The Home Depot Corporation: Successfully Navigating the Omnichannel Landscape

1. COMPANY BACKGROUND

Home Depot is the world’s largest home improvement retail chain and the ninth largest retailer globally in terms of revenues. It was established in 1978 by Bernie Marcus (a pharmacist by training), Arthur Blank (educated as an accountant), Ken Langone (an investment banker), and Pat Farrah (who had a merchandising background). The first two Home Depot stores opened on June 22, 1979, in Atlanta, Georgia, with the vision of “one-stop shopping for the do-it-yourselfer.” Today, Home Depot operates nearly 2,275 stores with over 370,000 employees in the United States, Canada, Mexico, Puerto Rico, Virgin Islands, and Guam—as well as an online business.

Home Depot targets the do-it-yourself (DIY) and professional contractor markets with its selection of 40,000 to 600,000 SKUs (stock-keeping units, or machine-readable barcodes), includ­ing lumber, flooring, plumbing supplies, garden products, tools, paint, and appliances. Home Depot also offers installation services for carpeting, cabinetry, and other products. The Home Depot went public in 1981, experienced tremendous growth in the 1980s and 1990s, and celebrated the opening of its 100th store in 1989. One-third of Home Depot’s total sales in FY 2016 came from California, Florida, New York, and Texas.

Home Depot seeks to provide excellent customer service through consistent high-quality products, customer service, and competitive pricing. Accordingly, every customer has a bill of rights at Home Depot, and this entitles the customer to the right assortment, quantities, and prices, along with trained associates on the sales floor who want to take care of customers. Home Depot’s vision is driven by a set of eight core values: excellent customer service, building strong relation­ships, taking care of its employees, giving back, doing the “right” thing, creating shareholder value, respecting all people, and exhibiting entrepreneurial spirit.

2. THE HOME DEPOT CORPORATION’S STRATEGY: KEYS TO SUCCESS

Throughout its existence, Home Depot has adhered to a consistent, far-sighted, customer-oriented strategy—one that has paved the way for its long-term achievements.

GROWTH STRATEGY Home Depot’s current strategy of product authority (continually analyzing customer data to better understand consumer preferences), providing a seamless and friction-free experience no matter where customers shop, and investing to build a best-in-class supply chain network support its dominant position in its industry. Disciplined capital allocation, continuous optimization of productivity, and efficient operations allow Home Depot to lower its operating costs and increase shareholder wealth.

Although the company operates in markets that are highly competitive in terms of customer service, store location, price, and quality, Home Depot has the resources to compete on the basis of price, service, and product variety. Competitors include major chains such as Lowe’s, Menard, True Value, Ace Hardware, and numerous local retailers. It also faces competition from pure- online retailers—for example, Amazon—as it moves into adjacent product categories in its quest for growth.

TARGETED APPEAL TO MULTIPLE SEGMENTS Home Depot serves three major market segments:

  1. Do-it-yourself customers are mostly homeowners and end-users who purchase products to complete their projects and repairs by themselves.
  2. Do-it-for-me customers are homeowners who purchase their products and hire a third party to complete their repairs and projects. To these customers, Home Depot is able to offer installa­tion programs and design services on carpets, countertops, home appliances, and many others.
  1. Professional customers are general contractors, repair people, and small business owners. To these customers, Home Depot offers value-added services such as dedicated staff, des­ignated parking, and bulk pricing. This segment accounts for one-third of sales revenues and represents a more recurring and larger sales opportunity compared to the first two retail customer segments.

DISTINCTIVE COMPANY IMAGE Home Depot communicates its vision and image as a one-stop shopping experience for the do-it-yourselfer through the extensive width and depth of its product portfolio and its store size. Its first stores in Atlanta, Georgia, at around 60,000 square feet each, were cavernous warehouses that dwarfed the competition and stocked 25,000 SKUs (much more than the average hardware store at that time). Empty boxes piled high on the shelves gave the illusion of even more depth in inventory. Although Home Depot still leverages its store size as a competitive advantage, it is losing its importance in the omnichannel marketplace. Stores of various sizes are continuously redesigned to allow customers to interact more with products and to allow the chain to more efficiently stock products.

“Big Orange” is the nickname by which Home Depot is known all over the world. The bright orange logo was inspired by crates used to transport freight, keeping in line with the “depot” theme. Stamped at an upright angle to symbolize success and in bright orange to help simulate activity, the logo appears on signs, equipment, and employee aprons. The Home Depot introduced the slogan “More saving. More doing” in the March 18, 2009, circular, replacing “You can do it. We can help” which had been used since 2003. Another slogan used in the past 25 years is “The Home Depot, Low prices are just the beginning” in the early 1990s. The company advertises through TV, flyers, radio, online, and social and mobile media.

STRONG CUSTOMER SERVICE FOR ITS RETAIL CATEGORY Home Depot’s philosophy of customer service—“whatever it takes”—means cultivating a relationship with customers rather than merely completing a transaction. The founders define themselves to be “in the people business.” From the start, associates offered excellent customer service, guiding customers through projects. After undergoing rigorous product knowledge training, store associates began offering clinics so cus­tomers could learn how to do it themselves. The Home Depot revolutionized the home improve­ment industry by bringing the know-how and the tools to the consumer, thus empowering them and saving them money.

MULTIPLE POINTS OF CONTACT Home Depot reaches its customers through extensive advertis­ing, stores in 49 states, a toll-free telephone service center (open 7 days a week, 17 hours a day), a Web site, and the use of Facebook, Twitter, LinkedIn, Pinterest, and other social-media sites. The retailer has applied the same customer service philosophy to its multichannel initiatives. The E-commerce channel is an increasingly vital sales driver for Home Depot, accounting for nearly 7.2 percent of overall sales revenues. Despite the many advantages of Web-only sales, Home Depot was early in recognizing that brick-and-mortar stores play a vital role in driving conver­sion rates. Stores often double as fulfillment centers. About 40 percent of Web site (homedepot .com) orders are fulfilled through its stores. Millions of deliveries are made from stores each year.

Three multichannel programs enable Home Depot to effectively leverage its store network: buy online, ship to store (BOSS); buy online, pick up in store (BOPIS); and buy online, return in store (BORIS). These omnichannel initiatives enable quicker order pickups and returns, reduce customer time, and save on storage and costs. Its fastest growing E-commerce channel is BOPIS. E-commerce sales also have a higher average ticket size than the average $55 to $65 in-store pur­chases, and a higher percentage of BOPIS sales also tends to improve store productivity metrics. Orders placed online and delivered to a purchaser’s home have the largest average ticket size because these orders typically consist of bulkier items that cannot be picked up in the store and are far more costly than smaller items typically purchased in a store.

EMPLOYEE RELATIONS Home Depot employed 385,000 associates as of the beginning of 2016. Employees are expected to share the same vision as Home Depot. Employees are provided with many in-house workshops, such as “customers-first” training program and company-sponsored programs, to give associates a better understanding of their products and services. Home Depot believes its employees are satisfied with the compensation and offers employees the opportunity to purchase stock options at a discounted price. Employees are also eligible for medical, dental, vision, and life insurance—depending on their status and tenure at the company.

INNOVATION The home improvement industry experiences continuous innovation. Home Depot introduces new products and services, such as 3D printing, thus allowing it to adapt to the change in equipment and consumer preferences. Home Depot’s focus on solving customer problems has been a source of innovation and strategic movement into adjacent markets for services by provid­ing design and installation services for its products as well as third-party resellers, equipment rental (e.g., carpet cleaning, small trucks to transport equipment), and home inspection products (water, air quality and radiation).

Home Depot collaborates with new and existing manufacturers to enable it to be a one- stop-shopping destination for home improvement products. It recently broadened the number of brands it offers in its appliances department by including Whirlpool, Frigidaire, and Electrolux. Additionally, it also introduced innovative new products to its DIY and professional customers in most of its departments.

COMMITMENT TO TECHNOLOGY Home Depot has consistently invested in backend, as well as customer-interactive, technologies. It currently operates 18 remote distribution centers in the United States, and 33 bulk distribution centers within the United States, Canada, and Mexico. The company continuously updates its distribution centers through building logistic competencies and improving its inventory management system. Over the past few years, Home Depot has centralized its inventory planning and implemented new forecasting technology. Currently, 91 percent of its U.S. store products are ordered through a central replenishment system and it hopes to increase the number in the coming years.

Home Depot is successfully implementing three multiyear internal initiatives: (1) ProjectSync—a major supply chain synchronization to reduce average lead time from supplier to shelf; (2) COM— Home Depot’s order management platform, which provides greater visibility into and improved execution of special orders for a more seamless and friction-free experience for customers; and (3) FIRST phones—in-store mobile enablement for inventory management, product look-up, and business analytics. It even offers line-busting features to speed up checkout for associates and customers.

COMMUNITY INVOLVEMENT Home Depot believes in creating shareholder value while being responsible and balancing the needs of its communities. Through The Home Depot Foundation, community impact grants, and associates’ volunteer time, the retailer strives to have a positive impact on communities in the United States, Canada, and Mexico. It invites community partici­pation in practical and educational programs in stores that benefit children and adults. The com­mitment to environmental sustainability is demonstrated through its sale of energy-efficient and sustainable products, recycling practices, and business principles. Home Depot promotes an envi­ronmentally friendly atmosphere by protecting its employees’ health and safety requirements. It has also created a supplier social responsibility program intended to ensure that suppliers observe a high standard of social responsibility.

ADAPTATION TO A GLOBAL, OMNICHANNEL WORLD Due to the difficult economic, political, and social conditions in recent years, even outstanding retailers, such as Home Depot, have been affected. In 2012, Home Depot closed all seven of its stores in China.

The company outsources some of its products from third-party manufacturers in third-world countries with unstable political environments. It may be exposed to trade embargos, increases in tariff rates, different tax regulations, and double taxation by the countries that do not have respec­tive treaties in place to avoid double taxes. Yet, many governments in these countries may have incentive programs applicable for Home Depot as an employer of local labor.

Home Depot has capitalized on the digitization in retailing by enabling a secure multichannel shopping experience—mobile, in-store, at home, or even on the job site. Its global sales revenues have grown substantially to almost $89 billion in fiscal 2016, and its operating income increased by 12 percent from the prior year to reach $11.8 billion. Home Depot’s performance was boosted by the demand for home improvement products, a better housing market, and rising consumer employment.

Growth in the number of big-ticket transactions boosted sales. The company’s multiyear productivity enhancement plan also provided some profitability upside. The Home Depot has been one of the best-performing stocks in the consumer discretionary sector and the Dow Jones Indus­trial Average over the past five years. The stock returned an annualized average of 28.5 percent— almost three times that provided by the S&P 500 Index’s 9.6 percent over the same period.

Although the strong U.S. dollar affected Home Depot’s sales growth in the Canadian and Mexican markets, they account for 10 percent of overall sales and are less significant. CEO Craig Menear has ambitious goals for FY 2018; his target is $101 billion in sales, with a 14.5 percent operating margin and a 35 percent return on invested capital. In 2015, Home Depot acquired Inter­line Brands, whose product portfolio of home repair and maintenance products is complementary to Home Depot’s offerings in home remodeling products and is largely viewed as a good strate­gic fit. Home Depot expects additional revenue from existing customers’ purchase of repair and maintenance products, which are recurring purchases, and a sales upside from Interline Brands’ customer base, which will get a tremendous boost from Home Depot’s E-commerce capabilities.

Source: Barry Berman, Joel R Evans, Patrali Chatterjee (2017), Retail Management: A Strategic Approach, Pearson; 13th edition.

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