How Home Depot Changed The Home Improvement Industry

How Home Depot Changed The Home Improvement Industry

The name itself tells you everything that you need to know. Home Depot. This is where you can come and get everything you could possibly need for your home improvement in one place. And that’s exactly the brand image that the company wants to portray.

Over decades now, Home Depot has entrenched itself in American culture and has shaped itself into one of those retailers that command the lion’s share of its industry. Before we get into the growth story of Home Depot, let's check out some of their astounding stats
  • $132.1 Billion (USD) in revenue in 2020, an increase 0f $21.9 Billion from 2019
  • 17% market share of the US home improvement market
  • 504,800 employees in 2021, a 21.64% increase from 2020
  • 2,200 stores across 3 countries 

How did it get there?

What made it successful?

What can we learn from its story?

These are some of the questions we’ll answer in this strategy study as we dig into the Home Depot and unpack some of the insights that led it to be the operation it is today. It wasn’t always easy, there were many bumps along the way, but they’ve managed to stay relevant through it all, delivering exceptional value to customers.

Let’s get started.

Home Depot’s Timeline

The story starts back in 1978 when Bernie Marcus and Arthur Blank were fired from their previous job working at another home improvement retailer. They didn’t see it as a bad thing, but instead, it was an opportunity for them to take all they had learned about the business and craft a new concept that would revolutionize the world of at-home improvement. Within a couple of months, they had incorporated a company and launched their first two stores in 1979.

Bernie Marcus and Arthur Blank

Bernie Marcus (left) and Arthur Blank (right) 

They found some early success that emboldened their vision for what a classic home improvement retailer could be. The cultural context at the time played in their favor, and they quickly heard of demand across the country for the offering they were providing in end-to-end home improvement. They took that momentum and went public a few years later, and by the end of 1989, they had 100 operational stores.

In the ‘90s, they spread their wings into Canada and Mexico through some carefully considered acquisitions that brought their operational capabilities to an existing customer base, proving that they could transcend the US borders and provide value in other contexts. They continued to grow and expand from there, opening their 2,000th store in 2005 and growing from strength to strength from then.

Their current global footprint boasts over 2,200 stores across the USA, Puerto Rico, the US Virgin Islands, Guam, Canada, and Mexico. In addition, they have various other investments across Asia and South America. All of this comes together to form a truly global conglomerate that dominates its particular vertical and has become synonymous with the very concept of home improvement.

We have a lot to learn from a company like this and so let’s now look into some of the key strategic decisions they made to get to where they are today.

The Superstore

Home-Depot-Superstore

Home Depot Superstore

When you enter a Home Depot store for the first time, your initial impression will undoubtedly be about its size. This is because home Depot stores are some of the largest you’ll find on the market (based on square footage), with the average size coming in at around 9,755m2. As a result, it feels more like a warehouse than a retail store, which is entirely intentional. The whole idea behind the shopping experience is that you’re going to your own personal warehouse where you can engage meaningfully with the people working there, rather than just a mere retail store.

This is the core principle of what they call the ‘Superstore’. From the very beginning, Home Depot wanted to be the one-stop shop for all home improvement projects. Whether it’s repairs, maintenance, construction, gardening, or something else, you could find everything you wanted under that roof. They never wanted the inventory in stock to be a constraint on what you wanted to build. Instead, you could bring all your plans and find the necessary materials in one go. This seriously cut down the friction in the building process because, as a customer, you never had to waste any time or energy phoning around to find various things. You didn’t have to worry about how you were going to pick it up, or if you were getting a good deal.

The Superstore took all of that away. You could trust that the Home Depot would have what you needed at a very competitive price. So customers would entrust the company with their business, and their market share skyrocketed as a result.

From a business perspective, running stores of this size is incredibly difficult. And in your classic management textbook, they might even try to dissuade you of the notion. Running these Superstores is challenging for a lot of different reasons:

  • Firstly, the rent you pay for land of this size is immense. Especially when you consider that they hoped to plant these stores in highly frequented locations to be as useful as possible to the local communities. As such, your overhead costs to run these stores already puts a lot of pressure on the investment. While they can negotiate good rates now because of their brand status, that wasn’t always the case. Yet, they pushed forward nonetheless and it clearly has paid off.
  • The rent issue only comes into play if you can actually find the right location, and that’s been notoriously difficult over the years. It often took the company to purchase a couple of adjacent plots to merge and create the floor size that they needed to work. This again had big cost implications for each store they planted.
  • From a customer perspective, stores of this size can be pretty overwhelming. If you walk in there for the first time and you don’t know how to navigate it, things can get a bit dicey. There’s nothing that kills a brand experience quite like not being able to find what you’re looking for. The company has mitigated this through a combination of great people and intuitive technology. The people they hired were tasked with managing customer expectations and helping them to navigate the store with help, while various geo-location technology and a mobile app helped individuals to find what they were after.
  • Inventory management gets more and more complex as the footprint increases, and so it puts extra pressure on your administrative capabilities. Bringing goods in, tracking movements, facilitating sales, and all that comes with it requires a lot of your staff and technology. This is especially the case when you’re dealing with large and cumbersome items that the Home Depot stocks and when you have to do all of this in off times so that your customers aren’t affected.

These challenges are there, but Home Depot still decided to go with the enormous stores. Again, this speaks to their belief in the customer promise they want to uphold. They really do mean it when they say that the store has everything. And that branding makes for a loyal customer base that can make up for all the additional resources and effort that go into running these sorts of stores.

Of course, this is not to say that they haven’t worked to mitigate these challenges. In fact, these might hold the key to just why the company has done so well. In their attempts to run warehouses as retail stores, they have learned a lot about operational efficiency, expectation management, technology, buying patterns, and more. The excellence they’ve developed as a result transcends each individual store and provides the granular data that they need as an organization to make the right business decisions for the group.

You can even think of the company itself as a Superstore that stocks Superstores. And we’ll see more of that as we continue talking about the strategy and growth of the organization.

Customer Champions

home depot staffsource

We alluded to it in the point above but one of the biggest competitive advantages that the Home Depot has is its in-store staff. They place a lot of importance on hiring the right people and training them well so that they can act as the perfect ambassadors within the retail buying experience. And all of this is crucial because the attention to detail here helps customers be happy with their purchases.

From the moment a customer walks into a store, the Home Depot employees are trained to greet that person and find out more about why they’re there. They don’t ask about what they’re looking for, but about the project itself. What are they trying to accomplish? What is the vision? What do they need help with?

This framing works wonders because it immediately puts the store associate on the same team as the buyer, allowing them to make suggestions from a place of experience. A retail buyer walking in for the first time might feel a bit apprehensive about the whole experience, so the associate’s job is to put them at ease and point them in the right direction.

The company knows that they’re not just selling items in a store like this. They’re selling knowledge and experience. They want to make sure that the customer feels like they’re making the right decisions, and any potential missteps that they can correct proactively will make that brand bond that much stronger. They want to collaborate with the buyer on their project, rather than just being somewhere to get the materials.

As such, your in-store staff cannot just be salespeople. They need to be well trained and have that passion and vision for home improvement that they can pass on to those they help. It’s about relationship building, and that’s what sets the company apart from its competitors. As a result, they have continued to invest in the people who serve the end-user to become customer champions that enhance the retail experience.

It’s worth thinking about how you can apply this same principle in your own business. Too often, we see salespeople as those who will try to convince customers to buy items. This direct approach leaves a bad taste in the mouth, and even if it was the right decision, it can feel like you’ve been taken advantage of. Instead, you want your customer-facing staff to be genuinely interested in the customer’s problems and helpful even if it doesn’t directly help the bottom line.

This thinking builds trust and it creates the sort of business that you can be proud of. When you are focused on being a customer champion, the entire interaction feels more authentic and builds rapport that simply cannot be manufactured.

It’s also worth mentioning a key ancillary benefit that comes with this paradigm. When you’re meeting customers where they are striving to find out about their objectives before you try and sell them something, you have the opportunity to collect tremendously valuable market research that you can then use to shape the future of your company. When you engage with customers meaningfully, you get to hear their problems as stated by them, which is really useful. If you are able to utilize that information productively, you can continue to fine-tune your offering over time, adapting to what you’re seeing on the ground.

Keeping this ethos as you scale is difficult, but Home Depot has shown that it’s possible with the right strategic mission, hiring procedures, and attention to detail.

The Transition to eCommerce

You’d be forgiven for thinking that a giant hardware store like Home Depot would struggle to transition into the new digital ecosystem where online shopping is slowly starting to dwarf in-person retail. But you’d be wrong. As a company, they’ve continually displayed their ability to adapt and adjust to changing circumstances and this has never been clearer than with the eCommerce revolution.

As more and more consumers began to trust the concept of online shopping and started to prefer it, Home Depot had to figure out how they would participate. They have invested billions of dollars into a countrywide retail operation that was purely brick and mortar. The products that they sell were not the same fast-moving consumer goods that you would typically associate with online shopping. But they knew that they had to be a part of it or they would risk becoming irrelevant.

After much consideration, they decided that the best option for them would be to go with a hybrid approach. They called this the ‘One Home Depot’ strategy and the idea was that they would create a fully interconnected shopping experience that blended the digital and physical aspects together into one process that was as intuitive and easy to use as possible. Customers would be able to search through the entire catalog on an online portal and place their order as required, before picking up the items in person from the store of their choice.

This mix of online shopping and in-person pickups became an incredibly popular shopping choice and it continues to grow even today. In 2019, the number of orders that were placed online and then picked up went past the 50% mark and that shows just how much this has changed their business. The modern stores act even more like warehouses today and your online orders are picked and ready for you to collect when you arrive.

Getting this right is not an easy thing. It’s one thing to manage the inventory in a retail store when you’re dealing with transactions in real-time. It’s a whole different ball game when you have to be able to set items aside and store them efficiently for pickups, while you’re still delivering the same high quality of in-store shopping at the same time. It takes an exceptional level of control over your technology and your quality control to make that seamless.

But that’s what they’ve been able to accomplish. The online ordering process feels like magic and it’s a testament to how the company understands its customers and is continually reconfiguring the value proposition to match what they see in the market. They now rake in over $10bn worth of eCommerce sales every year, which continues to grow quarter on quarter. This really does feel like the future of this business.

Here are some of the key innovations that they brought to the game in order to make this digital and physical integration work:

  • In order to bring the digital experience into the store, they started to install digital signs in specific product areas that would display ratings, reviews, and other information from the online portal that could help customers make better decisions. This provided the social proof that is so crucial with eCommerce and makes for much stronger retail trust.
  • They integrated a digital product locator into their app so that a customer coming to the store could be led directly to the items they were looking for without wasting time. It was a GPS for the store, essentially, and it helped to make the physical experience just as convenient and frictionless as the online one. This functionality was built directly into the shopping cart function as well so that you could plan your shopping list in advance and then be given the perfect route to pick up just what you needed.
  • They started installing pick-up lockers that customers could utilize if the items they had purchased online were small enough to fit inside a locker. This helped drastically reduce the wasted space and resources holding smaller items and made self-service a legitimate way to access those things you had bought.

  • In one of the more exciting innovations, they started to bring augmented reality into their mobile app in very interesting ways. The key idea was that you could take your phone and see what a particular piece of furniture or appliance would look like in your specific space before you bought it. By mapping the 3D image into the real world in front of you, you could make better purchasing decisions from home without having to imagine what something would look like while you are standing in the store. This is still in the early stages of its development but this seems to be a natural next step for the app and could unlock a whole new business model as it starts to gather steam.

  • Staying on a similar train of thought, the company also has integrated visual search functionality into the app which allows you to take a picture of something that you like (say a table, for example) and the app will use artificial intelligence to detect what that item is and then help direct you to the right sections on the Home Depot catalog. This might feel like a gimmick at this stage, but you can imagine a bunch of fascinating add-ons that you can layer on top of this as the technology continues to improve. It’s just another example of how the entire eCommerce value chain can be disrupted when you consider what is possible with these new developments.

home depot mobilesource

All of these changes represent the carefully considered hybrid shopping experience that the company is chasing. They could have easily done what everyone else is doing and just made their eCommerce store an online version of their product catalog. But they went above and beyond that, giving a lot of thought to the overall buying experience and the unique characteristics of their own target market. It’s because of this strategy that they’ve managed to build one of the biggest eCommerce stores in the world – even as a home improvement store.

The key takeaway is that you shouldn’t be needlessly jumping on a trend just because it dominates the headlines and you think its important. At every step of the way, you should be holding the customer experience front and center, delivering improvements that are going to matter to your core audience. That is how real innovation is done.

eCommerce is obviously a very big deal and every company must wrestle with what it means for them. But suppose you can take an objective view of your organization and be creative with implementing an online strategy. In that case, you might just find that you can leverage your strengths and create a unique experience that is more than just a Shopify account. You can craft new hybrid approaches that acknowledge the changing market conditions without throwing the baby out with the bathwater.

Acquisitions for Growth

Home Depot’s strategy has always been to stock a vast array of different items so that you can have everything under one roof. As they’ve done so, they have had a front-row seat to the developments when it comes to home improvement items and they have the sales data behind the scenes to understand what is most valuable from a business perspective. This information is incredibly valuable because they have a natural opportunity to make acquisition moves that can supercharge their own bottom-line growth.

They’ve never been one to shy away from these sorts of deals and throughout the past few decades, they have acquired numerous brands that they thought would be good additions to the Home Depot stable. They already controlled the distribution and understood the customer demand, so it made a lot of sense to acquire those companies and integrate them into the overall organizational structure because of the operational synergies they could unlock.

These assets then continue to compound in value over time and they become tied into Home Depot’s value proposition. It’s one of the cleaner M&A strategies that you’ll see because the customer often won’t notice anything different. All the changes are completely behind the curtain and the company can improve its margins on these items once the investment has been paid back.

This is in stark contrast to the majority of M&A deals which tend to deliver much less than initially promised. In most cases, you’re trying to combine two disparate companies into one and you can run into a wide range of different clashes because of it. The Home Depot has managed to be very active in the space without having to deal with these issues because they controlled the end distribution. Each deal was simply throwing more fuel on the fire and it talks to the value of being the ‘everything’ store.

When you are looking for growth in your business, you should only consider an acquisition if you are confident that the integration will be smooth and aligned. Whenever you’re trying to force two companies together for the sake of extra size, you’re going to find yourself in trouble. There needs to be proper alignment when it comes to branding, customers, and operations – so that you can unlock the value that you think is there. Without that, you’ll find that your acquisitions can very easily fall flat.

Of course, this advice is easy to give and much harder to hear because there is an adrenaline rush that comes with these sorts of deals. Once you have an idea in your mind and you’re excited about the potential, it is very easy to let things run away from you and you can find yourself looking for the proof that’s going to back up your initial decision while ignoring key data that might contradict you. You need to push against this tendency and give yourself time and space to think clearly.

Strong acquisitions are much rarer than most people think and so you need to be patient. Pursuing growth for its own sake is not a viable long-term strategy, so make sure that as you plot your path towards world domination, you maintain a healthy skepticism as to what a merger can do for you.

Integration with Contractors

In much the same way that the salespeople were encouraged to be solution-focused with their customers, Home Depot also stands out in the way that they bring independent contractors into the fray. Not all of their customers want to DIY their project and for those who wanted professional help – the company would be able to provide vetted professionals that could help.

Now, this is not unique with hardware stores, of course. There has always been an important connection between the retailers and the professionals who would undertake a lot of the physical work – but what Home Depot did differently was to take much more accountability for how these transactions and projects happened.

They understood that they were selling the whole package and the job that the contractor did directly bears how they were perceived in the eyes of the customer. If the customer was disappointed, they could leave for another competitor even though Home Depot had no real control over the contractor’s performance. Their items were only as valuable as the finished product that ended up in customers’ homes.

In order to wrestle back some control over this process, Home Depot made some significant investments into developing sophisticated screening procedures to verify the skills of their independent contractors and ensure that they would deliver the sort of quality that the company could stand behind. This means that they can offer a varied group of contractors for every project you can imagine, but the customer can trust that there has been some quality control performed that can give them some comfort.

If we extrapolate that to a more general principle we should learn that your accountability doesn’t just stop with your specific part of the value chain. As companies, we should always be seeking to deliver integrated solutions and if we are partnering with other service providers to make that happen, we should be very intentional with how we do that. You should always understand the entire customer journey including those pieces that don’t involve you because you can pick up insights that help to maximize engagement and deliver more value over the long term.

We tend to understand this concept when we talk about vertical integration specifically because our efforts are directed toward this way of thinking. When you’re purchasing a piece of a value chain to integrate it under your brand, you will undoubtedly treat it with more care because you directly influence how that new asset impacts the lives of your customers.

But suppose you can also realize the softer influence you have over surrounding stakeholders and partners. In that case, you can make a serious dent in some of your customer’s main problems – which helps to entrench you within the value chain. Every company your customers deal with on the way to you or after buying from you is key contributors to the end result. The holistic customer journey deserves regular consideration. If you can map out the entire value chain and look around for these opportunities wherever possible, you might be surprised by what you find. With a little bit of social engineering and some relationship building, you could release a bottleneck downstream that completely changes the game for your organization.

Soft power is incredibly underrated because it’s not as tangible as its counterparts. But the best operators understand how to leverage it and use it for their benefit. Don’t miss the forest for the trees, as they say. Pay attention to what’s happening around you and your influence can scale with your company.

Inventory Management on the Edge

home depot inventory management

source

It goes without saying that in order to get to the scale that Home Depot has achieved, you need to have a good grasp of your inventory at all times. The systems and technology that lies behind your operations need to be sufficiently sophisticated so that you can make the right purchasing decisions and adapt your warehousing for changing circumstances as they arise. This is even more important when your stores themselves are essentially warehouses as well. It’s table stakes that everything is carefully tracked and you can tap into that data whenever needed.

Home Depot went above and beyond here to make that data available to their customers in real-time. When you go onto the company app and you look for specific items, they can pick up your location and identify the live stock levels in any stores close to you. This inventory analysis pulls information from the main operating systems and it gives customers a good sense as to whether they’ll be able to get what they need.

This sort of strategy can be risky because it opens you up to potential embarrassment and reputational damage if you aren’t able to meet your own standards. Every customer essentially has your real-time inventory levels at their fingertips and you can find that you lose the trust of customers if you aren’t able to fulfill their expectations.

But assuming that you trust your own systems and you’re confident that you can meet the needs of your target market, it makes for a much more authentic shopping experience when you can see into the business more directly. It emphasizes once again that Home Depot sees you as a partner rather than a customer and it allows for more effective self-service on a mass scale.

Internally, it can also save you a lot of time and resources in terms of customer service and sales interactions because you can surface relevant information to customers without them having to call into a centralized point of call. This frees up resources to spend on the higher value customer service, rather than just information recall or administration.

This functionality is built seamlessly into the app and once you use it, you’ll wonder how you ever got by without it. Yet, it’s just one example of how the Home Depot app has revolutionized how customers interact with the company. By giving them more information, you build a relationship of trust and avoid some nasty confrontations that can happen when the store that has ‘everything’ is out of stock.

Increased transparency is a key trend that we’re seeing with a lot of modern companies as customers demand experiences that are pure and devoid of bad incentives. There is a certain social cache that comes with being open and honest – so it’s worth considering whether there are any ways that you can use a similar strategy to give your customers more self-service capability and hold yourself accountable to certain values as an organization. It might not be in the world of inventory, but if you give some thought to your specific business, is there a way to share data on the edge that can help enhance the customer experience? If there is, then some creative brainstorming might be in order because it could just transform the way you interact with your most important customers.

Recap

We hope that by digging through the strategic wizardry of Home Depot, you’ve been able to pull some ideas and concepts that could apply to your unique business and the journey that it’s on. It seems that the market, in general, seems to be quite pessimistic about the future of retail but when you look at how this company is adapting and adjusting, it shows that these concerns are often overblown.

Even with the advent of technology changing the way that customers go through the buying process, there are still plenty of ways for a company to add value if they can go back to first principles and look for the opportunities to innovate in the way that they do things. We all must do this because of the speed of change if we are to remain relevant over the long term.

But regardless of what the medium is, the core values and ethos of a company like Home Depot remain strong and informs the way that the corporation grows. If you can harness just a fraction of the staying power and self-awareness that the world’s largest home improvement store displays, then you’ll be off to the races.

Be a customer champion. That’s what it comes down to at the end of the day.

Everything after that is a bonus.

You might also like these reports.

Please subscribe to continue reading this study

Subscribe to Strategy Factory to see the best strategy content!