Competitive Advantage of HD: Inside The Box

Competitive Advantage of HD
Home Depot, how to keep growing
image source: freepik

This isn’t Minecraft. We can’t build or improve our home online, no undo, copy-paste, or redo. The home improvement business is one of the most insulated industries from the online threat. Is this the only competitive advantage of HD (Home Depot)? We don’t think so.

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The home improvement market is dominated by two companies, Home Depot and Lowe. This duopoly nature is a strong precursor of sustainable business advantage of the players.

HD Pro. Customer Side.

As the space for a living gets tighter and tighter, the need for home improvement professionals is more unavoided. This is what we recognize when we try to analyze the competitive advantage of HD: Its connection with professionalism.

The store itself is designed to be more professional looks, even some of the tools aren’t labeled and make it non-professional like us difficult to find the perfect nail or bolt for our home. Fact is, 45% of sales at Home Depot come from professional contracts.

Professional focus doesn’t mean that the business has no touch with customers. Having a great reputation among professionals will enhance brand perception in the customer’s eye.

A little bit out of topic, the position of Home Depot and Lowe reminds us about Nvidia and AMD in the graphic card battleground, with Home Depot on the Nvidia side. Both enjoy their connection with professionals/businesses while AMD and Lowe tend to be DIY products.

And by the way, if you are curious about who we call home improvement professionals, they are:

  1. Contractors, both general and specific. usually, you need the specialty. For example, bathroom specialist contractors are capable to build a spa-level in your bathroom.
  2. The architect or the designer. The contractor’s job is to execute what is designed by the architect. They are the guy who draws, design, hack your home to be more spacious, or more comfortable to stay.

We try to track back why Home Depot becomes the first choice of the home professional besides its store design.

If you are professional and get the exterior project that needs to be done as soon as possible, sometimes (or often?) you are in a situation that you can’t buy other than Home Depot. It is Friday night, and you need a can of paint tomorrow morning.

Home Depot with its more than 2.000 stores in America has a superior network that can serve these needs. Each of that stores is located in the premium area.

Another reason is the price. Take paint, for example, Home Depot paint is cheaper than Sherwin-Williams or Benjamin Moore paint, yes this is not an apple to apple comparison. But point is, Home Depot could press the price down to attract customers.

For these reasons: supply of products, delivery, price — we don’t see any threat of a new player (or even an existing rival) to compete in this industry, especially to break up Home Depot – professional world connection. Even, it looks like a monopoly for us (in the term of professional choice)

It is interesting to note that Lowe — Home Depot’s smaller rival — is in the home improvement business 30 years earlier. They have a slightly different business model. Thing is, disrupt the home rebuilding market isn’t impossible, but it really difficult since Home Depot has cemented its foundation in this industry.

Bargaining Power. Supplier Side.

We present you a data: The garden-related product only contributes 10% of Home Depot revenue. The case for its supplier, Scott Miracle, is much different. Home Depot contributes more than 30% of its revenue. This configuration gives Home Depot a strong position in the supply chain.

Speculating further, we believe that Home Depot’s bargaining power over suppliers is responsible for its capability to bring down the product prices.

Competitive Advantage of HD: Thinking Inside The Box, Online Protection

Choosing material or tools for home needs isn’t something that we can do online. Certain colors in your smartphone screen or computer may be inaccurate. Furthermore, customers need to touch, feel the hardness, surface, or any other physical contact. This is why online shopping is never enough – it doesn’t offer a shopping experience like the Home Depot store capable.

Another problem with online shopping –cough, Amazon — is the delivery. It is not seldom that the material or the product is heavy, making the distribution is difficult. This is the field in that Amazon has no power and once again, the Home Depot network solves the problem.

The Disadvantages: Unhappy Customer.

This will not be a big deal, but still worth mentioning. Some of Home Depot customer isn’t satisfied with its product, some of them say that the product has less quality (with cheaper price) – also, there is an assumption that material or tools in “box stores” like Lowe or Home Depot are inferior.

The investor needs to pay attention and not lose objectivity here, even though, it isn’t the problem right now.

The Disadvantages: Cyclical

We are very optimistic that Home Depot could keep its grip on the home improvement market, unfortunately, the improvement of the home market is questionable. As we know, housing is a very cyclical and economic sensitive sector, and with the tiny and tinier living space, room for Home Depot growth seems to be restrained. Yeah, we don’t see it in the financial report, yet. But along with quality issues, the uncertainty in the housing sector could spread some worry for us.

Competitive Advantage of HD: Key Takeaway

  1. Size matters in this industry. Home Depot has annual revenue of more than $110 billion, it just under Walmart in the first place. take it as consideration, Home Depot just sell home related product while Walmart is “all-round” retailer.
  2. There are industries that could not be penetrated by online threats. The industry which involves physical user experience is the kind of that.
  3. Professional connection is key to stability. This advantage is strengthened further with HD supply acquisition. Another benefit of acquiring HD supply is Home Depot could withstand when volatility hits the housing market.