When the housing market boomed, so did construction companies and building material suppliers. Every aspect of construction had an increase in demand from development companies looking for a large supply of building materials, and from a large consumer group of new homeowners. As a result, a company such as The Home Depot was able to capitalize from the success of the construction and home improvement markets. Unfortunately, the downturn in the economy is truly affecting Home Depot’s revenue. However, evaluating market conditions and market trends will help provide the company with the needed data to help predict the future market of Home Depot and suggestions to consider in order to overcome the economic challenges of the upcoming months.
The Home Depot, Inc., which was founded in 1978, is the world’s largest home improvement store that operates 2,274 stores throughout North America, Puerto Rico, Mexico, China, and Canada. The company is the second largest retailer in the United States following Wal-Mart, and has approximately 300,000 employees as of the last quarter in 2008 (The Home Depot, Inc., 2009).
The company supplies almost 45,000 items which are not limited to but include: lumber, floor and wall coverings, tools, paint, appliances, fixtures and almost every necessary item for home improvement.
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The company marketed itself to the large do-it-yourself consumer group and created the slogan, “You can do it. We can help.”Although The Home Depot dominates the home improvement market it is far from a monopoly, it is however structured as an oligopolistic firm. As an oligopoly market structure, The Home Depot has very few sellers with similar or identical products, but has numerous amounts of buyers. With competitors such as, Tru Value, Orchard Supply Hardware (OSH), Ace Hardware, and its largest competitor, Lowe’s, The Home Depot must take into account the actions of its competitors.
During its initial stages, The Home Depot dominated the do-it-yourself, home improvement market. Although Home Depot entered the oligopoly market structure where there were existing companies offering home improvement remedies, such as Wal-Mart, K Mart, and OSH, none of these companies offered do-it-yourself remedies at such a large scale. With Home Depot’s number one contender being Lowe’s, offering comparable prices with the same do-it-yourself warehouse environment, Home Depot is still in the lead as the largest home improvement retailer in the US, even with the current economic crisis.
Current Conditions and Market TrendsWhen the economy is in a downturn, indicators such as the unemployment rate, number of new building permits, money supply, and mortgage interest rates provide a representation of what economic issues businesses may face in the upcoming months. Therefore, monitoring such indicators will help determine the future market conditions and help identify the necessary actions to Home Depot should make to maximize its profits.
It is a well known that currently the United States is in a recession, one that has been going on for over a year now, without any signs of letting up. As the leader of the free world, when our nation faces economic troubles, the repercussions are not only widespread, but also felt around the globe. No company in the country is immune to the effects of this recession, and Home Depot is no exception to this rule. Fewer people are in the market to buy houses and cutting back on expenditures such as remodeling their homes or making improvements, thus cutting into the sales of the company. As the recession and softer U.S. housing market eat into the sales at Home Depot, their per-share profit has fallen greatly during this past year.
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The loss that Home Depot was burdened with was about three cents per share, totaling to a $54 million loss by their fourth quarter (Iconocast, 2009).
This comes as no surprise as the outlook of our nation’s gross domestic product (GDP) appears to be on a downward trend, as is evidenced by the GDP graph (economagic.com).
This can only have further negative impacts upon the growth of our industry, and more harmful effects to come. Another point to consider is the effects of a loss of workers in all non-farming positions, illustrated by the total non-farm chart (economagic.com).
Without doubt, this has affected the company, as Home Depot is also cutting 7,000 jobs as it shutters its Expo Design Center chain and trims corporate costs (Iconocast, 2009).
With the nation in a recession, the prudent approach for most companies would be to attempt a reduction of their inventories through sales in order to generate cash before trying to increase inventory once more. In fact, this appears to be the very situation in the U.S. at present time, as evidenced by the Manufacturing Woods Product chart (economagic.com).
The chart clearly displays a downward trend of keeping large amounts of lumber in stock at outlets, which cater to home repairs and improvement, which will certainly parallel similar reductions in inventory at our company of Home Depot. One might even say that such reduction of inventories is a direct result of a reduction in industrial goods produced, as shown in the Gross Value of Products graph (economagic.com).
The graph provides proof that along with the recession, production of goods is a ten year low, which will only bring further inventory reduction about at Home Depot as it becomes more difficult to restock, if it is capable of generating the capital needed to restock at all.
A loss of workers coupled with a lack of funds has more than enough potential to cripple a company’s ability to manufacture goods, and even more so during a recession. Home Depot may feel these type of effects from such negative outcomes, as is foreshadowed by the Industrial Production chart (economagic.com).
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With such a sharp downward trend occurring in productivity, Home Depot’s inventories will doubtless be reduced quickly, with little means to replenish its supplies. With less material to sell, major changes would have to take place in Home Depot for it to stay afloat, changes that will affect its cost structure. A major change that took place recently within Home Depot was their cutting of some seven thousand jobs. Home Depot has gone on record as saying the job cuts are intended “to better align the company’s cost structure with the current economic environment.” Whether or not this reduction of workers will have the effect desired by Home Depot remains to be seen, but those fortunate enough to remain in the company must feel as though their jobs are threatened as well, if not with direct layoffs, then with cuts to wages and benefits. From the Employment level chart (economagic.com), we see there is a strong decline in the number of jobs in non-agriculture industries, but also that some of this loss could possibly come from the positions no longer offering benefits in order to save the company some funds, or that the position no longer pays what it used to, as the company had reduced it.
Either way, some workers will feel they are worth more, or that they can still find positions elsewhere paying better than their now reduced job, and so will quit. Alternatively, the way of doing things here in the U.S. is not geared toward us taking cuts in pay; we are always looking for a raise, and so find it a bitter pill when we take a loss. These people may not want to take reduced pay when they just purchased a new house due to the market bringing prices of homes to record lows. Rental homes are at low points unheard of for years, as seen in the real estate and rental and leasing graph (economagic.com).
Renting at $1200 per month is throwing money away when you may get a loan and make mortgage payments which are less than renting the same type of house.
There are several indicators why businesses much like Home Depot are suffering from the overly stated and most evident economic recession; one of them being the Consumer Confidence level which basically is the domino effect felt by many Americans due to the unemployment rate in the United States. The Director of The Conference Board Consumer Research Center (CBCRC) stated that the “Consumer Confidence was relatively unchanged in March, after reaching an all time low in February. The situation at hand according to the chart below (economagic.com) is reference to the overall state of the economy which remains fragile and that more job losses are on the horizon.
... demand. The price elasticity graph (economagic.com) illustrates the predicament of many businesses today (University of Aberdeen, 2009). Home Depot ... competitors and the recent decrease in consumer confidence, we determined that The Home Depot supplies thousands of elastic products. ... took place recently within Home Depot was their cutting of some seven thousand jobs. Home Depot has gone on record ...
Nervousness about the outlook for the economy, the labor market, and earnings continues to weigh heavily on consumers’ attitudes. Looking ahead, consumers remain extremely distrustful about the short-term future and do not predict a turnaround in economic conditions over the coming months. Consumers’ short-term outlook was moderately less negative for the month of March. A report released from the CBCRC reflects an increase to 28.9 from 27.3 in February. Still, it is predicted that consumers expect business conditions to worsen over the next six months.
Another indicator of this recession is the unemployment rate that is at its highest level in two decades (U.S. Confidence Index, 2009).
The Jobs Index dropped to 40.8, down from 42.3 in February. The decline in American’s job security confidence is led by real experiences in job loss. Statistics have determined that a majority of the public knows someone who has lost his or her job within his or her close circle. According the U.S. Confidence Consumer Index, nearly two thirds (64%) of Americans have lost their jobs in the past six months due to the economy, up from 62% last month.
Unemployment increased sharply and the climb in unemployment, from a cycle low of 4.4% to 5.5%, is a strong recession indicator. Another concern is the YoY (year over year) change in employment is close to zero (the economy has added only 236 thousand jobs in the last year), also suggesting a recession (economagic.com).
Provided stats is an indication of why Home Depot is facing a huge deficit in revenue. Thus, having to release 7,000 associates was inevitable.
Some people say, “There is light and the end of the tunnel”; although unemployment is on the rise, consumer spending is on the upswing. United States consumers continued the increased spending pattern that began January 2009 into February 2009, according to the Bureau of Economic Analysis (BEA).
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The bureau reports that consumers spent a bit more in February than they spent in January even as personal income and disposable income was on the decline which is referenced in the following graphs (economagic.com) The bureau further reports that while any increase in personal consumption expenditures by consumers is a positive for U.S. retailers, this is tempered by declines in personal and disposable personal income.
Retail sales have seen a dramatic decrease in the last year. The increasingly worried and fragile economy has led to some apprehensive consumers. Disposable income has decreased as stated below and is creating the shift in supply and demand. The changes in retail sales are evident in the chart (economagic.com) where sales had been steadily rising until a dramatic change that occurred approximately mid 2008.
As indicated by the US Retail Sales graph of hardware stores (economagic.com), there seems to be an almost exact similarity to the graph of US retail sales figures, to that of the Hardware stores industry. The Home Depot’s financial statements, has shown a decrease in net sales by 2.53% from 2005 and 10.84% from 2007 (The Home Depot, 2009).
The price elasticity of demand is extremely important to any business, especially to a retail company such as The Home Depot. Determining how changing the price on specific products will affect the demand is crucial, especially in the current economy. Due to the amount of retail competitors and the recent decrease in consumer confidence, we determined that The Home Depot supplies thousands of elastic products. Decreasing the price on items such as appliances, building materials, fixtures, and flooring would most likely increase the demand. Looking into one specific item(s) such as appliances will give you a better understanding on the current market and elasticity of the product (economagic.com).
Unfortunately, the current consumption of kitchen and other household appliance is on a downward trend, which calls for some action to increase the demand of a product such as offering a longer warranty or lowering the price.
... HD's market share, positioning and further revenues in the long term.6. CURRENT STRATEGIESThe most current strategies Home Depot has implemented ... in order to keep up their success in the home improvement market. Home Depot therefore employs both management and staff from any industry ... increased buying power that gives them clout in making demands on manufacturers, such as for volume discounts, co- ...
Production of technology and/or any equipment that may facilitate a project or job has been a part of the marketing for The Home Depot. Now they offer electronics such as cameras, televisions, car audio, computers, home theater equipment, and other technology that has allowed them to expand into new markets (The Home Depot, 2009).
This new department will increase their market share into additional retail markets.
As the country continues to ride this economic Tsunami, one might ask the question, “What kind of role the Federal Reserve plays to offset the current credit crisis?” According to the Larning Markets (2009) website, the Fed is working overtime to offset the current credit crisis. An example of what the Feds is doing is injecting money into the financial systems to stem the effects of the current credit crisis. It also includes lowering current housing interest rates to a low of 4.625 %, effective April 9, 2009 (economagic.com).
According to Hobson (2007), lowering interest rates makes it less expensive for consumers to borrow money. Lower interest rates could in turn encourage continued spending, stimulate the economy, and help to reverse the credit crisis. In figure 15, the total credit market debt owed displays how the current credit crisis has created a heightened debt owed by consumers.
As previously stated, Home Depot has reported a $54 million loss in its fourth quarter report. The obvious contributing factor to its financial loss is the lack of demand of its products. Because Home Depot is a home improvement supplier, the construction industry is the primary customer of the company. Unfortunately, the demand for construction is low and as a result, the construction industry’s unemployment rate jumped from approximately 6.5% to 22% from late 2007 to early 2009 (economagic.com).
The rapid rise of unemployment is also reflected on a smaller scale such as in Stanislaus County of which unemployment jumped from approximately 6% to about 16% around the same period (economagic.com).
Another contributing factor for the lack of demand of Home Depot’s products is the lack of home sales (economagic.com), which also relates to the low confidence level consumers have of the bad economy. At the same time, the home vacancy rate was on a rise and just began to flatten out (economagic.com) because of foreclosures that might have been caused by the growing rate of unemployment. As a result, the supply of homes is high while the demand of homes is low and therefore, there is a surplus of available homes. Therefore, such trends provide a clear indicator of what might be the cause of the negative report of Home Depot’s fourth quarter financials (economagic.com).
Another indicator to look at is the trend of building permits issued on privately owned homes are on a decline, the graphs indicate a correlation to the recession period that started in the latter part of 2007 and trend looks like to be continuing on through 2009 (economagic.com).
Improvement projects on homes are always part of a pre-determined budget and in the long run, the demand for products sold at Home Depot is elastic. However, unplanned projects, like replacing wooden floors from water damage caused by a busted water pipe, create an inelastic demand. Unfortunately, the bad economy, the soft housing market, the high unemployment rate, and a lack of consumer confidence are contributing factors of the company’s quarterly loss. Therefore, the following recommendations are presented in order for the company to continue operating while maximizing profits.
Since it is generally anticipated that the current situation of economics will grow worse before getting better, it would seem Home Depot should prepare for the worst. Although cutting 7,000 employees from its workforce was a drastic step, it may become necessary again to lay off more workers to maintain its foothold. Home Depot should also evaluate its current cost structure, and see if there are other departments, which can be reduced or eliminated for the meantime. The company should continue attempting to generate cash with sales, and keep inventory lower than normal, until things begin to turn for the better.
Another recommendation is to give incentives to the customers such as bulk items and decreased prices. Marketing Home Depot, as a great low cost supplier to builders and larger construction companies with price incentives may allow the company to increase its market share. Increasing the demand by offering discounts on materials purchased in high quantities may reach a market that is currently trying to stay in business as well by cutting their average variable cost.
Therefore, a constant watch on leading indicators of the economy will truly provide a clear vision of what type of market conditions the company would possibly face and will contribute to solutions that will help Home Depot succeed in a dreary economy.
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Gross Domestic Product: Billions of dollars; SAAR (quarterly).
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Total nonfarm: All Employees (thousands).
Retrieved March 23, 2009, from
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The Conference Board Consumer Confidence Index™ Plummets Further in February. Retrieved on March 24, 2009 from http://www.conference-board.orgThe Home Depot, Inc. (2009).
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Top Home Improvement Retailer Home Depot hit by Recession. Retrieved March 23, 2009, from Iconocast Web site: http://www.iconocast.com