Introduction: The Lowes Corporation operates in what is known as the home improvement industry. The home improvement industry is about $300 billion in the US and another $48 billion in Canada. This industry was formed out of a consolidation of the industry of local hardware stores. Local hardware stores still exist and are a small competitor in the home improvement industry. However, the home improvement industry took on a form of its own in the late 1970’s when The Home Depot Corporation made a decision to compete with a large regional chain of hardware stores called Lowes.
Lowes recognized the threat of competition and both Lowes and Home Depot stores begun to invest in rapid expansion and grew their stores to be large big box retailers where customers could come to buy a variety of products ranging from appliances to tools, to paint, lumber and nursery products to improve their home. There have since been a few large regional chains that have been able to penetrate this market including Menards and Rona. This industry is largely confined to North America, with the exception of the recent expansion of Home Depot into China.
Between the big box retailers in this industry, there is little differentiation and the margins are generally pretty low. Intensity of Rivalry: Factors that determine intensity: Highly Intense Factors:
- Competitors are numerous
- Industry growth is slow
- Fixed costs are high
- Products are largely undifferentiated
- Brand loyalty is largely insignificant
- Consumer switching cost is very low
Moderately Intense Factors:
- Two of the largest competitors (Home Depot and Lowe’s) have equal market share and the remainder is consumed by a host of small competitors
Exit barriers are fairly high Interpretation:
- This makes the industry overall less attractive for new entrants
- Profit potential is decreased due to a saturated market, a few large competitors, slow growth and largely undifferentiated products.
Bargaining Power of Buyers:
- Overall, the bargaining power of buyers is quite low in the retail home improvement industry, for the following reasons:
- There are a large number of individual customers of home improvement retailers such as Lowe’s, Home Depot, or local hardware stores, and they individually buy in small quantities.
Therefore, these customers have little leverage to influence the price or the service provided by the store. If customers could band together in a large group (as McDonald’s customers did to protest the use of Styrofoam food packaging) they could potentially force a retailer to alter a policy, because they would then represent a larger piece of the company’s business. This would be a rare occurrence. Building contractors, who buy materials in larger amounts on a wholesale basis, may have some room to negotiate due to the greater quantities purchased.
- Demand for home improvement products is strong, which decreases buyer power. The weak housing market is projected to keep retail home improvement sales strong, as homeowners repair and remodel their houses, rather than sell them (Souers 2012).
- For many products at the home improvement store, there are no real substitutes. If one needs a light switch, a 2×4, or a length of pipe, there is nothing else that will do the job. This serves to decrease buyer power. Switching costs for the customer are low, because they can buy the same or similar things in many stores.
This contributes to more buyer power, as companies will lower prices or improve service if large numbers of customers defect to other stores. Bargaining Power of Suppliers: For many reasons, suppliers in the home improvement industry generally are in a weak position relative to retailers. Our rationale for that conclusion is outlined below. The bargaining power of suppliers in the retail home improvement industry depends on the type of product being supplied. Suppliers of generic commodity goods such as topsoil or shovels have little power over the retailers because retailers can easily switch to another brand and consumers will barely notice.
On the other hand, suppliers of well-known brand name goods (e. g. Scott’s fertilizer or Toro lawnmowers) have a bit more power because customers expect to see these brands in the store. The brand-name suppliers are in a stronger position because they know the retailers need them. For brand-name items, switching costs would be fairly high for the retailer. Supplier power is diminished by the fact that large retailers (Lowe’s, Home Depot) buy in huge volumes. This makes them very important to the suppliers, who are therefore willing to make concessions on price, terms, delivery, etc.
Smaller retailers have less power because they do not buy as much. Suppliers to home improvement stores are unlikely to forward-integrate and form retail stores of their own because of fairly high barriers to entry (high capital requirements, lack of distribution agreements, no economies of scale). Some suppliers might set up on-line retail sales channels for their own products, which would be relatively cheap for them. But these efforts would not reach the huge numbers of customers that big retailers can provide, so they are probably not viable stand-alone options.
The effect of this is lower supplier power. Large retail chains and buying groups have the resources to backward-integrate and indeed they frequently do. Ace Hardware, for example, markets a large number of items under its own brand. It’s true that most of these items are not manufactured by Ace, but the practice of store-branding makes it easy for them to switch suppliers without customers noticing. Moreover, even if a retailer does not backward-integrate, the threat is ever-present.
Home Depot, for example, sitting on $2 billion in cash (Yahoo Finance 2012), could buy almost any of its suppliers. These factors lower the power of suppliers, because they indicate the retailer needs the supplier less than the supplier needs the retailer. * In our estimation, the threat of substitutes is low from the supplier perspective. That is, home improvement retailers cannot find substitutes for the things they buy from suppliers. Retailers can switch from one brand to another, but they cannot sell kerosene lamps to people who want electric ones.
This tends to increase supplier power, but not enough to make a difference in the face of all the other forces that are pushing supplier power down. The Threat of Substitute Products or Services: The threat of substitute products or services to Lowes might appear to be a low risk to the company. Lowes provides products and services that are basic in general terms and relatively unsophisticated. To look at the possible substitute for their products and services, we need to look at the specific items they provide their customers.
Lowes offers building materials, tools, seasonal outdoor items, and appliances for the home. Therefore, their product or service they offer is to help homeowners and general contractors build, repair, or maintain property and homes. For the two primary buyers of Lowes’ products and services, homeowners and general contractors, what propensity or opportunity do they have to substitute?
The following categories depict the treat of substitute products or services:
Relative Price Threat of Substitutes: Low
- Lumber and other building materials are commodities that allow for easy price controls
- Home Improvement stores can buy appliances in large quantities to remain price competitive
- Major Home Improvement stores have shown the ability to keep prices competitive and reducing the threat to substitutes
Switching Cost to Customers: Medium/High
- For the homeowner, the cost of switching is relatively low
- The cost for a general contractor can be higher through lost discounts or other free delivery services provided by Home Improvement stores.
- Switching costs can be positive (savings to them) for some consumers by using the internet.
Building Materials: Low/Medium
- Modular construction of homes will continue to rise in the future
- New construction methods, such as concrete and foam will erode the need for lumber
- The desire for smaller energy efficient homes will reduce and replace demand for building materials
- Smaller local hardware stores are stocking more building materials
- A move to steel 2×4 construction will reduce or replace lumber Tools Used by General
Contractors and Consumers: Medium
- Price issues will cause purchases through internet suppliers
- Through the internet, specialty tools can be obtain quickly
- Steel 2×4 construction will require specialty tools that consumers do not possess
Knowledge Based Services: Medium
- Consumers can use internet to bypass repair answers and use the products recommended by the internet
- Local hardware stores can emphasize their expertise for products and repairs
- New service companies such as playground builders, lawn care, and handyman services can replace consumers relying on Home Improvement stores for products Demographic and Lifestyle
- Condo and apartment demand will replace products purchased by the homeowner
- As our society ages, they will look for low or no maintainance construction methods
Based on the price and the quality of services that Home Improvement stores provide would indicate the treat of substitute products or services is low. Demographics and other knowledge based factors could increase the buyer’s propensity to substitute products and services, however, the threat would remain low for several years. The demographics or knowledge based threat for products and services could move to medium over a longer period of time.
Threat of new Entrants: The threat of new entrants is dependent on the scope in which the home improvement industry is reviewed; if it is reviewed as its global entity, U. S. market, a regional market, or from a city, suburb, or township perspective. If reviewed as a major home center in the U. S. , the threat is low. According to Hoovers. com, “The home center segment of the industry is highly concentrated: the top four companies account for more than 90 percent of the segment revenue. ” However, if the entire home improvement industry is included and specific markets are considered, the threat increases.
Due to the varying scope possibilities, a broad scope will be used initially funneling down to multiple considerations. The following categories depict the treat of new entrants.
Economies of Scale: Low
- Buying and distribution efficiencies due to size and volume
- Long track record and time for refinement Lowes established (1934)
- Refined processes and methods of distribution
- Ability to be low cost provider, a byproduct of volume
Capital Requirements: Low
- New entrants need significant access to or existing capital to stock the shelves and procure buildings.
- Distribution Access and Supplier
- Longevity of relationship
- Existing relationships including: exclusives and rebranded products
- Price breaks due to volume and longevity of relationship
First Mover Advantage: Medium
- Infrastructure is in place for distribution and ability to negotiate new or enforce existing contacts
- Customer base is available to interview for future wants and needs
- Allows Lowes to have First Mover Advantage or Fast Follower with all infrastructures and relationships in place
Switching Costs: High.
- Customers have a wide variety of choices (hardware stores, home improvement retailers, general retailers).
- Retail experience is agnostic to customer without added value creating increased competition.
- Non-Traditional retailers in home improvement space
“The Sneakers”: High
- Expanded offerings that compete with Lowe’s on economies of scale, distribution access and supplier relationships, and ability to react due to infrastructure presence.
- Small Market/Hardware
- Little or no presence outside of large metro and mid-market
- Legal Barriers: Medium
- Import/Export issues
- Standard regulatory fair practice and discrimination type issues
Threat of new entrants is low in regards to large home improvement retailers entering the market. However, this could lead to a false sense of security. The greatest threat of new entrants is from established general retails expanding their product offerings and scope. As Forbes reported in April 2011, “Wal-Mart and Target also cater the home improvement market. ” They have the economies of scale and distribution ability to compete on price and there are no switching costs to the customer. Further, these stores offer a very similar shopping and customer service experience.
These factors increase the threat to moderate. Another consideration is the independent small town local hardware store. Although they are not able to compete on price, they offer a different shopping experience and depending on geographic location, convenience. Entry into a large metro or large town is difficult for new entrant. However, as the population base shrinks independent stores viability increases. Regardless, competing in the small market is not the strategy of the large retailers and entry into a larger market is difficult for a stand-alone or franchise retailers.
Overall threat of entry is moderate. Conclusion: It is clear from this analysis of Porter’s Five Forces of competition that the big players in the retail home improvement industry; Home Depot and Lowes represented 53% consumer preference (Forbes) (who are responsible for the overwhelming majority of sales in this category) are doing well from a competitive standpoint. Although rivalry is quite intense, due primarily to the small number of major competitors and the undifferentiated nature of the goods sold, significant barriers to entry conspire to reduce the threat of new entrants.
A noteworthy exception may be the threat of new entry from other large retailers that currently are not in direct competition with the big DIY retailers. Following the reasoning of Bergen and Peteraf (2002), Home Depot and Lowe’s must not ignore potential competitors who don’t currently compete but who have the resources to enter the home improvement market (see figure below). From Bergen and Peteraf (2002) Walmart? Target? Costco? Indirect competitors Market Commonality Resource Similarity Direct competitors Potential competitors.
Retailers benefit from the low bargaining power of both buyers and sellers, due to the large number of buyers and suppliers compared to the small number of retailers. The threat of substitute products is also fairly low, because building products will always be needed. However, retailers must keep up with changes in building materials (e. g. “green” building products and more steel components). Demographic changes also represent a threat, as America’s aging population may mean fewer people engaging in do-it-yourself home improvement projects.
- “Home Improvement – Wikipedia, the Free Encyclopedia. ” Web. 25 Feb. 2012.
- “Lowe’s Home Improvement | Company Overview. ” Web. 25 Feb. 2012.
- Bargaining Powers: Souers, Michael (2012).
- Sub-industry Review: Home Improvement Retail. NetAdvantage. Retrieved from http://www. netadvantage. standardandpoors. com. weblib. lib. umt. edu:8080/NASApp/NetAdvantage/showSubIndustryReview. do? subindcode=25504030
- Yahoo! Finance (2012). Home Depot Balance Sheet,Oct. 30, 2011. Retrieved from http://finance. yahoo. com/q/bs? s=HD
- Threat of new entry: Hoovers Online: Home Centers & Hardware Stores http://www.hoovers. com/industry/home-centers-hardware-stores/1539-1. html
- Forbes Online, April 5, 2011. Lowe’s Stock Looks too Heavy http://www. forbes. com/sites/greatspeculations/2011/04/05/lowes-stock-looks-too-heavy/
- Bibs Bergen, Mark and Peteraf, Margaret A. (2002). Competitor Identification and Competitor Analysis: A Broad-based Managerial Approach. Managerial and Decision Economics, 23:157-169. Forbes Online, 1/7/2011.
- Lowe’s Has Upside with Rising market Share http://www. forbes. com/sites/greatspeculations/2011/01/07/lowes-has-upside-with-rising-market-shares/#footnote_2_33587