Home Improvement Retailing Industry Analysis

Home Improvement Retailing Industry Analysis

            The home improvement retailing industry consists of large home centers and hardware stores that may provide products and services.  According to Charles Hill and Gareth Jones’ Strategic Management: An integrated approach, Porter’s model for analyzing an industry consists of five components.  These are the risk of entry by potential competitors, the bargaining power of buyers, the bargaining power of suppliers, the threat of substitutes, and the amount of rivalry between established firms in the industry.

            In the home improvement retailing industry the risk of entry by potential competitors is a low force.  The top two companies in the U.S. home improvement retailing industry are The Home Depot and Lowe’s (Hoover’s Inc., 2011).  These companies have established economies of scale through centralized purchasing.  Home Depot and Lowe’s also have strong brand names and each provide specific brand-name products that have established consumer loyalty.  Customer switching costs should not be a major issue in this industry due to the low-cost prices offered by the main competitors in the industry.  The top firms in the industry have absolute cost advantages based on their accrual of experience, supplier relationships, and ease of access to capital (Hoover’s, 2011).  Consequently, the risk of new entrants in the industry is low.

            Rivalry in the home improvement retailing industry is strong.  The industry is dominated by Home Depot and Lowe’s, but it is fragmented due to the high number of competitors and the vast variety of products and services (Sunita, 2010).  Competitors in the industry include electrical, plumbing, and building supply stores.  Other competitors are specialty design stores, discount stores, independent building supply stores, and even other retailers such as Wal-Mart and Sears (Home Depot, 2011). Industry demand is predicted to increase as the large Generation Y enters into the housing market and begins spending on do-it-yourself home projects.  Also, demand is currently increasing as homeowners begin home-improvements which were set aside during the economic slump and the bursting of the housing market bubble.  The increase in demand should moderate the strength of competition in the industry.  However, the industry maintains high fixed costs for capital leases, buildings, land, and employee salaries which heightens the rivalry among competitors for the greatest sales volume (Joint Center for Housing Studies, 2011).  Therefore, rivalry in this industry is strong.

            The threat of substitutes in the home improvement retailing industry may be considered low.  The products and services provided really are not ones that have any close substitutions.  While tea may be considered a substitute for coffee, there is no close substitute for paint, drywall, or other home improvement supplies or services.  The only product which may really be considered a substitute would be a new house.  A substitute for services provided would be more customers choosing to perform their own installations of products by educating themselves on the necessary procedures (Sunita, 2010).  In spite of this, these consumers will most likely still make their product purchases within the industry.  Hence, the threat of substitutes is a low force.

            The bargaining power of suppliers is a low force in the home improvement retailing industry.  Companies such as Home Depot and Lowe’s depend upon products from well-recognized brand-name suppliers.  If these firms are unable to maintain their strategic alliances and exclusive relationships with certain suppliers they might lose their product differentiation which attracts some customers.  In addition, these companies have some reliance upon third-party suppliers.  If these third-party suppliers were to run into financial or regulatory difficulties or for some reason be unable to uphold their side of an agreement there would be a negative impact on the companies in the industry. However, these firms maintain the majority of control over their own supply chains by eliminating the middlemen such as distribution centers.  Also, as a leader in the industry, Home Depot has an online center, workshops, and scorecards for suppliers.  This aids Home Depot in minimizing the control of its suppliers (The Home Depot, 2011).  Lowe’s also utilizes a supplier website for building and strengthening supplier relations (Lowe’s, 2011).  These activities limit supplier bargaining power to a low force.

            The bargaining power of buyers or consumers is a strong force.  There are three types of consumers for the home improvement retailing industry.  There are the do-it-yourself customers, buy-it-yourself customers, and professional contractors.  The number of competitors in the industry is relatively high granting greater bargaining power to the buyers.  Consumer tastes, preferences, and expectations influence consumers’ demands for products and services (The Home Depot, 2011).  This in turn increases the bargaining power of buyers.  Yet, as long as the industry is able to anticipate and properly respond, consumers will have a lower bargaining force.  In turn, this is why businesses in the industry place such a strong emphasis on customer consultation, customer service, consumer experience, and maintaining a strong consumer base.  The bargaining power of consumers is a stout force in the industry.

            Utilizing Porter’s five forces model this analysis illustrates that the home improvement retailing industry’s environment is currently an opportunity for established companies such as Lowe’s and Home Depot.  There is a low threat for new entrants in the industry, substitutes, and bargaining power of suppliers.  While rivalry and consumer bargaining power are strong forces in the industry, the established companies have a competitive advantage based on low-cost structures, economies of scale, and brand loyalty.