COMPETITIVE CUSTOMER VALUE ANALYSIS
In
order for market segmentation to be a useful component of marketing strategy,
market segments must be:
Measurable
Substantial
Accessible
Differentiable
Actionable
Measurable
The
Home Depot has essentially identified its two main market segments: the
do-it-yourself (DIY) home improvement consumer and the professional business
customer. This report will focus on The Home Depot’s market segmentation
strategy in relation to the estimated US$100 billion dollar opportunity
presented by the DIY home improvement consumer.
In
effectively targeting this market segment, The Home Depot has chosen its
products and service offerings to suit the lifestyles and personalities of the
majority of DIY home improvement consumers, who are characterized as busy,
active individual homeowners who take pride in their homes. The Home Depot
then combines its psychographic market segmentation strategy with demographics
segmentation strategy, taking into account the prospective customers’ family
life cycles, occupations and incomes, in determining the feasibility of a site
for a new store location.
Substantial
With
its growing market share and soaring sales, The Home Depot has proven that the
DIY home improvement consumer is a substantial market segment. Although the
Company currently claims only 12% market share of the overall DIY home
improvement consumer market, The Home Depot still retains market leadership of
a segment that has proven profitable enough to serve. This segment has proven
so substantial that competitors are copying The Home Depot’s business model
in order to get a piece of the pie.
Accessible
The
Home Depot has opened store locations in areas
which the Company has projected customer traffic density to be high.
These store locations almost invariably feature ample parking facilities. On
weekends, especially, traffic at individual store locations can be very
heavy. This reflects that the DIY home improvement customer is accessible to
The Home Depot and testifies to the stores’ accessibility to its customers.
Differentiable
The
DIY home improvement customer segment is highly distinguishable from the
professional business customer segment. While DIYs are proud homeowners who
prefer to handle their own household renovation and improvement projects and
buying products at low prices, professional business customers place a great
emphasis on more personalized service and a higher quality of products and
services. Professional business
customers have been hired to execute certain jobs, e.g. contractors, painters,
plumbers, etc. and quality, over low prices, would have a higher premium with
them than with DIYs.
Actionable
The
Home Depot has formulated several marketing programs to attract and
effectively serve DIYs through especially-tailored advertising campaigns
highlighting low prices, the stores’ locations and one-stop shopping
convenience concept, in-store home improvement classes. In addition, the Villagers
Hardware concept was introduced to meet the unique needs of DIYs who needed
the convenience of purchasing a few items from a regular neighborhood hardware
store.
Michael Porter's 5 Forces
Potential
Entrants (Threat of mobility)
2000 --
High
The
home improvement market is considered one of the most lucrative markets with
retails vying for a share of the $152 billion pie. Traditional brick and
mortar retailers such as Home Depot, Lowes, and Sears still dominate the home
improvement industry and there have been no new ‘big box’ entrants in the
industry. Instead, 1999 and 2000
have seen the sudden emergence of electronic retailers such as Amazon.com,
Homewarehouse.com, OurHouse.com, Hardware.com, and HomeTownStores.com. With
the increasing popularity of Internet commerce, there is a large threat of
potential new entrants in this market via electronic commerce; thus this
rating is ‘high’.
2005 -- Med
By
the year 2005, we expect this home improvement industry to become more
saturated and competitive as Home Depot and other retailers expand their
outlets to cover the most of the North American market. We also expect the
electronic retailing business to become more saturated and competitive since
Home Depot and Lowes will have entered this arena with their respective web
sites.
In 2005, we do not
expect the North American home improvement industry to be as attractive as it
currently is, therefore this rating is medium. There is however, the
international arena to consider. South America, Europe, and Asia are all
untapped markets. Home Depot has just opened its first few stores in Latin
America; the other retailers have yet to do so. HomeBase does have a number of
stores in Europe, but not nearly the kind of saturation North America does.
In 2005, the
current expansion will continue on a global scale into still untapped markets.
While Home Depot and other retailers have the resources to do this; the huge
potential of the global Home Improvement industry will make it attractive for
potential international entrants such as Home Base (U.K) and Castorama Group (EU).
Thus medium rating, therefore, is a combination of ‘Low’ for the North
American market and ‘High’ for the international market.
Suppliers
(Supplier power)
2000
-- Low
Currently suppliers have little power against large retailer such as
Home Depot. Because of their sheer size and ability to sell large quantities
of goods, Home Depot has a large amount of control over its suppliers. Home
Depot can squeeze and bully suppliers because in many cases they rely on Home
Depot for a substantial portion of their sales and revenue. Recently, Home
Depot issued a mandate barring suppliers from selling their products directly
to consumers via the Internet. The degree of Home Depots power over suppliers
was confirmed when, despite a few objections, none them went against the
mandate.
2005 – Med
We
believe the power of the suppliers will increase by the year 2005 from
‘low’ to ‘medium’. This prediction is based on the current trends in
the home improvement industry.
Although
Home Depot is still by far the largest retailer, Lowes and Sears are fast
becoming large retail chains of a Home Depot scale. Lowes has recently
acquired Eagle Garden & Hardware (38 stores) to bolster its West Coast
presence, Sears has acquired Orchard Supply Hardware (76 stores).
Lowes and Sears do
not have a mandate barring suppliers from selling directly to consumers via
the Internet. As they increase in size and the ability to sell large volumes
of products, the competition between Home Improvement retailers will increase
and suppliers will be able to choose among retailers to get the ‘best
deal’.
By 2005, the
portion of home improvement sales done over the Internet will have grown
substantially. This will increasingly tempt suppliers to sell their products
directly to consumers rather than through intermediary retailers such as Home
Depot. Since their BATNA (best alternative) to using retailers like Home Depot
will have improved with the growth of the Internet, they may no longer need to
submit the policies, mandates, or wills of the large retailers the way they
currently do. In other words, there will be an increased possibility that
suppliers will be able to walk away from bullying retailers. Therefore, this
rating is ‘medium’.
Buyers
2000
– Med
Buyers or consumers currently have a ‘medium degree’ of power over
the retailers in the home improvement industry. The first reason for this is
location and the nature of home improvement items. Products used in home
improvement tend to be large items such as wood, panels, windows, etc. This
places high importance on convenience and location when customers buy these
items. If there is only a single retail outlet near the consumer’s location,
such as a Lowes, then the consumer would essentially have no choice but to
shop there if he wanted those items immediately.
Currently, the retail home improvement industry is not yet saturated in
many areas. Consumers do not have the luxury of choosing among nearby outlets
when shopping for home improvement items. This restricts their power to not
patron outlets they do not like.
While buyer power
is limited by the nature of home improvement products, there are alternatives.
E-tailers sell many hardware items via the Internet, patient consumers willing
to wait for delivery can buy their products through this channel. Traditional
retailers also offer delivery service. Again, if consumers are willing to
wait, they can essentially choose among different retailers with little
switching cost.
2005 – Med / High
By
2005, buyers power will have increased from ‘medium’ to ‘medium /
high’. The main reason for this is the current aggressive expansion by large
retailers like Home Depot and Lowes as well as the emergence of home
improvement e-tailers. As saturation increases, so does competition and the
consumers ability to switch between retailers with minimal effort. Buyers will
be able to demand higher levels of service or lower prices simply by choosing
one retailer over another.
Substitutes
2000
– Med
There
are no substitutes currently available for home improvement materials.
Material such as wood, tiles, glass, tools, etc have and will continue to be
the necessary
2005 – Med
Home
Depot is currently developing their web site in order to be able to sell
directly to customers on the Internet. By the end of the year, all major brick
and mortar retailers are expected to do the same. Although there are currently
at least eight Internet DIY retailers, this number is expected to fall as Home
Depot and other established retailers begin selling on the Internet, and the
competition squeezes smaller E-tailers out.
Home Depot has also
made their presence felt in the mail order industry and subcontracting
business. Home Depot recently acquired Nation Blinds, which operates a
national mail order business for windows and blinds. Home Depot also provides
installation services for all of its outlet items (at an additional cost).
Because Home Depot has and is still expanding into all substitute distribution
channels, this rating will remain medium in 2005.
Industry Competitors (Segment Rivalry)
2000
– Medium
The
current level of competition within the retail home improvement industry is
‘medium’. Home Depot has twice as many outlets as its nearest competitor
Lowes, and dominates in terms of sheer size. Although a few years ago this
rating would have been ‘low’, circumstances in the industry have changed,
stiffening the competition.
Over
the past decade, as Home Depot continued to introduce ‘big box’ outlets
across North America, they only had to compete against small hardware stores.
Through better price, selection, and service, Home Depot was able to easily
brush this competition aside. Today, Home depot has to compete against other
‘big box’ retailers such as Lowes, Sears, and Mernard’s, as well as the
emerging group of E-tailers such as Amazon.com.
The
one thing that currently holds back the competition is the fact that the North
American market is still largely untapped, and many of the retail outlets do
not have similar competitors nearby.
2005 - High
Home
Depot is planning to build another 900 stores over the next 4 years. Its
competitors Lowes and Sears are also planning to expand on similar percentage
scales. As the number of outlets surges, so will the competition between them.
By 2005, the competition in this industry will be ‘high’. There will be an
increasing number of retail outlets close to one another and retailers will
have to spend larger suns of money trying to differentiate themselves from one
another. The competition may not only be limited to different companies. As
expansion continues, nearby Home Depot outlets, Villager stores, and Expo
stores may wind up drawing customers away from one another.
Home Depot will not
only face increased competition with traditional brick and mortar retailers
like Lowes and Sears, but also against E-tailers as well. By 2005, e-commerce
will account for a much larger portion of home improvement sales. Home Depot
will have to compete against Amazon.com and HomeHardware.com, who have had a
head start in online retailing and specialize in delivering customer value
online.
By 2005, the home
improvement industry will become a very competitive one, with companies
increasingly try to differentiate themselves from one another. This rating is
‘high’
5.4.1. Importance of Market Perceived Quality Factors
The
most important factors influencing customers purchase decision are the
following:
Service Quality - Good
Price -
Excellent
Quality of Products - Good
Selection and Availability - Good
Getting around
the Store - Satisfactory
The above information is based on Consumer Reports survey of home centers (June 1999). 18,000 shoppers who had 30,000 shopping experiences there in the year prior to the survey decided on the above order of factors significant for them.
Service
– Good
Service
is by far the most important for do-it-yourself home improvers. The general
opinion formulated by customers about their shopping experience was most
influenced by it, even more than by price. In the scale of five: excellent,
good, satisfactory, fair, and unsatisfactory, Home Depot was given good
for service. This is above the average for the industry where there has been a
steady decline in the quality of service.
Home Depot scored as high as its main competitor Lowe’s. Trained
salespeople help customers around the store. Many of them are experienced
tradespeople- plumbers, electricians, and carpenters. All salespeople can help
customers find what they need, are competent in the product knowledge as well
as treat customers respectfully. Also installation services are becoming more
and more popular, since about 16% of the shoppers surveyed bought something
that somebody else had to install. Most projects done by subcontractors
recommended by the chain went smoothly.
Price
– Excellent
Today
customers can do more comparison before making a purchase. Therefore, price
can easily be put against competitors and can become a liability or an
advantage. Customers questioned in the survey saw Home Depot’s prices as
much better than average. There was only one other home center chain (out of
15 ranked) which scored an excellent mark for prices – Menard’s.
Quality
of Products – Good
Even
though customers agree that price or quality of merchandise matters less than
quality of service, Home Depot does not neglect either. The company’s
overall quality of products was good
as opposed to Sears' excellent. That may be the result of the company’s
positioning strategy that emphasizes the low price rather than excellent
quality image in the eyes of the customers. Consequently, the chain’s
efforts to upgrade its quality image are met with the already formulated
perception that the customers have of Home Depot. They see the stores as a
good bargain place rather than exceptional quality provider.
Selection
and Availability – Good
Home
Depot carries a wide range of products both from familiar national brands as
well as from its own exclusive lines, for instance: Behr paints and stains,
Husky hand tools, Ridgid power tools, Hampton Bay ceilings fans, Vigoro lawn
fertilizer, and Scotts lawn mowers are some of them. Also the store is the
only home center chain to offer Ralph Lauren paint. Home Depot sells more
flooring than any other US retailer does. However, one of five customers in
the survey found the too broad choice of models overwhelming. This is the
point where a knowledgeable salesperson is needed.
Getting
around the store – Satisfactory
Out of the above-enumerated factors customers were least content with Home Depot’s layout, clutter, and checkouts. This is the only category in which Lowe’s scored higher. Its store was given a fair mark. Home Depot’s prototypical idea of working warehouse might be at fault. The large area of a store worked fine with constructors who know what material they need and feel comfortable in unstructured- building site-like environment. But the small home improvers feel lost and even more alienated by the unknown surroundings. Since the company now targets a segment of do-it-yourself home improvers this feature might become a major liability.
Customer
Value Map
The
Customer Value Map sums up the position of Home Depot and its main competitors
(Sears, Lowe’s, and Menard’s) on Market Perceived Quality (MPQ) and Market
Perceived Price (MPP). As it
stands, Menard’s products are about the same in price as Home Depot’s
products, however Menard’s products are perceived to be lower in quality
than those of Home Depot. For the
Quality of the products that it carries, Menard’s should not want to
increase the price of its products. A
second option for Menard’s would be to directly attack the giant chain, Home
Depot, by increasing quality. However,
it would be too costly for Menard’s, which has only 135 stores in the
Midwest to directly attack the giant chain Home Depot, which has 850 stores
nationwide. The best possible
scenario for Menard’s would be to lower the price and provide a more
reasonable price for the quality of the products that it carries.
In this way, Menard’s can target the lower market segments.
Lowe’s has a slightly higher MPQ than Home Depot and a much
higher MPP than Home Depot. Lowe’s
could increase its price. However,
this would not only move Lowe’s away from the ideal line, it would be
increasing its price to match that of Sears products, which are much higher in
MPQ. Another option would be for
Lowe’s to increase its quality. In
this way, Lowe’s gets closer to the ideal line.
It would increase quality, while maintaining price.
This would give a much better market perceived value and it would also
mean that Lowe’s is servicing a higher market segment than Home Depot.
The last option for Lowe’s would be to lower its prices and go into
direct competition with Home Depot. This
would, however, be costly for Lowe’s.
Sears
is much higher in MPQ and MPP than Home Depot.
It is servicing the upper market segments.
Sears could decrease its MPP, putting it in more direct competition
with Lowe’s and Home Depot. The
decrease in price would increase the market perceived value of the products.
Another option for Sears would be to increase its MPQ.
This would also increase the market perceived value of the products.
One thing that Sears would most certainly not want to do is increase
its MPP, because it is already the highest on the MPP scale.
Home
Depot for its part, is higher in MPQ than Menard’s but lower in MPQ and MPP
than Sears or Lowe’s. Home
Depot’s MPP is higher than that of Sears and Lowe’s and equal to that of
Menard’s. However, its MPQ is much lower than that of Lowe’s and
Sears. One option for Home Depot
would be to Lower its MPP so that it is in more direct competition with
Menard’s. However, this does
not fit in with the company’s goal to expand and service a larger market.
The best course of action for Home Depot would be to increase its MPQ.
To do this, Home Depot has to differentiate itself from the rest of the
competition.
Differentiation
Strategy
There
are two major aspects of differentiation that Home Depot can work on to be
more competitive with Sears and Lowe’s.
One aspect is product differentiation.
It must increase the quality of the products.
More specifically, it can improve upon the performance quality, the
conformance quality, the durability, the reliability, the repairability and
lastly, the style of the products.
The
second aspect that Home Depot can improve upon to be more competitive, is its
image differentiation. That is,
it must improve the atmosphere of its stores.
Both Lowe’s and Sears scored higher on the customer value factor,
“Getting around the store”. This
indicates that Home Depot’s stores are sometimes very confusing and that it
is difficult for customers to find things and to actually reach the products
on the shelves. Home Depot needs to re-organize its stores so that these are
no longer issues for the customers.
Positioning
Strategy
At this point, Home Depot has a much better price positioning than Sears and Lowe’s do. However, its quality positioning is weaker than that of Sears or Lowe’s. Sears is very well known for its Craftsman tools and Lowe’s has stores that are easy to get around. In order to maintain its lead in the industry, Home Depot needs to provide more of what the customers want. Namely, better service and better quality products. Home Depot must maintain its strong price positioning and improve customer service and product quality. This will give Home Depot a large competitive edge over its competitors.