How home centers continue to encroach on retailers’ turf
January 22/29, 2018: Volume 33, Issue 16
By Reginald Tucker
For all the talk that the nation’s largest home centers—Home Depot and Lowe’s, specifically—are lagging behind specialty retailers when it comes to personalized service, professional installation and higher quality goods, there’s no denying the big boxes are continuing to nip more share of the flooring space.
Among the main reasons industry observers cite: Home centers draw a much larger captive audience as many consumers who shop the big boxes for materials for other renovation projects (i.e., kitchen and bathroom makeovers) often select their flooring at the same store; big boxes often provide less expensive products as a result of their purchasing power, size and scale—all of which translates into better deals for the consumer; and home centers offer attractive financing terms, a plus for consumers who might not have the disposable income outright to take on expensive projects.
In specialty retailers’ defense, many small business owners—many of whom already operate on razor-thin margins—simply can’t compete toe-to-toe with the big boxes on price alone. And for some, that’s just fine. “We try not to compete with box stores on any product,” said Char Smith, manager of Gallagher’s Flooring, Grand Junction, Colo. “For the most part, they are selling to people who are only interested in a price point and have no idea or concern regarding quality of product. We have chosen to deal with suppliers that produce quality products.”
Other specialty dealers follow a similar strategy, refusing to sell products that retail at the lower end of the spectrum. For one, dealers say, they’ll never win the price game. Second, marketing entry-level products negatively impacts the bottom line, even if the strategy is designed to generate higher foot traffic. “I simply don’t sell the comparable products to the home centers,” said Fred Wee, owner of Interiors and Textiles, Palo Alto, Calif. Wee is already predisposed to higher end, luxury flooring goods (he sells more wool than nylon-based carpet products, for example). “Take a category like laminates; for the amount of time my installers spend laying down the floor, working with a $1.99-per-square-foot product just isn’t worth their time. The laminate floors we sell are nowhere near that price.”
Specialty retailers aren’t the only ones dealing with this issue. Channel competition and conflict, as it turns out, is a much bigger issue for the manufacturers who simply can’t afford to walk away from the buying power that home centers represent. At a recent NAFCD conference, ITR Economics president Brian Beaulieu, shared statistics showing Lowe’s sales steadily climbing over the years, reaching roughly $67.9 billion in 2017. That’s up from roughly $30 billion in 2005.
So for suppliers, the interim solution is to develop products, tiers and even sub-brands designed to ease this channel conflict. Generally speaking, manufacturers strive to offer higher-end, higher-margin products that help dealers make more money. “We have always tried to create differentiated products in terms of style and performance so those products can compete with one another in the marketplace,” said Roger Farabee, senior vice president, laminate and hardwood, Mohawk. “So far that strategy has worked pretty well. We’ve not only been able to do that with respect to the quality of the product itself but also with respect to our brands that have meaning to the consumer and the trade. It is a challenge, but that’s why we have so many products in the pipeline.”
Other major suppliers, Armstrong included, are taking a similar approach. “We are committed to continued innovations in performance and design to not only compete but also give specialty retailers more products that can’t be shopped at the big boxes,” said Michael Bell, general manager, hardwood.
Higher and higher
While this approach helps keep the peace, it doesn’t overshadow the fact that home center revenues are continuing to grow at a respectable clip. According to a recent CNBC report, Home Depot’s same-store sales blew past Wall Street estimates in the third quarter of 2017—the latest period for which figures are available. While this was largely due to repairs required after devastating hurricanes and wildfires in certain parts of the country (revenue from hurricanes Harvey and Irma added roughly $282 million to the sales total for the third quarter), it points to a sobering trend: shoppers on average have also been spending more across Home Depot stores.
During its fiscal third quarter, Home Depot also said it saw stronger sales in popular categories such as appliances, vinyl flooring and carpet. Big-ticket sales, or those transactions over $900, were up 12%. Plus, Home Depot also saw more DIY shoppers flocking to its stores.
“Home Depot has created a proposition that ensures it is the go-to destination online and is successfully defending its business from the rise of Amazon and other Internet players,” said Neil Saunders, retail managing director, GlobalData. “Favorable economic tailwinds, especially from the housing market, [are likely] to continue [well into] 2018.”
A growing footprint
Not only are the revenues at home centers growing, but the big box leaders are also increasing their respective footprints. According to the Statistics Portal, Home Depot operates 2,274 stores worldwide, while Lowe’s ran 1,857 units. Both of these companies have seen an increase in their number of stores over the last few years as customers carried out about more than 1.5 billion transactions last year, with net sales exceeding $90 billion.
On the whole, the average amount spent by consumers on home improvement products has seen a year-on-year increase. In 2016, the average amount consumers spent at Home Depot and Lowe’s exceeded $60 billion and $66 billion, respectively. In a survey carried out by the National Retail Federation, Home Depot ranked fourth in the leading 100 American retailers in 2015 with estimated retail sales of about $79.3 billion that year. In this same survey, Lowe’s ranked 10th. In a review of the brand value of the 20 most valuable brands in the world, Home Depot ranked third with an estimated brand value of $36.44 billion while Lowe’s was seventh with a brand value of about $13 billion.
Ultimately, retailers say they are going to stick to their guns and not cave in to the price pressures. “In coming to my store, the customer is dealing with staff that has been trained in all the products we carry and has the expertise in proper installation and problem solving,” Gallagher’s Flooring Smith said. “We believe that is worth its weight in gold when it comes to customers who are looking for straightforward answers regarding our products’ benefits and limitations.”