Team Case Study Report:
Home Depot vs. Lowe’s
Lonnie Morrison
Scott Reid
Karen Reyes
Donald Sigwalt
Jeffrey Snyder
IST 614: Management Principles for Information Professionals
Prof. Robert Brenner
May 5th, 2005
Page 1 of 37
Table of Contents
We’ll edit this part once all the sections are completed.
Introduction
Whether you own your home or rent, chances are that at some point you will find
yourself looking for something that will lead you to one of these two retail giants. The home
improvement industry has evolved from small regional and locally owned hardware stores to
these superstores. The top two in the industry are Home Depot and Lowe’s. Each has their eye
on moving into international markets, each has superstores in all 50 states and each has evolved
along different paths to reach their current positions.
According to Fortune 500 Home Depot, Inc. is ranked at #25 and the second largest
retailer in the US after Wal-Mart. Home Depot Inc. has its corporate headquarters in Atlanta
Georgia. What began in 1979 as two 60,000-foot stores that resembled warehouses has grown to
about 2,200 stores across North America, Puerto Rico, and China. Home Depot Inc. is publicly
traded on the New York Stock Exchange as NYSE:HD. At the end of 2008 Home Depot Inc.
employed 331,000 people. Home Depot sales recorded and posted in 2009 are $71,288.0 mil.
Home Depot Inc. is the number one home improvement retailer with Lowe’s coming in second
place with sales posted in 2009 at $48, 230.0 mil..
Founded in 1946 Lowe’s went from a small hardware store to the ninth largest retailer in
the US. Lowe’s went public in 1961 and began trading on the New York Stock Exchange as
NYSE:LOW in 1979. According to Fortune 500 Lowe’s Companies, Inc. is ranked at #47.
Lowe’s Companies, Inc. are headquartered in Mooresville North Carolina. Lowe’s competes
with Home Depot, Inc. (home improvement) and Sears (appliances) they are second to both.
Lowe’s currently has 1640 superstores in the U.S. and another dozen stores in Canada. Lowe’s
also plans to open stores in Mexico in 2009. Lowe’s has not moved as aggressively in foreign
markets as Home Depot. At the end of 2008 Lowe’s employed 216,000 people.
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As the economy tightens Home Depot, Inc. and Lowe’s Companies, Inc. are both vying
for the business of the do-it-yourself, weekend warrior of home improvement as well as
professional contractors. While Home Depot carries appliances, Lowe’s has chosen to focus on
appliances as a major portion of their business positioning. Both companies carry an inventory of
about 40,000 items in their superstores that encompass lumber, flooring, plumbing, gardening
supplies, tools, paint, and appliances as well as carpeting, cabinetry, and other installation
services. Lowe’s places its focus on lowest prices and superior customer service. Home Depot
rewards superior customer service through awards and compensation. As both of these giants
compete for business customers are enjoying “low price guarantees”(Home Depot, Inc.) and
“lowe’st prices guaranteed plus 10%” (Lowe’s Companies, Inc.) as each moves to increase
customer shares of the marketplace.
Home Depot, Inc. and Lowe’s Companies, Inc. have different employee benefit
structures. Home Depot, Inc. has less full time employees that the 75% that make up Lowe’s
workforce. Home Depot, Inc. prides itself on offering the most competitive pay and benefits for
its full and part time employees these include some non-traditional benefits as well as savings
plans and employee stock purchase plans. Lowe’s offers benefits for its full and part time
employees but describes these as comprehensive and these are less publicized and much less
detailed that those benefits offered by Home Depot. Both companies are looking for associates to
work in the stores that have experience and knowledge; each company has cross over employees
that have worked for the competitor.
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Perception Management
Both Home Depot and Lowe’s cater to the Do-it-Yourself (DIY) home improvement
market and construction professionals and want to be seen as a one-stop, customer-friendly
shopping establishment. For example, Lowe’s vision is to “provide customer-valued solutions,
with the best prices, products and services to make Lowe’s the first choice for home
improvement.” (http://investor.shareholder.com/lowes/).
Both markets are considered to be areas for potential growth given the current status of
the housing industry, and the fact that more homeowners are reinvesting in their homes, and the
economic environment. Although both companies operate more than 1,500 retail stores, Home
Depot is the larger of the two, with stores in all 50 states, the District of Columbia, Puerto Rico,
U.S. Virgin Islands, Canada Mexico and China. At the present time, Lowe’s stores are only
located in the U.S. and Canada. Home Depot and Lowe’s are ranked # 25 and #47 respectively
in 2009 on the Fortune 500 U.S. list.
Both companies want to be perceived as consumer and environmental friendly, and
community oriented. This is evident in an on-line article on the history of The Home Depot, in
which the author stated the following about Home Depot “What they find is a "feel good" store:
a place where they feel good about walking in our doors, feel good about consulting our
knowledgeable associates, feel good about paying a low price and feel good about returning time
after
time.”
(http://www.fundinguniverse.com/company-histories/The-Home-Depot-Inc-
Company-History.html.)
Deming, Drucker, and Williams are all in agreement that consumer needs should be
paramount for an organization’s success, most notably in their discussion regarding consumer
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loyalty. Although, I would argue that Deming tends to place more emphasis on product quality
than Drucker and Williams.
With regards to being environmental friendly, both companies appear to have been
winners of the ENERGY STAR partner of the Year Award for leadership in recognition of their
efforts in reducing greenhouse gas emissions. In addition, the Home Depot Foundation and their
suppliers have committed more than $11 million to support recovery and rebuilding efforts in
regions impacted by Hurricanes Katrina, Rita and Wilma, and have been active with local
welfare organizations, Habitat for Humanity, and the Boys and Girls Clubs.
Home Depot is considered to be the innovator of the warehouse store, versions of which
have been adopted by Wal-Mart, Kmart, etc. It is interesting to note that Lowe’s was initially
reluctant to build warehouse stores, but realized that it would not be able to compete with Home
Depot if it did not do so.
Home Depot stores average 105,000 square feet, whereas, Lowe’s average 75,000.
Although, as I have indicated, in order to be competitive with Home Depot, Lowe’s stores that
are opening in larger markets tend to average around 114,000 square feet.
Both stores cater to DIY and professional contractors, and stock building materials, wall
and floor covering, paint, plumbing supplies, hardware, tools, electrical supplies, and supplies for
landscaping and gardening. However, Lowe’s also has a home fashions and interior design
center; and an appliance and home electronics dealer. Hence, Lowe’s is not only competing with
Home Depot, but with stores that specialize in home appliances and electronics.
Given the real estate slump, Home Depot and Lowe’s have refocused on their core retail
business, closing some underperforming U.S. locations and halting plans for building new stores.
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Both companies recognize that customers’ needs are an important element in fostering a
company’s growth. For example, although do-it-yourselfers made up 60% of the building supply
industries sales, the majority had little knowledge or expertise in home repair and improvement
projects. Hence, to meet customer needs, management increased the stock of items for sale and
educated its sales force. The expectation was that staff would help customers gain confidence in
doing home projects and come back to purchase the items needed and/or get additional advice.
Although Home Depot originated the concept of hiring professionals to provide the customer
with "expert advice" Lowe’s has now copied this practice. It is interesting to note that since
small retail stores could not compete in the area of sales items and price, customer service was
the one area that smaller stores had the advantage over Home Depot and Lowe’s.
Conclusion
We would argue that Home Depot had a more focused business strategy than Lowe’s.
For example, Home Depot was the first to establish the warehouse retailing concept, warehouse
pricing and professional sales support. It has been suggested that their dominance in the industry
is in part due to being first in their focus on technical support and customer service.
The founders of Home Depot, Bernie Marcus and Arthur Blank, used a three legged stool
to describe their core business strategy – assortment, price, and service. Lowe’s core strategy is
similar and recognizable via the acronym RSVP – retail sales, volume, and profit. Darrow,
Smith, and Fabricant (1994) argue that there have been imitators, but none have been able to
achieve the success of Home Depot. In his article Innovation and Entrepreneurship, Drucker
(Pierce and Newstrom, 1993), discusses the concept of “Fustest with the Mostest,” the aim of
which is to achieve permanent leadership.
Although Drucker argues that of all the
entrepreneurial strategies, it comes with the greatest risk, but success offers the greatest reward.
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We would argue that this is indeed what Home Depot has been able to accomplish and although
Lowe’s has attempted to diversify its sales items it has not have much success in gaining
significant market share.
Another way in which both stores are comparable, yet different is in their pricing policy.
Home Depot carries the broadest range of merchandise, priced below competition in every
market where they compete. Hence, both are committed to competitive pricing; although, Home
Depot has a single price policy and Lowe’s a two-tier pricing policy.
Customer service is an area where both companies have tried to establish a competitive
advantage. Darrow, Smith and Frabricant note that Home Depot’s hiring strategy is to hire
individuals who are customer-friendly as well as individuals with experience in the building
trades. We would argue that this employment model has been copied by Lowe’s. However, it is
not clear if such approach is a viable one as stores expand into metropolitan urban areas.
We think that Home Depot and Lowe’s have been able to successfully portray themselves
as consumer-friendly companies through their emphasis on pricing, service and product choice.
However, behind the scene there is intense competition to attract customers and establish
consumer loyalty.
We would argue that Home Depot’s business strategy, along with its
innovative approach to customer service, has been instrumental in helping it to achieve market
dominance and should continue to do so in the future.
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Organizational Design
Don and Lonnie,
Copy and paste the completed Organizational Design section here.
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Human Resources
Human resource management can best be described as the function of the organization
that focuses on recruitment, hiring, management, benefits, safety, motivation, training,
communication, and ultimately organizational development. A strong and healthy management
of human resources can be the difference between success and failure, being first in the industry
and always taking second place. In terms of the value of human resources and their management
Home Depot, Inc. currently seems to be providing the industry standard. That has not always
been the case.
The Wall Street Journal reported in April of 2008 the restructuring of Home Depot’s
human-resources department. The change eliminated about 1,000 jobs and affected over 2,200
people. The shift from having HR supervisors in each store allowed the retailer to put additional
workers in stores. The HR supervisors were replaced by a centralized service center near the
company headquarters. This was the latest in a series of HR issues that has plagued Home Depot
since the hiring of CEO Robert L. Nardelli in 2001. Nardelli was driven by data, the HR
decisions made during his time as CEO were driven by data, Nardelli believed that efficiency
could be aligned with a human-centered management creating a formula for success. This
success was short-lived Nardelli resigned January 2006; the current CEO, Frank Blake replaced
Nardelli. Blake has spent the past 2+ years working to repair the HR cultural upheaval that
occurred seven years ago when Nardelli initiated his first sweeping changes to the company. The
same HR executives that were hired under CEO Nardelli to go into the stores and develop
partnerships at the store level shared in the ultimate decision to streamline their organization. By
streamlining and shifting resources this would allow for a greater number of associates to be
available in each store. Under current CEO Blake there is a clear message being sent to the
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workforce, it is aimed at improving morale, and increasing both the numbers and quality of the
associate at the stores. Despite the current economy Home Depot, Inc. included this message to
their shareholders:
Our associates carry our service culture to our customers everyday. For 2008, we
issued success-sharing checks in excess of $88 million to our hourly associates.
This is a Company record, and it is a source of pride that we can take care of
associates in economically difficult times like these. Furthermore, associates
under the officer level will receive performance based merit increases and our 401
(k) matching program remains intact. Taking care of our associates is an
important part of taking care of our customers.
Annual Report 2008
Home Depot, Inc. was founded with the philosophy that customers and the associates that serve
those customers is key to success. There was support for entrepreneurial spirit and creativity
among the employees, recognition for sales performance included financial rewards and stock
benefits. Nardelli shifted the focus, imposing rigorous standards, reducing benefits to associates
while developing a bureaucratic control. Blake is working to return to the philosophy that made
Home Depot number one.
Current hiring practices require that HR managers have at least three years of experience
in HR as well as experience in a retailing area similar to Home Depot’s. The focus is back on
human resources as Home Depot puts its restructuring plans in place. Home Depot is keeping
their HR call center while other retailers are outsourcing this function.
In comparison, Lowe’s continues to keep a full time HR presence at the store level. In
contrast Lowe’s has had very little published about its HR. While Home Depot has had company
layoffs, Lowe’s is hoping that by using a different strategy it will be able to maintain its
workforce or at least minimize layoffs. Lowe’s is choosing to freeze the salaries of all vice
presidents and above for 2009 and reduce raise levels for all other employees. The company has
also chosen not to fill about 400 positions at the corporate offices that have been vacated through
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attrition. Lowe’s has also decided to cut the number of new stores that will open this year from
80 to 60 and that number is subject to change again according to CEO Robert A. Niblock.
Lowe’s limits its information regarding employee benefits and perks in contrast to the explicit
outlines of benefits that Home Depot creates. For anyone seeking employment based on benefits
and bonuses as well as knowing the culture and climate of the employer it is clear that you can
readily find all that information about Home Depot but would have to interview and get hired to
find out what to expect from Lowe’s. Lowe’s has about 75% of their associates that are
employed full time, while Home Depot maintains about 50% of their associates as full time
employees. One thing is clear, Home Depot and Lowe’s each have a different view of their
human resources.
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Innovation
The home improvement industry is a continuously changing market; Home Depot and
Lowe’s are constantly making incremental improvements to their processes, procedures and
technologies. In their never-ending battle for market dominance, managers must constantly
analyze their business environment, down to the tiniest detail, to be able to innovate for an
advantage. Lowe’s first started selling shares in 1961, almost twenty years before Home Depot;
however, it was Home Depot that was able to revolutionize the home improvement industry by
introducing “big-box” warehouse stores to provide better selection, better prices and better
service than its competitors (Upbin, 2003).
Home Depot was able to become the largest home improvement retailer in the U.S. by
“being fustest with the mostest.” This is an innovation and entrepreneurial strategy, described by
Peter Drucker, in which an entrepreneur aims at leadership, if not dominance of a new market or
a new industry (162). Arthur Blank and Bernie Marcus founded the Home Depot in 1978
(Johnson, 1998). They built radical “big box” stores, averaging 108,000 square feet, loaded with
every imaginable home product. Besides building bigger stores than their competition, the true
innovation was in their founders’ mantra: this is a service business, not a discount hardware
store. They hired plumbers, carpenters, contractors, and other industry professionals to provide
the highest level of customer service possible. Their famously loyal and knowledgeable store
employees are widely credited with creating the modern home improvement marketplace and
propelling the chain to dominance in its market niche. In 1989, Home Depot officially surpassed
Lowe’s in revenue to become the largest home improvement retailer in the U.S. (Upbin, 2003).
“Then, after the innovation has become a successful business, the work really begins,”
writes Drucker (164). He adds, “then the strategy of ‘being fustest with the mostest,’ demands
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substantial and continuing efforts to retain a leadership position; otherwise, all one has done is
create a market for a competitor.” To ensure Home Depot is constantly innovating and able to
stay ahead of their competitors on price, displays and product assortment, they constructed an
88,000 square foot Innovation Center in 2004 (Grow, 2004). In a secret, discrete looking brick
building, somewhere in Atlanta, HD associates are able to test everything from riding lawn
mowers to displays for patio furniture sets before they hit the stores. Tom Taylor, EVP of
merchandising and marketing, and his team use this facility to experiment and explore new
product segments. Drucker believes, “new uses have to be found; new customers must be
identified, and persuaded to try the new materials”; this is exactly the impetus behind the
innovation center and a sign that Home Depot doesn’t not plan on relinquishing its leadership
position.
During the 1980’s, Lowe’s was the industry leader, but intense competition from Home
Depot caused the chain to suffer (Upbin, 2003). Although Lowe’s resisted, management knew it
would need to adopt the “big box” format in order to survive. Lowe’s abandoned its 52 year
heritage as a ‘small-box,’ small-market retailer to follow the blueprint created by Home Depot
(Johnson, 1998). The average size of a Lowe’s store increased from 20,000 sq. ft. in 1989, to
86,000 in 1998, to over 100,000 today. In this sense, Drucker would consider Lowe’s a ‘creative
imitator.’ “What the entrepreneur does is something that somebody has already done. But it is
creative because the entrepreneur applying the strategy of ‘creative imitation’ understands what
the innovation represents better than the people who made it and who innovated,” writes Drucker
(165-166). Like ‘being fustest with the mostest,’ ‘creative imitation’ is aimed at market or
industry leadership.
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Robert Tillman, Lowe’s former CEO, says, “If you've ever been No. 1, it's no fun being
the No. 2 sled dog and looking at the lead dog's you-know-what” (Johnson, 1998). According to
Tillman, “our objective is in every market we serve to be the first choice store for home
improvement products.” In order for a creative imitator to be successful, they must serve the
markets the pioneers have created but do not adequately service. “Other companies mindlessly
copied Home Depot but didn’t focus on the customer,” says Tillman, “if the customer doesn’t
think we’re doing what we need to do, then we do it.”
The management team at Lowe’s developed two innovative strategies to better service
this market. Tillman seized research that showed women initiate 80% of home improvement
projects (“Robert Tillman: Lowes,” 2003). Stores were redesigned to be given a brighter
appearance, they began stocking more appliances, and they’ve focused on higher end goods –
everything from Laura Ashley paints to high end bathroom fixtures. While not completely
pulling back on male-dominant categories like tools, they’ve expanded their décor related
segments and have added other subtle feminine improvements. The second driver in
differentiating themselves is their lean distribution network. Since they used to operate mainly in
smaller markets, they’ve learned how to distribute merchandise more efficiently than Home
Depot. Their distribution networks, located around the country, permit Lowe’s to buy larger
quantities of products from vendors, resulting in volume discounts and lower prices and they can
get those products into its stores quicker (Johnson, 1998).
This strategy has appeared to work so far as Lowe’s has been able to close the gap on
Home Depot. Current CEO, Robert Niblock says, “our core strategy is really based on winning
customers’ business and loyalty by offering them something different and hopefully better”
(Howell, 2005). The innovation is ongoing for Lowe’s; to keep stores fresh and relevant, they
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spent more than $500 million in 2005 on existing stores, ranging from routine projects to major
merchandising projects. Although still in second, they’ve been able to carve out a niche for
themselves in home improvement retailing with a compelling, differentiated offering, especially
amongst female buyers.
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Social Responsibility
Social Responsibility Overview
Organizations that employ social responsibility programs demonstrate concern for the
environment, human rights, community development, and employee welfare (Noer, 2008). The
primary reason is to increase revenues due to loyalty by socially and environmentally conscious
consumers (Noer, 2008). There are many social and environmental programs supported by
corporations today. Categories include but are not limited to: environmental, human rights,
community development, and employee welfare (Wikipedia, 2009) (Starbucks, 2007).
While most organizations believe social responsibility will be beneficial to the bottom
line, there isn’t much evidence to prove this theory (Vogel, 2008). Vogel states that there are
many companies with successful Corporate Social Responsibility (CSR) programs, but just as
many CSR programs that are not as successful. One prime example he cites is Starbucks. They
have a very active CSR program, yet their share value has dropped almost fifty percent (Vogel,
2008). None the less, both Home Depot and Lowe’s have active CSR programs.
Home Depot Social Responsibility
Home Depot maintains “giving back” as one of their fundamental corporate values
(Home Depot, 2006). One of the primary venues they use to give back is in community relations
and four main focal areas are: “building and refurbishing playgrounds, ensuring the safety and
accessibility of community gathering spaces, building and refurbishing affordable and
transitional housing; and preparing communities for emergencies” (Home Depot, 2006).
Home Depot has been so successful in their environmental programs, they’ve received a
number of nationally recognized awards (Home Depot, 2007). Home Depot is considered a
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“luminary of the corporate sustainability movement” (Hollender & Fenichell, p. 97). This
movement attempts to bring environmentalists and businesspeople together “to come up with
sustainable business models that appreciate the connectedness of humans, technologies, and
natural resources” (Batstone, p. 164). Home Depot does not tout a wood policy as Lowe's does
but “is the largest buyer in the United States of wood certified by the Forest Stewardship Council
to be sustainably harvested” (Makower, 2009, p. 33). Business is still business though and in
1997 Home Depot stopped buying from a Forest Stewardship Council certified Oregon logger
that was unable to supply the quantities Home Depot wanted (Hoffman, p. 157). Nor was Home
Depot always a proponent of sustainability. There was a time when Home Depot sold 'old
growth' wood. It took a campaign by the Rainforest Action Network to convince Home Depot to
change its ways. Despite Lowe's wood policy it and other lumber retailers “followed Home
Depot's example” (emphasis added ) (Aburdene, p. 37).
Home Depot has since seen the light and “has recognized the green opportunity”
(Denton, p. 194). Home Depot has tried to capitalize on this opportunity in a variety of ways.
One was the 1990s Recycling Depot, a drive through recycling center (adjacent to a Home
Depot store) where people could sell left over building material scraps and other recyclables
(Watson). The Recycling Depot was seen “as an ideal way to marry the sale of building
materials with the idea of keeping them out of landfills” (Denton, p. 44). It is not clear if the
Recycling Depot succeeded. A more recent attempt is Eco Options “a labeling program ... that
highlights environmentally friendly products” (Makower, 2009, p.89). The Home Depot web
sire has an entire Eco Options sections devoted to educating the environmentally concerned
customer. The program appears to be a success despite the challenge involved in deciding
exactly which products are actually true Eco Options. The men in the orange aprons soon
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discovered “you can paint anything green” and there isn't always a consensus on what is good for
the environment (Makower, 2009, pp. 89-90).
Home Depot, like Lowe's, is a natural supporter of organizations that build and repair
housing. A well known housing provider noted Home Depot “provid[ed] $30 million in financial,
in‐ kind support, technical resources and training” (Habitat for Humanity, p.1). Christmas in April USA
repairs housing for the needy and claims “Our foremost national sponsor is the Home Depot out of
Atlanta. They donate tons of materials” (Glauser, p. 196).
In 1992 NBC's Dateline ran a story about child labor in Asia. While the story was aimed at WalMart and the textile industry it prompted Home Depot to consider the issue of labor exploitation and it
created “a questionnaire seeking information on labor practices, which it subsequently required all
overseas vendors to fill out” (Makower, 1994, p. 268)
Lowe’s Social Responsibility
Lowe's takes social responsibility seriously. Their theme is titled “Opportunity in Every
Community” and is disseminated via their 2007 social responsibility report (Lowe’s, 2007).
While the promotional aspect of the report can't be denied it does show the areas the company
believes are important for social responsibility and that “enhance the way we work to improve
our employees’ lives and the communities where our employees live” (Lowe's, 2008, p. 1).
These areas include charitable donations aimed at improving education and providing affordable
housing. The Lowe's Charitable and Education Foundation was created in 1957 and provided
“grants totaling more than $17.5 million” in 2007 (Lowe's, 2008, p. 7). Lowe's has contributed
funds to a number of organizations such as the American Red Cross, Home Safety Council, The
United Way, and “Lowe’s Plant for the Cure” (Lowe’s, 2007).
In line with their business, Lowe’s has been a significant sponsor of Habitat for
Humanity. This included being an underwriter for the “Women Build” program which strives to
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bring more women into helping to construct Habitat homes. They have also partnered with the
Rebuilding Together® organization to assist with a number of building projects that allowed a
number of aging homeowners to stay in the houses they currently reside in (Lowe’s, 2007).
The Lowe's Employee Relief Fund gave a million dollars in aid in 2007 (Lowe's, 2008,
p. 15). Lowe's has scholarship programs for children of employees and “health and wellness
programs that employees and their family members can access” (Lowe's, 2008, p. 16).
Lowe's also believes social responsibility includes caring for the environment. Lowe’s
philosophy is to fulfill consumer’s expectations that the products they sell and services they
provide are environmentally friendly (Lowe’s, 2007). Recycling is a key environmental policy
and Lowe's recycles cardboard, wood and plastic shrink wrap waste that is generated in the
course of it's business and has a consumer program for recycling batteries. Another interesting
policy of Lowe's is its commitment to buy Green Power in increasing amounts. Lowe's is
working to reduce greenhouse gas emissions through more a efficient transportation system and
has a wood policy aimed at sustaining wood as a renewable resource (Lowe's, 2008, pp. 20-21).
Like Home Depot, Lowe's has garnered many environmental friendly awards (Lowe’s, 2007).
Social Responsibility Comparison
Both Home Depot and Lowe’s are highly involved in improving both the communities
they operate in and the world at-large. Both are involved in many of the same programs and
initiatives. They differ very little with respect to the programs they support.. As identified by
Vogel, it is very difficult to say whether or not the amount of CSR investment they make will
actually
provide
returns
for
them
in
the
long
run
(Vogel,
2008).
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Finance
According to information in their 2008 annual reports, Home Depot is the larger of the
two corporations by almost any measure. The Home Depot has 2,233 stores to 1,649 for Lowe's.
The Home Depot has 322,000 employees while Lowe's has 228,000. The Home Depot has
assets, liabilities and equity of $41.1 billion, $23.4 billion and $17.8 billion dollars respectively.
The corresponding figures for Lowe's are $32.7 billion, $14.6 billion and $18.1 billion. The
equity figures are intriguing as they show the two companies to have a fairly equal residual value
for shareholders even though The Home Depot has almost half again as many stores as Lowe's.
The most recent annual net income from operations for the two companies was also practically
identical: $2.3 billion for The Home Depot versus $2.2 billion for Lowe's. This metric has
declined two years in a row for both companies with The Home Depot experiencing the sharper
reductions. The Home Depot's operating income for the fiscal year ending February 2008 was
$4.4 billion and the year before it was $5.8 billion. The figures for Lowe's are $2.8 billion and
$3.1 billion. Over the same three year period The Home Depot's earning per share dropped from
about $2.80 to about $1.35 while Lowe's went from about $2.00 to about $1.50 (The Home
Depot, Inc., pp. 16-29; and Lowe's, 2009a, pp. 5, 13 & 28-29).
Investors seem to favor The Home Depot despite these bottom line similarities. The
Home Depot has 1.71 billion shares of common stock outstanding (The Home Depot, Inc., p.
30). Its stock closed at $25.77 a share on May 1, 2009 (Google, 2009a) giving a current total
market value of about $44.07 billion. Lowe's has 1.47 (Lowe's, 2009a, p. 30) billion shares
outstanding with a total market value of roughly $30.65 billion given the stock's close of $20.85
on May 1, 2009 (Google, 2009b). The Home Depot stock is valued at 19 times 2008 earnings
whereas Lowe's is selling at only 14 times last year's earnings. Investors apparently have higher
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expectations of Home Depot's future potential. This disparity is puzzling given Lowe's higher
earnings per share and the roughly equal shareholder's equity and recent net operating income of
the two companies. The Home Depot does have a much higher dividend at $0.90 per share for a
yield of 3.49% (The Home Depot, Inc., p. 30) than Lowe's at $0.335 per share for a 1.60% yield
(Lowe's, 2009a, p. 28). Having a yield above certificate of deposit interest rates does explain at
least part of investor's preference for The Home Depot stock, though this assumes investors have
confidence that The Home Depot can sustain this dividend rate.
The Home Depot's liabilities are 57% of its assets compared to a ratio of 45% for Lowe's.
The Home Depot's total debt is $11.4 billion with $5.0 billion due in five years. Lowe's debt is
$6.1 billion with only $0.6 billion due in five years. Home Depot pays over $600 million a year
in interest on its long term debt while Lowe's pays over $300 million interest on its long term
debt (Value Line, pp. 881-2). It is also interesting to compare assets and liabilities per store for
the two companies. Home Depot has $18.4 million in assets per store but the smaller Lowe's has
$19.8 of assets per store. Home Depot has ten and a half million dollars in liabilities per store
but Lowe's has only $8.9 million. Lowe's financial position seems to be stronger that that of
Home Depot. The most likely explanation is that Home Depot has been more aggressive in
opening new stores and has borrowed considerably to fund its growth. A book written in 1999
mentions that “Home Depot expects to be operating over 1,600 stores by 2002” (Sagawa &
Segal, p. 34). Since Home Depot has over 2,200 stores in 2009 the company opened or acquired
at least 600 stores in the last ten years. The growth was actually much greater since Home Depot
had 761 stores in 1998. That's 1472 new stores in 11 years, an average of two and a half new
stores per week. During the same period Lowe's grew from 484 stores to 1649, averaging just
over two additional stores per week (Marcus, Blank & Andelman, p. 162)
2
Lowe's was “founded in 1946 ... [and] went public in 1961, and began trading on the
New York Stock Exchange in 1979” (Lowe's, 2009b).
In four years the stock price had
quadrupled and by the mid-1990s it had increased twenty fold over it's 1979 value. It doubled
again around the turn of the century and then tripled again before losing a third of its value in the
current depressed market (Google, 2009b).
The Home Depot was founded in 1978 and its start up capital was two million dollars
from a group of forty investors who took a mix of preferred and common stock. The men who
created the Home Depot business plan, and who would run the business, received common stock
for “pennies a share” (Marcus, Blank & Andelman, p. 53) Bernie Marcus became CEO with
18% of the original common stock, Arthur Blank was the main financial officer with 15% and
Pat Farrah, the lumber yard merchandiser got almost 15% (Marcus, Blank & Andelman, p. 65).
The Home Depot went public in 1981 and the original preferred sock was converted to common
stock (Marcus, Blank & Andelman, p. 94). In a couple years the stock's value had increased
twenty fold (Google, 2009a).
When Marcus stepped down as CEO in 1997 and Blank took his position (Roush, p. 227)
the stock had increased in value another twenty fold (Google, 2009a) making it four hundred
times its original value. Three years later Blank retired as CEO in favor of Robert Nardelli who
remained in charge until 2006 (Kavilanz). Under Blank the stock's value quadrupled but a slide
was in store. “In his five years as CEO, he [Nardelli] has made more than $245 million, while
the company's stock declined 12 percent during the same period” (Marquez). The bear market of
2008 further eroded the stock's value which now under performs versus the Dow Jones industrial
average and currently trades at about twice the value if did when Marcus retired as CEO
(Google, 2009a).
3
This look at the historical stock values of the two companies shows that investors have
greatly favored stock in The Home Depot over that of Lowe's The current market price of the
former is over 800 times its late 1970s value while the former trades at a mere 80 times its value
from the same era. By comparison the Dow Jones Industrial Average is currently only ten times
it's 1978-79 levels. A close look at the most recent annual reports of the two companies leads
one to question whether the historical investor bias in favor of The Home Depot stock relative to
Lowe's will continue. The per share book value (total equity divided by outstanding shares) of
Lowe's stock is $12.31 versus $10.41 for The Home Depot, yet the latter stock trades for five
dollars a share more with only a higher dividend to recommend it.
4
The Role of IT
Home Depot and Lowe’s are continuously battling for market share in the home
improvement industry. To create and maintain competitive advantages in this market, these
companies need to have accurate, complete, relevant and timely information concerning all
aspects of their operations. Managers must consistently assess and upgrade their information
systems and technology to support the company’s growth, control costs and improve decision
making. Since these companies are so alike, it is no surprise they have very similar technical
needs; their technology must provide real-time inventory information, support administrative and
decision making functions, and enhance the experience of the customer.
In July of 2001, Lowe’s CIO, Steve Stone revamped the company’s approach to IT
planning by investing in an enterprise portfolio management (EMP) system (Waxer, 2005). In
the hopes of aligning IT initiatives with corporate strategy, Stone and his team sought to
carefully document commitments, time lines and resource demands of every IT project in the
works, from routine hardware upgrades to enterprise wide rollouts. Stone assembled an IT
steering committee, consisting of Lowe’s CEO Robert Niblock, and six other executives from
cross functional departments to review detailed project proposals. With a proper IT governance
framework in place, management at Lowe’s is able to take on strategic projects and ensure they
remain on budget, on schedule and align with corporate goals.
In 2005, Lowe’s implemented the ‘Rapid Response Replenishment’ (R3) program to
improve supply chain efficiency and better leverage inventory (Biederman, 2007). Lowe’s
collaborated with vendors using CaseStack, a 3rd party logistics company that specializes in
retail vendor consolidation, to ensure full, on-time shipments to its eleven distribution centers.
When the R3 initiative was first implemented, about 50% of stock moved through these
5
distribution centers; by the end of 2006, over 75% of stock moved through the distribution center
network. This gives managers real-time perpetual inventory information and allows business
intelligence technology to track over 50 million items in its 1,400 stores to plan inventory levels
and analyze the effectiveness of the 4,000 to 6,000 quantity-discount programs Lowe’s has in
place at any one time (Havenstein, 2007).
In 2001, when then-executive VP and CIO, Bob DeRodes joined Home Depot, he joked
that the most advanced technology in some HD stores was a No. 2 pencil (Whiting, 2005). His
mission was clear: to transform Home Depot into a “more information-based company.”
DeRodes felt Home Depot lacked merchandising, inventory, and supply chain management
capabilities, as well as visibility into its supply chain operations. Karen Etzkorn, VP of IT
marketing and merchandising systems, also emphasized that they needed to be electronically
connected to its suppliers. Under DeRodes leadership, Home Depot spent $1 billion, from 2001
to 2005, to overhaul both its front- and back-end IT infrastructure (“Most Powerful CIO’s,”
2005). Home Depot chose to implement SAP for its retail merchandising and supply chain
applications because it is a scalable system that could stretch across its consumer and contractor
businesses and expand as the company grows. The addition of a new point-of-sale (POS) system,
cordless scan guns, and self-checkout technology has allowed Home Depot to automate its
inventory control systems so employees can spend less time restocking and replenishing, and
more time on the sales floor (Dutton, 2007).
Another important function of IT for both companies is to improve customer satisfaction.
Shoppers are becoming more familiar with emerging technologies and demanding the option of
using them in stores and online. In response, Home Depot and Lowe’s have identified ecommerce as a growth area of its business and are hoping to replicate that in-store experience
6
online (Pallavi, 2006). Allurent Research found that found that for every $1 spent online, the
internet influences consumers to spend another $6 in stores (Murphy, 2007). In addition, 67% of
consumers who visited an online store intending to make a purchase left because the retailer did
not provide enough information. To that end, both companies have invested heavily in online
retailing; proving detailed, up-to-date product descriptions and prices, product comparisons and
reviews, and special online promotions.
These companies are also bringing the web into stores with internet kiosks. Both
companies are using technology created by EdgeNet to allow customers to design their own
window treatments, counter tops and entire rooms with an easy to use, point and click design
program (Desjardins, 2005). Customers can visualize how they want to transform their space,
and then have the option to have it delivered directly to their homes and even installed. Besides
creating convenience and a visual aid for customers, this technology is increasing sales by
adding an average increase of 30% in ticket size.
These stores are also enhancing customer satisfaction and convenience by improving
POS systems. In 2006, Home Depot redesigned its POS system to allow for greater flexibility
and creativity (“This Old POS,” 2006). This new system is now capable of improving inventory
control, measuring employee performance, and provides an online price and receipt lookup
feature. The introduction of this system as well as wireless handheld scanners has reduced
employee compensation claims and reduced transaction times by nearly 10%.
Lowe’s followed Home Depot’s success by making major improvements to their returns
system. CIO Steve Stone says, “if we can make this process as painless as possible, its yet
another reason for them [customers] to choose Lowe’s” (Weier, 2007). Lowe’s was successful
implementing this system because it considered business processes first and technology second.
7
The system was designed to specifically handle the complexity of returning items from several
different shopping trips that may have used different payment methods. Lowe’s has been able to
reduce the average time of a return by 90 seconds and reduce labor time at the return desk by an
average of 30 hours per week, per store.
Both companies have also been pioneers in the fastest growing technology in retail: the
self-checkout lane. Home Depot was able to reallocate between 5% and 12% of its cashier to
other jobs on the sales floor, recapturing between 50 and 80 employee hours per week (“This Old
POS,” 2006). Senior manager of front end operations at HD, Paul Burel says, “all other things
being equal, between 9% and 12% will shop with you over a competitor if you’ve got selfcheckout.”
Both Home Depot and Lowe’s have been able to leverage information technology to
improve their operations in merchandising and supply chains, allowing them to make better
business decisions and create competitive advantages. These companies have been able to align
IT
with
business
objectives
to
create
value
and
gain
market
share.
8
Strategic Plan
Strategic Plans are both the cornerstone and keystone document for most organizations.
Essentially, they are high-level plans developed by either executive level management or the
corporate board and serve many different purposes (FML, 2009). As the cornerstone, they
provide the foundation for defining where the company wants to head in the future, setting both
the long term strategy and creating focus on the goals they want to accomplish. As the keystone,
they serve to tie all of the subordinate divisions of the organization together by providing them a
cohesive vision for the future and setting the expectations of their employees and stakeholders
(FML, 2009).
Strategic plans typically contain both a mission and vision statement, each possessing
their own purpose (Williams, 2008). The basis of the mission statement is to define and describe
the purpose of the organization’s existence (FML, 2009). There are certain fundamentals that
must be considered when developing the mission statement: statement developers should
“consider the organization's products, services, markets, values, and concern for public image,
and maybe priorities of activities for survival” (McNamara, 2008). With respect to the vision
statement, they are more focused on the long range goals of the enterprise. They typically
encompass a longer time window and better define where the organization wants to be as
opposed to where they are today.
Due to today’s economic environment, both Lowe’s and Home Depot must contend with
how to maintain sales as well as maintaining or gaining market share. The world economic
situation, especially regarding the downturn in the housing market and tightening of the credit
market, is putting stress on both organizations for the fact that consumers are more likely to curb
discretionary spending on home improvements as the cost of food, fuel, and family necessities
1
increases (Lowe’s, 2007). For this reason, both will have to develop new strategies and methods
for creating demand for their products and services.
Home Depot Strategic Plan
The Home Depot is the largest home improvement do-it-yourself retailer in the world
(Home Depot, 2007). However, even though they are considerable in size, they too are feeling
the pain of a downtrodden economy. They’ve seen their retail sales decline by an average of
2.1% over the past couple of years and their average earnings per share fell over 11% last year
(Home Depot, 2007). In an effort to weather this economic storm, Home Depot’s long term goal
is to emphasize improving the customer experience in their stores. Within that primary goal,
they have five top priorities: associate engagement (e.g. recognition, training, and
compensation), product excitement (e.g. new innovative products and revamped product lines),
product availability (e.g. improved distribution networks and supply chains), shopping
environment (e.g. improved store maintenance), and “own the pro” (e.g. deploy new commercial
customer programs) (Home Depot, 2007).
Lowe’s Strategic Plan
Lowe’s, as you might surmise, is the second largest home improvement do-it-yourself
retailer in the world (Lowe’s, 2007). And, as stated previously, have felt the pinch of the
shrinking economy as well. In their 2007 annual report, Lowe’s is very forthcoming regarding
the issues they’ve faced during this economic downturn.
Their overall plan for the future is to gain strategic advantages and continue to expand
into additional markets to gain a larger market share. In the nearer term, one of their main
objectives is to continue researching and analyzing external factors to find out how best to cope
with these external pressures. Current day strategies include: improved service to the customer
2
(e.g. better customer service experience, merchandising, and specialty sales), new experiences in
more places (e.g. new stores, new markets, and new formats), and improved execution through
greater efficiency (e.g. distribution, expense management, technology, and training) (Lowe’s,
2007). As demonstrated by Lowe’s vision statement, customer service is the primary goal they
believe will enable them to achieve improved performance in the years to come.
“Lowe's Vision - We will provide customer-valued solutions with the best
prices, products and services to make Lowe's the first choice for home
improvement.” (Lowe’s, 2005)
Strategic Plans Comparison
Both Home Depot and Lowe’s are obviously impacted by the state of the world and U.S.
economies. And as such, both are painfully aware that it is impacting their ability to maintain
revenue and market share. However, when evaluating both of their strategic, long term plans,
both are surprisingly similar. Both companies are employing Drucker’s strategy of creating
customer utility. Especially in today’s tough economic times, both are striving to: create utility,
improve pricing, adapt to the customer’s social and economic reality, and deliver what represents
true value to the customer (Drucker, 2001). Employing these tactics as part of their overall
strategy are likely to win over customers who are looking for value in the products they buy and
helping to stretch the buying power of each dollar they spend.
Also, today’s consumers are also much more ecologically and socially conscious. Again,
both companies realize this fact. They have developed programs that help to improve the
communities they operate in and also the world at large. They support: educational programs,
volunteer programs, ecology improvement programs, as well as community improvement
programs such as Habitat for Humanity (Home Depot, 2007). In supporting these types of
efforts, their strategy is to gain customer loyalty through the demonstration of these company’s
desire
and
ability
to
improve
their
local
communities.
3
Conclusion
All,
This section is incomplete. We should all contribute a paragraph or so to this section on the Wiki
page covering our respective topics.
1
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