Home Depot (
) has announced that it is planning to put in place infrastructure
that will enable the same-day delivery of orders. The new systems
will also allow the company to boost its online sales in general
and perhaps capture a chunk of rival, Lowe's' customer base.
Home Depot intends to spend around $300 million on building new
fulfillment centers, a new warehouse management system and a
new material handling system. Apart from providing same-day
delivery, Home Depot also intends to reduce the time it takes to
fulfill online orders in general.
The latest initiative will likely strengthen Home Depot's grip
on the professional contractor segment which accounts for around
35% of its sales and includes those customers who wouldn't mind
paying a small premium to save an extra trip in the middle of a
home improvement job.
We have a
Trefis price estimate of $77 for Home Depot's
, which represents a 2% downside to the current market price.
Our complete analysis for Home Depot's stock
After extensive surveying of the market, Home Depot says that
costs being equal, its customers prefer faster delivery of goods.
When asked to choose between faster delivery and low costs, most
customers display a preference for low cost. However, if the
premium for speed is not too high, they may be willing to pay a
little extra. Therefore, Home Depot is building its fulfillment
centers to meet customer needs by balancing cost and speed.
When people are in the middle of executing a home improvement
job, they find it very inconvenient and annoying to make a trip to
the nearest Home Depot store to source extra lumber, tiles, screws
or other materials. Professional contractors, in particular, want
to complete their tasks in a time-bound manner to allow them to
move to the next job quickly. Such customers may not be averse to
paying a reasonable premium in exchange for faster delivery of
goods which will save them the time and extra effort needed to make
a physical trip.
What Home Depot Is Planning
The home improvement retailer plans to open three new
fulfillment centers in California, Atlanta and Ohio over the next
two years. It wants the shoppers to place orders by 5 pm so that
delivery for these can be initiated the same evening. For orders
placed later than 5 pm, delivery will be initiated the next day.
The aim is to fulfill at least 90% of the orders within two days.
The geographical locations of the fulfillment centers have been
decided in a manner that would allow the company to leverage
its parcel freight carriers' network for its goals.
The new fulfillment centers will range in size from a little
under a million square feet to over 1.5 million square feet. Each
center will have the capability to hold as many as 100,000
Stock Keeping Units (SKUs) to begin with, which may be scaled up in
future. This is huge, considering that a typical Home Depot store
has around 30,000 SKUs.
We think that professional contractors are likely to find Home
Depot's quick delivery service very attractive. While
contractors make up just 3% of Home Depot customers, they are
responsible for 35% of its sales. Therefore, we expect the
initiative to boost Home Depot's online sales considerably. After
attracting new customers in this segment, Home Depot can work on
building long term relationships with them to ensure repeat orders
on a sustained basis. ((
Home Depot Q3 2013 Earnings Conference Call
, Seeking Alpha))
We also think that Home Depot will lead over Lowe's, its closest
competitor in the home improvement market, by virtue of its first
mover advantage in the same-day delivery segment. It may even be
able to poach some of Lowe's existing customers with this
initiative. Apart from using fulfillment centers, Home Depot is
planning to use its existing network of 2,000 brick and mortar
stores to fulfill online orders by integrating them within the
system. If it is successful in doing so, it will have created a
single interconnected retail system that will result in efficiency
gains and higher margins.
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