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Retail Management: Home Depot, Strategic Analysis

The Home Depot, Inc., most commonly referred to as Home Depot, is a major retailer operating within the home improvement sector. The retailer is affected by several economic and environmental factors. The most significant environmental factor affecting the sector is the spread and popularity of online shopping. The sector faces increased competition from retailers specializing in a wide assortment of products, although with a limited merchandise depth (Levy et al., 2019). In addition, the sector is under customer expectation to offer new sustainable products in various categories (Gladchenko, 2021). Furthermore, the sectors’ target market demographics are changing due to more people engaging in DYI projects (Gladchenko, 2021). However, it can be argued that major retailers within the sectors, including Home Depot, experience no image issues and manage to respond to emerging challenges.

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Retailer Description

Home Depot is one of the largest do-it-yourself (DIY) home improvement retailers operating in the United States. The primary business of the company includes the sale of building materials, décor, appliances, and home enhancement products. Furthermore, the retailer offers a variety of services, including installation and home upgrade services, such as flooring and bathroom fittings (The Home Depot, Inc., 2021). The retailer follows the business-to-consumer business model as it sells its goods and offers services directly to customers. However, it also incorporates the business-to-business model with its tool renting program and sale of goods to remodelers and builders (Salandro, 2019). In 2017 the company announced its new consumer-focused One Home Depot corporate strategy aimed at improving all aspects of the business (Home Depot, Inc., 2021). The strategy’s goals are multifaceted and are aimed at company employees and associates, product innovation, supply chain and delivery expansion, digital experience enhancement, and business to business service development (Danziger, 2020). Thus, the overarching goal of One Home Depot strategy is the overall customer experience improvement.

Since the first Home Depot stores opened in 1979, the company has changed and evolved significantly. The scale of the business is now far greater, but the core value remains the same. Home Depot aims to offer the best customer service, the broadest choice of products, and the most competitive prices on the market to its customers (Home Depot, 2021a). Although DYI sales significantly contribute to the company’s net income, sales to professionals and businesses correspond to 45% of all transactions (Motley Fool Transcribers, 2019). Home Depot seeks to capitalize on the business-to-business element of its business strategy and increase revenue through fostering a deeper relationship with professional business customers (Home Depot, Inc., 2021). Overall, the company remains profitable and can be described as a staple in the home renovations retail sector.

Corporate Analysis

During the last fiscal year, Home Depot was quite profitable. According to the company’s annual report, in the fiscal year ended January 31, 2021, the company’s net earnings reached $12.9 billion, a nearly 10% increase on the preceding year (Home Depot, Inc., 2021). Total sales grew $21.9 billion, a 20% increase from the previous fiscal year (Home Depot, Inc., 2021). The annual report failed to make concrete projections for the company’s future sales and net earnings. Home Depot is not planning to contract its operations, expanding its assortment of products, fulfillment, and distribution networks (Home Depot, Inc., 2021). The company plans to strengthen its business-to-business operations by continuing to improve its tool and equipment rental program and delivery capabilities (Salandro, 2019). In addition, Home Depot financially outperforms its main competitor, Lowe’s. Net sales of the latter reached $89,597 million, while net sales of Home Depot were $132,110 million (Home Depot, Inc., 2021; Lowe’s Companies, Inc., 2021). It can be concluded that Home Depot is the dominant retailer in the home improvement sector.

Financial Analysis of Home Depot and its Competitors

The fiscal year 2020 was particularly successful for Home Depot. The company’s annual report indicates approximately 20% revenue growth, 9.7% net margin, and an inventory turnover of 5.8 (Home Depot, Inc., 2021). The company’s return on assets (ROA) in 2020 deteriorated to 18.23%, return on investment (ROI) grew to 40.1%, whereas the gross margin remained stable at 34% (Home Depot, Inc., 2021). Home Depot’s main competitor, Lowe’s, also had a profitable fiscal 2020. Thus, the organization’s revenue growth reached 24.18%, with the gross margin of 33.01%, ROI of 27.7%, ROA of 12.49 %, and inventory turnover of 4 (Lowe’s Companies, Inc., 2021). Meanwhile, the company’s net margin reached 6.5% (Lowe’s Companies, Inc., 2021). Another competitor of Home Depot, Ace Hardware, experienced revenue growth of 27.8%, ROA of 16%, gross margin of 12.5%, 3% net margin, and 6.7 inventory turnover (Ace Hardware Corporation, 2021). The company failed to indicate its ROI in the fiscal year 2020. These metrics indicate that Home Depot is highly profitable compared to its main competition. However, profitability can be improved by increasing inventory turnover.

Competition Analysis

Home Depot has several direct and indirect competitors, including Lowe’s and Ace Hardware, that can be classified as direct competitors due to offering similar merchandise. The indirect competition includes companies that offer different goods and services and target a similar customer group, such as Amazon, Walmart, and other retailers offering home improvement products. According to Danziger (2020), Home Depot dominates the home improvement retail sector and accounts for 29% share of the market, while Lowe’s accounts for 19%. The company’s interconnected strategy One Home Depot is the retailer’s main competitive advantage as it offers customers a better shopping experience by “blending the physical and digital worlds” (Home Depot, Inc., 2021, p. 2). Although Home Depot admits it faces competition from various retailers, no specific competitors are identified.

The Retail Market Strategy

As a retailer operating within the home improvement sector, its target market comprises people engaging in DYI projects, home renovations and remodeling, and professional customers. According to Reuter (2021), typical customers are middle-aged white men with a college education and income of over $80,000 and Hispanic and Latino shoppers (Reuter, 2021). It should be noted that the company’s main competitor, Lowe’s, have a comparable target market. Home Depot is marketed as a consumer-centric company with core values of respect for all people and excellent customer service (Home Depot, Inc., 2021). The retailer has the image of a store that has answers for all customers’ home improvement needs, including professional shoppers. This image is comparable to Lowe’s, with a greater emphasis on professional consumers. Home Depot embraced technology in its operations, offering customers a digital shopping experience and applying it to supply chain management (Home Depot, Inc., 2021). Thus, the company adjusted well to the requirement of the e-commerce market.

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Home Depot is present in several markets, including the U.S., Canada, and Mexico. However, it failed to penetrate the Chinese market as it failed to account for local culture and competitors (Shedd, 2019). The company’s location strategy of freestanding sites can be explained by the need for space due to significant inventory storage requirements and customer convenience (Levy et al., 2019). The retailer’s merchandising strategy aims to provide customers with a wide assortment of home improvement products at a low price. Home Depot offers various merchandising subcategories, from flooring to kitchenware, with a great assortment of products. Thus, the breadth and depth of the retailer’s merchandise are substantial (Levy et al., 2019). This is reflected in the company’s financial strategy of investing in supply chain facilities and low pricing strategy (Home Depot, Inc., 2021). Home Depot’s choice to keep prices low contributes to profitability in a highly competitive environment. The company effectively employs advertising and promotional campaigns to increase customer traffic and sales (Home Depot, Inc., 2021). Home Depot faces few challenges in terms of retail strategy, with low pricing and merchandise depth and breadth being critical to its success.

Home Depot Strengths and Weaknesses

Home Depot is a well-known company in the U.S. market. Its strengths are its brand recognition, low prices, and a broad assortment of merchandise. However, the main weakness of Home Depot is its limitation to three markets, with most of the revenue being generated in the U.S. market (Home Depot, Inc., 2021). The most significant opportunity available to the company is penetrating foreign markets, as its global presence is limited to Canada and Mexico. For example, the company can open stores on the territory of Puerto Rico, utilizing the existing relationship between the two countries to its advantage. The biggest challenge Home Depot faces is growing competition in the U.S. market, specifically in the field of e-commerce. The company is prepared to meet this challenge, as the One Home Depot strategy aims to connect the digital and traditional shopping experiences (Home Depot, Inc., 2021). Overall, Home Depot promptly responds to challenges and has avenues for further growth and development.

What Future Holds for Home Depot

Home Depot is the dominant retailer within the home improvement sector, and future strategies should be aimed at consolidating this position. One Home Depot strategy should be further developed, with customers engaging in online and traditional shopping. In addition, a strategy for penetrating foreign markets should be developed. Specifically, it is recommended to conduct in-depth research on the home improvement retail sector in foreign territories such as Puerto Rico and their home improvement culture to evaluate chances of successful market penetration. Another strategy is to create a database of professional customers of Home Depot in order to connect them with non-professional clients. Thus, by becoming an intermediary between professionals and their potential clients, Home Depot can attract new buyers. All these opportunities can be capitalized on, but creating a building and renovation professionals database is easiest to implement and will not require a substantial monetary investment.

Store Layout, Design, and Visual Merchandising

Home Depot stores layout, design, and visual merchandising techniques are effective and attract the target market. The design is minimal, with emphasis made on the company’s orange color, complemented by black. The store’s exterior echoes the interior design with a minimalistic approach and the accent on the orange color, while the location is accessible by public transport and has a large parking lot for customer use. It can be argued that the overall ambiance of the physical location is marginal as Home Depot targets customers interested in the merchandise offered by the store rather than the hedonistic experience of shopping (Levy et al., 2019). Therefore, the store does not require a remodel or renovation as the layout serves to help the customers in locating the goods they need with modest design providing few distractions.

Fixtures

The relevant fixtures in the physical location of Home Depot include lighting, shelves, and flooring. The store floors are tiled to allow for more manageable navigation with heavy shopping carts. Fluorescent lamps with cool lighting are installed along the aisles. The lighting in Home Depot is not used to capture a mood but rather to provide the customers with a light source to examine the desired items. The store relies on high minimalistic metal shelves to present merchandise. All the described fixtures are consistent with the overall minimalist ambiance of the store and portray the image of convenient and quick shopping for home improvement supplies.

Promotions

Home Depot signage is easy to navigate and effectively directs the customers to the products they are searching for, thus contributing to the merchandise being sold. The Home Depot app allows customers to search for specific products and navigates them to the exact shelf where it is stored with its Product Locator feature (Home Depot, 2020). As the store is quite utilitarian in its approach to selling goods, no theatrics are implemented to help sell merchandise. Along with the tall shelves, wall space is utilized to present certain products, for example, wall clocks and lamps. The sales staff are very friendly, and the suggestive selling they use is appropriate and helpful. Specifically, the store staff recommends items that are usually bought with the items customers are purchasing. The employees’ image is consistent with the store’s image, with orange aprons being worn by them.

Layout

Home Depot store layout helps draw people through the store. It is achieved with the use of a grid layout with wide aisles that allow for the movement of customers with wide shopping carts for building materials (Levy et al., 2019). The single entry point is located opposite an isle that goes through the store, with intersecting aisles giving customers a chance to turn for the check put area and exits. The layout is aimed at the target market of Home Depot – the customers searching for specific home improvement products. Other types of layouts, such as free form and racetrack, would not work for Home Depot as home improvement merchandise requires tall shelves that would obstruct the view and negate the benefits of such layouts.

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Merchandising

Home Depot employs few techniques for achieving greater space productivity. No-selling space in the store is minimized, with most of the available areas being occupied by shelves with goods. Merchandise is arranged by product type, with complementary categories in adjacent aisles to encourage customers to buy them together (Levy et al., 2019). In addition, shelves with small items are located in the checkout area to prompt spontaneous purchases. No displays that might increase interest in the offered products were found in the story. It can be argued that the store can benefit from gondola displays with items on sale or items that do not sell well to boost their sales. Overall, the merchandising strategy of Home Depot is efficient and responds to the needs of the target market of the company.

Critique

In summary, the physical Home Depot store is minimalistic, with few atmosphere-enhancing techniques and design ideas being employed. The layout of the store, its merchandising strategy, and the design choices reflect the customers’ needs of finding the necessary home improvement products quickly and wish of being offered a wide variety of high-quality goods. It can be argued that the image of Home Depot needs no significant improvement as customers are used it having a specific image and value it for the products and services it offers. However, the sales can be boosted with separate stands dedicated to underperforming products on discount. The Home Depot physical location can benefit from introducing a café or a rest area for customers as the store’s square footage is quite large.

Internet Retailing. Comparison of Online Shopping Experience to Traditional Shopping

The online shopping experience on Home Depot official website differs significantly from the traditional one. The primary difference lies in the convenience of online shopping, as it does not require a visit to the store’s physical location. Thus, online shopping is less time-consuming compared to the traditional one. Customers can view more items and compare prices online, whereas they are exposed to a limited number of items on display in the shop during traditional shopping. However, a trip to a physical store location allows shoppers to examine an item before purchase, whereas such inspection is not possible online. Overall, both online and traditional shopping have distinct benefits and drawbacks.

Advantages and Disadvantages of Internet Shopping Experience

Internet shopping on any retailer’s website, including Home Depot, has several advantages and disadvantages. Online shopping is convenient, as it allows customers to browse through items from any physical location and does not require travel. Another advantage of shopping on the Home Depot website is the variety of offered items, as physical stores are limited in their display space. Furthermore, online shopping allows searching for specific items by using various filters. Customers can compare prices for different items and their characteristics online. The main disadvantage of online shopping is the inability to check the product for defects and damage before purchase. It can also be argued that photographs of items taken on a camera with professional lighting do not correctly reflect how they look in real life. A product can differ from the one that customers expect to receive based on a picture on the retailer’s website. Thus, internet shopping can save customers time, and it affords a variety of options, but the purchase process is “blind” due to customers not being able to check the products they are acquiring.

Internet Shopping Experience Description

The online shopping experience on the Home Dept website is straightforward and present no difficulties. The website is well designed and easy to navigate, with customers able to find and access products in all retailer departments. It also offers such useful components as order tracking, credit services, and the help feature that offers customers advice on issues they might be experiencing with online purchases and in-store purchase support (Home Depot, 2021b). Suggestive selling is present on the website, with seasonal goods and products on sale offered to the shoppers on the homepage. Furthermore, similar items are recommended to shoppers on product pages. In order to purchase an item, customers should register on the website, add it to their cart, and proceed to checkout. The website offers several payment options, including online payment and payment upon delivery. It should be noted that the prices for items were the same both online and in the physical location. Overall, Home Depot offers a pleasant and convenient online shopping experience.

References

Ace Hardware Corporation. (2021). 2020 Annual Report. Web.

Danziger, P. N. (2020). Home Depot’s transformation to a fully interconnected retailer shows record-breaking results. Forbes. Web.

Gladchenko, A. (2021). Home improvement retail industry. Ecommerce guide for brands. Gepard. Web.

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Home Depot, Inc. (2021). Annual Report 2020. Home Depot, Inc. Web.

Home Depot. (2020). How to find everything you need inside the Home Depot. Web.

Home Depot. (2021a). The home is where our story begins. Web.

Home Depot. (2021b). Home Depot: #1 Home Improvement Retailer. Web.

Levy, M., Weitz, B. A., & Grewal, D. (2019). Retailing management (10th ed.). McGraw-Hill Education.

Lowe’s Companies, Inc. (2021). Annual Report for the fiscal year ended January 29, 2021. Lowe’s Companies, Inc.

Motley Fool Transcribers. (2019). Home Depot Inc (HD) Q3 2019 earnings call transcript. The Motley Fool. Web.

Reuter, D. (2021). Meet the typical Home Depot customer: A 45-year-old white man with a college degree earning over $80,000. Business Insider. Web.

Salandro, V. (2019). Home Depot B2B website on pace to onboard 1M pros by end of fiscal year. Web.

Shedd, K. (2019). Why Home Depot failed in China. CNBC. Web.

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