Last week, home improvement retailer Lowe's (NYSE: LOW) announced it would expand its relatively small tool rental business. A handful of locations already offer this service, but the company now aims to expand this operation nationwide. Locations slated to add tool rentals to the mix will allocate about 4,000 square feet of space for the effort, either by reconfiguring stores' footprints or via new construction.
It's an intuitive move. The company already serves professionals and DIY customers -- many of them may be looking to acquire an expensive tool they need for a project without purchasing a new one. This move allows that to happen, but Lowe's expansion plan isn't entirely about generating revenue from tool rentals and related services. It's about drawing more customers -- and contractors in particular -- to its stores where they're likely to make additional purchases. And it gives the company an opportunity to close a shocking gap.
Image source: Getty Images.
Tool rental is on the way
Lowe's didn't say exactly how many of its roughly 2,000 stores would be adding tool rental service in the foreseeable future or what selection of tools will be offered. The company only said it would be a nationwide rollout -- one store in any given market may be enough.
The actual tool rental business is secondary, though.
The United States' tool rental market is worth a mere $3.7 billion, according to numbers from IBISWorld, which is a fraction of the $80 billion of revenue Lowe's has produced over the the last year. Also, bear in mind Lowe's will only capture a small piece of the relatively small and fragmented rental market that chief rival Home Depot (NYSE: HD) already serves.
That rental market expands when including heavier construction equipment like cranes, bulldozers, highway excavators, and loaders. The American Rental Association puts that market closer to being a $60 billion annual business. If Lowe's rental business is going to look anything like Home Depot's, however, it won't include much of that market. Scissor lifts and mini skid-steer equipment are among the bigger items it offers on a rental basis. Smaller items like floor strippers and demo hammers are the core of Home Depot's offerings. Lowe's version will likely look similar.
So why bother? Because those tool renters need more than just tools. For most pros, they need a lot more than just tools.
It's all about the professional
Various clues support the theory that the tool rental strategy is really about attracting professional tradesmen, and the company has said as much. Senior Vice President of Lowe's Pro Sales and Services Fred Stokes said in the recent press release, "As the new home for Pros, offering tool rental is just another way we are committed to keeping them working. Whether a Pro's tool fails on the job, needs a repair or they're looking to try something new, tool rental will allow them to get back to the jobsite faster, saving them time and money."
The rental venture takes shape, however, after a string of additional developments meant to better serve that customer base. For instance, in 2018, the company overhauled its website aimed at professionals to make it easier for crew members to find and buy the goods they need. The rest of that year and into 2019, Lowe's continued to beef up what it could do for professionals, including dedicated product loaders at stores and drive-through loading areas under canopies. The company even went as far as to unveil JobSIGHT for pros in June, which helps contractors continue to find jobs despite the toll COVID-19 is taking on the economy.
It all follows an uncomfortable but important acknowledgment CEO Marvin Ellison voiced in mid-2018, when he conceded, "I think one of the strategic missteps over the last seven years here is not really understanding what the Pro customer does to the overall productivity of the business."
Ellison has been doing something about it ever since then.
Here's why -- and where -- it helps
The rental market for the tools Lowe's can feasibly offer may be relatively small, but the ancillary opportunity is significant in light of two pieces of information.
First, as Lowe's Executive Vice President of Stores Joe McFarland shared during the fiscal second-quarter call, 70% of professional contractors regularly rent tools. That's a lot of opportunity to also sell them lumber, nails, pipes, drywall, and more while they're at the store.
Second, as big as the nation's contracting and professional home repair/maintenance market may be, this piece of the home improvement industry only accounts for between 20% and 25% of Lowe's total top line. For Home Depot, that figure has been estimated to be nearly half of its sales. If Lowe's can poach a chunk of Home Depot's large base of pro customers, that could translate to outsized growth.
Tool rentals can help, even if it's not yet clear by exactly how much.
10 stocks we like better than Lowe's
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*
David and Tom just revealed what they believe are the ten best stocks for investors to buy right now... and Lowe's wasn't one of them! That's right -- they think these 10 stocks are even better buys.
*Stock Advisor returns as of August 1, 2020
James Brumley has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Home Depot. The Motley Fool recommends Lowe's and recommends the following options: long January 2021 $120 calls on Home Depot and short January 2021 $210 calls on Home Depot. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
