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

                          1
Table 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

                                                                       2
Executive 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.

                                        3
Financial 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.

                                                      4
Basic 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

                                      6
Chart: 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

                                                 7
The 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

                                             8
One Year (daily) Stock Price Comparison of Home Depot and Lowe’s

                               9
Five Year (weekly) Stock Price Comparison of Home Depot and Lowe’s

                               10
Summary 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

                                            11
Per 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%)

                                           12
Current 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.

                                                            13
Five 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.
                                          14
In 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

                                              15
retailers 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

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somewhere 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.

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Strategic 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.

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In 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
                                                     19
important 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.

                                    20
Overall, 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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