth rate.
18In order to find the effectiveness of the ad campaign on the Home Depot image, a
random poll was taken regarding the responses to the new Home Depot
commercials and advertisements.
Like the ads a lot
All respondents 23%
Ad Track survey average 21%
Among key target groups
Male respondents 16%
Female respondents 30%
Dislike the ads
All respondents 4%
Ad Track survey average 13%
Think they are very effective
All respondents 22%
Ad Track survey average 22%
(USA Today: Advertising and Marketing Poll, 2002)
Costello stated that the advertisement campaign was “targeting home-focused
individuals, men and women, young and old.” However, the commercials struck
a special chord with 25- to 29- year-olds: 36% liked the ads a lot, and 36%
considered them “very effective.” Among households with income of $75,000-
plus, 28% liked them a lot, and 26% considered them “very effective.”vii With
continued advertisement, Home Depot’s image and reputation will continue to
improve as long as marketing efforts are matched with corresponding
improvements in quality at the stores themselves.
In order to back up all the claims and promises made by their new national ad
campaign, Home Depot has increased retained earnings in order to improve and
refurbish older Home Depot stores. For the year of 2003, Home Depot is
increasing capital spending on new and existing stores from a previous $3.3
billion to $4 billion. Included in the new figure is the $250 million to remodel
stores. The average Home Depot is five years old, but 26 percent of its 1500
locations are seven years old or older. Home Depot’s older stores, coupled with
its weaker service, have opened the door for its main competitor (Lowe’s) to
impress shoppers with its modern stores, which are generally described as brighter
and having wider aisles.
Along with personnel and training changes needed to focus more on customer
services, Blaisdell Consulting also believes that personnel training should also
focus on more experienced personnel. While customer service is important, it is
19important to train personnel specifically for a customer base with no home
improvement experience. With a new advertisement campaign encouraging
average homeowners to take the initiative and attempt home improvement
projects, only experienced personnel can provide competent customer service. If
employees are young and inexperienced, customers may be dissatisfied with their
lack of knowledge, despite their friendliness. . Although more experienced
employees will command higher salaries, the increase in expense relative to
overall company costs is small relative to the importance of increased customer
satisfaction. With such a pivotal change, Home Depot will stay competitive with
Lowe’s while maximizing customer assistance and minimizing customer base
loss.
Coupled with more experienced customer service in an attempt to increased
customer satisfaction, Home Depot is also investing in technology to increase
customer satisfaction. To increase the amount of customer service, Home Depot
is increasing the number of stores with self-checkout registers from 45 to 800 by
year-end, increasing both efficiency and customer satisfaction by cutting down on
checkout time. Hopefully, all these changes will completely fulfill the promises
made to customers by the Home Improvement advertisements. Cyclical customer
satisfaction is especially necessary in the market of home improvement, where
repeat business makes up a majority of the customer base.
With $250 million dollars being funneled into improving older stores, the rest of
the retained $4 billion dollars is going to be spent opening up new stores. Home
Depot has aggressive growth plans for a 21-22% annual growth in store openings
scheduled. More than 200 stores will be opened during the year, bringing the
total number of Home Depots to more than 1,900 by the end of 2003. In keeping
with the statement by Costello to “stick to what we do best,” Home Depot also
will slow the growth of its Expo division, which sells high-end home design
merchandise. After opening 11 Expo Design Centers last year, it will only open
two in 2003. viii
Based out of Atlanta, Home Depot’s expansion has officially started in Texas,
which has been chosen as the first expansion state. Along with expanding within
the US, Home Depot has begun to set up a network of stores internationally. By
setting up warehouse retailers in foreign countries where the home improvement
industry is underdeveloped, Home Depot can completely monopolize the market.
For the past couple years, Home Depot has been tightening its hold on the home
improvement market in Mexico. By purchasing the current Mexican home
improvement retailing chains and instituting their own stores, Home Depot has
already placed themselves as one of the top retailers in Mexico. In August of
2001 and June of 2002, Home Depot purchased the Total HOME and Del Norte
chains. By immediately converting all these stores, Home Depot has now become
the second largest home improvement retailer in Mexico within two years.
20Overall, Home Depot’s best chance for success is to focus its strategy on several
key efforts. By continuing to expand both within the US and internationally in
underdeveloped markets, Home Depot will be able to continue corporate growth.
Equally important is the advancement of an aggressive advertising campaign
backed by improved current stores and customer service practices that will allow
Home Depot to hold its current market share.
i
2002 Home Depot Annual Report
ii
2002 Home Depot Annual Report
iii
Graphs from www.globeInvestor.com
iv
www.yahoo.marketguide.com
v
www.finance.yahoo.com
vi
www.stlouis.bizjournals.com/stlouis/stories/2003
vii
USA TODAY, 2002. “Home Depot Ads get personal.” Theresa Howard.
viii
www.finance.yahoo.com
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