A Comparison of the Giants

Bob Vereen investigates the differences – and similarities – between the two giants of American retailing, Home Depot and Lowes

Home Depot and Lowes, the two largest home centre chains in the world, and the industry leaders in the United States, are battling head-to-head in America. Lowes is invading the major metro markets that Home Depot has dominated for several decades, while Depot is beginning to open stores in smaller stand-alone markets, once the primary growth vehicle for Lowes.

Home Depot stores feature wide aisles and easy-to-find categories

Both companies are publicly owned, and thus must report annually to stockholders. A close analytical look at the numbers reported reveals some remarkable similarities between the two (to be expected), and some surprising differences.

The National Retail Hardware Association (NRHA) annually conducts a ‘Cost of Doing Business’ survey for the industry, and also provides statistics on a number of smaller, privately-owned home centres which contribute data for the CODB report. These can be used to compare figures against the giants.

The spreadsheet developed for this story contains major operational figures for both Depot and Lowes, as well as for the 121 smaller home centres which reported to NRHA. It also contains a fill-in column, so readers can insert as many of their own statistics as might be available, for direct comparison.

But first, let’s look beyond the statistics!
While Depot still is more than twice the size of Lowes, during the last several years Lowes has been growing at a faster pace than Depot — 18% compared with 11% in 2003. What isn’t revealed in the raw numbers, is the fact that Lowes is achieving this impressive double-digit growth just by opening new stores and improving the performance of existing units; whereas Depot has been acquiring other businesses and expanding into niche markets — gardening, professional markets, etc. In fact, during 2003, Lowes sold its 26 contractor yards in order to focus on its main Lowes strategy. Both, however, are also concentrating on developing their installed sales, recognizing that some tasks are too complicated for today’s consumer or that time-pressed, double-income families possess the income to be able to afford to “have it done for them”— the “buy-it but don’t do it” segment of the market.

Design Place, and the availability of major appliances are key to Depot attracting new customers.

In their annual reports, both also stress a new emphasis on special-order sales, particularly important for high-end items and to build sales in smaller stores, which both chains are opening in smaller cities and towns. Lowes began operating in smaller markets. It continues to expand in those markets with a 94,000 sq.ft prototype store, supplemented by a 30,000sq.ft-plus garden centre, but its main focus is on metro markets against Depot. Depot, having largely saturated metro markets and ignored smaller markets, is quietly opening stores in those markets — cities with a population as small as 15,000 people, but with a surrounding trade territory of approximately 60,000 people.

With its addition of major appliances and its upgraded “Design Place” concept, Depot now feels it can attract customers seeking a wider range of products, and thus can build the volume in small markets to support a big store.

Depot says in its annual report that its new stores in existing metro markets cannibalize 17% of sales from existing stores, which makes it even more important that Depot find a way to target smaller markets for future growth. Depot continues on an aggressive growth plan, with 175 stores scheduled to be opened in 2004, contrasted with 140 for Lowes.

One major difference between the two chains is Lowes’ reliance on its own distribution centres, whereas Depot largely has merchandise shipped from vendors directly to its individual stores. Lowes operates nine distribution centres, and has one more scheduled for completion in 2004 and another in 2005. It also operates nine flatbed distribution centres. The only distribution centre Depot mentions is for redistributing its imported merchandise. Both chains report, however, that they are importing more merchandise, and using these lower-cost products to improve their overall margins.

Lowes also reports using product line reviews, and sometimes vendor changes, to further increase its gross margins. Another difference is that Depot is touting its use of self-checkouts, whereas Lowes does not mention any such move. Depot reports that it had self-checkouts in nearly 800 stores at the end of 2003, which handled about one-third of sales in those stores. With the reduced need for checkout operators, more staff are being put on the sales floor to improve customer service.

Now, let’s compare their statistics. Forgetting the huge sales volume of each of these two chains, other statistics in the accompanying spreadsheet can be compared with readers’ own data.

Where Lowes Excells

The main focus of Lowes’ marketing strategy is on major metro markets
Lowes achieved higher sales and earnings gains than Depot in 2003. Its average sale is also considerably greater than Depot’s, as is its comparable-store sales gains. Over the past three years, Lowes earnings gains also exceeded those of Depot. Lowes’ return on equity at 22.6% exceeds Depot’s 20.4%.

Where Depot Excells
Depot’s average sales per store are considerably greater than Lowes: $49.8 million compared with $32.4 million, reflected in sales-per-sq.ft. of $370.87 to $209.00, compensating for the fact that Lowes stores are slightly larger on average (114,000 sq.ft. to 107,200.) Depot also outperforms Lowes in managing its inventory, with a higher sales-to-inventory ratio and GMROI (Gross Margin Return On Inventory.) Depot’s sales per employee are slightly above those of Lowes, too.

Now it’s time to put your own figures into the spreadsheet.

MEASUREMENT HOME DEPOT LOWES YOUR FIRM IND. AVG
Total sales in 2003 $64.8 bill. $30.8 bill __________ $484 million
Sales gain in 2003 11% 18% __________ 2.7%
Earnings gain in 2003 21% 27% __________
Gross margin 31.80% 31.15% __________ 30.20%
Pre-tax profit 10.60% 10.70% __________ 2.60%
Average sale $51.15 $59.21 __________ $44
Sales/sq. ft $370.87 $209 __________ $334
Sales per store $49.8 mill $32.4 mill. __________ $3.4 million
Number of stores 1,707 952 __________ 121
Sales to Inventory ratio 7.2 times 6.7 times __________ 5.1 times
Comp store sales gain 3.80% 6.70% __________
GMROI* 229 208 __________ 153.3
Sales per employee $216,800 $209,500 __________ $205,380
Total square footage 183 million 109 million __________ 4.84 million
Average store size/sq. ft 107,200 114,400 __________ 12,000
Return on equity 20.40% 22.60% __________ 12.50%
Number of stores opened in 04 175 130 __________
New stores planned in 05 175 140 __________
3-year sales gain 42% 42% __________
3-year earnings gain 71% 83% __________
Estimated market share 11% 5% __________

Editor’s Note: Lowes was founded in 1946 in North Wilkesboro, North Carolina, and Home Depot was founded in Atlanta, Georgia, in 1978.