The Home Depot: Low Prices, High Volume, and Excellent Service

Strategy and Elements

The difference between a company with a concept and one without is the difference between a stock that sells for 20 times earnings and one that sells for 10 times earnings. The Home Depot is definitely a concept stock, and it has the multiple to prove it—27-28 times likely earnings in the current fiscal year ending this month. On the face of it, The Home Depot might seem like a tough one for the concept-mongers to work with. It’s a chain of hardware stores. But, as we noted in our last visit to the company in the spring of ‘83, these hardware stores are huge warehouse outlet 60,000 to 80,000 feet in space. You can fit an awful lot of saws in these and still have plenty of room left over to knock together a very decent concept. And in truth, the warehouse notion is the hottest thing in retailing these days. The Home Depot buys in quantum quantities, which means that its suppliers are eager to keep within its good graces and hence provide it with a lot of extra service. The company, as it happens, is masterful in promotion and pricing. The last time we counted, it had 22 stores, all of them located where the sun shines all the time.

Growth has been sizzling. Revenues, a mere $22 million in fiscal ‘80, shot past the quarter billion mark three years later. As to earnings, they have climbed from two cents in fiscal ‘80 to an estimated 60 cents in the fiscal year coming to an end [in January 1985]. Its many boosters in the Street, moreover, anticipate more of the same as far as the bullish eye can see. They’re confidently estimating 30% growth in the new fiscal year as well. Could be. But while we share their esteem for the company’s merchandising skills and imagination, we’re as bemused now as we were the first time we looked at The Home Depot by its rich multiple. Maybe a little more now than then. The above report appeared on January 21, 1985, in “Up & Down Wall Street,” a regular column in Barron’s financial weekly.The Home Depot’s strategy had several important elements. The company offered low and competitive prices, a feature central to the warehouse retailing concept. The Home Depot’s stores, usually in suburbs, were also the warehouses, with inventory stacked over merchandise displayed on industrial racks. The warehouse format of the stores kept the overhead low and allowed the company to pass the savings to customers. Costs were further reduced by emphasizing higher volume and lower margins with a high inventory turnover. While offering low prices, The Home Depot was careful not to sacrifice the depth of merchandise and the quality of products offered for sale.

Low and Competitive Prices

To ensure that the right products were stocked at all times, each Home Depot store carried approximately $4,500,000 of inventory, at retail, consisting of approximately 25,000 separate stock-keeping units. All these items were kept on the sales floor of the store, thus increasing convenience to the customer and minimizing out-of-stock occurrences. The company also assured its customers that the products sold by it were of the best quality. The Home Depot offered nationally advertised brands as well as lesser known brands carefully chosen by the company’s merchandise managers. Every product sold by The Home Depot was guaranteed by either the manufacturer or by the company itself.

The Home Depot complemented the above merchandising strategy with excellent sales assistance. Since the great majority of the company’s customers were individual homeowners with no prior experience in their home improvement projects, The Home Depot considered its employees technical knowledge and service orientation to be very important to its marketing success. The company pursued a number of policies to address this need. Approximately 90% of the company’s employees were on a full-time basis. To attract and retain a strong sales force, the company maintained salary and wage levels above those of its competitors. All the floor sales personnel attended special training sessions to gain thorough knowledge of the company’s home improvement products and their basic applications. This training enabled them to answer shoppers’ questions and help customers in choosing equipment and material appropriate for their projects. Often, the expert advice the sales personnel provided created a bond that resulted in continuous contact with the customer throughout the duration of the customer’s project.

Finally, to attract customers, The Home Depot pursued an aggressive advertising program utilizing newspapers, television, radio, and direct mail catalogues. The company’s advertising stressed promotional pricing, the broad assortment and depth of its merchandise, and the assistance provided by its sales personnel. The company also sponsored in-store demonstrations of do-it-yourself techniques and product uses. To increase customers’ shopping convenience, The Home Depot’s stores were open seven days a week, including weekday evenings. Fortune magazine commented on The Home Depot’s strategy as follows: Warehouse stores typically offer shoppers deep discounts with minimal service and back-to-basics ambiance. The Home Depot’s outlets have all the charm of a freight yard and predictably low prices. But they also offer unusually helpful customer service. Although warehouse retailing looks simple, it is not: As discounting cuts into gross profit margins, the merchant must carefully control buying, merchandising, and inventory costs. Throwing in service, which is expensive and hard to systematize, makes the job even tougher. In the do-it-yourself (DIY) segment of the industry—which includes old-style hardware stores, building supply warehouses, and the everything-under-one-roof home centers.