MGMT4842
Group Project II
Home Improvement
Industry Group
Lowe’s Companies Inc.
Table of Contents
Executive Summary...........................................
Organizational Summary...................................
Corporate Objectives
Strategic Objectives.......................................
Financial Objectives.......................................
Corporate Level Strategies.................................
Business Level Strategy......................................
External Analysis
Opportunities................................................
Threats..........................................................
Competitive Analysis
Rivalry............................................................
Potential Entry of New Competitors.............
Competitive Pressures from Substitutes.......
Customer Power............................................
Supplier Power..............................................
Industry Key Success Factors.............................
Internal Analysis
Strengths.......................................................
Weaknesses...................................................
Financial Analysis...............................................
Strategic Issues..................................................
Strategic Issues and Alternatives.......................
List of References..............................................
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20-22
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25-27
27-32
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34-41
42-45
Executive Summary
Lowe’s Companies Inc faces many challenges during its quest to achieve the number one status
in the home improvement industry. Its number one competitor, Home Depot, is constantly adjusting its
strategy to out-maneuver Lowe’s. While facing a severe recession Lowe’s must maintain growth and
increase its profitability—something that is important to its stability and shareholders. Developing and
implementing a strategy for reducing its largest expense, payroll, will increase its profitability greatly. By
reducing these expenses, Lowe’s will be able to use these increasingly larger profits to grow the
company more and create more value for its shareholders. An alternative for this is to reduce the
promotion expenses, a relatively small expense compared to payroll, but if cut would result in a reduced
market awareness of Lowe’s.
Lowe’s also must maintain vigilance in expanding internationally, although this must be done
carefully. Lowe’s must expand into other countries before its competitor—Home Depot—does, but
must also keep expanding into Mexico and Canada. This will enable Lowe’s to keep its current strategy
in those countries, gain valuable knowledge in the development of international stores, and increase its
footprint in the industry. Its alternative is to forsake the rest of the world and focus on Mexico and
Canada solely—an option that would place Lowe’s at a disadvantage.
Lowe’s must also continue to reduce its long-term debt. This debt saddles the company with
interest payments and can reduce stability within the company. The best method to do this is to finance
its needed growth through increased shareholder equity. To continue with the high levels of long-term
debt will restrict the company in the event of a further or prolonged recession. Another way to reduce
the debt is to stop corporate growth. The reason for the debt is to fund corporate growth, so in halting
growth, Lowe’s can halt its debt. This has an undesirable effect on its growth strategy. By financing the
growth through equity, Lowe’s can maintain its current growth while reducing its debt load—an ideal
that is in the best interest of Lowe’s corporate growth strategy.
1|Lowe’s Companies Inc.
Organizational Vision
Lowe’s is determined to be the market leader in home improvement supplies retailing.
Lowe’s strives to uphold a high level of customer satisfaction, as well as provide the best
price on products and services. Its goal is to be the first-choice in home improvement
supply and consumer durables purchasing for do-it-yourself and repair and remodel
contractors. It plans on maintaining customer value through high-quality, exclusive
brand items such as: Pella Windows, Cub Cadet and Husqvarna lawn equipment, Kichler
lighting and Waverly home interior decorating products. It plans on continually
improving and expanding on its own brands, such as Kobalt tools, Top Choice Lumber, as
well as its Harbor Breeze ceiling fans. Lowe’s strives to remain vigilant in promoting
Energy Star® compliant items to promote the reduction of greenhouse gas emissions, as
well as forbidding any of its products to be sourced from rain forests.3 Finally, Lowe’s
will work to improve its brand image and name recognition through aggressive
advertising, increased market penetration, and high-levels of customer satisfaction.
Corporate Objectives
Strategic Objectives
Achieving Lower Overall Prices than Rivals
In order to maintain a higher level of a competitive advantage over rivals, Lowe’s must
maintain a lower price strategy. This is especially important in the current recessionary
economy. Currently, Lowe’s has undertaken the New Lower Pricing initiative, or NLP. 4
This initiative was designed around the idea of reinforcing the low price leader image in
the home improvement industry as well as increase foot traffic throughout the stores’
locations. This low-price strategy is particularly important during a down economic time
as rivals are constantly striving for customers’ dollars and patronage. Lowe’s must
continue to seize opportunities where it sees fit to lower prices and attempt to steal
valuable market share away from industry competitors.
Have Stronger National Sales and Distribution Capabilities than Rivals
Part of maintaining and growing Lowe’s competitive advantage includes ensuring that
top-notch sales and distribution facilities exist. Currently, Lowe’s operates 1,649 stores
in the United States and Canada.6 Its biggest competitor and rival, Home Depot,
operates as of the end of 2008, 2,233 Home Depot stores in the United States and its
territories, China, Canada, and Mexico. In addition, Home Depot operates an array of
other home center, lawn and garden, and design stores—of which all of these are being
closed due to strategic reasons.7 In order to improve its standing in the competitive
environment, Lowe’s must constantly observe areas where there is a market weakness
and exploit that weakness. It must continue to place a store location in underserved
locations as well as compete directly by placing its locations in existing occupied markets
in order to steal market share from its chief rival, Home Depot. By doing this, Lowe’s
2|Lowe’s Companies Inc.
will solidify itself not only as a low-price leader, but as the market leader in the United
States and abroad.
Overtake Key Competitors on Customer Service Ratings
One method to gain a competitive advantage is to have superior customer service,
something that lacks in many industries—including home improvement. Lowe’s must
maintain a stringent employee selection process, employee training, as well as customer
satisfaction incentives to keep and improve its already significant customer service
rating. Lowe’s was recently rated 779 points out of 1,000 in its most recent JD Power
and Associates customer satisfaction rating.8 The competitors were rated based on
merchandise; sales staff; price; sales/promotions; and facility.8 This rating is the second
highest in the industry, however it has room for improvement. Statistically speaking, a
high level of customer satisfaction means an increase in revenue. According to this
same survey, customers will spend 76% of their home improvement budget in their
primary home improvement store.8 However, customers who show a higher satisfaction
rating with store facilities and sales staff are likely to spend an additional 4% of their
budget at that same retailer.8
Win a 45% Market Share
As of June of 2009, Lowe’s Companies held a substantial market share in the home
improvement industry of 40%.1 It is important to improve market share to achieve the
goal of being the number one retailer in home improvement, both in price leadership
and volume of sales. Currently, Lowe’s is out-maneuvering its chief rival, Home Depot,
by eroding its market share and providing a higher level of customer satisfaction. It is
accomplishing this by a strategic rearrangement of its stores to cater mainly to the “DoIt-Yourself” customer. It is still able to provide high levels of customer service to its
commercial contractor customers, but has found its niche in the “Do-It-Yourself”
market. Lowe’s strengths lay in this recessionary economy as major remodels or
rebuilds that require contractors are grinding to a halt; the average home “Do-ItYourself” customer is still able to purchase the occasional item—enabling Lowe’s to
increase sales, and steal valuable market share from competitors.
Consistently getting new or improved products to market ahead of rivals
One of Lowe’s strengths is its high-quality, exclusive and store brand products. It is
through these products that Lowe’s is capable of competing effectively against its rival
home improvement stores as well as industry rivals such as paint stores and lumber
yards. Lowe’s has forged relationship with different manufacturers to sell high-quality,
store brand premium paints such as Valspar.9 It has also entered into strategic alliances
to supply high-quality decking material. Weyerhaeuser recently extended its
contractual relationship with Lowe’s to provide ChoiceDek® decking products to Lowe’s
Companies.10 All of the competitors in this industry offer these types of products and
alliances. However, being able to offer those ahead of a competitor will provide a
definitive competitive advantage and will enable Lowe’s to win over customers of rival
stores. By not providing these types of products ahead of competitors, customers will
3|Lowe’s Companies Inc.
become bored with the current product offerings, causing them to possibly try out a
competitor’s products.
Increase Number of Stores Outside of the United States
As the home improvement industry market in the United States becomes more
saturated, it is imperative to continue growth internationally. Presently, Lowe’s is
slowing its growth domestically and plans on opening additional stores in Canada and
Mexico.12 During fiscal year 2008, Lowe’s had opened 115 stores. During fiscal year
2009, it only plans on opening between 60 to 70 new stores.12 Lowe’s first entered the
Canadian market in 2007 with the opening of 3 stores.12 However, as the recession
postpones the larger projects, the contractors that were once working on these have
now been relegated to smaller jobs—improving the sales at these Lowe’s stores. It is
imperative for Lowe’s to grow these major metropolitan areas in Canada and Mexico in
order to capture that market and to improve its growth in the long-term. Lowe’s largest
competitor—Home Depot—has already successfully entered these markets and China.11
In order for Lowe’s to remain competitive with its competitors, it must closely follow or
lead the charge into new market areas.
Financial Objectives
Increase the Overall Growth in Revenues
With the current global recession, Lowe’s is finding it more difficult to grow its revenues.
Historically speaking, Lowe’s has had good growth. Between January of 2005 and
January of 2009, Lowe’s experienced revenue growth of $11,766,000,000—a growth
rate of over 30%.13 However, between January of 2008 and January of 2009, Lowe’s
experienced a loss of revenue of around 2%. This is indicative of the poor economic
situation. In order to drive revenues up, Lowe’s will have to continually look for ways to
improve its competitive advantage, increase market share, and pique customers’
interests to improve store traffic. Doing these things, as well as pricing goods
accordingly will help Lowe’s increase its overall revenue growth.
Decrease overall expenses
One way to improve the financial soundness of a company, as well as enable it to be
more competitive is to decrease expenses. In the case of Lowe’s, it has had many
opportunities to do this, and has taken advantage of those opportunities. Recently,
Lowe’s rebid its contract required for vendors to supply and repair customer carts and
brochure racks.6 In addition, by revamping its worker scheduling matrix and physical
inventory processes, Lowe’s is able to streamline operations better and become more
efficient.6 Through its streamlined operations, during fiscal year 2009, Lowe’s expects
to save $10 million in its non-selling physical inventory process, and $7 million due to
increased recycling and waste-management programs.6 Lowe’s will have to remain
diligent in finding these expenses and analyzing them for excesses. This way, it can
remain competitive in this already cutthroat market.
4|Lowe’s Companies Inc.
Increase Stock Price
To help secure the cash it needs to finance its operations and to expand globally and
domestically, Lowe’s needs to ensure its stock is valuable to shareholders. Its 52-week
range is $13.00 to $24.09 per share. Its earnings per share are near the industry
average at $1.28.15 It is extremely important for Lowe’s to improve the attractiveness of
its stock. Lowe’s strategic alliances it forms with other companies can help it achieve
this. Recently, Lowe’s added value by aligning strategically with Woolworth’s,
Australia’s largest hardware store chain.24 It has also recently partnered with Johns
Manville to provide additional “green” merchandise to help appeal to consumers
interested in ecologically safe products.32 As Lowe’s performs well during this poor
economy, investors will take notice. In addition, by broadening its customer base in
different countries, Lowe’s will improve its overall image as the market leader and will
be able to entice new investors to take a risk on Lowe’s, as well as current investors
increasing their investments in Lowe’s.
Increase Profit Margins
Throughout the last three fiscal years, Lowe’s has reported a gross profit margin of
34.52% in 2006, 34.64% in 2007, and 34.21% in 2008.6 Lowe’s has been able to uphold
these high margins by its stringent inventory shrinkage policies and procedures, its
positive shifts in product mixes, and its increased use of imported goods. 6 Its 2008
margin was adversely affected by increased fuel costs as well as start up costs for new
distribution facilities.6 To keep this level of profit margin and to increase it Lowe’s will
have to remain vigilant in continually shifting its inventory mixes to mesh well with
consumer demand. It will also have to remain in constant watch over inventory
shrinkage problems and ways to halt or slow down the shrinkage. With the initial costs
for distribution center setup behind it, Lowe’s margins should remain in a positive
upward swing, as it takes on more imported products and remains one of the more
active home improvement stores during these poor economic times.
Increased Shareholder Value
To increase shareholder value, Lowe’s is going to have to deliver growth and profits.
Although growth and profits have both been a bit stymied due to the recession, Lowe’s
is still managing to provide strong shareholder value, both in the form of growth—
although stunted—as well as profits—although diminished. It has been successful in
posting a 39.4% CGR percentage in cash dividends6, as well as a positive increase in
revenues of 30% over 4 years. Lowe’s will strive to provide growth in market
penetration through expansion of its current markets, entering new—untouched—
markets, as well as expanding internationally, both through direct involvement and
strategic alliances. Through these methods, Lowe’s can increase its value to
shareholders, increase profitability, and achieve a high level of growth.
5|Lowe’s Companies Inc.
Diversify Base of Revenues
In order to navigate the pitfalls of a recessionary economy, Lowe’s has had to diversify
its revenue base some. Historically, Lowe’s core business is from the retail sale of goods
and services in store. However, as more and more customers have become internet
savvy, Lowe’s decided to take advantage and start up its online store. In 2000, Lowe’s
unveiled its online store with just appliances and tools. It has added a new category
each quarter since then and now has over 100,000 items available for sale online. 29 In
addition to diversifying into internet sales, Lowe’s is also diversifying its base
demographically. In years past, Lowe’s—as well as other home improvement centers—
were known as places where men go to get tools, hardware, and the like. Currently,
Lowe’s carries a wide array of home decor items, decorative lamps, mirrors, outdoor
furniture, as well as a wide variety of other items. It is through this diversification that
Lowe’s is seeing its largest growth and it is removing market share away from the
current leader, Home Depot. Lowe’s must continue to look for ways to diversify its
revenue base—both domestically and internationally, online or in-store.
Corporate Level Strategies
Market Penetration
One of Lowe’s goals is to further penetrate this already saturated market. The home
improvement industry is highly concentrated with 87.2%1 of the total sales coming from
the three largest retailers. This makes further penetration that much more difficult.
However, through Lowe’s merchandising savvy and differentiation through services and
products provided, Lowe’s has been successful more recently in penetrating this market
further. One thing it did was to set up a website, now with over 100,000 items available
for purchase.29 Through this website, Lowe’s is capable of reaching market segments
where it does not have a physical presence—in smaller towns, or even other countries.
Another method to capturing additional market share is to price accordingly. Just
recently, due to lagging sales during a recessionary economy, Lowe’s slashed prices on
several hundred items throughout its stores.4 Not only does this help to satisfy current
customers, but it also may entice new customers to take a look for the first time—
opening up the possibility that they may come back again. Through these methods,
Lowe’s will be able to further penetrate this saturated market.
Strategic Alliance
One way Lowe’s can be successful in a saturated retail market is to find unique ways to
differentiate itself from its competitors. Lowe’s has worked hard to cement its image as
an Energy Star® retail partner, and was recently named the 2009 Energy Star Retail
Partner of the Year by the Environmental Protection Agency.32 Lowe’s utilized this stats
as a springboard to propel itself into a strong retailer of choice for environmentally
friendly and “green” products. In 2009, Lowe’s formed a strategic alliance with Johns
Manville, naming it the sole supplier for fiberglass insulation with Lowe’s. 32 Manville had
6|Lowe’s Companies Inc.
already carried some of its product in approximately 600 of Lowe’s stores, however with
this agreement, Lowe’s will carry a full line of Johns Manville products to all of its retail
stores. This helps Manville by providing a stable and predictable relationship with
Lowe’s—enabling Manville to provide Lowe’s with its most competitive pricing,
something that Lowe’s needs to stay competitive. Lowe’s benefits by providing a
consistent supply of environmentally friendly, high quality home insulation that will
appeal to both professionals and homeowners alike.
Joint Venture
One of Lowe’s objectives is to increase its presence in other countries. Typically, doing
so is not only very costly, it is also very risky. Many times, customers in a particular
geographic area are averse to shopping in a store they are unfamiliar with. Also, when
entering a new geographic area, there are often times customs, traditions, and mores
that are typically followed by native citizens, but are completely unfamiliar to outsiders.
To overcome many of these hurdles, it is sometimes necessary to form joint ventures to
get the best of the situation. In the case of Lowe’s, it formed a joint venture with
Woolworth’s Ltd. Woolworth’s Ltd. is the largest retailer in Australia and New Zealand
by sales volume.24 Woolworth’s operates 3,000 supermarkets, department stores, liquor
shops, and other specialty retailers.24 Both companies hope that by joining forces,
Lowe’s can take advantage of the Woolworth’s name and presence in Australia and New
Zealand. Woolworth’s hopes to take advantage of the merchandising expertise Lowe’s
can provide in the sale of home improvement merchandise. The venture’s goal is to
open up 150 new stores in this market within the next 5 years.24 This joint venture is
extremely valuable to both parties in that both of them gain something significant, in
both presence and knowledge—two goals will be met.
Vertical Integration
In order to further its goal of being the number one retailer in home improvement,
Lowe’s must continue to offer the competitive prices it offers. However, many of the
population do not possess the knowledge to install the items these stores sell. In
addition, there is an increased chance that should a potential customer come to a
Lowe’s store to purchase—as an example—a hot water heater, that if that person
couldn’t install it themselves, they would have to hire a contractor to install it. A
contractor may or may not purchase this item from Lowe’s—potentially costing Lowe’s
the sale. To alleviate this problem, Lowe’s—as well as its main competitor, Home
Depot—has vertically integrated into the contracting and installation business.25
Through this integration, Lowe’s is able to offer both the product and the installation.
Using its perceived low-cost provider status, Lowe’s is able to secure orders for
installations from most of its sales—from roofs to kitchen sinks. This way, it can better
secure its customers, providing a better service and lower cost product than its
competitors.
Product Diversification
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One of the keys to the success of the home improvement store industry has been its
product diversification. Lowe’s offers thousands of products in hundreds of categories.
Through this broad selection, it is able to offer something to almost anyone—from a
homeowner to a professional contractor or builder. In order to keep customers coming
back, Lowe’s must always be looking out for newer and more innovative products.
Many of these products are introduced by manufacturers; many are requested by
Lowe’s to be manufactured. The home improvement stores industry is a very cut throat
business in that the slightest advantage seen due to a more diverse product can either
make or break one of these stores. Lowe’s is constantly changing its merchandise lineup
to include higher grade merchandise, such as professional versions of a normal
homeowner’s product—a method to give the purchaser the option of buying a higher
grade item, typically with a higher price tag; items with longer warranties; items that are
exclusive to its stores, etc. Through these methods, Lowe’s is able to diversify its
product selection and stay on top of the competition.
Horizontal Integration
One of the tools available for companies to use to expand its current market presence is
to horizontally integrate with current industry competitors. In the situation with Lowe’s,
one of its goals is to become an international company, with stores spanning into other
countries. Recently, it formed a joint venture with Woolworth’s Ltd in Australia. 24
Woolworth’s portfolio of retail establishments included nearly all different types of
retail stores, except the “big box” hardware retailers. Lowe’s provides that knowledge
to Woolworth’s, and Woolworth’s provides that market presence Lowe’s needs to be
successful in Australia. To help kick start this joint venture, it was necessary to purchase
an existing hardware retailer in Australia—John Danks and Son Hardware.26 Danks is a
well-known hardware retailer in Australia. Through its joint venture with Woolworth’s,
Lowe’s made an offer to purchase Danks for $87 million.27 This move was just approved
November 12, 2009 by the Australian Competition & Consumer Commission, paving the
way for this acquisition to be finalized.27 Through acquisitions like these, Lowe’s can
further cement its status as an international retailer, and giving it a solid reputation in
other countries.
Business Level Strategy
Best Cost Provider
As stated in its corporate vision, Lowe’s strives to “provide customer-valued solutions
with best prices, products and services, to make Lowe’s the first choice for home
improvement.”28 Currently, the industry is extremely saturated, not only in the sense of
number of retailers and competitors, but also in the variety of products available for
sale in these stores. Lowe’s must differentiate itself by presenting an image of low
prices but high quality. Lowe’s not only utilizes this strategy for the sales of its retail
goods, but also for the services it provides for installations and commercial contractor
assistance. Using this strategy, Lowe’s can differentiate itself from its competitors—
many of whom only advertise low prices, or higher quality. If Lowe’s can provide both
8|Lowe’s Companies Inc.
high quality and lower prices, it can enjoy a competitive advantage over its competitors.
As long as consumers agree with Lowe’s definition of high quality and low prices, this
strategy can be a very successful one.
9|Lowe’s Companies Inc.
External Analysis
Opportunities
Expanding into new International and Domestic Markets
To remain profitable in today’s market, the home improvement industry members must
always be looking for ways to expand their market share and can do so by recognizing
their market opportunities. Competitors within the industry have made a significant
impact on the foreign market; adding stores in Canada, Mexico, Guam, Puerto Rico,
territories of the Virgin Islands, and the latest, China. Some of these moves were made
by industry member Home Depot, as they continue their attempt to claim their share of
the multi-billion dollar business in international markets. As of the fourth quarter of
2008 Home Depot operated over 262 international locations, accounting for 11.5% of
the store base.14
As industry sales continue to climb, and demand for industry products continues to
increase, industry members will realize that further market penetration is needed. The
industry as a whole has a significant market share of total hardware and associated
items sales. However, being a fiercely competitive marketplace, industry members are
constantly jockeying for the lead position. Individual members have opportunities to
improve their market coverage, as well as brand recognition. Many store owners will
enter into markets currently underserved, including smaller population based towns and
cities, foreign countries, and adding additional locations in an already served city. For
each of these top competitors, market expansion is key and an ever present opportunity
to gain an advantage over the competition.
Openings to win Market Share from Rivals
Market analysts know that best way to take an advantage away from a competitor is to
steal its customers. A prime example of this is the battle for territory that happened
back in 2001 for a prime location in San Antonio Texas. At that time, Home Depot
operated 11 units in San Antonio, with plans to open another store later that spring. At
the same time Lowe’s was contracting to open two new 150,000 square foot stores to
try and cut in on home depot’s market share. To some this might sound trivial, but in
reality it’s one of the best ways to challenge the growth of the competition in any given
industry.30 As the competing firms see an opportunity to grow and to take market share
from its competitors, it must make that move in order to remain competitive. Industry
members are very familiar with each others’ operations. It is a relatively common
practice to place a competing store adjacent to a rival. If the industry wishes to increase
market share and remain competitive overall, then it must be on the lookout for and
win market share from rival industries.
Expanding the Company’s Product Line
10 | L o w e ’ s C o m p a n i e s I n c .
Consumers are always looking for new and innovative products, and are willing to spend
their money on the “next best thing”. Today’s world is consumed with environmentally
friendly products. Realizing this, Home Depot was able to capitalize on this and
expanded its product line by establishing Eco Options. This new product line was
designed to include products that are environmentally friendly and reduce the impact
on the environment. Home Depot has gained national recognition since the release of
this product line, including receiving the Atlanta Business Chronicle’s Enovation award.31
Overall, the launch of this product has given Home Depot exactly what it needed—a
boost in sales and a new consumer base of eco-friendly consumers.31
Lowe’s has also made strides to expand its company’s product line. In 2009, Lowe’s
joined forces yet again with the Johns Manville Corporation to provide new insulation
products for home and business. This strategic alliance is intended to give consumers
and increased access to the insulation technology for energy efficiency as well as
improved indoor air quality, all beneath one roof at over 1700 store locations.32
These two are a mere example of the different methods in which industry members as a
whole can expand and improve its product line. As trends emerge in retail, this industry
must be in a position to respond quickly and effectively to keep customers’ interest
piqued.
Entering into Alliances or Joint Ventures
Joining forces with another successful company that is already prosperous and has its
dedicated consumer base is a great way to further a company’s competitive advantage.
As an example of this, Home Depot recently announced its new joint venture with
Martha Stewart Omnimedia Inc.33 The new product line is set to hit stores in 2010. This
joint venture is particularly beneficial for both parties involved—as is the case with
many joint ventures. Another example of this is Lowe’s stores venture with
Woolworth’s. In late 2011, Lowe’s will open a new store under the partner of its latest
joint venture deal with Woolworth’s. Woolworth’s is Australia’s number one home
improvement chain and holds a large stake in the $24 billion home improvement market
in Australia.34 Through these avenues, the members of the home improvement industry
will be able to capitalize on strengths that are in place on foreign soils—enabling them
to merge competencies, as well as assets to better serve the available customer base.
Online Technology and Sales
The internet has changed the way people do business. Online features have made it so
you don’t even need to leave your home. You can bank, shop, order food, and anything
else you can think of online. So it is only natural that the home improvement industry
capitalizes on this ever popular marketing tool. Through mergers and acquisitions,
members of the home improvement industry are able to develop and broaden their
online sales. As an example, in 2006 Home Depot recognized the need to strengthen its
online presence and in turn acquired Home Decorators Collection (HDC). HDC is an
online and catalog retailer of furniture, rugs and lighting, and by acquiring them, Home
Depot hoped to increase its presence on the web and appeal to more consumers. 35 With
a large portion of Americans having access to the internet in their own home, the
11 | L o w e ’ s C o m p a n i e s I n c .
industry will be able to achieve their goal of increased online sales and service. Another
competitor in the home improvement industry, Lowe’s, activated its website in 2001,
adding over 100,000 items available to its online customers.36 This segment of the
market must not go unutilized, as competitors to this industry are all vying for consumer
dollars and loyalty. As technology develops, so should industry websites.
Retirement Age for Consumers
Our country is witnessing the retirement age of many baby boomers.37 Many of the 76
million Americans born during the time period of 1946-1964 are ready for retirement.
The home improvement industry is looking forward to the revenue that the consumers
in the retirement phase of their life bring. Many of the baby boomers will turn their
attention to remodeling their homes. It has also been argued that the retirement of
baby boomers provides a strong demographic driver and should lead to continued home
improvement expenditures. Many of these citizens will make a decision as they start
their retirement as to whether to remodel or buy a new home. Due to the poor
performance of many peoples’ retirement accounts, many will opt for the less expensive
remodel, thus rendering income for the home improvement industry.
Threats
Slowdowns in Market Growth
Economic hardships negatively affect the profitability of businesses all around the
world, and the hardships that the economy is facing right now has proven to greatly
affect the home improvement industry. Not only have people slowed down on
purchasing new homes, they have also slowed down on investing in them as well. In
earlier months of 2009, the industry leaders—Lowe’s and Home Depot—reported weak
second quarter earnings, as consumers have considerably scaled back on completing
home repairs. Because of these tough economic conditions, companies need to scale
back on costs, forcing the closings of many home improvement stores all across the
United States. As the economy shifts back toward the positive, so will the results seen
by the industry. However, the current recessionary economy remains a viable threat to
the growth and stability of the industry as a whole.
Increasing Intensity of Competition
Although the industry is facing tough economic times, the competition among industry
rivals continues to squeeze profits. As stated earlier, both Home Depot and Lowes have
both suffered losses and posted very weak earnings for this year. As the market gets
tougher, industries will engage in price competition in an attempt to retain or attract
new customers. Industry members have realized it had to make changes in its pricing in
order to keep their market share interested in their products. During that time Home
Depot decided to cut back prices on almost 1200 items from trash bags to toilets.38
Many industry competitors promote a low-price strategy as a method to improve
market share and convince buyers to shop at their establishments. The pricing war
12 | L o w e ’ s C o m p a n i e s I n c .
within this industry will more than likely continue and strengthen until the demand
returns to the level it once was in years past.
Shift in buyer needs
The demand for a product depends on the need of the buyers. As a result of a sluggish
economy, buyers have changed what is important to them in terms of spending. Items
for home repairs or “Do-It-Yourself” projects are not essential during this time, which is
damaging to the home improvement market. In today’s economy essentials such as
food, health, and beauty aids are amongst the products that are being sold most
frequently.39 Even these products are being substituted for cheaper, less-costly brands.
Carl Steidtmann Deloitte, chief economist for consumer business says that many
consumers have the money to spend, “They just don’t have the will”.39 In order to adapt
to these changing times, retailers will have to take measures to attract the consumers to
their prices. Customers are no longer looking for the best name brand; they are simply
trying to buy the best product at the most affordable price. For the home improvement
industry the downward economy and the housing market has made it difficult to attract
customers, so they must work twice as hard to appeal to the same demographic, but
wisely price their products, allowing the customer to feel like what they spent their
money on was a wise decision.
Slow Real Estate Market
Industry revenue from the housing market is expected to drop in 2009 by 6.4%, with a
falling sales activity for new and existing homes. The increase in foreclosures and the
slowdown in construction all negatively affect the housing market, which in turn causes
a decline in revenue for the home improvement industry. Homes are losing value, and
according to IBIS, the overall housing price index will fall by 1.5% over 2009. In 2007
home prices experienced a decline in the first time in 13 years alerting consumers to the
weak condition of the economy and forecasting the real estate slump in years to come.
Consequently, with all the trouble in the real estate market today, the home
improvement industry is adversely affected. Until the housing market conditions
change, the home improvement industry will continue to encounter slow growth and
declining revenue.
Diminishing Labor Force
At an all time high unemployment rate of over 10%, many businesses in the US have to
shut down or scale back in order to compensate for the loss of man power. With weekly
unemployment rates rising to over the half-million mark, it is clear to see that the US
economy is still losing jobs. Economists are hoping for signs of a rise of job creation in
the US, but a new report suggests that employers are just finding ways to increase
production from the remaining workforce, instead of hiring on new people. The top
leaders of the home improvement industry have experienced setbacks with the current
unemployment issues. Earlier this year, Home Depot announced that it will cut about
2% of its workforce, totaling about 7,000 jobs.40 It is tough for economists to predict
when the job market will finally turn around and begin to see an increase in
13 | L o w e ’ s C o m p a n i e s I n c .
employment. Until then, industries such as the home improvement industry will have to
continue operating at less than desirable employment levels in hopes for a favorable
economic turnaround in the near future.
Environmental issues
In today’s world everyone is trying to “go green”, and if a company does not have a “go
green” strategy, there is a good chance they are in the process of developing one. The
home improvement industry is no exception. Feeling the pressure to advertise more
earth friendly products, top leaders in the industry are investing in new products and
market plans to gain favor in the public eye. Competitors have launched various
promotions and product lines to promote new and existing environmentally friendly
products. However these Earth-friendly products have been under scrutiny as
environmentalists question the degree of which these products will help eliminate or
reduce pollution. Many proponents to “green” initiatives have faulted the industry as a
whole, stating that their initiatives are purely for show and for profit—having little
effect on real “green” problems. Industry competitors in the home improvement
industry need to be cautious of how they intend to include Earth-friendly products to
their product line. If they are not careful they can be the subject of more criticism and
perhaps even lose potential customers. In order for them to be successfully eco-friendly,
consumers must believe that the company is honestly concerned for the environment
and taking serious measures to ensure their products help reduce or eliminate pollution.
Competitive Analysis
Rivalry: Moderate1
This industry operates in a highly saturated state. It is estimated that approximately
87.2%1 of the available market share is occupied by the three largest competitors in this
industry: Home Depot, Lowe’s, and Menards. A moderate level of rivalry exists simply
due to the lack of outside competition and small number of internal rivals.
When competing sellers are active in making fresh moves to improve their market standing and
business performance2
During the current recessionary economy, most stores in this industry have resorted to
deeply discounted pricing promotions. Sales totals have dropped considerably as
people stop spending money on non-essential items. Every sale made by an industry
member is made at a pricing level that is well below normal values, and is typically
observed by competitors, setting off price wars. Home Depot takes home improvement
a step further in offering additional services which are typically done through a direct
relationship with a contractor. Home Depot has offered heat pump installation as well
as equipment rental services3—something that it is using to differentiate itself and gain
better company performance. The two main competitors in this industry—Lowe’s and
Home Depot—consistently go against one another in product offerings, pricing
promotions, services, and even geographical store placement; many times placing
competing stores next door to each other.
When buyer demand is growing slowly2
14 | L o w e ’ s C o m p a n i e s I n c .
Currently, buyer demand is very weak and not growing. In the home improvement
stores industry, Home Depot has taken a large loss. Throughout the last four years, its
overall sales have decreased and its stock price has decreased 36%.4 The other main
competitor in this industry, Lowe’s, has not suffered as much, neither has their stock
price. Most consumers are now spending discretionary money on needed repairs and
improvements, instead of the historically relied upon big-ticket items—appliances,
flooring overhauls, and window replacements. These stores, who were once moving
larger amounts of stock, are finding themselves with a surplus of inventory of which
they must get rid of. To do so, the stores must reduce prices and offer promotions to
move this inventory. If it cannot move merchandise in this manner, then it must sell it
in alternative markets such as auction clearinghouses, discount volume retailers, etc.
This condition creates a higher level of rivalry, due to the increase in competition.
It becomes less costly for buyers to switch brands2
Other than store preference there is little reason—price wise—that would stop a
consumer from shopping and making a purchase at any of the retailers in this industry.
Although they may not all offer the same identical brand merchandise, all offerings are
of near equal quality and price. Many times, the competing stores will even offer the
same identical product. Unless there is a specific contractual agreement between one
of the stores and a contractor for purchasing building materials, there would be little to
no additional cost to switch from one store to another. This creates a higher level of
rivalry as competing stores vie for the attention and business of a decreasing number of
customers.
The products of rival sellers are commodities or else weakly differentiated2
The majority of the products offered through home improvement warehouse type
stores is very similar to one-another. All stores offer appliance, lawn and garden,
nursery stock, lumber, doors and windows, as well as a variety of tools—both power
and hand. They all offer plumbing supplies, electrical supplies, and in some cases home
decor. The different stores—Lowe’s and Home Depot—both offer these products and
have very little differentiation between them. Their brand names may be different, but
their prices are similar, as is the quality of the products. This being the case, it is
extremely easy for a customer to purchase an item from either store and lose no value
in the process. These stores must differentiate themselves in other ways—including
additional services, more creative merchandising, and more convenient store location
placement.
There are fewer than five sellers2
In this instance, there are three store chains, with only two main chains as competitors. 1
Lowe’s, Home Depot, and Menards are the three main competitors—although between
Home Depot and Lowe’s, they have 82%1 of the total market share. Menards carries
approximately 4.2%1 of the total market share. Between the three, 87.2%1 of the
market share is taken. This leaves relatively little room for any competition. However,
with this little number of sellers, it is not typically a great idea to get into much of a
15 | L o w e ’ s C o m p a n i e s I n c .
pricing war. The outcome is typically a reduction in profit for both stores vying for that
sales dollar. In a situation such as this, the overall loss of profit is too great to gamble on
lowering the price. Therefore, in most situations, it is better to not undercut the
opposing competitor, and approach it as a live and let live strategy.2
One or two rivals have powerful strategies and other rivals are scrambling to stay in the game 2
As stated in previous paragraphs, 82% of the total market share is divided between the
two most dominate companies in the industry—Lowe’s and Home Depot. Their
strategies are to offer a wide range of products at a competitive price, and make them
available to consumers—both professional and personal. Between the two chains, they
own and operate 3,500 retail locations1 world-wide. This type of market domination
has relegated any hopeful competitors to a mere fraction of the available market share.
This situation isolates the rivalry between Home Depot and Lowe’s and does little to
affect Menards—although Menards has had to modify its strategy lately to include
appliances.1 Due to Home Depot and Lowe’s extreme control of the market share, it
makes it very difficult for a competitor to make any ripple in the competitiveness. No
other competitor has the same geographic reach, sales volumes, or sheer number of
store locations that Home Depot and Lowe’s possesses. This type of domination has
weakened the overall rivalry within this industry to just two main competitors.
Tools of Rivalry2
Some of the methods used in the home improvement stores industry is competitive
pricing—something that both Lowe’s and Home Depot have in comparison to their
rivals. Other methods of combating a rival in this industry are to offer a wider selection
of merchandise including: appliances, lawn and garden equipment, nursery stock, and
construction materials—as well as home decor. Competitors must offer attractive, lowinterest financing options for customers. Differentiation is also a means by which a
competitor my set itself apart. As an example, Home Depot offers heat pump and air
conditioner installations by its contractor network. Although Home Depot does not
stock these items, they have contracted with local heating and air contractors to install
these items, while enabling the consumer to finance this purchase on Home Depot’s
credit card. Lowe’s has differentiated itself by offering a range of home decor products
which it has found that its female shoppers typically will purchase.
Potential Entry of New Competitors: Weak
Presence of sizable economies of scale in production or other areas of operation 2
Due to the scale of the two largest competitors, Home Depot and Lowe’s, they are able
to erect extremely large economies of scale in this industry. Between the two chains,
they offer 3,500 stores and growing, 82%1 of the total industry market share, and
approximately $99 Billion1 of sales per year. In order to become a viable competitor in
this industry, one would have to make a significant investment in economies of scale to
even be in a position to compete. Being that since this is nearly an impossible task,
given the present economic conditions and competitors available, it makes
16 | L o w e ’ s C o m p a n i e s I n c .
accomplishing these high levels of economies of scale extremely difficult, if not
impossible.
Existing competitors are struggling to earn healthy profits2
The last year this industry was gaining in revenues was in fiscal year 2005, and which
point they registered a 12.7%1 growth over the previous fiscal year. Since that time, the
industry as a whole has struggled with the recessionary economy of the United States.
Fiscal year 2006 reported a slight drop in revenues of -.5%1 and progressively got worse
throughout fiscal year 2009 at which time the industry recorded a -7%1 decrease, with
the largest drop being in fiscal year 2007 with a -15%1 decrease. This decrease in
revenues has downgraded the expansion plans of all of the major chains within this
industry, and has forced competitors to slash prices in an effort to bolster sales. This
being the case, makes it an unattractive industry to try to enter at this time, and would
create a large problem in maintaining any sort of profitability during this poor economic
time.
Buyer demand is growing slowly2
As stated in the previous paragraph, the industry has suffered during the past four
years, with dropping sales figures progressively for three, and only during fiscal year
2009, picking up to only a 7%1 decrease over the past year of a 15%1 decrease. This
decrease in sales revenues is a large indicator of a decreasing buyer demand. As the
economy begins to recover, some of this buyer demand will also recover. However, as it
stands with the current economic situation—increasing unemployment and labor
market weaknesses—consumers are holding back on “big-ticket” items, and are mainly
concentrating their expenses on necessities. Formerly, these large warehouse-type
stores catered to and derived a portion of their income from small contractors or do-ityourself types on home improvements and additions, of which less and less are
occurring. As the economic situation improves so will the attractiveness of this market,
as buyers demand more and profit levels increase.
Industry members will strongly contest the efforts of new entrants to gain a market foothold 2
As stated previously, approximately 87%1 of the available market share is occupied by
the three largest competitors in this industry: Home Depot, Lowe’s, and Menards. This
being the case, if a well-funded competitor decided to attempt to strong-arm
themselves into this industry and market, the two main competitors—Lowe’s and Home
Depot—would be in an excellent position to eliminate that competitor before they were
able to gain any type of foothold. The volume in which Lowe’s and Home Depot deals in
is far too large, capital too high, and their relationships with suppliers too strong, to be
easily broken. If a new competitor decided to go against these industry giants, they
would be quickly disposed of.
The difficulties of building a suitable distributor network2
As a well established industry, the competitors involved have, at their disposal, a very
strong network of distributors, wholesalers, and even growers. Home Depot accounts
for approximately 14% of the total garden products sold in the United States. 1 Home
17 | L o w e ’ s C o m p a n i e s I n c .
improvement stores as a whole, account for nearly 30% of the building supplies sold in
the United States.1 As such, the distribution relationships present are significant. If a
company were to attempt to destabilize these relationships, it would have to do so with
the idea basing it upon differentiation and geographical location. However, since the
current industry majority occupies much of the available market, it would be nearly
impossible to do so.
Existing industry members are looking to expand their market reach by entering geographic
areas where they currently do not have a presence2
As is the case with most national retail establishments, the number of stores a company
has built is directly correlated to the amount of population in a geographic area. As an
example, in the Southeastern United States, the Home Improvement industry has
approximately 29.9% of the established stores located in this region, which holds
approximately 25% of the nation’s population.1 This same trend follows the rest of the
population bases in the United States. However, if a competitor wanted to stand a
chance to compete against the major competitors in this market, it would be best suited
to find a geographic location which is not serviced by any of the larger stores.
Potentially, the major retailers may face a slight bit of competition and may lose some
of their foothold in this industry if a smaller store or chain was successful in establishing
itself in one of these underserved regions. The effect it would have company wide is
most likely not significant.
Likely reactions of Incumbents
Should an incumbent retailer decided to infringe on the “turf” of one of the major retail
chains in this industry, the incumbents would not have a problem combating the
different tools that may be used. Should a new entrant decide to cut prices, the larger
retailers would be able to match and/or beat their prices. If a further situation arose
that the new entity decided to differentiate itself, the incumbents would be able to use
their might to out-maneuver the new entrant; either cutting them off, or counteracting
with a better form of differentiation. In addition, competitors may utilize their existing
relationships with suppliers to provide favorable credit terms, promotions, and
improved pricing availability in order to weaken the chance of survival of the new firm.
Competitive Pressures from Substitute Products: Strong
In this industry, substitute products are available from a number of competing
industries. These include the paint and wallpaper store industry, lawn and garden
center industry, hardware store industry, among others. All products from these
industries, whether it is paint, lawn tractors, simple tools, or fertilizers, can all be
purchased through other avenues and all serve the same purpose as the products
purchased at a home improvement type store.
Good substitutes are readily available2
In this industry, there are many substitutes that are readily available. During the time
period of 2000 to 2007, paint, flooring, and wallpaper were all categories where Home
18 | L o w e ’ s C o m p a n i e s I n c .
Depot saw decreasing sales due to an assumed competition from the respective stores
that sell these items: paint and wall paper stores and flooring stores1. Tools may be
purchased through other avenues as well—either from direct manufacturer dealers
such as Snap-On, or through other hardware stores. Lumber and other building supplies
can be purchased directly from building supply dealers, etc. Due to this competition,
the home improvement stores industry can only charge but so much—a price ceiling has
been established. In order to keep from losing significant business, these home
improvement stores must maintain competitive prices and available services.
End users have low costs in switching to substitutes2
Many times, items sold in a home improvement store are items sold as a convenience.
Typically, a consumer may enter the store with the thought of buying a gallon of paint,
but end up purchasing some fertilizer for their lawns, or a screwdriver. The cost
comparisons between rival industry competitors on a gallon of paint or other products
are negligible. If a consumer gets upset at a level of service expected at a home
improvement store, there is little to no cost in switching to a substitute can of paint
from a paint and wallpaper store. The same goes for most of the other substitute
products offered through rival industry stores. The biggest key to the survival of the
home improvement store is the ‘everything under one roof’ concept that is very
attractive to consumers. Once consumers decide, however, that they are not satisfied
with the quality of service or products being offered through these retailers, they are
very apt to purchase the same or similar product through another avenue.
Whether buyers view the substitutes as being comparable or better in terms of quality,
performance, and other relative attributes2
Home Improvement store industry members are always looking out for the best
possible deal for their customers, and to provide the best possible profit for their
shareholders. This being the case, many times in order to achieve such high profit
levels, stores may negotiate with their manufacturers to provide a product in a certain
quantity for a certain price. It is up to the manufacturer to achieve this goal in order to
do business with the stores. Sometimes this comes at a detriment to quality.
Consumers may find that products offered at Lowe’s, Home Depot, or Menards may not
be as high of a quality that can be purchased through a competing industry’s store. As
an example, Lowe’s sells Cub Cadet Brand lawn tractors. In order to achieve the pricing
that Lowe’s demands, Cub Cadet must manufacturer a less expensive, lesser quality
tractor, than then would sell at a lawn and garden store. An observant customer may
see this difference in quality as a reason to spend a little more money on a higher
quality substitute item through a competing industry member.
Customer Power: Moderate
Buyer switching costs to competing brands or substitute products are low2
Customers in this industry are easily able to switch to similar or even identical products
available through competing industries. This fact gives the customers a very high level
19 | L o w e ’ s C o m p a n i e s I n c .
of power in dealing with the larger home improvement store chains. If the customer
feels wronged, doesn’t feel they are getting the level of service they deserve, or feel
that the price they are paying is unfair, they can and will go to a competing seller in
another industry. It is due to this that they home improvement center industry
members must maintain a high level of vigilance both on the pricing and service front, in
order to maintain a high level of customer satisfaction.
Buyers purchase an item infrequently or in small quantities2
As opposed to other industries in which the buyers may purchase items by the pallet or
truck load, typical customers in this industry are average citizens that are purchasing a
new appliance, a few pieces of lumber, or a new lawn tractor for their house.
Therefore, items are typically always purchased in small quantities. This typically means
that customers will have little bargaining power with the stores as far as pricing or credit
terms are concerned, garnering them less influence on the ways the industry conducts
business on a regular basis.
Buyer demand is declining2
Due to the recent economic decline, buyer demand for items in this industry have been
declining progressively over the past four years.1 Due to this decline in demand, stores
in this industry have been forced to reduce prices and offer more favorable credit terms.
This has created a buyers’ market in which buyers possess a much higher level of power
than usual. Should this economic situation reverse, power would shift from the buyer to
the seller. Until that happens, the power will remain in the hands of the buyers—those
that drive the prices.
Supplier Power: Moderate
Industry members account for a big fraction of suppliers’ total sales and continued high volume
purchases are important to the well-being of suppliers2
In this industry, the volume in which these stores typically deal with is enormous. As an
example, Home Depot stores sell the most garden products in North America. This
industry as a whole sells 29% of the building materials, 14% of the lawn and garden
equipment and supplies, 10% of the plumbing fixtures, and 9% of the electrical
supplies1—among many others. The fact that these stores sell so much of the available
market share gives these suppliers very little room for negotiation. Should the
relationship between the supplier and stores diminish, the stores could simply choose
another supplier.
Industry members incur high costs in switching their purchases to alternative suppliers2
Many times, suppliers and retailers have contractual agreements to supply products for
a set price. In order to switch from one supplier to another, this contract would have to
20 | L o w e ’ s C o m p a n i e s I n c .
be broken—typically incurring a great cost to do so. In addition, should one of these
industry members possess the distribution and retail rights to sell a very high quality
product, the loss of the ability to sell this product may hurt the credibility of the store—
causing a loss of value in that manner. Many times, suppliers may decide that the
quality of product they can manufacture is higher than the amount the retailer is willing
to pay them for. In situations like this, sometimes the manufacturer may opt out of the
relationship with the retailer, giving the manufacturer greater power over it.
There are only a few suppliers of a particular input2
In the case of home improvement stores, many of the products carried are only
manufactured by only a few suppliers. For example, lumber is only manufactured
typically by either Georgia-Pacific or Weyerhaeuser. In this instance, those
manufacturers have a higher level of pricing and quality influence than usual. In the
case of nursery stock, there are thousands of wholesale nurseries available that are
more than willing to ship their product to the Lowe’s and Home Depot stores in the
United States. In this case, the supplier has relatively little bargaining power, as these
retailers could easily choose a different supplier.
Home Improvement Stores Industry Key Success Factors
Loyal Customer Base
There are few distinguishing factors between home improvement stores. A local
example is Lowe’s Home Improvement versus Home Depot. Through experience, both
stores maintain a similar product inventory, services, and pricing. Market research
backs this by suggesting, “… there is little product differentiation amongst players in this
industry”.1 In such situations, establishing brand loyalty may be the key success factor.
This must be accomplished through relationship marketing efforts. According to
Hawkins22, relationship marketing has 5 key elements:
1.
2.
3.
4.
5.
Develop core services and products
Develop individual relationships with customers
Provide “extra” benefits in relation to core products and services
Provide competitive pricing
Market and train employees to cater to customer needs
These five elements aggregate into a customer loyalty program. It is easy to identify the
loyalty programs in action with a visit to your local home improvement store. These
efforts include free classes in laying kitchen tile, building a birdhouse with your kids, and
gift cards—among others. These programs have the desired customer outcome of
repeat purchases, brand loyalty, and word of mouth referrals—all of which are
considered very important to industry growth and sustainability.
Wide and expanding product range
21 | L o w e ’ s C o m p a n i e s I n c .
Another success factor of the home improvement store industry is a large range of
products and services. This is not limited to single products but also a large variation of
similar products with differentiating aspects—quality and appearance. Sometimes
referred to as a “big box” store, successful home improvement stores offer a one-stop
shop for most customers needs. A quick trip to any large home improvement store
illustrates this variety. The average consumer can find nearly any home-related item
needed. This includes plants for the garden, power and hand tools, lumber, large
appliances, windows, and carpet. As mentioned, there is also a large variety of a single
product. For example, a consumer can find 20 different types and brands of a hammer.
In addition, successful stores provide a large selection of customer “Do-It-For-Me”
services. These include product delivery and installation, rental trucks, free instructional
videos and consulting services. Such an environment appeals to a large customer base
with many needs and requirements.
Providing this large range of products and services also provides members of this
industry purchasing power. This effect, allows these retailers to drive down purchase
cost from their suppliers and pass the savings to their customers. It is clear that this
ability to provide many products at reasonable prices has mass consumer appeal and
been a key success factor in this industry.
Ability to control costs of stock on hand
As with any retail industry, the cost of goods sold is the largest expense. Research
shows that on average, 72% of home improvement sector costs are inventory related. 1
The burden of maintaining a large inventory is the ability to control cost. Systems and
technologies are required to ensure low inventory costs and high inventory turnover
rates. As stated above, cost is a critical factor in maintaining a loyal customer base.
Maintaining a strong logistical program, state of the art inventory tracking, and just in
time systems are essential. However, from a historic standpoint, this industry is slow to
adopt the required technologies and systems required to implement such programs.
Only recently, did Home Depot, a major home improvement store, implement
technologies for the automation of receiving products and customer self-checkout.1
Companies like Home Depot who were slow to adopt these technologies have struggled.
In January of 2009, Home Depot announced the closure of 48 stores and 7,000 job
cuts.19 Granted, the world economic conditions have been bad for 2008 and 2009.
However, competitors like Lowe’s Home Improvement, who adopted inventory controls
earlier, seem in a better position than Home Depot.
Companies in this industry must also examine their related value chain to drive down
inventory costs. Looking once again at Home Depot, they have backward vertical
integration by owning several lumberyards.17 It stands to reason, that to be competitive,
one must be able to strictly control inventory and stock costs. Not doing so would result
in an industry in a non-competitive state with competing industries waiting to take
advantage. The ability to control the costs of stock on hand is definitely a key success
factor for this industry.
22 | L o w e ’ s C o m p a n i e s I n c .
Experienced work force
Companies in the home improvement industry have little product differentiation
between competing industries. To stand out above the competition, they must have
great customer service and a well-trained workforce; this promotes brand loyalty. With
a wide variety of products to choose from, consumers want to engage a staff that is
knowledgeable about the products they sell and their applications. This seems even
more applicable to retailers that cater to the “Do-It-Yourself” customers like the home
improvement sector.
Retailers in the industry have responded to this customer demand by hiring experienced
sales representatives for the perspective departments they represent. Currently, Lowe’s
career site reveals they are looking for trained electricians who understand government
codes and regulations.20 These candidates will run the electrical department for a
Lowe’s retail store. While speculative, this must be a perceived customer value and will
result in repeat purchases and customer loyalty. Having knowledgeable employees is
definitely a key success factor in the longevity and differentiation of the home
improvement industry.
Attractive product presentation
Many of the key success factors for the home improvement industry revolve around
marketing efforts. The final discussed success factor is a pure marketing effort –
product presentation. In the broadest sense, this relates to the store atmosphere which
includes: lighting, layout, colors, sounds, etc. Consumer behavior studies show that a
retail atmosphere influences a shopper’s mood and a perception about the quality of
the outlet. Known as “situational influences”21, these items that interact with the
senses, i.e. smell, sight, and touch, are studied in detail by behavior specialist. The
desired outcome is to develop a series of characteristics that increase consumer buying
and customer retention. Through personal experience, it is easy to determine that
companies in the home improvement sector are very concerned about their retail
atmosphere. Such retailers provide clean stores with attractive product displays, open
floor design, and a well-lit environment.
Internal Analysis
Strengths
Good Customer Service Capabilities
Recently, Lowe’s was given a score of 779 out 1000 by JD Power and Associates for
customer satisfaction.8 This score was the industries second highest, the highest being
Ace Hardware—although Ace is not technically in the same industry, JD Power grouped
them together. These scores were given based on merchandise; sales staff; price;
sales/promotions; and facility. Lowe’s scored its highest figures in its merchandise
area.8 In addition of further customer importance is facilities.8 Having a high level of
23 | L o w e ’ s C o m p a n i e s I n c .
customer satisfaction is key to sales. Research shows that customers spend 76% of their
home improvement budget at their preferred store; however if that same person is
“delighted” with their preferred store, they are likely to spend an additional 4% of their
budget at the same store.8 Essentially, a high level of customer satisfaction leads to a
higher level of income from these same customers. Simply, a customer is not going to
spend money at a store it does not see as an enjoyable place to visit.
Economy of Scale Advantages over Rivals
As compared to many of its rivals, Lowe’s wields an impressive economy of scale over
many of its rivals, save Home Depot. With its large number of stores covering a wide
swath of geographic area, both in the United States and abroad, Lowe’s has tremendous
bargaining power over its suppliers. In addition, having this large economy of scale
enables Lowe’s to lower their prices to a level unapproachable by many, if not all, of its
smaller rivals. The operational expenses that Lowe’s incurs to operate can be spread
across a wider store base than a chain with fewer locations. Also, Lowe’s, with this
larger economy of scale can undercut its competitors on price and still be able to turn a
decent profit, where if a competitor were to try this, it would most likely lose money.
Strong Advertising or Promotion
Through Lowe’s strong promotions, it is able to drum up business that, during a difficult
economic time, might be hard to come by. As an example, recently Lowe’s was
promoting $199 carpet installations with purchase of new carpet from Lowe’s—a price
well below what most competitors can achieve.16 Through advertising and promotions
like this, Lowe’s is able to increase its market visibility as well as interest hesitant
customers into taking on a home improvement project—making a sale for Lowe’s. Part
of making the best of a poor economy, is remembering that the multi-thousand dollar
remodeling projects simply are not available anymore. Lowe’s recognizes this and
advertises the repainting of a room, redoing landscaping, as well as many other smaller
fixes. An additional revenue stream that Lowe’s identified was that with the current
economic situation, homeowners are not able to upgrade homes or expand their
current homes. However, homeowners are trying to make more with what they have.
Recognizing this, Lowe’s has recently been advertising its line of patio furniture. This
enables homeowners to turn their back yards into an extension of their home. 16
Wide Geographic Coverage and Distribution Capability
One of Lowe’s main strengths is its wide geographic coverage. Throughout the United
States, its main territory, Lowe’s operates 16496 stores in all 50 states and Canada. The
majority of the stores Lowe’s owns are east of the Mississippi River. However, this is by
design. The majority of the population base in the United States is east of the
Mississippi, and located mainly in the Southeast United States. By having a broad
geographic coverage, Lowe’s is able to reach more customers in more areas. Another
advantage of a wide geographic coverage is the ability to recoup losses, should a
particular area have a more difficult economic situation—it is able to spread its losses
among other geographic areas that may be more profitable than others. In addition,
24 | L o w e ’ s C o m p a n i e s I n c .
brand recognition increases with the wider array of stores. The ability to secure repeat
customers increases with a larger number of stores geographically. Through Lowe’s
distribution centers, it is able to quickly replenish its sold inventory within a day or less,
making more of its merchandise available for sale, and also enables Lowe’s to react
quickly to higher demand at particular locations. As an example, during hurricane
season, Lowe’s is able to replenish plywood used to board up windows more quickly
with a nearby distribution center than a smaller rival that may have to wait for shipment
from the manufacturer or wholesaler.
An Attractive Customer Base
In order for a company to remain strong and to continue selling through difficult
economic times, it must attract a large, diverse, customer base. In years past, Lowe’s
was noted mainly for its attractiveness for male shoppers—a macho place to shop.
However, as more and more women take on the role of sole provider in households,
and concrete their independence, Lowe’s has become more of a family centered type of
store. This has its great advantages over other industry rivals. Many rivals only carry a
few items that attract people other than weekend remodelers or professionals—Lowe’s
has a lot of these items. By offering these items, Lowe’s is able to gain an attractive
customer base. Its customer base is very diverse. It includes weekend remodelers,
someone looking for repair components to fix their house, and someone looking for
home decor items to women and men shopping for plants, and professional contractors.
By catering to such a diverse customer base, Lowe’s is able to capture a much larger
share of the market than a traditional hardware or lumber yard type store. Through its
innovative marketing and diverse inventory, it will continue to attract many new, and
diverse customers.
Alliances/Joint Ventures with other firms that provide access to attractive geographic markets
Through a joint venture in Australia with Woolworth’s Ltd, Lowe’s is able to enter the
Australian market.26 This joint venture helps Lowe’s to understand the Australian
market by teaming up with an existing Australian retailer. In tradeoff, Woolworth’s is
able to learn about marketing home improvement goods in a “big box” setting. This
arrangement creates less of a risk for both firms, as in this joint venture, the costs and
investments are split between the two companies, eliminating the burden on one single
company to support the venture. It is through this venture that both companies hope
to benefit—Woolworth’s learning “big box” home improvement marketing and Lowe’s
getting its feet wet in a new, unfamiliar market. Typically, these arrangements are
mutually beneficial for both companies. This venture is a strong point for Lowe’s as this
agreement enables it to form further alliances with other companies in other regions. It
can use this single venture as a foundation for further ventures—further spreading its
marketing model and store style into new and larger markets throughout the world.
25 | L o w e ’ s C o m p a n i e s I n c .
Weaknesses
Lack of Adequate Global Distribution Capacity
A weakness of Lowe’s is its global distribution capacity. Within the United States,
Lowe’s has a very well established distribution network of stores and distribution
centers. These centers and stores are able to service Lowe’s customers in short notice,
with no drop off in service and inventory availability. This same capacity extends to
portions of Canada. In an effort to further its globalization, Lowe’s recently partnered
with Woolworth’s Ltd in Australia. The purpose of this partnership is to utilize Lowe’s
home improvement products marketing expertise with Woolworth’s retailing
knowledge of the Australian market—a partnership which is mutually beneficial to both
companies involved. However, even with all of this global distribution available to
Lowe’s, its overall distribution capacity is poor. In essence, the global distribution
capacity of the whole industry is poor. Home Depot is a few steps ahead of Lowe’s in
that it has stores in Mexico and Canada, and is eyeing putting stores in China. 5 Lowe’s is
still playing catch-up with Home Depot and is actively placing stores in major
metropolitan areas trying to steal some of Home Depot’s market share. It does not
have a market in China, and is slowly entering Canada. In order to better compete in
the industry and to put itself in position to steal more market share from Home Depot,
Lowe’s will have to continue expanding at a rapid pace—constantly looking out for
opportunities to expand in the more profitable metropolitan areas of the world.
Weak Brand Image or Reputation
Lowe’s has extremely high brand awareness in the eastern part of the United States,
where its biggest concentration of stores is. However, in the larger metropolitan areas
which were traditionally outside of Lowe’s normal store market, its brand image is not
as strong. Historically, Home Depot placed its stores in the larger areas with the
expectation that more population equals more sales. Lowe’s typically attacked the
smaller town markets, hoping to capitalize on its previous image of a local hardware
store. As Lowe’s continues its growth into the larger metropolitan areas—an area
Lowe’s recognized as a weakness—its brand image will improve. This improvement in
geographic distribution, as well as traditional advertising and word of mouth advertising
between customers and contractors, will prove to be the biggest factor helping Lowe’s
improve its weaker brand image—especially in metropolitan areas that are used to
having only Home Depot.
Subpar Profitability because of the Recession
Due to the current economic recession being suffered worldwide, Lowe’s, along with
many of its competitors, have found that profits are a difficult thing to achieve. During
these times, consumers’ are uncertain in their employment status and home values.
Therefore, they are more hesitant to do any major improvements and resist spending
larger amounts of money on projects. As a result of this situation, Lowe’s—as well as its
26 | L o w e ’ s C o m p a n i e s I n c .
competitors—has seen a large decrease in its profitability. Lowe’s has experienced
seven straight quarters of earnings decline as of August 2009.41 Its profits have dropped
19% during the three months that ended July 31, 2009.41 As Lowe’s continues to try to
grow its geographic base, a loss of profitability will temper growth until a higher level of
profitability can be achieved. In the meantime, Lowe’s will still create new and
innovative ways to get consumers into its stores, in an attempt to convince them to
purchase the smaller items—ones that could be used to repair or replace an item that
has needed it. Lowe’s feels that if it can achieve this—getting new customers in for
smaller purchases—that it can get an increased level of business from these same
customers once the economic situation improves. In the meantime, Lowe’s will
continue to grow—albeit slower than anticipated—and wait for a better economic
situation to occur to try and achieve a higher level of profitability.
Product Recalls
One of the hazards of retailing merchandise is the possibility of product recall. A
product recall can become a very expensive venture, as the possibility of lawsuits,
damage to the image of the retailer, and consumer backlash are all heightened when a
product recall happens. In one instance, consumers reported that gas grills that are sold
exclusively at Lowe’s have had problems with the burners deteriorating, causing burns.
This same grill, due to these burner issues has also had problems with the lids catching
on fire, posing a much more serious fire hazard.42 In another instance, it was reported
that certain models of roman shades, sold at Lowe’s stores, has had problems where the
pull cord to raise and lower these blinds, has become wrapped around children’s necks,
strangulating them.42 In both of these cases, hazards of retailing are evident. Should too
many of these occur with one store brand, or chain, a clear-cut message would be sent
to consumers to stay away from a particular store or brand. A major recall can be
damaging to the store financially, but also in the goodwill it has established with longtime customers. A strike to this goodwill could possibly result in a large amount of
customer backlash as customers decide where to purchase their merchandise. Lowe’s
must remain vigilant on choosing vendors to purchase its merchandise from. Too many
recalls could have a very adverse result for its competitiveness and legitimacy in the
marketplace.
Short on financial resources to grow the business and pursue promising initiatives
Due to the economic situation in the world today, what was once Lowe’s driving factor
to its bottom line—expansion—has had to slow down. In the previous few years, from
2001 to 2007, Lowe’s had opened a typical 100 new stores per year. Throughout 2008,
Lowe’s decreased its openings from the normal 100 or so, to its planned 62 to 66 stores
in 2009. It had originally planned to open an additional 60 or so stores in 2010, it has
now decreased its estimate to between 30 to 45 new stores.41 This decrease has mainly
been influenced by Lowe’s recent profit woes. During the past few months, and even
possibly years, Lowe’s profitability has decreased, along with the flow of the recession
and housing market collapse. Unfortunately, in Lowe’s industry and in the situation
Lowe’s is in, its growth is dictated by the number of stores it can build and the amount
27 | L o w e ’ s C o m p a n i e s I n c .
of market it can penetrate. Without this capital to grow its store numbers, Lowe’s faces
a weakness in its earnings. As the economy turns around and Lowe’s profits return to a
more stable level, it will be able to build the additional stores needed to pull market
share from its rival, Home Depot, and, in return, increase its bottom line—allowing it to
build even more stores in the United States and abroad.
Lack of Adequate Services Offered Comparable to Rivals
One of the competitive advantages that Lowe’s and Home Depot can utilize against its
competitors is its ability to perform a wide array of installation services. Currently,
Lowe’s will install many of the products it sells, such as windows, carpeting, flooring,
roofing, and doors. However, even with all of this it still falls short in comparison with
Home Depot. Home Depot is currently partnered up with Compact Power Inc in Fort
Mills, SC to sell and rent equipment to consumers through Home Depot’s retail
outlets.43 In addition, Home Depot has partnered up with many local heating and air
conditioning contractors to install Trane brand heat pumps and air conditioners in
customers’ homes. Through this program, it is able to offer installation on these items
to customers who charge the price of the installation to their Home Depot credit cards
and receive the installation from a local, licensed heating and air conditioning
contractor. In order to remain competitive in the home improvement marketplace,
Lowe’s is going to have to expand its service offerings to include many of these services.
If a single store can offer more options to its customers, those customers are more likely
to purchase more and return more often than if they were not offered these options.
Financial Analysis
Profitability Ratios
Gross Profit Margin1, 23
Year
Lowe’s
2005 2006
33.7 34.2
2007
34.5
2008
34.6
2009
34.2
Home Depot
33.5
33.5
32.8
33.6
33.7
Industry average
33.6
33.9
33.7
34.1
34.0
For a retail firm, the gross profit margin is the percentage of revenue left over from the
difference of purchasing an item versus the sales price. As a stand-alone item, it tells
little about the performance of an industry. Comparing the values to similar industries
and identifying trends may prove useful.
A report provided by the National Association of College Stores shows the average gross
margin for various retail industries range from 23.5% to 47.2% in the clothing industry.18
The home improvement industry falls in upper range of this scale. This suggests that
this sector is more competitive as compared to other retail industries. Over the 5-year
28 | L o w e ’ s C o m p a n i e s I n c .
span, the industry average increases. Such an increase may be indicative of greater
purchasing power or better efficiency.
Throughout the five-year analysis, Lowe’s has consistently produced gross profit
margins above the industry average. This bodes well for the success of Lowe’s as a
whole. It also appears that Lowe’s is being successful in beating its main industry rival,
Home Depot, in developing and maintaining profitability in the long-term. As long as
Lowe’s can maintain this level of profitability, it should have no problem competing and
growing its business, even during a difficult economic time.
Return on Assets1, 23
Year
Lowe’s
Home Depot
Industry average
2005
10.3
12.9
11.6
2006
11.2
13.1
12.2
2007
11.2
11.0
11.1
2008
9.1
9.5
9.3
2009
6.7
5.6
6.2
The Return on Assets is a measure of an industry’s earning in relation to owned assets. It
shows the ability for an industry to utilize its own assets for profitability versus
shareholder equity or debt. The industry downward trend may indicate problems.
Indeed, long-term debt has jumped significantly for this industry. In specific, the
majority of this was seen with Home Depot, which owns 42% of total market share. As
the economic situation worsens and companies find it harder to make sales, they are
finding it difficult to maintain the higher returns on their owned assets. This is
illustrated in the consistent decline shown in the above chart.
Historically, Lowe’s has been behind Home Depot and the industry average on return on
assets. However, with the declining economy and Home Depot’s struggle to maintain
profitability, Lowe’s has taken the lead during the year 2009. Lowe’s has spent an
enormous amount of cash to expand its network of stores and distribution centers and
those areas have not, until 2009, generated the return expected due to the overall
newness of the stores and the fact that sales are just now ramping up there. As Lowe’s
continues to grow its network of stores, a positive trend should be seen for the return
on assets for Lowe’s.
Liquidity Ratios
Current Ratio1,23
Year
Lowe’s
Home Depot
Industry average
29 | L o w e ’ s C o m p a n i e s I n c .
2005
1.2
1.3
1.3
2006
1.3
1.2
1.3
2007
1.3
1.4
1.3
2008
1.1
1.2
1.1
2009
1.2
1.2
1.2
The current ratio is a measure of the ability to pay off current liabilities. Current assets
are typically those that can convert to cash within a one-year period. Such assets include
cash, accounts receivable, inventory, etc. A value of 1 or greater suggests the ability to
pay short term debt, and accounts payable. A number below 1 may indicate trouble to
meet current liabilities. The slight downward trend may be of concern to some creditors
who may look further into the financial health of companies in this sector—although
this trend is most likely driven by the poor economic state of the world. Both
companies exhibit a ratio indicative of the ability to pay off its liabilities successfully.
Quick Ratio1,23
Year
Lowe’s
Home Depot
Industry average
2005
0.1
0.3
0.2
2006
0.2
0.2
0.2
2007
0.1
0.3
0.2
2008
0.1
0.1
0.1
2009
0.1
0.1
0.1
The quick ratio Is another measure of the ability to pay current liabilities. It is similar to
the “current ratio” however, removes inventories from the calculation. Also referred to
as the “acid-test ratio”, it is a conservative approach in calculating the ability to pay
short-term dept. It is used due to concerns of some industries not able to easily convert
inventory into cash. For the home improvement industry, this may not be an issue. The
bulk of this industries inventory should be able to convert to cash in a reasonable time.
However, the lower ratio shows that in this industry, the stores must sell its inventory in
order to pay its liabilities.
The slow economy, triggered by a recession and a crashing housing market has made it
even more difficult for this industry to maintain its ability to pay its current liabilities.
During the years 2008 and 2009, both companies have exhibited their lowest quick ratio
combined in the period evaluated. This is most likely caused by the longevity of the
recession setting in.
Leverage Ratios
Debt-to-Asset1,23
Year
Lowe’s
Home Depot
Industry average
30 | L o w e ’ s C o m p a n i e s I n c .
2005
17.4
5.5
11.5
2006
14.3
9.2
11.8
2007
16.0
22.3
19.1
2008
21.6
30.3
26.0
2009
18.5
27.8
23.2
The Debt-to-Asset ratio measures how much debt is leveraged to finance assets. The
lower the figure, the better, and the upward trend may not be a good sign. In particular,
Home Depot is greatly affecting this ratio. Lowe’s Companies has 40% of the market
share and has remained relatively flat in their debt-to-asset ratio. Home Depot has a
history of financial problems over the last several years. This increase may show a bleak
future for this company. In comparing the two companies to the industry, where Lowe’s
has been decreasing its overall debt-to-asset ratio, Home Depot has actually been
increasing its ratio—taking on more debt in comparison to its assets. This is a sign of
great weakness within Home Depot—its having to finance more and more of its
operation to stay in business, something that will affect overall profitability in the longrun if this ratio is not kept in control.
Long-Term Debt to Equity1,23
Year
Lowe’s
Home Depot
Industry average
2005
26.5
8.9
17.7
2006
24.5
9.9
17.2
2007
27.5
46.5
37.0
2008
34.6
64.3
49.4
2009
27.9
54.4
41.1
The Long-Term Debt to Equity ratio is a measure of total liabilities versus shareholder
equity. A high ratio may indicate aggressive financing through debt. Once again, Home
Depot skews the numbers. However, Home Depot jumped from a ratio of 9.9 in 2006
to 64.3 in 2008. This may be another sign of trouble and the inability of Home Depot to
borrow funds in the near term. Lowe’s Companies has, currently, been aggressively
building store locations throughout the United States in an effort to expand operations
into metropolitan areas currently occupied by Home Depot. Home Depot’s ratio has
been increasing exponentially due to its aggressive debt financing campaign it has been
forced to do, due to the overall poor condition of the economy and the extreme
pressure being applied by Lowe’s in its effort to unseat Home Depot as the number one
home improvement store chain.
Activity Ratio
Inventory Turnover1, 23
Year
Lowe’s
Home Depot
Industry average
2005
3.1
4.3
3.7
2006
3.6
4.8
4.2
2007
3.9
5.5
4.7
2008
4.0
4.6
4.3
2009
4.0
4.2
4.1
The Inventory Turnover ratio is a determinant of the number of times inventory cycles
per accounting period. A low ratio indicates slow turnover, a higher ratio indicates the
opposite. Generally, this ratio is used to compare companies within the same industry.
31 | L o w e ’ s C o m p a n i e s I n c .
Historically, Home Depot has been more successful in turning over inventory on a
regular basis. Its abilities have been stymied much as of late, due to a recessionary
economy. Lowe’s has progressively been increasing its inventory turnover to a high of
4.0 times. This is an indicator that Lowe’s is starting to become more efficient in its
operations and is improving its overall ability to sell the merchandise it has on hand.
Total Asset Turnover1
Year
Lowe’s
Home Depot
Industry average
2005
1.1
1.7
1.4
2006
1.4
1.9
1.6
2007
1.5
2.1
1.8
2008
1.5
1.8
1.7
2009
1.5
1.7
1.6
The total asset turnover ratio is a measure of revenues versus assets. It is an efficiency
measure of assets used to generate revenue. A higher number is generally better but is
also indicative of profit margin. Companies with high profit margin tend to have low
asset turnover and visa-versa. For the home improvement industry, the trend is moving
slightly upward. However, this is largely due to Lowe’s Companies consistent upward
trend throughout the past five years. Home Depot was once the market leader in total
asset turnover, however with its recent economic woes; it has decreased its total asset
turnover throughout the past five years. This is an indicator that the industry as a whole
is leveling out, leaving much more parity than was existent previously.
Other Ratios
Price to Earnings Ratio23
Year
Lowe’s
Home Depot
Industry average
2005
19.2
16.5
17.9
2006
15.0
13.3
14.1
2007
13.5
13.2
13.4
2008
12.2
12.3
12.2
2009
15.3
17.7
16.5
The price to earnings ratio is a measure of investors’ confidence in a company’s stability,
outlook, and its earnings. As a whole, the industry did an average job at enhancing
shareholder confidence as indicated by averages ranging in the teens throughout the
five years analyzed. However, in general, the investors in this industry have some
confidence in the industry to increase earnings and value. The average price to earnings
ratio stayed nearly steady throughout the five years analyzed. Generally speaking,
ratios above 20 indicate a strong investor confidence. However, the key “low figure” for
P/E ratios is 12—indicating an industry with little to no likeliness for growth.2 This
industry will grow, although at a slower rate. The bad economic times are to blame for
the low earnings, thus the low affecting the P/E ratio. As far as Lowe’s is concerned, its
32 | L o w e ’ s C o m p a n i e s I n c .
potential for growth is increasing as it continues to find ways to make money during the
bad economy.
Earnings Per Share23
Year
Lowe’s
Home Depot
Industry average
2005
1.4
2.3
1.8
2006
1.8
2.7
2.3
2007
2.0
2.8
2.4
2008
1.9
2.3
2.1
2009
1.5
1.4
1.4
The earnings per share calculation is an indicator of how profitable a company is, based
on its profit allocation per share of stock. Obviously, the higher the EPS, the better;
however due to the high-stakes rivalries involved with the home improvement stores
industry, the EPS for the industry is low. The industry, in 2009, actually showed the two
leaders—Lowes and Home Depot—both pull to near equals in their Earnings per Share.
Both major companies and the industry as a whole must boost its EPS in order to
continue to drive up the value of its stock. Although it is unlikely that these earnings per
share will increase dramatically any time soon, it is expected that with an improving
economy, the companies will be in a position to earn more money per share of stock,
increasing their earnings per share. The earnings per share increased will entice more
investors to take a look at the company stock, possibly making an investment that will
further value Lowe’s and any of its competitors—bringing more legitimacy to this
already large industry.
33 | L o w e ’ s C o m p a n i e s I n c .
Strategic Issues
1. How Lowe’s Companies can increase its profitability
During the current recessionary environment, Lowe’s—as well as industry rivals—are
having a difficult time in providing the higher levels of profits it is accustomed to. To
improve this profitability, Lowe’s has a variety of ways in which it can improve its
offered services, increase market coverage in its current market area, as well as expand
into new areas. Lowe’s can also improve its supply chain systems and distribution
models.
2. How Lowe’s Companies can increase its distribution Internationally
In an effort to increase profitability, customer awareness, and geographic market
coverage, Lowe’s will have to increase the number of stores it has in other countries. To
ignore this opportunity will place Lowe’s in a position well behind the market leader—
Home Depot. If Lowe’s wishes to overtake more market share from Home Depot, it will
have to build more stores and increase its distribution centers throughout the world. In
an effort to gain competitive advantage, Lowe’s will have to enter new profitable
geographic locations.
3. How Lowe’s Companies can improve its long-term-debt to shareholder equity ratio
To help solidify its share price and valuation, Lowe’s Companies must improve its longterm-debt to shareholder equity ratio. This ratio helps to measure Lowe’s ability to pay
off its long-term debt. It also displays the ratio of Lowe’s debt financing versus
shareholder financing with equity. Lowe’s historically higher long-term debt to
shareholder equity ratio shows that Lowe’s has been financing, with debt, a lot of its
operations in the past few years. With a declining economy, it is imperative that Lowe’s
reign in its borrowing in order to avoid being overwrought with interest payments,
affecting the overall solvency and competitiveness of Lowe’s in the long-term.
34 | L o w e ’ s C o m p a n i e s I n c .
Strategic Issues and Alternatives
1. How Lowe’s Companies can increase its profitability
During the current recessionary environment, Lowe’s—as well as industry rivals—are
having a difficult time in providing the higher levels of profits it is accustomed to. To
improve this profitability, Lowe’s has a variety of ways in which it can improve its
offered services, increase market coverage in its current market area, as well as expand
into new areas. Lowe’s can also improve its supply chain systems and distribution
models.
Notably, at the end of the third quarter of 2009, Lowe’s earnings have dropped 29.5%
from the same time last year.44 In addition; Lowe’s net sales from October 30, 2008
were 11,728, while in October 30, 2009 the sales were 11,375—an approximate 4%
drop in net sales over a year. While this number is not alarming, the 5% increase in total
expenses is. The following table shows the Lowe’s Companies Inc third quarter of 2009
three months ended financial data. As can be seen by viewing the below table, the
expenses have increased out of proportion with the amount of net sales. By reducing
these expenses, Lowe’s will e able to regain much of the profitability it needs to remain
competitive in today’s market.
($000,000)
Three Months Ended
October 30, 2009
October 31, 2008
Current Earnings
Amount Percent
Net sales
$ 11,375
100.00
Amount Percent
$ 11,728
100.00
Cost of sales
7,485
65.80
7,743
66.02
Gross margin
Expenses:
Selling, general
and
administrative
Store opening
costs
Depreciation
Interest - net
3,890
34.20
3,985
33.98
2,872
25.25
2,726
23.23
10
403
77
0.09
3.54
0.68
31
385
65
0.27
3.29
0.56
Total expenses
Pre-tax earnings
Income tax
provision
Net earnings
3,362
528
29.56
4.64
3,207
778
27.35
6.63
184
344
1.62
3.02
290
488
2.47
4.16
35 | L o w e ’ s C o m p a n i e s I n c .
$
$
Alternative A:
Decrease its payroll expenses company-wide
Pros
 Lowe’s can benefit its profits greatly from reducing its largest operating expense,
payrolls.
 Reduction of payrolls can help to lean-down Lowe’s operations, allowing the
company to find ways to service customers better, while doing so with less, resulting
in a more efficient company in the long-term
 Reducing payrolls will lessen the burden on Lowe’s in the form of payroll taxes,
employee benefits, and retirement pensions
Cons
 Loss of employee morale and company loyalty—employees may fear eventual layoff
and provide lesser service to existing customers, decreasing morale.
 Large numbers of layoffs will be viewed as a major weakness for Lowe’s stability.
36 | L o w e ’ s C o m p a n i e s I n c .

Layoff of any employees in bulk, or singularly, will cause Lowe’s to incur further
expense in the form of unemployment benefits
Alternative B
Reduce the amount of money spent on promotions
Pros


Creating more profitability by reducing the extremely costly promotions it has been
running in an effort to compete against similar industries
Free up money spent on promotions for the construction of new store locations in
underserved locations throughout the United States
Cons



Possible loss of sales for previously promoted items—causing a larger loss than
would be if the promotions took place
A possibility of surrendering market share to competitors who are willing to
continue promotions
Loss of customer awareness for Lowe’s in markets where its brand image is weak or
overpowered by those of its competitors
Recommendation
Lowe’s should consider reducing its payroll expenses. This expense is the largest single
expense Lowe’s has in its operations. Keeping in mind the sensitivity of the subject,
with the possibility of alienating certain employees and possibly creating a bad image
for the company, this strategy will prove to be the most beneficial in both the short and
long terms. By controlling the single largest expense within the corporation, the most
overall good can be accomplished. By utilizing the extra money saved from payroll,
Lowe’s will be able to put itself into position to possibly build more stores or pay off
current long-term liabilities that are owed to creditors.
Implementation
Lowe’s can implement the strategy of reducing payrolls through various avenues readily
available to it, making the largest impact financially with the smallest amount of
backlash and public relations problems. To accomplish this, Lowe’s must utilize a
specifically designed staffing model. This model will enable Lowe’s to place the best and
brightest employees in locations within its stores that will provide the best possible
experience for its customers. It can reduce staffing within stores by attrition—when an
employees leaves, simply do not hire another immediately. Managers must work
closely with employees to ensure a high level of employee job satisfaction in order to
not negatively affect customer service and job performance. Another method of
37 | L o w e ’ s C o m p a n i e s I n c .
performing this is to monitor all store locations for busy and slow times and staff
accordingly—highly staffed for busy times and lesser staff for slow times. Once these
times are established, Lowe’s can further modify its staffing model to allow for reduced
hours for employees, and even stores. As Lowe’s increases its store density within the
United States, it will be able to centralize more operations into different district or
region offices—concentrating more stores per regional office. This will allow it to phase
out employees that were handling fewer stores and provide a quicker response time to
handle store problems. Another method is to place pay caps and freeze wage increases
on corporate employees with the title of vice president or higher. This will still enable
these employees to work and receive their normal paycheck, but will still cut payroll
expenses for the company as a whole. Also, as the sales environment decreases, Lowe’s
corporate office can reduce, through attrition, its payroll expenses by simply not hiring
anyone to replace an employee that has left. By performing these types of cutbacks and
freezes, Lowe’s can avoid the negative publicity that comes with layoffs, employee
morale will remain stable, and Lowe’s will be able to make large reductions in its largest
expense, payroll.
2. How Lowe’s Companies can increase its distribution Internationally
In an effort to increase profitability, customer awareness, and geographic market
coverage, Lowe’s will have to increase the number of stores it has in other countries. To
ignore this opportunity will place Lowe’s in a position well behind the market leader—
Home Depot. If Lowe’s wishes to overtake more market share from Home Depot, it will
have to build more stores and increase its distribution centers throughout the world. In
an effort to gain competitive advantage, Lowe’s will have to enter new profitable
geographic locations.
As the economy in the United States makes a gradual recovery, it is important that
Lowe’s has its eyes set on international distribution and store placement. Its main rival,
Home Depot, has already started doing this, and is further along in its development than
Lowe’s. If Lowe’s desires to become a market leader, instead of a market follower, it
must take the initiative to place stores in international markets that are yet untouched
by the home improvement industry, and namely Home Depot. The following is an
illustration on the number of stores Home Depot has in other countries, versus the
number of stores Lowe’s has internationally.
Canada
Mexico
China
Australia
38 | L o w e ’ s C o m p a n i e s I n c .
Home Depot
179 (Q3-2009)
60 (Q3-2009)
12 (via purchase of The
Home Way Stores Chain)
0
Lowe’s
15 (Q3-2009)
3 to 5 planned (2009)
0
12 Planned via Joint
Venture with Woolworth’s
Ltd.
Alternative A
Expand more in current international markets Mexico and Canada, ignoring the rest of
the market
Pros



Familiarity with current economic and cultural trends and customs in these
markets—limited research would need to be completed
Current management teams already in place for these markets, eliminating the cost
of hiring additional executives to expand
Customer familiarity with corporate brand image creates an easier sell to entice
customers to newly build stores
Cons



Economically places company at a disadvantage should the economy of one or both
of these countries decline
Essentially cedes control of other populous countries to Home Depot, creating the
effect of constantly playing catch-up
Lost opportunity to create a bond with new international customers that may
believe in solid brand loyalty, creating an iron-clad customer/retailer relationship
which is difficult to break.
Alternative B
Expand internationally into unfamiliar countries with high population bases and good
potential, but continually expand strategically into Mexico and Canada
Pros


Be the first to break into a new market, creating electricity and high sales through
this new expansion
Beat the main competitor to a new market, creating a higher level of rivalry, possibly
unseating Home Depot as the number one market leader
Cons


Experience the costs of learning a new market—financial and corporate well-being
Much more work involved in creating a new market in an unfamiliar territory
39 | L o w e ’ s C o m p a n i e s I n c .

Must hire more experienced personnel and find the right balance between known
retail expertise and local customs and trends
Recommendation
Lowes should expand internationally into unfamiliar markets with a higher population
base and good potential, but should continually expand strategically into Mexico and
Canada. Currently, Lowe’s main competitor, Home Depot has a large lead in the
Mexican and Canadian markets. It also has a slight head-start into China. In order for
Lowe’s to eventually overtake Home Depot as the market leader, it must stake its claim
to its share of the international market. Not by following Home Depot, but by blazing its
own trail into a new, and untouched market—one that is both populous and that has
high potential for sales and growth.
Implementation
Lowe’s can implement the strategy of entering many international markets at once via
many different methods. One method is to continue with its plans in Mexico and
Canada, choosing stores carefully, and in the exactly right markets to maximize sales
and profits. However, while it is doing this, Lowe’s should also consider forming a team
of investigators to analyze the Chinese market, as well as the Indian market place.
These are the two most populous countries in the world. China holds a better potential
than India, as the level of home-ownership in China has increased greatly in recent years
with estimates of upwards of 70% of Chinese citizens are home owners. Lowe’s should
also consider investigating European and South American markets—especially the
population centers of these countries. Through these methods, it can actually get a
head start on its competition, Home Depot, who is only now just evaluating China for its
potential. Lowe’s should remain very cautious in this endeavor, however, as to enter a
foreign market too hastily, without proper consideration for local mores, traditions, likes
and dislikes, can lead to poor sales and even a poor image for a company, which may in
turn, defeat the purpose of the store even being placed there. As Lowe’s gains more
popularity into Mexico and Canada, it will have the additional freedom to evaluate and
place more stores into more territories with bolstered confidence and an increased level
of profit. Lowe’s can also work with other retailers in foreign markets similarly to the
way it has worked with Woolworth’s Ltd. on forming a “big box” home improvement
retailer in Australia. Through this method, Lowe’s can benefit on many levels, including
the ability to penetrate a market using tried and true techniques from an existing
retailer, utilizing less money to enter a market with a joint partner and its investment,
and the creation of good will with the citizens of the new market.
3. How Lowe’s Companies can improve its long-term-debt to shareholder equity ratio
To help solidify its share price and valuation, Lowe’s Companies must improve its longterm-debt to shareholder equity ratio. This ratio helps to measure Lowe’s ability to pay
off its long-term debt. It also displays the ratio of Lowe’s debt financing versus
shareholder financing with equity. Lowe’s historically higher long-term debt to
shareholder equity ratio shows that Lowe’s has been financing, with debt, a lot of its
40 | L o w e ’ s C o m p a n i e s I n c .
operations in the past few years. With a declining economy, it is imperative that Lowe’s
reign in its borrowing in order to avoid being overwrought with interest payments,
affecting the overall solvency and competitiveness of Lowe’s in the long-term.
Although the majority of the debt incurred for Lowe’s has stemmed from its rapid
expansion into new territories—both domestic and foreign—with the current economic
situation at hand, if Lowe’s does not reign in its debt, if the economy worsens, Lowe’s
will be faced with debilitating interest charges from its lenders. These charges, without
proper income to offset them, will destabilize the company and threaten its position as
the number two retailer in the industry. The following table is an illustration of Lowe’s
position in the industry and versus Home Depot.
Long-Term Debt to Equity1,23
Year
Lowe’s
Home Depot
Industry average
2005
26.5
8.9
17.7
2006
24.5
9.9
17.2
2007
27.5
46.5
37.0
2008
34.6
64.3
49.4
2009
27.9
54.4
41.1
As can be seen in this chart, Lowe’s is well below the industry average in the past three
years. However, its consistently higher ratio over the five year period is what is the
most bothersome. Home Depot’s average increased significantly due to its drop in
market share and poor economy, causing it to finance more expenses via debt. It
appears by viewing this chart that Lowe’s consistently finances its operations with large
amounts of debt, something that can be extremely costly in a bad economy.
Alternative A
Greatly reduce company expansion plans in an effort to halt the growth of debt incurred
within the company
Pros
 Reduce the amount of long-term debt for the company, saving money in interest
payments to finance companies
 Create a more stable environment for the company during a recessionary economy
 Prevent the devaluation of the company that may occur via equity financing by the
issuance of additional share of stock at a lower face value
Cons
 By halting company expansion, essentially it would halt company growth
41 | L o w e ’ s C o m p a n i e s I n c .


By reducing debt and slowing growth, earnings to shareholders would be slowed or
stopped, creating negativity from stockholders who may lost confidence in the
company
Stopping growth goes against the corporate strategy of becoming the number one
retailer in the home improvement industry
Alternative B
Finance corporate growth more through shareholder equity instead of financed debt
Pros
 Reduce the amount of debt the company will incur and save money in interest
payments
 Lowered stock price due to issuance of more stock may make Lowe’s a more
attractive investment for more casual investors, as well as pique interest from
additional institutional investors
 Continue to grow at current rates that are determinant upon market demand
Cons
 May not be able to encourage enough investors to invest a sufficient amount of
money in order to cover expenses during expansion
 Dividend payments are not tax deductible, whereas interest payments are, creating
a possible liability where while using debt could be a asset
 Shareholders share in the company profits using equity where while using debt, the
company can leverage its profits
Recommendation
Lowe’s should finance its corporate growth more through shareholder equity instead of
utilizing financed debt. It is not feasible to halt company growth, especially in this
industry which is very cut throat in competition. To do so would essentially cede control
of the whole industry to Home Depot, something Lowe’s would need to avoid. In
addition, to incur additional debt would lead to stability issues within the company and
could prove to be catastrophic should the economic situation worsen. Utilizing more
shareholder equity, wisely, would result in the best of both worlds—a reduction in longterm debt, and an ability to continue growth worldwide—a strategic goal of Lowe’s.
Implementation
In order to accomplish this goal, Lowe’s is going to have to issue additional stock at a
lower price in order to entice investors to purchase large numbers of shares. However,
Lowe’s must be very careful to not issue too many shares of outstanding stock, greatly
devaluing the company and the shareholder equity—to do so would create ill-will within
42 | L o w e ’ s C o m p a n i e s I n c .
the investor community and be counterproductive to Lowe’s goal of gaining equity.
During the actual growth stage of the company, Lowe’s should build and expand as it
receives the equity levels to do so. This may hinder growth some, but during this
economic time a slower growth strategy is completely acceptable, and expected.
Through the profits earned by the expansion, Lowe’s can not only pay off its long-term
debt more, it can utilize those earned profits to produce dividends to entice more
investors to its stock. Another benefit to adding to the shareholder equity is by doing
so, not only can it reduce its long-term debt, it can also convert its short-term debt into
shareholder equity, greatly adding to its shareholder equity value. As Lowe’s further
enters the international marketplace, it will find that this additional equity will serve as a
solidifying attribute to foreign companies and countries. This will, more than likely,
entice foreign investors to buy stock in Lowe’s, creating a stronger overall company. In
addition, as Lowe’s earnings increases due to this increase in shareholder equity with
less of a debt burden, it will find that with its retained earnings increasing, it can place
additional capital aside—not paid out as dividends—and increase its shareholder equity.
With these two methods of generating shareholder equity—through direct public
investment, and retained earnings improvement—Lowe’s can position itself to be more
free from the interest payments that comes with debt financing, placing the company in
a stronger position to compete in all possible economic situations.
43 | L o w e ’ s C o m p a n i e s I n c .
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