Home Depot: Corporate Expansion and Image Improvement

Eric Aispuro Stuart Martin Ji Chong

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Table of Contents Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 03 Financial Analysis Consolidated Statement of Earning . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic Fiscal Summary For 2002 Business Operations . . . . . . . . . . . . . . . . Chart: Home Depot's Stock Price (Mar. 02-Mar. 03) . . . . . . . . . . . . . . . . . . Stock Price History: Significant Developments . . . . . . . . . . . . . . . . . . . . . Chart: One Year Stock Price Comparison of Home Depot and Lowe’s . . . . Chart: Five Year Stock Price Comparison of Home Depot and Lowe’s . . . . Summary Statistics (as of Feb. 03) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Current Investor Feasibility Trends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

04 05 07 07 09 10 11 13 13

Five Forces Analysis Market Definition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Internal Rivalry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Entry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Substitutes and Complements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplier Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buyer Power . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14 14 15 16 16 17

Strategic Recommendation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18

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Executive Summary Because Home Depot’s performance has deteriorated over the last three years, the company has asked Blaisdell Consulting to assess its position and make recommendations for improvement. From a high of nearly $70 per share in January 2000, Home Depot’s stock price has declined sixty percent to just over $40 today. Although many factors are to blame, much of this loss can be attributed to the market share losses to rival competitor Lowe’s Inc. With newer and more modern stores, Lowe’s has taken away business from many of Home Depot’s aging stores. Because of the success of Lowe’s Inc., coupled with the current downturn of the American economy, Home Depot needs to take some immediate and substantial steps to right itself. As the largest warehouse home improvement retail company in the United States, Home Depot has three times more stores than any of its competitors. Based out of Atlanta Georgia, Home Depot specializes in do-it-yourself warehouse retail stores offering building materials, home improvement products and related furnishings. Operating in 1,502 stores worldwide, Home Depot employs about 280,000 people and is credited with being the innovator in the home improvement retail industry by combining the economies of scale inherent in a warehouse format with a level of customer service unprecedented among warehouse-style retailers. Ranging in of about 114,000 square feet per store (with an additional 20,000 square foot garden center), Home Depot caters to do-it-yourselfers, as well as home improvement, construction and building maintenance professionals. Selling a complete spectrum of Home Improvement consumer goods from single bulk items (i.e. carpets) to more extensive projects such as kitchen cabinets alongside in- house design centers and a new At-Home Services program. To help Home Depot not repeat the history of K-Mart, which got overtaken by WalMart and Target, Blaisdell Consulting has identified a Home Depot strategy that will allow it to stay competitive and hold back the challenge of Lowe’s. Blaisdell Consulting believes that Home Depot can stabilize growth and improve earnings with a combination of store improvements and customer service funded by retained earnings, alongside a large advertisement campaign alerting customers to the change. After stabilizing its primary consumer base in the U.S., Home Depot will then be free to grow internationally.

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Financial Analysis Elected Consolidated Statements of Earnings Data The data below reflect sales data, the percentage relationship between sales and major categories in the Consolidated Statements of Earnings and the percentage change in the dollar amounts of each of the items. IN PERCENTAGE

FISCAL YEAR(1) -------------------------------------

INCREASE (DECREASE) IN DOLLAR AMOUNTS -----------------------

2001 2001

2000

----------

NET SALES GROSS PROFIT OPERATING EXPENSES: Selling and Store Operating Pre-Opening General and Administrative Total Operating Expenses OPERATING INCOME

100.0% 30.2

--------

100.0% 29.9

1999 ---------

100.0% 29.7

19.0 18.6 17.8 0.2 0.3 0.3 1.7 1.8 1.7 ---------------------20.9 20.7 19.8 ---------- -------- -------9.3 9.2 9.9

INTEREST INCOME (EXPENSE): Interest and Investment Income Interest Expense

0.1 (0.1) ---------Interest, net ----------EARNINGS BEFORE INCOME TAXES 9.3 Income Taxes 3.6 ---------NET EARNINGS 5.7% ---------SELECTED SALES DATA (2) Number of Transactions (000s) 1,090,975 Average Sale per Transaction $48.64 Weighted Average Weekly Sales per Operating Store $812,000 Weighted Average Sales per Square Foot(3) $387.93

vs. 2000 -------17.1 %

2000 vs. 1999 --------

18.0

19.0% 19.9

19.4 (17.6) 12.0 ----18.2 ----17.7

24.8 25.7 24.4 ----24.8 ----10.1

0.1 (0.1) ---------------9.2 3.6 -------5.6% --------

0.1 (0.1) ---------------9.9 3.9 -------6.0% --------

12.8 33.3 ----(3.8) ----17.5 16.9 ----17.9% -----

27.0 (48.8) ----750.0 ----10.9 10.2 ----11.3% -----

936,519 $48.65

797,229 $47.87

16.5% --

17.5% 1.6

$864,000

$876,000

(6.0)

(1.4)

$422.53

(6.5)

(1.9)i

$414.68

(1) Fiscal years 2001, 2000 and 1999 refer to the fiscal years ended February 3, 2002; January 28, 2001; and January 30, 2000, respectively. (2) Excludes Apex Supply Company, Georgia Lighting, Maintenance Warehouse, Your "other" Warehouse and National Blinds and Wallpaper. (3) Adjusted to reflect the first 52 weeks of the 53-week fiscal year in 2001.

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Basic Fiscal Summary For 2002 Business Operations FISCAL YEAR ENDED FEBRUARY 3, 2002 COMPARED TO JANUARY 28, 2001. Fiscal year 2001 consisted of 53 weeks compared to 52 weeks in fiscal 2000. Net sales for fiscal 2001 increased 17.1% to $53.6 billion from $45.7 billion in fiscal 2000. This increase was attributable to, among other things, the 204 new stores opened during fiscal 2001 and full year sales from the 204 new stores opened during fiscal 2000. Approximately $880 million of the increase in sales was attributable to the additional week in fiscal 2001. Comparable storefor-store sales were flat in fiscal 2001 due to the weak economic environment resulting from certain factors including, but not limited to, low consumer confidence and high unemployment. Gross profit as a percent of sales was 30.2% for fiscal 2001 compared to 29.9% for fiscal 2000. The rate increase was primarily attributable to a lower cost of merchandise resulting from product line reviews, purchasing synergies created by a newly centralized merchandising structure and an increase in the number of tool rental centers from 342 at the end of fiscal 2000 to 466 at the end of fiscal 2001. Home Depot expects to have tool rental centers in approximately 600 stores by the end of fiscal 2002. Operating expenses as a percent of sales were 20.9% for fiscal 2001 compared to 20.7% for fiscal 2000. Selling and store operating expenses as a percent of sales increased to 19.0% in fiscal 2001 from 18.6% in fiscal 2000. The increase was primarily attributable to growth in store occupancy costs resulting from higher depreciation and property taxes due to Home Depot’s investment in new stores, combined with increased energy costs. Also, credit card transaction fees were higher than the prior year due to increased penetration of total credit sales. These increases were partially offset by a decrease in store payroll expense caused by an improvement in labor productivity resulting from initiatives inside the store and new systems enhancements. Store initiatives include the Service Performance Improvement (SPI ) initiative which was implemented in every Home Depot store in fiscal 2001. Under SPI stores receive and handle inventory at night, allowing associates to spend more time with customers during peak selling hours. In addition, the Pro program was in 535 of our Home Depot stores at the end of fiscal 2001, providing dedicated store resources to serve the specific needs of professional customers. Home Depot expects to have the Pro initiative in more than 950 stores at the end of fiscal 2002. SPI and Pro have resulted in improved operational efficiency, safety and customer service. Pre-opening expenses as a percent of sales were 0.2% for fiscal 2001 and 0.3% for fiscal 2000. 204 new stores were opened in both fiscal 2001 and 2000. Preopening expenses averaged $569,000 per store in fiscal 2001 compared to 5

$671,000 per store in fiscal 2000. The decrease in the average expense per store was primarily due to shorter pre-opening periods as Home Depot reengineered their store opening process. General and administrative expenses as a percent of sales were 1.7% for fiscal 2001 compared to 1.8% in fiscal 2000. This decrease was primarily due to cost savings associated with the reorganization of certain components of general and administrative structure, such as the centralization of merchandising organization, and focus on expense control in areas such as travel. Interest and investment income as a percent of sales was 0.1% for both fiscal 2001 and 2000. Interest expense as a percent of sales was 0.1% for both fiscal 2001 and 2000. Home Depot’s combined federal and state effective income tax rate decreased to 38.6% for fiscal 2001 from 38.8% for fiscal 2000. The decrease in fiscal 2001 was attributable to higher tax credits and a lower effective state income tax rate compared to fiscal 2000. Net earnings as a percent of sales were 5.7% for fiscal 2001 compared to 5.6% for fiscal 2000, reflecting the increased gross profit rate, which was partially offset by higher store operating expenses. ii

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Chart: Home Depot’s Stock Price (Mar. 02-Mar. 03)

iii

Stock Price History: Significant Developments March 20, 2002 The Home Depot, Inc. To Rapidly Expand its Presence in Mexico with Acquisition The Home Depot, Inc. announced that it has doubled its presence in Mexico by signing an agreement to acquire Del Norte, a four-store chain of home improvement stores in Juarez, Mexico. The financial terms of the transaction were not disclosed. In addition to acquiring Del Norte, construction has begun on a newly acquired site in Mexicali, and work will be underway soon on another in Tijuana. Both store locations are expected to open by the end of 2002. July 12, 2002 The Home Depot, Inc. Shares Fall On Analyst Downgrade - DJ The Home Depot, Inc. shares fell as Dow Jones reported that Merrill Lynch downgraded the Company's stock, citing sluggish sales and depleted inventory. July 15, 2002 The Home Depot, Inc. Announces $2 Billion Share Repurchase Program; Confirms Q2 and Long-Term Guidance The Home Depot, Inc. announced that its Board of Directors has approved a share repurchase program of up to $2 billion effective immediately. The Company added that it is comfortable with the second quarter consensus earnings estimate of $.47 per share, according to Multex. The Company also reaffirmed its three-year guidance of 15 to 18% annual sales growth and 18 to 20% annual earnings growth through fiscal 2004. Nov 19, 2002 The Home Depot, Inc. Confirms Q4 EPS Guidance; Expects 3-5% Drop in Q4 Same -Store Sales; Issues Fiscal Year Guidance Below Analysts' Estimates

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The Home Depot, Inc. reaffirmed that it expects to earn $0.31 diluted earnings per share for the fourth quarter. The Company also indicated that it expects to earn $1.57 diluted earnings per share for the fiscal year. Wall Street analysts on average were expecting the Company to earn $0.31 per share in the fourth quarter and $1.58 per share in the fiscal year, according to Multex. Reuters also reported that the Company expects sales at stores open at least a year to fall 3% to 5% in the fourth quarter. In the year earlier fourth quarter, Home Depot's comparable -store sales rose 5%. The Company cited lower lumber prices and an aggressive campaign to roll out new products as the primary reason for its same-store sales decline forecast, according to Reuters. Jan 02, 2003 The Home Depot, inc. Revises Fiscal Year 2003 Outlook Downward The Home Depot, Inc. announced that it is revising its diluted earnings per share guidance for the fiscal year ending February 2, 2003 from $1.57 to between $1.53 and $1.55. The change in earnings per share outlook is due to slowing sales during the month of December, which lowered the Company's expectation of a decline in comparable store sales in the fourth quarter to as much as 10% versus previously provided guidance of a decline of between 3% and 5%. The Company said lower customer transactions and lower-than-expected performance in traditional gift categories like hardware and power tools severely impacted December results. Reflecting this quarterly guidance, The Home Depot expects total sales growth of 10% and earnings per share growth of 21% to 23% on a comparable 52-week basis for fiscal year 2003. According to Multex, analysts expected the Company to report fiscal year 2003 earnings per share of $1.57 on total sales of $58.83 billion. Jan 28, 2003 The Home Depot, Inc. Announces Divisional Consolidation The Home Depot, Inc. announced plans to consolidate its New England division with its Eastern division that is headquartered in Atlanta, GA. The expanded Eastern Division will support more than 600 Home Depot stores and have over 110,000 associates. The consolidation, which is expected to take place over the next 60 days, will result in the transfer of merchandising and core support functions from the Company's Canton, Massachusetts office to its South Plainfield, New Jersey office. The company also said the consolidation would not have any impact on its customers or result in any store closings or reduction of store jobs. iv

8

One Year (daily) Stock Price Comparison of Home Depot and Lowe’s

9

Five Year (weekly) Stock Price Comparison of Home Depot and Lowe’s

10

Summary Statistics (as of Feb. 03) Competitive Landscape As of Feb 25 2003

KEY: Best of Group

Top Competitors

Key Numbers Home Depot

Lowe's

Menard1

TruServ1

Annual Sales ($mil.)

58,247.0

26,490.9

5,300.0

2,619.4

Employees

256,000

108,317

9,200

4,000

Market Value ($mil.)

53,125.8

30,160.1

--

--

Home Depot

Lowe's

Menard1

TruServ1

Industry 2 Market 3

Gross Profit Margin

31.99%

32.17%

--

--

30.87% 46.94%

Pre-Tax Profit Margin

10.18%

8.26%

--

--

8.52%

4.43%

Net Profit Margin

6.29%

5.55%

--

--

5.26%

1.90%

Return on Equity

18.2%

18.5%

--

--

16.2%

3.8%

Return on Assets

11.7%

9.3%

--

--

10.0%

0.7%

Return on Invested Capital

17.1%

12.6%

--

--

13.4%

1.8%

Home Depot

Lowe's

Menard1

TruServ1

Price/Sales Ratio

0.91

1.14

--

--

1.09

1.01

Price/Earnings Ratio

14.64

20.88

--

--

21.00

55.61

Price/Book Ratio

2.64

3.79

--

--

3.37

2.03

Price/Cash Flow Ratio

11.65

15.20

--

--

15.69

12.43

Home Depot

Lowe's

Menard1

TruServ1

Days of Sales Outstanding

7.78

2.54

--

--

6.42

55.13

Inventory Turnover

5.1

4.5

--

--

5.1

7.7

Days Cost of Goods Sold in Inventory

71

81

--

--

71

47

Asset Turnover

2.0

1.8

--

--

1.9

0.4

Net Receivables Turnover Flow

50.0

137.8

--

--

56.0

6.5

37.8%

37.3%

--

--

38.2%

--

Home Depot

Lowe's

Menard1

TruServ1

Current Ratio

1.52

1.59

--

--

1.66

1.31

Quick Ratio

0.6

0.4

--

--

0.5

0.9

Leverage Ratio

1.56

1.99

--

--

1.63

5.75

Total Debt/Equity

0.07

0.48

--

--

0.22

1.48

Interest Coverage

170.4

13.5

--

--

28.1

1.6

Profitability

Valuation

Operations

Effective Tax Rate Financial

11

Industry 2 Market 3

Industry 2 Market 3

Industry 2 Market 3

Home Depot

Lowe's

Menard1

TruServ1

Revenue Per Share

25.04

33.92

--

--

24.38

19.73

Fully Diluted Earnings Per Share from Total Operations

1.56

1.85

--

--

1.27

0.36

Dividends Per Share

0.21

0.11

--

--

0.14

0.40

Cash Flow Per Share

1.96

2.54

--

--

1.70

1.61

Working Capital Per Share

2.03

2.86

--

--

1.98

1.67

Long-Term Debt Per Share

0.57

4.79

--

--

1.66

10.79

Book Value Per Share

8.65

10.19

--

--

7.92

9.88

Total Assets Per Share

13.48

20.25

--

--

12.87

56.77

Home Depot

Lowe's

Menard1

TruServ1

12-Month Revenue Growth

8.8%

19.8%

--

--

0.0%

0.9%

12-Month Net Income Growth

20.4%

43.8%

--

--

0.0%

2.6%

12-Month EPS Growth

20.9%

42.3%

--

--

0.0%

9.1%

12-Month Dividend Growth

23.5%

37.5%

--

--

0.0%

(2.4%)

36-Month Revenue Growth

15.1%

18.5%

--

--

11.5%

7.1%

36-Month Net Income Growth

16.6%

29.4%

--

--

11.2% (31.5%)

36-Month EPS Growth

16.1%

27.8%

--

--

10.2% (41.3%)

36-Month Dividend Growth

22.2%

19.1%

--

--

11.5% (13.4%)

Per Share Data ($)

Growth

12

Industry 2 Market 3

Industry 2 Market 3

Current Investor Feasibility Trends

Home Depot Business Profitability trends over last 11 years 1993

1994

1995

1996

Sales per share

4.57

6.12

7.21

Earnings per share

0.22

0.29

0.34

Div'ds decl'd per share

0.02

0.03

Avg Ann'l P/E Ratio

42.3

33

Relative P/E Ratio

1997

1998

1999

2000

2001

2002

2003

9.03

11

13.65

16.68

19.68

22.83

25.5

28.4

0.43

0.52

0.71

1

1.1

1.29

1.54

1.8

0.04

0.05

0.06

0.08

0.11

0.16

0.17

0.21

0.24

27.9

26.5

30.8

40.1

45.8

46.6

35.6

2.5

2.16

1.87

1.66

1.78

20.9

2.61

3.03

1.81

Avg Ann'l Div'd Yield

0.30%

0.30%

0.40%

0.40%

0.40%

0.30%

0.20%

0.30%

0.40%

Sales ($mill)

9238.8

12477

15470

19536

24156

30219

38434

45738

53553

58900

65500

457.4

604.5

731.5

937.7

1160

1614

2320

2581

3044

3650

4260

37.90% 38.30%

38.80%

Net Profit($mill) Income Tax Rate Net Profit Margin

5.00%

4.80%

Working Cap'l ($mill)

994

918.8

Long-Term Debt ($mill)

842

983.4

720.1

13.10% 14.30%

13%

Return on Total Cap'l

4.70%

38.90% 38.90%

39.20% 39.00%

38.80% 38.60% 37.60% 37.50%

4.80%

4.80%

5.30%

6.00%

5.60%

5.70%

6.10%

6.50%

1255.5 1867.30%

2004

2076

2734

3392

3636

4750

5425

1303

1566

750

1545

1250

1300

1300

13.30% 14.20%

16%

18%

15.90%

1246.6

52-week stock high $52.6

16% 17.50% 17.50% v

52-week Stock Low $20.10

Financial Analysis Summary Although not performing well in relative terms in the immediate present, Home Depot is a company with a strong financial foundation. Higher retained earnings have been reinvested to make material improvements on stores and to improve sales techniques . Future plans call for the construction of 200 new stores and implementation of an efficiency improving checkout system called the FAST (Front-End Accuracy and Service Transformation). This system integrates software that is designed to improve speed, accuracy, and service at the checkout stations, improving customer satisfaction and lowering operation costs.

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Five Forces Analysis Market Definition Home Depot is a retail firm involved in the sale of products and services used for building improvement and construction, including lawn and garden products. Home Depot market definition would be any goods related to home improvement/construction products through cross-elastic demand. Although this defines a huge market, the limited number of direct competitors simplifies the situation. As of late, Home Depot has been selling increasingly to professional builders and contractors, who now account for one-third of sales. Regardless of this trend, Home Depot’s main target consumer is the general public. New ad campaigns and investment products are catered to the average homeowner.

Internal Rivalry Home Depot faces a myriad of other competing businesses. However, Home Depot’s unique warehouse size retail store allows it to employ cost-saving economies of scale characteristics, while maintaining the specialty product and personnel service that is popular with smaller size home- improvement product and service retailers. Therefore, while price competition is very fierce in the home improvement industry, the economies of scale exhibited by Home Depot allow it to act more as a dominant firm with many smaller price-taking fringe firms. Home Depot has faced some serious competition as of late from other new home improvement warehouse retailers. Lowe’s Inc. in particular has launched an aggressive growth plan with an existing base of 800 stores, second only to Home Depot’s 1,400 stores. Although the market share competition between the two stores will lower profit margins for both corporations, the rapid growth rate of Lowe’s Inc. implies empty market space and that more entry is possible. In order to remain the largest home improvement/construction provider, Home Depot must now refocus its business strategy to deal with the new competition. Dealing mainly with the internal rivalry created by Lowe’s Inc., Home Depot has already initiated several plans. Home Depot plans to invest $500 million in new inventory, focusing on products such as rugs, appliances, and bathroom hardware. Secondly, Home Depot plans to remodel all older stores and bring them up to date with newer technologies and operating procedures. By 2005, Home Depot also plans to expand its tool-rental program to include over 80% of its stores and expand its presence into Mexico by adding two new stores. 14

In the more immediate future, Home Depot has unveiled a new national advertisement campaign in order to gain a market edge amid growing competition. The new advertisement motto reads, “The Home Depot is more than a store. You can do it. We can help.” The Home Depot ad will play down the role of price promotions and focus more on the services that home improvement retailers have to offer. The role of service and contact with consumers will be highlighted along with the emotional connection to consumers created at Home Depot. At the moment, Home Depot is the largest home improvement supplier in the entire world. With the highest annual sales (58,347 mil), market value (53,125.8 mil), and largest number of employees (256,000), Home Depot has proven to be the dominant firm in the market place. However, the question remains as to whether Home Depot can maintain this dominant position. Lowe’s ga in in market share over the past two years and aggressive growth plan is now becoming a major threat to Home Depot’s continued existence. Lowe’s recent 4th quarter earnings for 2003 rose 46% and created a six percent or two dollar increase in the stock market valuation, while Home Depot reported lower earnings which resulted in a standstill growth of two cents in its stock market valuation. Alongside its growth, Lowe’s gross profit rates, return on equity and other accounting figures are comparable, if not better, to Home Depot’s. It seems clearly understood that Home Depot’s earlier and somewhat lethargic corporate strategy is quickly changing in response to the intense competitive challenge from Lowe’s Inc. It remains to be seen whether Home Depot’s new strategies will work, or whether Lowe’s Inc. will continue to eat away at Home Depot’s market share.

Entry While it is easily possible for any business entrepreneur to open a homeimprovement store, it is much more difficult to build a warehouse size retailer even closely comparable in size to Home Depot. Building such a huge warehouse size retail store requires a large amount of capital and thus prohibits most from being able to accomplish it. Due to this barrier to entry, most stores are smaller in size and cannot extract the same type of cost-saving economies of scale from business operation. This both blocks new entrants from entering the home improvement/construction market and inhibit the growth of existing stores to reach the required size to effectively compete by exercising economies of scale. Although this capital- intensive barrier to entry prevents most entrants, it does not prevent all. Newly created warehouse retailers and rapidly growing existing 15

retailers have shown that the marketplace has displayed enough profit incentive for new entrants to take the chance.

Substitutes and Complements In terms of products and services, the Home Depot retailer can offer nothing that cannot easily be sold by another retailer. Home Depot’s biggest asset is its size and low cost. Only its comparatively lower prices can attract customers, since its products and services are not at all unique. A substitute product can easily be found in any other home improvement retailer. However, in terms of complements, the Home Depot Corporation is now beginning to increasingly offer service-oriented products. Most complementary services offered by Home Depot are most likely going to be tied to basic bulk goods as a complement (selling cabinets and installation, etc.) in order to extract the highest profit possible.

Supplier Power The Labor and Materials needed in order to operate a home improvement store is comparable to other businesses. Most employee positions do not require extensive training and the stock materials bought by Home Depot for sale can be bought from many potential materials providers. In order to get the lowest costs, Home Depot exerts an enormous amount of buyer power against its suppliers by negotiating in bulk as an entire corporation. By buying bulk for an entire chain of 1,400 stores, Home Depot is able to demand much lower costs from most suppliers by sheer volume of order. Each bulk supplier is then predetermined for every good at each store by the head corporation in order to keep costs at their lowest. By following Standard Operating Procedures, individual Home Depot stores then buy from these predetermined suppliers in quantities decided by the regional manager. Therefore, while the regional manager determines the actual quantity of each good, allowing the entire corporation to collectively exert buyer power maximizes the money saved on the bulk goods.

Buyer Power As for customers of Home Depot, business is attracted for the same reason as any other warehouse/bulk retailer. Desirable pricing coupled with service (both personal and product), attract any rational consumer who is trying to get more for his money. The cost advantage inherent in Home Depot’s large warehouse retailing allows it to simply sell the same products at cheaper prices than the competition. Therefore the only reason that a rational consumer would shop 16

somewhere other than a warehouse retailer would be for reasons other than price, which is generally service quality. Historically, one of the main advantages that smaller stores would generally have is the benefit of customer service. However with the rapidly increasing competition, Home Depot’s new focus is exactly that. With competitive price promotion as a staple of Home Depot’s advertisement campaign, supportive and helpful customer service has become Home Depot’s new focus. With this advantage gone, competition with Home Depot and other warehouse retailers is going to become that much more difficult if not impossible for smaller home improvement suppliers.

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Strategic Recommendation Corporate Expansion and Image Improvement The last two years have been witness to an increasingly poor company performance by Home Depot Inc. Although some of this financial downturn can be attributed to a general economic slowdown in the wake of September 11, other more serious factors are also at fault. Home Depot’s stock price has fallen from a per share stock price of near $70 to under $25 in the last three years. It is clear that Home Depot must quickly change its strategy in order to remain the world’s top home improvement retailer. Due to Home Depot’s unique retail configuration, it has had a specific advantage over other retailers that were in direct competition with it. This advantage allowed Home Depot to become a powerful, if not dominant, firm in the home improvement retailing industry. However, new entrants are becoming an increasingly dangerous threat to Home Depot. Lowe’s Inc. in particular has been the most successful of Home Depot’s competitors and has increased its stock price by 83% in the last two years, even in a poor economy. While both Home Depot and Lowe’s offer relatively low prices because of their cost saving economies of scale, Lowe’s has managed to build a very positive service and quality reputation. Home Depot sells its bulk goods at prices comparable to those of Lowe’s, but has been losing market share to competitors because of its comparably worse service and customer care. While customers would be indifferent to the similar prices of two stores, the bundled good of price with service would cause home improvement customers to go to alternative stores rather than Home Depot. In order to respond to the situation, Home Depot has initiated a program to improve quality and service and launched a new national ad campaign to call attention to these changes. Home Depot’s ad campaign addresses the problematic issue of store image. Much of Lowe’s’ success can be attributed to its positive reputation with consumers. Home Depot’s new campaign is an attempt to assure consumers of Home Depot’s commitment to improved quality and service-oriented focus. Commercials and advertisements show “everyday people” receiving satisfaction by accomplishing home improvement tasks with the help of Home Depot. Chief Marketing Officer John Costello stated that Home Depot would continue to lead the market by sticking to what it does best. vi Assuming Home Depot can improve its image through marketing and real changes to improve store quality and in customer service, Home Depot would have more than the capacity to resume the pre-competitive corporate growth rate.

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In order to find the effectiveness of the ad campaign on the Home Depot image, a random poll was taken regarding the responses to the new Home Depot commercials and advertisements. Like the ads a lot All respondents

23%

Ad Track survey average

21%

Among key target groups Male respondents

16%

Female respondents

30%

All respondents

4%

Ad Track survey average

13%

Dislike the ads

Think they are very effective All respondents

22%

Ad Track survey average

22%

(USA Today: Advertising and Marketing Poll, 2002)

Costello stated that the advertisement campaign was “targeting home-focused individuals, men and women, young and old.” However, the commercials struck a special chord with 25- to 29- year-olds: 36% liked the ads a lot, and 36% considered them “very effective.” Among households with income of $75,000plus, 28% liked them a lot, and 26% considered them “very effective.”vii With continued advertisement, Home Depot’s image and reputation will continue to improve as long as marketing efforts are matched with corresponding improvements in quality at the stores themselves. In order to back up all the claims and promises made by their new national ad campaign, Home Depot has increased retained earnings in order to improve and refurbish older Home Depot stores. For the year of 2003, Home Depot is increasing capital spending on new and existing stores from a previous $3.3 billion to $4 billion. Included in the new figure is the $250 million to remodel stores. The average Home Depot is five years old, but 26 percent of its 1500 locations are seven years old or older. Home Depot’s older stores, coupled with its weaker service, have opened the door for its main competitor (Lowe’s) to impress shoppers with its modern stores, which are generally described as brighter and having wider aisles. Along with personnel and training changes needed to focus more on customer services, Blaisdell Consulting also believes that personnel training should also focus on more experienced personnel. While customer service is important, it is 19

important to train personnel specifically for a customer base with no home improvement experience. With a new advertisement campaign encouraging average homeowners to take the initiative and attempt home improvement projects, only experienced personnel can provide competent customer service. If employees are young and inexperienced, customers may be dissatisfied with their lack of knowledge, despite their friendliness. . Although more experienced employees will command higher salaries, the increase in expense relative to overall company costs is small relative to the importance of increased customer satisfaction. With such a pivotal change, Home Depot will stay competitive with Lowe’s while maximizing customer assistance and minimizing customer base loss. Coupled with more experienced customer service in an attempt to increased customer satisfaction, Home Depot is also investing in technology to increase customer satisfaction. To increase the amount of customer service, Home Depot is increasing the number of stores with self-checkout registers from 45 to 800 by year-end, increasing both efficiency and customer satisfaction by cutting down on checkout time. Hopefully, all these changes will completely fulfill the promises made to customers by the Home Improvement advertisements. Cyclical customer satisfaction is especially necessary in the market of home improvement, where repeat business makes up a majority of the customer base. With $250 million dollars being funneled into improving older stores, the rest of the retained $4 billion dollars is going to be spent opening up new stores. Home Depot has aggressive growth plans for a 21-22% annual growth in store openings scheduled. More than 200 stores will be opened during the year, bringing the total number of Home Depots to more than 1,900 by the end of 2003. In keeping with the statement by Costello to “stick to what we do best,” Home Depot also will slow the growth of its Expo division, which sells high-end home design merchandise. After opening 11 Expo Design Centers last year, it will only open two in 2003. viii Based out of Atlanta, Home Depot’s expansion has officially started in Texas, which has been chosen as the first expansion state. Along with expanding within the US, Home Depot has begun to set up a network of stores internationally. By setting up warehouse retailers in foreign countries where the home improvement industry is underdeveloped, Home Depot can completely monopolize the market. For the past couple years, Home Depot has been tightening its hold on the home improvement market in Mexico. By purchasing the current Mexican home improvement retailing chains and instituting their own stores, Home Depot has already placed themselves as one of the top retailers in Mexico. In August of 2001 and June of 2002, Home Depot purchased the Total HOME and Del Norte chains. By immediately converting all these stores, Home Depot has now become the second largest home improvement retailer in Mexico within two years. 20

Overall, Home Depot’s best chance for success is to focus its strategy on several key efforts. By continuing to expand both within the US and internationally in underdeveloped markets, Home Depot will be able to continue corporate growth. Equally important is the advancement of an aggressive advertising campaign backed by improved current stores and customer service practices that will allow Home Depot to hold its current market share.

i

2002 Home Depot Annual Report 2002 Home Depot Annual Report iii Graphs from www.globeInvestor.com iv www.yahoo.marketguide.com v www.finance.yahoo.com vi www.stlouis.bizjournals.com/stlouis/stories/2003 vii USA TODAY, 2002. “Home Depot Ads get personal.” Theresa Howard. viii www.finance.yahoo.com ii

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