The Home Depot
History
Important Issues
It is important to note that as
The Home Depot was formed in
Home Depot has grown so quickly, it
1979 by Bernie Marcus and Arthur
has been able to garner significant
Blank in Atlanta, Georgia. Home Depot
concessions in prices from suppliers.
virtually revolutionized the do-itHome Depot has also been able to
yourself home improvement industry in
establish and successfully execute a
the United States almost overnight.
market saturation strategy coupled with
The two entrepreneurs opened their
low prices and high service. Being able
stores which were no frills warehouses.
to execute on these three pillars has
In 1998 the average Home Depot
been the hallmark of Home Depot’s
carried 35,000 products. Products
strategy and will carry the company
varied from well known national brands
into the future.
to propriety Home Depot brands.
As Home Depot continues to
Home Depot held its IPO in
expand, the cost of prime real estate will
1981 and listed on the New York Stock
rise as they compete head to head with
Exchange three years later under the
their main competitor, Lowes. Also tied
ticker – ‘HD’. Home Depot reached
to the market saturation strategy, Home
$1 billion in sales in 1986. Sales of $20
Depot stores may realize a
billion were reached in 1997 making
cannibalization of sales when a nearby
them the fastest growing home
store opens its doors.
improvement retailer with an average
While expanding
annual growth in sales of 119% during
internationally, Home Depot will be
said period.
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Page 1
careful to pay close attention to local
building customs, laws, and regulations.
Maintaining solid returns on
Home Depot’s competition
(except Lowes) primarily focus on one
aspect of their expansive product
investment and financial health will be a
offerings. For example, Sears would
primary concern. More interestingly,
specialize in selling Craftsman tools to
Home Depot plans on investing
Home Depot’s offering; likewise Frank’s
significant amounts of money in their
Nursery competes directly with Home
human capital to maintain their
Depot’s garden center.
consistently high marks in customer
Lowe’s Companies is Home
service and knowledge of home
Depot’s largest competitor. Home
improvement projects.
Depot and Lowes have very similar
Five Forces Model of
Competition
Rivals
As the world’s largest home
product offerings and large warehouse
formats. In many major markets Lowes
and Home Depot stores go head to head
improvement retailer, Home Depot’s
both vying for the patronage of the do-
competition runs the gamut of lumber
it-yourself customer.
yards, specialty interior stores that
Suppliers
concentrate on one aspect of the home,
i.e. kitchens, lighting, flooring, etc.
Home Depot’s competition is also
relationships with many suppliers that
stock Home Depot stores with over
30,000 different products. Although
embodied in other such retailers as:
Sears, Ace Hardware, Frank’s Nursery,
and Lowes.
Home Depot maintains
Home Depot has a significant amount of
suppliers they are still able to force
them into offering price concessions due
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to the fact that Home Depot makes up a
professional customer segments to
large portion of the supplier’s sales.
Home Depot.
These concessions have gone a long
Specifically the buy-it-yourself
way in driving down the cost of home
customer segment are those consumers
improvement as well as further
that like to pick out the materials being
increasing Home Depot’s margins and
used in their homes, but want a
competitiveness with Lowes and others
professional to install them.
in hotly contested markets.
Moreover the professional
customer segment that Home Depot
Buyers
At the time of the case, Home
Depot has 3 distinct customer
now associates itself with are
contractors, electricians, plumbers,
segments.
landscapers, etc. This group has been
Since the company’s
able to get Home Depot to offer
incorporation, they have been primarily
focused with the do-it-yourself (DIY)
customers. These customers are non-
products in larger quantities due to
their larger scale projects.
Substitutes
professional consumers interested in
Substitute products pose a grave
doing their own home improvement
threat to many companies. However,
projects.
Home Depot does not have many
More recently, Home Depot has
substitutes. People will always be
also begun to redefine the market in
houses and the desire to improve one’s
which they operate. This redefinition
home is one that is ageless.
has opened up the buy-it-yourself and
A substitute to Home Depot’s in
store home improvement classes is the
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vast resources of the internet. With a
The barriers to entry include the
few clicks of a button, a customer can
following considerations: large product
find “How To” instructions as well as
selection, highly trained employees,
plans for various types of projects.
large startup capital, prime real estate,
Another substitute that the
Home Depot should be aware of is the
strong regional recognition, and
unwavering customer loyalty.
purchase of new homes. With new
SWOT Analysis
homes people will have a much lower
need to purchase home improvement
supplies.
Home Depot has many
competitive strengths that make them a
very difficult company to compete
New Entrants
against. Home Depot’s strengths
New entrants to the home
improvement will find it very difficult to
compete directly with Home Depot and
or Lowes. A company that is new to the
market will face a vast difference in
economies of scale that they may not
necessarily be able to overcome. Also
new entrants will be faced with trying
to compete head to head with Lowes
and the Home Depot or they will be
forced to specialize in a certain product
category.
Strengths
include:




Business model
Well known brand name
Extensive product offerings
Ability to grow
Home Depot’s business model, the
first of its kind in the home
improvement industry has
revolutionized the way customers shop
for home improvement products. Their
business model is simple. Sell home
improvement products and services to
DIY, BIY, and professional customers
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in huge spacious warehouses that boast
home improvement. Their extensive
a wide variety of products with sales
product lines have made Home Depot
associates that are educated and
the one stop shopping in home
knowledgeable about home
improvement.
improvement (case). This is all done
with low prices as the primary driver.
The Home Depot name has
Since the beginning, Home
Depot has demonstrated its desire to
become the largest home improvement
become synonymous with home
retailer in the world. Home Depot has
improvement. This association has been
planned on growth rates of 21%-22%
forged over a long time of being number
growth rates in the number of stores
one in customer’s minds when it comes
over the next several years. By 2003
to home improvement. Home Depot’s
Home Depot plans on having over 1900
orange aprons, low prices,
stores (case).
knowledgeable associates, and
Weaknesses
Counterbalancing the strengths
warehouse like stores have all
contributed to a very strong brand
of Home Depot, it also has a couple of
key weaknesses that need to be
image.
It is no secret that if you want
addressed.
Growth has both a blessing and
anything having to do with home
improvement the first place to go is
a headache for Home Depot. As the
have expanded aggressively into new
Home Depot. Home Depot has
markets, they have seen their operating
distinguished itself as the home
improvement warehouse that has what
you are looking for when it comes to
expenses rise in direct proportion with
their growth in revenue. While this is
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would be expected in most instances.
program is due to deliver huge paybacks
This means that Home Depot is not
in productivity of night team workers.
capitalizing on economies of scale in
Other IT projects pose great
logistics and distribution provided to
opportunities to increase efficiency,
them by their market saturation
decrease costs and further increase
strategy.
margins.
Opportunities
Threats
Because of Home Depot’s size
Because of the competitive
they have some interesting
nature of the retail industry, Home
opportunities available to them.
Depot’s success depends on price, store
With a solid foothold in North
location, customer service, and wide
America, Home Depot will set its sights
product selections. In each market that
on other world markets to further
Home Depot serves there is a plethora
expand and spread its business risk
of specialty home improvement stores
across many diverse world markets.
that have the potential to cutting into
Expansion will be the primary focus for
Home Depot’s market share
growth into the year 2000.
(Datamonitor).
Home Depot has an opportunity
Home Depot’s overlap with
in the global sourcing of their products
primary competitor, Lowes, poses a
as their scope and reach becomes global.
potential threat. In the minds of
Sourcing from other countries may
consumers, Home Depot may be seen as
significantly grow their gross margin.
interchangeable with Lowes which
Home Depot’s Service
Performance Improvement (SPI)
would in turn decrease customer
loyalty. Also when a Lowes enters a
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market that is only served by Home
Depot, Home Depot’s sales have a
tendency to decrease by up to 15%
(Datamonitor).
As Home Depot and Lowes
continue to compete head to head in
primary markets and both continue
their strategy of market saturation, the
awareness of US market saturation
becomes a very real possibility.
 Relative Price of Products
 Brand Image/Reputation
 Executive Management
 Use of Technology
 Distribution Network
 Financial Resources
The price a company charges for its
products and services is vital to the
successfully competing. If a company
prices itself way below the competition
in order to undercut the existing prices
in the industry and is unable to recoup
lost margins, then it will suffer as much
According to Datamonitor, “The US
home center potential is valued at
as it would have if they priced their
products way out of the reach of their
approximately 3,500 stores. With Home
target customer.
Depot and Lowes opening a combined
300 stores a year, the industry could
reach saturation in the next few years.”
Brand image in the home
improvement industry is vitally
important because you do not want to
lose customers to your competition.
Home Depot has positioned its brand
more towards men and professionals as
Industry Key Success
Factors
In the competitive home improvement
Lowes targets the women of the family
with their cleaner, better lit stores.
The strength of a company’s
industry there are several key success
factors to be considered:
distribution network is of utmost
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importance in the home improvement
the home improvement industry. Lowes
industry. The company that has the
is not far behind Home Depot. The
most stores and can get the most
major difference between Home Depot
product out to the customer (profitably)
and Lowes was Home Depot’s
is the industry winner.
advantage in financial strength and
The financial might of a
possessing a powerful brand.
particular competitor allows them to
Ace Hardware is a non-
invest in programs that would
contender; however they had far more
potentially save them money, or grow
stores than Home Depot in 2000. The
their sales. A financially stable company
main difference is the fact that one
is critical in an industry where growth
Home Depot store has a much higher
is the name of the game.
volume of sales than a typical Ace
Competitive Strength
Assessment
In the competitive strength
assessment, the industry key success
Hardware Store. Most of the other
points were a wash, as Home Depot
won in all but one of the most important
categories.
factors were used to analyze the
competitive strengths of Home Depot,
Lowes and Ace Hardware. Please see
Strategic Group Map
The strategic group map
exhibit 1 for the actual strength
(exhibit 2) is a measurement of the
assessment.
From the competitive strength
assessment we have learned that Home
Depot is the best positioned company in
home improvement industry’s two main
factors of competition: product selection
and price.
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From the map, Home Depot and
2000. This is amazing growth. Home
Lowes own an overlapping piece of the
Depot continues its market saturation
market. Ace Hardware is much smaller
strategy which consistently grows their
than the two main competitors and sells
net revenues. Please see exhibit 3.
its products at a higher price point. This
Home Depot’s growth in net
is due in part to the fact that Ace does
earnings over the same period has been
not enjoy the same economies of scale as
284%. This is fantastic. The money that
Lowes and Home Depot.
the firm is retaining as profits is
Rounding out the strategic
outpacing the total amount being
group map is the mom and pop
brought into the company. This is
hardware store. In many markets they
indicative of a company that is realizing
are not even able to compete with the
economies of scale in their operations
giants. The mom and pop store occupies
and increased brand awareness.
the complete opposite side of the map as
Ratio Analysis
From the ratio analysis in
Home Depot and Lowes.
exhibit three we see that in 1998, Home
Depot was leading Lowes in all of the
Financial Analysis
The Home Depot at the end of 2000
stands on rock solid financial footing.
On a whole they are poised to make a
successful run into the next millennium.
Home Depot’s net revenues have
grown 208% between FY 1995 and FY
profitability ratios listed except
earnings per share. Lowe’s EPS equaled
$1.37 to Home Depot’s $0.73. This is in
part due to the fact that Lowes is
significantly more leveraged with debt
than Home Depot. This is displayed in
the debt to equity ratio.
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It is important to note the
very sound which is good considering
activity ratios when talking about an
they will need vast amounts of capital to
industry where competitors need to
continue growth. Home Depot also
carry a lot of inventory to effectively
appears to be realizing investments
compete. Home Depot leads in total
from IT as well as operational
asset turnover as well as inventory
efficiencies provided to them by SPI.
turnover. Home Depot sells out of their
Home Depot seems to show
stock 6.71 times per year as opposed to
some weakness in their ability to collect
Lowe’s 5.91 times.
from customers as evidenced in the
Overall from the analysis it is
average collection period (exhibit 3).
safe to say that in 1998, Home Depot
Perhaps a reworking of the credit policy
was on solid financial ground compared
is in order. They should also be careful
to their primary rival, Lowes. Since they
not to grow out of control due to
are in the heart of their growth, I would
imminent market saturation and overall
imagine that they will continue to have
industry slowdown.
significant gains in economies of scale
and further translate those savings to
the bottom line.
Recommendations
From the in depth analysis of
Home Depot and its primary
competitors, it seems that Home Depot
is positioned well to move into the next
millennium. Financially, Home Depot is
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Bibliography
Bensinger, Ari. (June 15, 2000)
Retailing: Specialty [Electronic
Version] Standard & Poor’s Industry
Surveys
Datamonitor, (2004, October) Company
Profile: Home Depot. Retrieved
December 1, 2004 from
www.datamonitor.com
Home Depot 10-K 1995-2000. (n.d.)
Retrieved December 1, 2004 from
LexisNexus
Home Depot Annual Report 1995 –
2000. (n.d.) Retrieved December 1, 2004
from www.homedepot.com
Lowes Annual Report 1998 – 2000.
(n.d.) Retrieved December 1, 2004 from
www.lowes.com
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Exhibit One – Competitive Strength Assessment
Key Success Factor
Relative Product Price
Brand Image/Recognition
Executive Management
Use of Technology
Distribution Network
Financial Resources
Sum of Important Weights
Importance Weight Home Depot
0.30
0.20
0.05
0.10
0.20
0.15
1.00
Weighted Overall Strength
Rating
The Home Depot
Lowes
Ace Hardware
8/2.4
9/1.8
8/0.4
7/0.7
9/1.8
9/1.35
7.5/2.25
7/1.4
8/0.4
8/0.8
8/1.6
7/1.05
5/1.5
3/0.6
5/.25
3/0.3
10/2.0
5/0.75
8.45
7.5
5.4
Page 12
HIGH
Exhibit Two - Strategic Group Map
PRICE
Mom &
Pop
Ace
Hardware
Home
Depot
LOW
Lowes
LOW
HIGH
PRODUCT SELECTION
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Exhibit Three - Financials
**Numbers in Millions of dollars
1995
Net Sales
Cost of Merchandise Sold
Gross Profit
Operating Expenses:
Selling and Store Operating
Pre-Opening
General and Administrative
Non-Recurring Charge (note 8)
Total Operating Expenses
Operating Income
Interest Income (Expense):
Interest and Investment Income
Interest Expense (note 2)
Interest, net
Earnings Before Income Taxes
Income Taxes (note 3)
Net Earnings
1996
1997
1998
1999
2000
12476 15470 19535 24156 30219 38434
8991 11184 14101 17375 21614 27023
3485 4285 5434 6781 8605 11411
2216
51
230
2783
52
269
3521
54
324
3900
1533
4303
65
413
104
4885
1896
5341
88
515
0
5944
2661
6832
113
671
0
7616
3795
2498
986
3105
1179
28
-35
-7
979
375
604
19
-4
15
1195
463
731
25
-16
9
1534
597
937
44
-42
2
1898
738
1160
30
-37
-7
2654
1040
1614
37
-28
9
3804
1484
2320
45000
40000
35000
Net Sales
30000
Gross Profit
25000
20000
Total Operating
Expenses
15000
Net Earnings
10000
5000
0
1995 1996 1997 1998 1999 2000
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