Download Individual Case Study on Lowe`s Companies, Inc.

Individual Case Study on
Lowe’s Companies, Inc.
By Mike Chuang
MGT-695 Strategic Management in the Global Environment
Executive Summary:
For me, not a Native American, Lowe’s is an unknown company before I do this study. When
I desire to purchase home materials, I only can come up with IKEA, B&Q and Home Depot.
While I am looking for the information about Lowe’s, I discover that Lowe’s did a fantastic
job than I can imagine. Lowe’s started from a small hardware store in 1921 and become the
first large home improvement retailer of the world after Home Depot. The FORTUNE 500
ranks the Lowe’s in the 42nd place. In 2006 BusinessWeek research, Lowe’s raised up to 11th
of Top 50 Best Performance Companies. On the other hand, Home Depot started from a
big-box warehouse store in 1979 at the period of housing boom and led the way in the home
improvement sector to become what it is today. Even though Home Depot founded later than
Lowe’s, they quickly move up and surpass Lowe’s and other competitors into the number one
position of the world. Unfortunately, last year, they fell down to 50th place in 2006 campaign.
Lowe’s and Home Depot directly compete with each other in the industry so that other
competitors almost can not catch up with them. They are very similar but there are still
several differences they conduct the business. They own a high degree of overlap in the
market. An extensive merchandises and lower price allow them to enjoy the economics of
scare in terms of purchasing power. But, they take diverse market strategies. Lowe’s focus on
customers; however, Home Depot concentrate on the profitability. The brighter, clearer and
well-organized layout with professional and friendly service attracts broader customers
especially women to go one shop shopping at the Lowe’s stores. Yet, Home Depot expands its
stores in the urban area, which represents high opportunity market in the future. This paper is
going to discuss with SWAT, P.E.S.T Analysis, and Porters Model about how the Lowe’s
perform in the past and will be in the future under the stress of Home Depot. In the last
section, I will propose three strategies that could change the status of Lowe’s.
Vision and Mission Statement:
Vision:
We offer customer-satisfied (customer-oriented) services with the best prices, products,
valuable packages (solutions or projects) and value-added experience to make Lowe the first
choice for home improvement customers.
Slogan:
“Let's Build Something Together.” In order to convey our emphasis on projects and our
stores' ability to help consumers and contractors both with all aspects of their home
improvement projects from start to finish.
Mission:
Customers:
We provide homeowners, renters and commercial business customers a one-stop shop for
products needed to complete home improvement, repair, maintenance or construction projects.
Homeowner and renter customers primarily consist of Do-It-Yourself (DIY) and
Do-It-For-Me (DIFM) customers, who use the company's installed sales programs, and others
buying for personal and family use. Commercial business customers include repair and
remodeling contractors, electricians, landscapers, painters, plumbers, and commercial and
residential property maintenance professionals.
Product Mix and Market:
Our products can be categorized into six business segments: appliances, indoors, outdoors,
building products, tools and services. We offer them in 49 states of the United States, and are
going to expand to Canada and Mexico in the upcoming years.
Responsibilities:
We do not just offer the tools to help you create your dream home. We also help our
customers to lay the foundation for a better place to live. As a national partner with Habitat
for Humanity, we commit to building stronger communities. As one of the world's leading
retailers, we realize everything we do impacts the people and environment around us. With
effort to the environment, we commit to building healthier environments such as
solar-powered rooftop energy generation system at three stores in California. With effort to
people, we commit to building big opportunities by offering jobs and keeping families
together. With effort to the communities, we commit to building better education and
awareness. Since 1957, Lowe’s Charitable and Educational Foundation (LCEF) has been
dedicated to improving the communities we serve through support of public education,
community improvement projects and the environment. We are raising the barrier in every
aspect of the way we conduct our business. To us, the best way to do business is by being a
good neighbor.
Philosophies and Values:
At Lowe's, we believe community involvement extends beyond the boundaries of the
traditional retail setting. Whether it is helping with natural disaster recovery or taking an
active role in programs that make our neighborhoods better places to live, we are committed
to helping our neighbors through alliances with well-respected organizations.
Internal Audit:
History:
Lowe's story started from 1921 when L. S. Lowe opened a hardware store in the small town
of North Wilkesboro, North Carolina. In 1946, Carl Buchan, his son-in-low, grasp the
opportunities of the post-World War II building boom to concentrate on selling only hardware,
appliances and hard-to-find building materials. Sales grew over time and additional Lowe’s
stores opened in neighboring towns throughout western North Carolina. By eliminating
wholesalers and dealing directly with manufacturers, Lowe's established a reputation for low
prices, and then turned into a wholesale-style seller of hardware and building supplies.
During the rapid growth period between the 1960s and the 1970s, The Company went public
in 1961 and was renamed Lowe's Companies, Inc.; U.S. housing starts soared and
professional builders became Lowe's loyal customers, accounting for the majority of Lowe’s
business. In 1982, Lowe’s had its first billion-dollar sales year.
By the late 1980s the retail industry in the U.S. had once again been transformed into the new
era of the "big-box" warehouses. Home Depot Inc. led the way in the home improvement
sector with its aggressive expansion strategy. To response this strategy, the modern Lowe’s
began after we shifted from a chain of small stores to a chain of large, warehouse-style stores
over the period from 1991 to 1995. The largest size was to be reserved for Lowe's stores built
in larger markets. Meanwhile, the company began to aggressively expand in new territory
such as Texas, Iowa, Michigan, and Oklahoma. In 2006, our expansion strategy is to open a
new store on average every three days with our 117,000-square-foot.
Although times have changed, we always devoted ourselves to enduring our values of
offering quality home improvement products at the lowest prices, while delivering superior
customer service.
Current Strategies:
1. Everyday low prices (EDLP): We work hard to keep our price leadership by
guaranteeing lowest price claim every day. We promise to customers is if they find a
lower everyday or advertised price on an identical stock product at a local competitor, we
will not only match that price, but we will beat it by 10 percent. We do our best to provide
our customers with the best values whenever we can.
2. “Big 3” sales initiatives: Installed Sales, Special Order Sales (SOS) and Commercial
Business Customer (CBC) are designed to meet specific needs of the customers. Beyond
merely sourcing, stocking and selling products to consumers, we are an integrated
provider of home repair and improvement solutions. We help customers all aspects of
their home improvement project from start to end.
3. Supply Chain initiatives: In order to ensure we have the right products, in the right
stores, at the right time, Rapid Response Replacement (R3) is designed to better leverage
our industry leading distribution and logistics infrastructure. Our three objectives with
this strategy are to improve customer service, improve total supply chain profitability and
better leverage inventory. R3 allows us to both maintain and improve our in-stock
position while driving greater efficiencies and flexibility in the total supply chain
infrastructure.
4. Domestic and International Expansion: We continue to pursue opportunities to expand
our business into additional geographic markets, customer service and product categories.
The percentage of expanding new stores is on the average of two stores every week.
Recently, we just announce an expansion plan into Mexico.
5. Brand Strategy: Our branding strategy is designed to build the Lowe’s brand quickly,
efficiently and effectively by offering our customers the best-known and most-respected
national brands. In addition, our brand strategy will go beyond formulation of brand. This
means We will provide added value and become strategy consultants to our clients
Finance Analysis:
U
Profitability Analysis:
When we look at profitability, we look at the statistic about revenue, grow margin, operation
margin and net income margin. The following table is going to tell you a whole story about
the profitability of Lowe’s.
2001
2002
2003
2004
21,714
26,112
30,838
36,464
43,243
99.15%
28.85%
30.34%
31.03%
33.61%
34.23%
18.65%
Operation Margin
7.18%
8.76%
9.54%
9.70%
10.42%
45.13%
Net income Margin
4.61%
5.73%
5.98%
5.97%
6.41%
39.05%
Revenue
Gross Margin
2005 5yr growth
(Source: Annual 10K Reports of Lowe’s)
Over the past five years between 2001 and 2005, Lowe’s was increasing their ability of
earnings no exception in any of view about profitability. The statistics indicates two things.
One is that we operated with efficiency in buying less and selling more about 20%, the
growth in gross margin. In other words, our growth in sales revenue (100%) is faster than our
growth in purchasing cost (80%). The other is that the operation expense was well controlled
by cutting about 25%, which can be calculated by using the growth of operation margin (45%)
minus that of the gross margin (20%). This is significant relative to the growth of the
company.
Next, the below table is comparing the short-term and long-term growth of profitability.
1-year
3-year
5-year
Sales %
18.59
18.31
18.15
EPS %
28.07
22.79
26.82
(Source: Reuters)
From this table, we can see that EPS is growing quickly than sales, which results from our
efficient cost control. Then, we will show you that our growth is better than our major
competitor – Home Depot. The next table can tell you the truth.
(Source: Reuters)
Overall, the trend of our profitability goes upward. This represent that we are able to generate
more revenue against expense.
Balance Sheet Analysis:
The balance sheet is helpful to identify the financial structure of the company. The balance
sheet analysis can tell us the ability of the company to meet financial obligation. It also helps
investors to find out whether the value of the company is overestimated or underestimated.
The following table is 5yr comparative balance sheet of the Company. There are two issues
we can review.
(Source: 2005 Annual report of Lowe’s)
The first issue is our increasing inventory level. The ratio of inventory to current assets
increases from 75% in 2001 to 85% in 2005. But when we see the inventory turnover, it is
significant lower in the industry than in the market (S&P 500.) The higher inventory in the
industry seems to be common in the industry, but it should not increase year after year.
Another issue is big difference of account receivable between 2004 and 2003. The reason for
this can be found in the cash flow, we need cash to repurchase back common stock by selling
our account receivable to General Electric (GE) on May in 2004. Therefore, our cash in 2004
and 2005 is below than before.
Overall, the growth of total assets (16%) goes faster than that of total liabilities. (12%) This
gives the investors an idea that Lowe’s can meet their financial obligations. Also the growth
of shareholder’s equity (21%) goes faster than that of total assets (16%,) which means we
have strong financial structure.
Cash Flow Analysis:
Cash flow is essential to the movement of money into or out of a company. It is the cycle of
cash inflows and outflows that determine the company’s solvency. Net cash inflow from
operating activities means earning from selling; net cash outflow means spending to invest in
future growth; and net cash inflow or outflow means raising money by issuing stocks and
bonds.
2001
Net cash from operating activities
2002
2003
2004
2005
1,596
2,677
3,034
3,073
3,842
(2,196)
(2,575)
(2,487)
(2,362)
(3,674)
Net cash from financing activities
929
(64)
(17)
(1,047)
(275)
Net cash flow
329
38
530
(336)
(107)
Net cash used in investing
activities
(Source: 2005 Annual Report of Lowe’s)
In 2004 and 2005, the net cash flow is negative. This is not necessarily a negative signal
because our cash inflow generating from operating activities can still cover outflow of the
investing activities.
Free cash flow is another way to assess cash flow statement while looking at net earning plus
depreciation & amortization minus changes in working capital and capital expenditures.
2001
Net earnings
2002
2003
2004
2005
1,023
1,471
1,844
2,176
2,771
Depreciation & Amortization
530
641
807
926
1,051
Changing in working capital
(174)
282
113
(296)
(113)
(2,196)
(2,359)
(2,345)
(2,927)
(3,379)
(817)
35
419
(121)
330
Capital expenditure
Free cash flow
The problem in 2004 is too much higher inventory. Except that, the free cash flow performs
very well in other years.
Ratio Analysis:
The ration analysis provides clues in evaluating the firm’s current financial position
comparing to the industry.
(Source: Reuters)
Because our inventory level in the industry is very high, quick ratio is useless to assess. Our
current ratio can beat the industry but behind the market. About the financial leverage, the
industry is considerably less risk than the market and we are close to the industry. These
statistics above indicates that we stand at a strong financial position in financial strength.
Next, when we look at management effectiveness, we are almost the same level with the
industry and beat market a lot; especially, ROA is almost twice higher than the market.
Therefore, we are very proud of our management ability. Yet, we can use our assets in
generating more revenues than market.
Finally, in terms of efficiency, our productivity both from revenue and net income is far less
than the market but higher than the industry. This indicates that there is still room for
improvement of out productivity to catch up with the market.
Business Segment:
Product mix concentration is a key to understand where the business’s profitability comes
from. Since 2000, the install services sector has plenty of room to grow as baby boomers get
older; they are increasing going to be less DIY and more DIFM. Since 2002, the appliances
sector is important income to respond the stale performance. The following table provides the
information that each business segment contributes that much to sales at the end of 2005
fiscal year.
% Contribution to sales
Appliances
13
Indoors
30
Outdoors
16
Building products
26
Tools
8
Services
7
(10-k reported in 2006)
The statistic indicates that indoor segment contribute the most to Lowe’s sales because of its
prior demand that customers want to make home comfortable. The income of building sector
comes from lumber, building materials and fashion plumbing. Tools sector is less part of the
sales because tools are just low-end merchandise and can not reach economics of scale.
Critical Successful Factors:
1. Strong Distribution Network: Our Regional Distribution Centers (RDC) play a vital role
in the state-of-the- art distribution network that keeps Lowe's stores supplied with the
products that our customers need. Products will then be quickly loaded as customized
orders. Today about 70% of stock product flows through our distribution network, and we
are well positioned to achieve our goal of 75% by the end of 2006.
2. High Quality of Customer Services: We believe that providing excellent customer
service is necessary to our future growth. We are focusing on our customers by providing
the products and services they want. Our “Big 3” sales initiatives are designed to meet
specific needs of customers and have helped bring more customers into our stores. In the
“2006 BW50” survey of BusinessWeek magazine, we rank in 11th of Top 50 Best
Performance Company, which is significantly greater than Home Depot’s 50th ranking.
The evidence shows that our successful tactic is customer service.
3. Prices Strategy: EDLP is our heart of the competitive strategy. The strategy is a vital
factor that can attract the customers who are loyalty to buy cheap, and then meet the
company’s vision: the first choice of the customers. This strategy really boosts our sales
in a specific market segment.
4. Well-Know Brand Selection: Each of our stores carries a selection of national brand
name merchandise, such as Whirlpool, KitchenAid, Samsung, Pella, Werner, Kohler,
DeWalt, John Deere, Troy-Bilt, Jenn-Air, ClosetMaid and others. These brands cover
several categories, such as paint, lighting, flooring, doors, windows, tools and others.
Exclusive brand names, such as American Tradition, Mohawk Premier Living, Kobalt,
Portfolio, Harbor Breeze, Reliabilt, Perfect Flame and Top-Choice Lumber are found only
at Lowe's. Our goal of selecting brand is to meet customers’ diversified needs.
5. Market Strategy: Every company has one or more target markets. Lowe's markets itself
internally and externally as a “customer-oriented” organization in contrast with Home
Depot’s “contractor-” and “professionally-oriented” organization. Lowe's provides
brighter, easy-to-navigate stores that attract a broader customer base, particularly women.
Summary of Strength and Weakness
In summary, Lowe’s has many competitive strengths standing for our success. Three key
factors toward success in home improvement industry are customer service, good prices, and
in-stock merchandise. None of them can be absent from our kernel values to conduct our
business. Customers are people who actually drive our businesses. We invented “Big 3” sales,
EDLP and R3 supply chain initiatives to service them and provide them better shopping
experience in or out of stores. The cleaner, brighter environment at Lowe's was noticeably
more appealing to customers especially women. Our retail strategy is one that attracts the
whole family, not just home-improvement contractors. Beside, we are the first two home
improvement retailers and have already build up the economics of scale to gain advantages in
buying and price competitiveness. We have strong finance condition to support our expansion
strategy. We have very strong brand image in customer’s mind so that our brands are already
connected with the number one service provider in the industry for a long time.
However, we still have to overcome some weakness. Inventory level is too high even though
we are better in the industry; but we are far away from the market. The financial liquidity is
vital for our future growth. Next, productivity is another part of our disadvantage while
comparing to the market. Our employees are the foundation of our continued success. We
will recruit, motivate, develop and retain outstanding employees to execute our visions.
Solving these two issues can make us absolutely surpass our major competitor- Home Depot.
Finally, we have a relatively low penetration in large urban markets, which represent a
significant opportunity for further market share gains, and we never stop planning to expand
into these high volume markets.
External Audit:
State of Industry:
U
Lowe's Companies, Inc., is the second-largest home improvement retailer in the United States
and ranks 42nd on the FOURTUNE 500, holding about 30% of the $150 billion home
P
P
improvement market from the Reuters report. For as long as Americans have owned homes,
they have desired to improve them through remodels, renovations and decoration. America’s
fascination with home improvement and the recent rise in home ownership, the home
improvement retail industry has benefited greatly over the prior five years achieving a
compounded annual growth rate of 7.1% according to the Citibank Home Improvement
Industry Report 2005. Home Depot and Lowe’s, the number one and two market share
leaders, account for approximately 90% of the overall market based on revenue described in
the below table.
Revenue(B)
% Revenue
Home Depot
90.06
59.72%
Lowe's
47.33
31.38%
Sherwin-Williams
7.80
5.17%
Building Materials
3.25
2.16%
Tractor Supply Company
2.37
1.57%
150.81
100.00%
Total
(Source: Reuters)
Industry’s Boundaries:
Retailers made money in the housing boom, but market conditions never stay the same. Until
the early 1990s, the home improvement industry was highly fragmented between hardware
stores, paint and wallpaper stores, lumber yards and retail lawn and garden stores. Each
served a unique niche of the marketplace with minimal crossover. Most recently, many of
these smaller storefronts have been forced to close due to dwindling sales and their inability
to match the fierce pricing battles they face when competing against the likes of Home Depot
and Lowe’s. For those that have survived, they have been forced to undertake large plans of
expansion both within their stores by adding additional square feet and in terms of their
regional footprint through the addition of new stores and acquisitions.
In 2004, the home improvement retailers in the US have responded well to the industry’s stale
performance in the last two years, diversifying into the Appliances sector while introducing
several key revenue drivers such as store credit cards, increasing the value of the industry to
over $304 billion.
In 2004, Appliances have emerged as a major revenue driver, propelling margin growth in
terms of high value sales and promoting the sale of after-purchase installation services such
as plumbing in the US home improvement industry.
Private label credit cards have driven top line performance within the US home improvement
industry, attracting business through period specific interest free purchase schemes. While the
cost of deferred interest has detracted from gross margins, companies, such as Lowe’s and
Home Depot, have been able to employ their financial power as a bargaining tool in
negotiating some very favorable financing terms with their card partners. Company reports in
early 2005 demonstrate the full effects of the cards introduction as consumers begin their
payments, increasing revenues significantly.
Introducing self-checkout facilities is another power to increase revenues with the success of
Home Depot in 2004. This can increase the concentration of employees on the selling floors
to boost sales. Around 35% of their transactions went through self-checkout, allowing for an
increasing sales presence and contributing to the company’s increased sales and escalating
average ticket prices.
The growth in online home improvement retail can be traced to the success of websites such
as Amazon and eBay and some aggressive online advertising by home improvement firms
that have recognized the potential of the internet as a sales platform. Home Depot and Lowe’s
have an economy of scale in terms of their purchasing power. Both of them have developed
online sales platforms to counter the threat from internet only retailers.
Industry Characteristic and Attractiveness:
The home improvement industry came into its own with the post-World War II housing boom
in America. Returning soldiers and their families needed living space, and the industry
retailers were happy to provide it. The size of the industry has grown from a small store to a
big-box retailer; it is at the weight average of $66.9 billion of market capitalization, $68.2
billion of sales revenue, and $248k employees reported in Reuters. With the comprehensive
rang of products, the retailers in the industry have pricing power both in purchasing lower
from supply and selling lower to the customers. However, most of our merchandises do not
belong to consuming products, which means the price could be a little higher and the liquidity
will slower than ordinary necessaries.
Current estimates place the retail home improvement market at $250B – $340B reported from
yahoo finance in the below table. In light of the changing nature of the industry and the
continual addition of new offerings, such as the recent trend in providing Do-It-For-Me
(DIFM) services and appliances, it is likely that the overall market value is towards the higher
end of this range. Even with the dominance of Home Depot and Lowe’s, the retail home
improvement industry is still by many standards considered highly fragmented.
The home improvement industry can be characterized as a mature industry: slowing growth
sales and housing demand since 2002. The home improvement industry was concerned about
slowing sales growth and increasing capital expenditures. Both Home Depot and Lowe’s are
figuring out new ways to make money.
The performance between industry and market (S&P 500) is showed in the below table. The
profit of the industry grows slower than that of the market; but the industry earns better return
both in assets and equity. Then, comparing the short-term (1yr) and long-term (5yr)
performance within the industry, the home improvement industry performs a stable growth
rate by average 14%; the gross margin is very high up to 30%; the operation margin is about
10%. Higher gross margin with lower operation margin mean there is a considerably more
amount of expenditure in the industry. The return rate both in assets and equity can reaches
two-digit growth of earnings. In brief, the market grows faster than the industry. This is a
signal that the industry is in the mature markets.
Sales Growth - 1yr
Gross Margin - 1yr
Operation Margin - 1yr
ROA - 1yr
ROE - 1yr
Revenue/Employee
Industry
13.8%
34.3%
10.9%
12.7%
22.6%
$287,091.6
S&P 500
16.3%
45.6%
18.6%
7.6%
21.2%
$852,908.8
Sales Growth - 5yr
Gross Margin - 5yr
Operation Margin - 5yr
ROA - 5yr
ROE - 5yr
14.30%
32.80%
10.00%
12.30%
20.30%
12.70%
45.40%
17.60%
6.00%
20.10%
(Source: Reuters)
Recent Developments in the industry:
Similar to retail department stores within the United States, the retail home improvement
industry has gone the way of “bigger is better”. The trend of providing a one-stop shopping
experience is likely to continue as Americans’ time constraints continue to grow.
Baby boomers, which include the majority of the plus-55 population in the United States,
account for more than half of all home improvement expenditures today. They are expected to
increase their expending on home improvement projects after their kids are moving out.
Since 1999, home ownership has increased 2.2% and stands at 69% overall in 2004. This
could be the factor that will influence growth within the retail home improvement industry.
According to a report of Harvard University about “Joint Center for Housing Studies”, the
structure of the home improvement industry is changing due to increased divorce and
decreasing remarriages. The demand for these single men or women to have their own
privacy space might push themselves in DIY projects so that the sales of the home
improvement industry must rise.
According to RenovationExperts.com , women are now as likely as men to be in charge of
remodeling projects. Of the homeowners they surveyed, 46% of the women were looking for
and planning to make the final decision with regards to a remodeling project as compared
with 54% of the men. Additionally, single women are purchasing homes at twice the rate of
single men and represent the fastest growing group of homebuyers after married couples.
The rising cost of having one remodeled by a professional led more homeowners to take on
construction projects themselves. DIY project is expected that the greatest growth over the
next five to ten years within the home improvement industry will be in the Do-It-For- Me
(DIFM) category.
Global Market of the industry:
Home improvement is a booming business in China and several home-grown chains have
mimicked Home Depot over the last decade. Two Big two events are changing the life of
Chinese people. One is 2008 Beijing Olympic Games and the other is 2010 Shanghai World
Export, which has 150-year history and is regarded as the Olympic Games of the economy,
science and technology. The Chinese government is working on keeping pace with the world
by improving both in local and national infrastructure. They force to phase out the old and
broken houses, but still reserve some Chinese-traditional art infrastructure, and build up more
modern-style buildings. Besides, the rich people in China are getting more and more because
of their boosting real estate industry. This trend is very similar to post-World War II housing
boom era in America. For home improvement industry, it is a big opportunity to enter this
market.
“The State of Mexico’s housing 2004” reports1 that the housing demand in Mexico has been
rapidly growth due to the population and household growth. The effect of the changing age
structure of the population on housing demand is evident in recent trends in household
growth. Household growth is projected to continue to rise gradually by nearly 770,000 new
households per year until 2010. Again, this is a big opportunity for home improvement
industry to enter this market.
Remote Factors:
Political & Economic Forces:
The macroeconomic police of the government can lightly or strongly affect the housing
market. Like the Energy Policy Act of 2005, many homeowners were able to receive a tax
credit for a handful of the home improvement projects they undertake. From the perspective
of the retail home improvement industry, higher short-term borrowing rates will likely
depress sales growth; but lower lower-term interest rate can benefit the company in long-tem
debt financial strength. The growth of GDP, employment and disposal households’ income is
a strong indicator of home improvement sales; inflation, energy price can be an index of
inflation, might hurt the sales. How effect the government can manipulate these factors as a
whole will lead to how strong opportunity or threat the industry faces in the future.
1
Reported by the State of the Nation's Housing
Recently, higher energy price results in lower customers’ spending and higher expenditure of
the venders. The relatively positive index as the below table suggests the industry will likely
be more confident than in the past several years.
(Source: U.S. Department of Labor)
Social Changes:
The financial impact of the four hurricanes that struck Florida and the southeastern US
seaboard in August and September 2004 has proven to be a positive development for home
improvement retailers in terms of increased sales although its full impact will not be felt until
early 2005 when consumers finalize their payout agreements with insurance companies. The
volume of natural disaster preparation and reconstruction schemes will continue to affect the
industry’s revenues moving forward.
Housing turnover is expected to continue at a historically high pace according to The
National Association of Realtors, which is good news to the industry.
Technological Innovation:
Although both Home Depot and Lowe’s do not address too much on their technology
implement. The technological innovation does deeply have affected the success of the Big
Company for at least a decade. Since the inventory and the productivity are two keys which
the industry can not catch up with the market, the industry should pay more attention to
improve supply chain and operation process with technological innovation. For example, the
self-checkout registers can reduce the employees’ time on checking out and they can focus
more on profitability things which can contribute values to the company.
Changing Demographics:
The US baby boomer generation will have a positive effect on the industry. Since older
people tend to have more disposable income and spend more time in the home, they generally
engage in higher levels of home improvement. Those companies engaged in the installation
services sector are likely to be principal beneficiaries of the aging baby boom generation.
In addition, demographic shifts in the U.S. are increasing the number of consumers entering
the housing market. Members of Generation X are buying homes at a younger age than their
parents and have shown a strong desire to personalize and upgrade features in their homes.
The emergence of the Echo Boomers, sometimes referred to as Generation Y, is expected to
have a similar positive effect on our business. Echo Boomers are 72 million strong and, with
the influx of immigration, are likely to be the largest generation in American history. Much
of this group is just beginning to enter homeownership and the housing market will begin
seeing the impact from this generation as early as 2007.
Competitive Analysis:
Porter’s Five Force Model:
Rivals:
In many major markets, Lowe’s and Home Depot stores go head to head especially in DIY
market. Home Depot and Lowe’s have very similar product offerings and large warehouse
formats. Other Competitors such as Ace Hardware, Homebase Inc., Hughes Supply, Woloham
Lumber, and True Value Company are far off the pace that Home Depot and Lowe’s are
setting for the industry. A threat that might be affect us is Home Depot began training
executives at a small Chinese retailer a decade ago; and last year, Home Depot bought the
retail - Protégé so that Home Depot will have its first stores in the fast-growing Chinese
market.
New Entrants:
New entrants to the home improvement will find it very difficult to compete directly with
Home Depot and Lowe’s. Home Depot and Lowe’s have created an oligopoly in the US,
accounting for majority of the industries overall market share and creating an economy of
scale in terms of their purchasing power. A company that is new to the market will face a
huge difference in economies of scale that they may not necessarily be able to overcome.
Also new entrants will be faced with trying to compete head to head with Lowe’s and the
Home Depot or they will be forced to specialize in a certain product category.
The barriers to entry include the following considerations: large product selection, highly
trained employees, large startup capital, prime real estate, strong regional recognition, and
unwavering customer loyalty.
Suppliers:
The supplier has power of how much price they can sell the merchandises. Then, supply and
demand will determine the final market price. In the industry, Home Depot and Lowe’s can
create a large portion of the supplier’s sales so that they are able to negotiate price
concessions. These concessions have gone a long way in driving down the cost of Home
Depot and Lowe’s as well as further increasing margins of them. The supplier has less power
in the industry.
Buyers:
The buyer always has power of deciding how much price they want to buy the merchandise.
Then supply and demand will determine the final market price. DIY customers are
non-professional consumers interested in doing their own home improvement projects. The
professional customer segments that we now associate it with are contractors, electricians,
plumbers, landscapers and so forth. This group has been able to purchase products in larger
quantities due to their larger scale projects. They have more power of buyers than DIY
customers.
Substitutes:
There are no real substitute products or services that can be created in the industry. Only
those who focus their business on garden supply sector, appliance sector and the like
hardware stores might be our substitute’s competitors when they can delivery that much of
quantity at lower price than us. Other retailers in grocery department industry such as
Walt-Mart, K-Mart and Target could be possible substitutes. A small part of their products has
overlap with ours. The customers would like to have one-stop shopping at their stores.
Issues:
1. Increasing inventory level gives us a clue about ineffective sales forecast and financial
liquidity. Even though our R3 have enhanced the supply chain a lot, the statistic shows we
still have to work on inventory turnover issue to competitive with the market.
2. There might be a problem that insufficient cash inflow of the operating activities cannot
cover cash outflow of the investing activities in the past 12 months. This will impact on
the company’s expansion strategy.
3. The financial ratio shows that our productivity is considerably lower than service sector
and market while we can use assets better in generating more revenues. This indicates that
we might not well position the employees on the right occupation, the employees do not
have well training, or we have redundant employees.
4. What if the long-term interest rate goes high, we will have potential loss especially 500
million of long-term debts in 2010.
5. In the U.S. market, our stores located mostly in eastern coast with lower percentage in
urban area than Home Depot. We should expand our stores to these areas to shrine market
size gap and raise our sales.
6. In the global market, less awareness in Asia area especially in the prospective China or
Indian market will decline our competition. The failure example of Holland-based Makro
can tell a story that different culture, rules and regulations between eastern and western
countries.
7. The trend of online shopping might shift the market a little bit. Shopping on the internet is
very convenient because customers do not go outside and can save time for leisure. Some
only online retailers such as eBay, Amazon and etc.
8. Reuters reported that the Retail sales growth will be moderate next years as the customers
realize that higher gas prices are a reality. We should find new ways to dig growth.
9. Menards continues its slow-but-steady expansion and will go head-to-head with Lowe’s
in more markets especially Midwestern United States in the future.
10. Housing market fluctuations, changing demographics, increased regulatory pressures, the
growing need to find qualified associates and competitive pressure from non-traditional
sources, i.e. Wal-Mart, will test Lowe’s management.
Strategies:
1. In the digital world, company can not ignore the power of the state-of-the-art Technology.
I will recommend the company to research and develop a Knowledge Management
System to beat the Home Depot.
2. This is a globalization era today. To success, we should conduct business with global
business view. China is already recognized as a profitable market. I recommend the
company adopt the joint venture strategy with a local well-performance firm. We have
experience of Retail channel, customer service and products. The local partner can
provide its knowledge of the market about the culture, values, rules and regulations. Like
the success of B&Q, a British retailer, in Taiwan, it is because they alliance with a
Taiwan-based trade company to well develop the Big Chinese market in Taiwan and
Mainland China while comparing to the failure of Holland-based Makro.
3. One of the thirty-six strategies proposed by Sun Tzu, an ancient Chinese military
strategist is “Association with the next rivals to compete with the major enemy.” Market
share is index of the size. By merging with Menards, Lowe’s can grow its weak market
share in Midwestern. Also, Menards can appreciate the company values and go public
through the alliance with Lowe’s.
The strategies are based on fortifying internal environment and then expanding external
market. The bigger the better will be our new corporate strategy. There will be several
division strategies to endorse the corporate strategy. When we win 1% sales back from Home
Depot, the difference will decline 2%. The day we exceed them will come sooner.
Reference:
1. Lowe’s 2005,2004,2003 Annual Report
2. Lowe’s 2006 10K
3. http://www.lowes.com/lowes/lkn?action=frameSet&url=lowes.mediaroom.com/index.php
?s=company_overview
4. http://www.investor.reuters.com/business/BusCompanyFullDesc.aspx?ticker=LOW&sym
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6. http://forpros.lowes.com/articles/0606bizmaint_mission.cfm
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19. http://today.reuters.com/summit/allsummits.aspx
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