Strategic Management of Home Depot
Home Depot, Inc. (HD) is a home improvement retailer that provides consumers with home improvement and lawn care products, building materials, equipment rental, and installation services. The Home Depot, Inc. was established in 1978, and it is operated out of Atlanta, Georgia (Yahoo Finance). The initiation of the 2008 economic recession and the crash of the housing bubble had an adverse effect on the entire home improvement retailing industry, as well as Home Depot’s sales. However, the organization has been able to make a strong recovery, and is the world’s largest home improvement retailer.
Home Improvement Retailing Industry
The home improvement retailing industry consists of large home centers and hardware stores that may provide products and services. According to Charles Hill and Gareth Jones’, Strategic Management: An integrated approach, Porter’s model for analyzing an industry consists of five components. These are the risk of entry by potential competitors, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitutes, and the amount of rivalry between established firms in the industry.
In the home improvement retailing industry the risk of entry by potential competitors is a low force. The top two companies in the U.S. home improvement retailing industry are The Home Depot and Lowe’s (Hoover’s Inc., 2011). These companies have established economies of scale through centralized purchasing. Home Depot and Lowe’s also have strong brand names and each provide specific brand-name products that have established consumer loyalty. Customer switching costs should not be a major issue in this industry due to the low-cost prices offered by the main competitors in the industry. The top firms in the industry have absolute cost advantages based on their accrual of experience, supplier relationships, and ease of access to capital (Hoover’s, 2011). Consequently, the risk of new entrants in the industry is low.
Rivalry in the home improvement retailing industry is strong. The industry is dominated by Home Depot and Lowe’s, but it is fragmented due to the high number of competitors and the vast variety of products and services (Sunita, 2010). Competitors in the industry include electrical, plumbing, and building supply stores. Other competitors are specialty design stores, discount stores, independent building supply stores, and even other retailers such as Wal-Mart and Sears (Home Depot, 2011). Industry demand is predicted to increase as the large Generation Y enters into the housing market and begins spending on do-it-yourself home projects. Also, demand is currently increasing as homeowners begin home-improvements which were set aside during the economic slump and the bursting of the housing market bubble. The increase in demand should moderate the strength of competition in the industry. However, the industry maintains high fixed costs for capital leases, buildings, land, and employee salaries which heightens the rivalry among competitors for the greatest sales volume (Joint Center for Housing Studies, 2011). Therefore, rivalry in this industry is strong.
The threat of substitutes in the home improvement retailing industry may be considered low. The products and services provided really are not ones that have any close substitutions. While tea may be considered a substitute for coffee, there is no close substitute for paint, drywall, or other home improvement supplies or services. The only product which may really be considered a substitute would be a new house. A substitute for services provided would be more customers choosing to perform their own installations of products by educating themselves on the necessary procedures (Sunita, 2010). In spite of this, these consumers will most likely still make their product purchases within the industry. Hence, the threat of substitutes is a low force.
The bargaining power of suppliers is a low force in the home improvement retailing industry. Companies such as Home Depot and Lowe’s depend upon products from well-recognized brand-name suppliers. If these firms are unable to maintain their strategic alliances and exclusive relationships with certain suppliers they might lose their product differentiation which attracts some customers. In addition, these companies have some reliance upon third-party suppliers. If these third-party suppliers were to run into financial or regulatory difficulties or for some reason be unable to uphold their side of an agreement there would be a negative impact on the companies in the industry. However, these firms maintain the majority of control over their own supply chains by eliminating the middlemen such as distribution centers. Also, as a leader in the industry, Home Depot has an online center, workshops, and scorecards for suppliers. This aids Home Depot in minimizing the control of its suppliers (The Home Depot, 2011). Lowe’s also utilizes a supplier website for building and strengthening supplier relations (Lowe’s, 2011). These activities limit supplier bargaining power to a low force.
The bargaining power of buyers or consumers is a strong force. There are three types of consumers for the home improvement retailing industry. There are the do-it-yourself customers, buy-it-yourself customers, and professional contractors. The number of competitors in the industry is relatively high granting greater bargaining power to the buyers. Consumer tastes, preferences, and expectations influence consumers’ demands for products and services (The Home Depot, 2011). This in turn increases the bargaining power of buyers. Yet, as long as the industry is able to anticipate and properly respond, consumers will have a lower bargaining force. In turn, this is why businesses in the industry place such a strong emphasis on customer consultation, customer service, consumer experience, and maintaining a strong consumer base. The bargaining power of consumers is a stout force in the industry.
Utilizing Porter’s five forces model this analysis illustrates that the home improvement retailing industry’s environment is currently an opportunity for established companies such as Lowe’s and Home Depot. There is a low threat for new entrants in the industry, substitutes, and bargaining power of suppliers. While rivalry and consumer bargaining power are strong forces in the industry, the established companies have a competitive advantage based on low-cost structures, economies of scale, and brand loyalty.
In the 1990’s, Home Depot followed a differentiation business model. It focused on distinguishing itself from the competitors with knowledgeable, helpful employees, brand-name products, and a unique customer experience (Brown, 2007). As the home improvement retailing industry matured and became less fragmented, Home Depot recognized the need for a new strategy to maintain a competitive advantage and increase profitability. Therefore, Home Depot’s top management team decided to implement a cost-leadership strategy (Brown, 2007). Home Depot also utilized a chaining strategy to achieve cost advantages and consolidate the industry. It established networks of connected retail stores which helped them control their supply costs (Hill & Jones, 2008).
The cost-leadership strategy The Home Depot adopted allowed it to lower its cost structure and improve operating performance. This has enabled Home Depot to be more profitable than Lowe’s and other competitors, such as Menards. Another benefit of the cost-leadership strategy is that Home Depot is able to charge a lower price which attracts more customers and increases its competitive advantage (Corral, 2010). The Home Depot has been able to “destroy brands and transform entire products into low-margin commodity markets (Schwalm & Harding, 2000).”
Within its cost-leadership model, The Home Depot has established a “three-pronged strategy to boost business this year and onward (Corral, 2010).” It is specifically concentrating on supply-chain transformation, merchandise transformation, and customer service. According to Marvin Ellison, evp, U.S. stores, the three-pronged strategy creates great value for Home Depot while instituting product authority (Corral, 2010). Along with this, “Home Depot is shifting its model to cater to do-it-yourself customers” by changing its “product-mix in stores to focus on smaller projects” since the “money is in small projects that homeowners can accomplish themselves over one or two weekends without breaking their bank accounts (Peterson, 2011).” Home Depot wants to improve customer service and simplify store operations.
According to Corral, “The supply chain transformation relates to the rollout of company’s new rapid deployment centers (RDC) (2010).” The RDCs have “dramatically improved store environments,” and allow for the shifting of payroll from moving freight to concentrating on customers (Corral, 2010). Nineteen new RDCs have been opened and now cover 100% of the retail stores (Wahlstrom, 2010). According to Ellison, the RDCs have “improved lead times and they’ve improved our overall turns (Corral, 2010).”
The merchandising transformation initiative focuses on “providing great value and reestablishing product authority (Corral, 2010).” This allows individual stores to more closely monitor their own product inventories. There is also an automated clearance cycle which reduces the amount of products that are marked down. In turn, this aids Home Depot’s profit margin (Corral, 2010).
Good customer service is vital for The Home Depot to maintain its competitive advantage. Therefore, The Home Depot is concentrating on associates who interact with customers, as well as customers themselves. Associates receive a generous benefits package, and good performance is always rewarded. Home Depot also provides leadership to allow associates to continue developing their knowledge (Corral, 2010). Knowledgeable employees are better able to meet consumer needs. This leads to autonomous actions on the part of the associate which is important for combating new technology and adverse situations (Hill & Jones, 2008). For customers’ benefits, Home Depot has simplified its product return process. It has also begun providing guaranteed price matching, as well as other bonuses (Corral, 2010).
Home Depot is working to attract new customers through technological advances such as, its online website, iPhone and Android apps, self-checkout with SAP platform, and YouTube videos. The online website provides a much larger assortment of products for consumers than in stores (Smith, 2006). The self-checkout technology allows more employees to be on the store floor assisting customers, and saves Home Depot $1 billion a year (Dignan, 2005). The smart-phone applications allow customers to search and shop from their phones, locate stores, and learn individual stores layouts. YouTube is a great way to achieve media-promotion and the free-help videos and how-to advice builds The Home Depot brand. Hundreds of their videos are viewed in over thirty countries (Zmuda, 2011).
Additional actions that Home Depot has taken to attract new customers include: new products, “new-everyday savings,” credit card program, and targeted circular advertising (Wahlstom, 2010). New products include the Martha Stewart Collection, soft flooring, and theater systems. The “new-everyday savings” provides discounts for customers who use their Home Depot credit card. The targeted circular advertising focuses on specific market segments, such as the do-it-yourself customers (Wahlstrom, 2010).
An analysis of trends, a competitor, and the industry reveals that Home Depot, Inc. is in a good financial position. An examination of trends of Home Depot’s ratios for the years of 2007 through 2011 revealed several points. Please refer to Table 1 as a reference. In 2007 Home Depot’s inventory turnover had been 4.09. The turnover rate increased throughout 2008 and 2009 spiking up to 4.43 and declining again through and 2011 and is now down to 4.21. The inventory turnover rate has not reached 2007 levels yet. However, with the continuous recovering of the economy, HD may be able to regain pre-crisis levels. In 2007, Home Depot’s debt ratio was at .52, yet in 2008 it spiked to .60. It may be that HD took on more debt to continue operations through the recession. HD’s debt ratio began to decrease in 2009, yet it has not regained pre- economic crisis levels. In 2007, Home Depot’s return on assets was .11 and began to decrease through 2008 and 2009. However, the return on assets has begun to increase again for 2010 and 2011. HD’s current ratio for 2007 was 1.39 and dropped down to 1.15 in 2008. Since 2009, HD’s current ratio has steadily increased, yet it has not achieved 2007 levels. The economic crisis had a significant influence on Home Depot’s liquidity, but Home Depot is regaining the liquidity necessary to meet its debt obligations.
An analysis of Home Depot, Inc. in comparison to Lowe’s Companies Inc., a home improvement retailing competitor, revealed interesting ratio differences between the two companies. Please refer to Table 1: Home Depot’s Ratios and Table 2: Lowe’s Ratios for specific ratios (on page?). Compared to Lowe’s, Home Depot has had a higher total asset turnover from 2007 to 2011. Therefore, Home Depot may be utilizing its assets more efficiently than Lowe’s. Home Depot’s inventory turnover rate was higher than that of Lowe’s for 2011 and 2010. This may indicate that Home Depot’s inventory is more liquid than that of Lowe’s, or Home Depot may have stronger inventory management. Also, Home Depot’s return on assets has been two percent higher than that of Lowe’s in 2011 and 2010. This may reflect that Home Depot has a management team that is more effective at creating profits with its available assets.
A comparison of growth rates and price ratios reveals that Home Depot is currently in a stronger position than Lowe’s. In an evaluation of sales this quarter versus the previous year’s quarter, Home Depot has a 3.8% sales growth rate while Lowe’s only has 3.1%. Also, Home Depot’s net income for the year to date versus the previous year to date was 121.9 in contrast to Lowe’s -34. However, Lowe’s 5-year annual dividends were 30.73 while Home Depot’s were only 18.76. It may be that Home Depot is claiming more in retained earnings than Lowe’s. Additionally, Lowe’s P/E ratio is 18.9 in contrast to Home Depot’s 18.7. Yet, .2 may or may not reflect a significant difference in price/earnings. Home Depot’s current price/book value is 3.23 while Lowe’s is 2.0. This leaves Home Depot 1.23 points higher than its competitor. Home Depot’s current price/sales ratio is 0.90 while Lowe’s is 0.72. This is a reflection of Home Depot having a higher stock price than Lowe’s. Home Depot’s price/cash flow ratio is 12.30 compared to Lowe’s 9.80. Since Home Depot has a significantly higher price/cash flow ratio, it must have more cash on hand to utilize than Lowe’s. This is apparent since the statement of cash flows adds back in the costs of depreciation which are really just a “paper cost” without cash outlay.
An assessment of Home Depot’s relation to the home improvement retail industry, Home Depot seems to be doing well. Home Depot’s gross profit margin of 34.3 is above the industry’s 33.7. Home Depot also has higher pre-tax and net profit margins than the industry. Home Depot’s sales for this quarter versus the previous year’s quarter are .30 higher than the industry, and HD’s net income for the year to date versus the previous year is 121.90 compared to the industry’s 62.40. Home Depot net income rate is substantially greater than the industry average. This may reflect that Home Depot’s management has been more efficient at controlling costs than other companies in the industry. Yet, Home Depot’s dividend rate is 18.76, while the industry’s is 22.31. Home Depot may be claiming more retained earnings than other companies. Finally, Home Depot’s price/sales ratio, price/book value ratio, and price/sales ratio are slightly above those of the industry.
Home Depot, Inc.’s financial position appears to be well and stable. Home Depot was in a strong position in 2007 which it lost during the economic crisis of 2008. Yet, Home Depot has been steadily making gains since then to control its inventory, costs, and debt. Home Depot seems to be managing operations more efficiently than its competitor, Lowe’s. Home Depot’s market price, book share value, return on assets, and total asset turnover are higher than Lowe’s. Home Depot has been riding alongside the industry, as well as surpassing it in areas like sales and net income. Home Depot, Inc. is operating at a satisfactory level.