Home Depot Can Improve its In-store Operations with Digital Technologies

With the application of digital tech, Home Depot can greatly improve the efficiency of its in-store operations.

Jun 8, 2014 at 10:23AM

Management of Home Depot (NYSE:HD) often tells investors how the housing market is lifting or hindering the company's sales. One has to wonder how much Home Depot is leaving its business up to external forces. Such corporate planning resembles the macroeconomic trend-betting strategies used by some money managers.

However, returns based on this investment scheme have not always been satisfactory. Different companies can do better or worse in a given business environment. What Home Depot can do in less favorable housing market conditions says more about the company than the performance suggested by automatic sales boosts from a rising housing market.

Current in-store management issues
A few trips to a Home Depot will quickly reveal some common store management issues that include insufficient shelf stocking, likely caused by lead time or outright merchandising mismanagement, and misplaced parts not being returned to their rightful places. Problems like these may cost the company sales and result in customers making the wrong purchases.

Such ineffective operations may go on without the company ever knowing it if customers lack effective communication channels to report problems. Even if customers do get to talk to a store clerk, the information may not be shared further with responsible parties. A clerk can certainly help customers look around, but may not be able to address any issue on the spot if the problem proves somehow systematic.

Further assessment of in-store operational inefficiencies
To correct such operational inefficiencies, the company could put an in-store, tech-enabled management system in place to respond to customers in real time, a critical element that services companies have increasingly come to rely on for competitive purposes. A large store like The Home Depot would benefit from using today's digital technologies to set up a more inter-connected store operation that could respond to customer requests in a timely manner.

A favorable business environment may bring in more customers, but serving them better rests on a company's internal management strengths. It's surprising to realize that no traces of digital technology applications can be seen inside The Home Depot. The store operates in much the same way that any other conventional, physical stores do. Everything is manually arranged. Most noticeably, two employees check out purchase receipts at the door as customers exit the store, something that adds no service value.

Potential tech solutions to in-store mismanagement
Needless to say, Home Depot has a self-named mobile app that customers can use on the go to search for products and make purchases. However, that's part of the online operation and greatly differs from an onsite, dedicated management operation set up to assist with customers' in-store shopping. The mobile app is not much more than an extension of the full version of the company website, and its goal is just helping the company make more sales online.

The Home Depot mobile app can be useful for in-store shopping with functions such as accessing the in-store map, product aisle information, and inventory look-up. However, some form of tech-enabled, physical customer workstations inside The Home Depot stores could be more beneficial to customers' onsite shopping experience. For example, instead of labeling items manually, making certain parts scannable by customers would prevent misplaced parts from being wrongly identified, especially when some of them are a mere one or even a half inch apart in measurements.

More tech-enabled in-store operations
Another way of attracting customers is by adjusting inventory according to market conditions. When Lowe's (NYSE:LOW), Home Depot's closest competitor, posted a better-than-estimated profit for its 2014 first quarter, it was reported that Lowe's better merchandising choices helped the company withstand the challenging sales conditions during the period's harsh winter months. By the same token, careful merchandising selections could potentially help relieve some sales pressures often felt by home-improvement retailers when outside housing and economic conditions are less ideal.

Many basic parts used in electrical and plumbing tasks, etc. are staple items that home improvement suppliers like Home Depot have to carry, regardless of how much consumers are spending on home renovations. However, certain other merchandises may have less dependence on consumers who are doing full-scale home remodeling projects. For example, companies can sell some household fixtures, such as lighting and cabinet items, more easily as customers may purchase them whether or not they are working on home renovation projects. Moreover, fixture items may offer wider profit margins compared to some of the electrical and plumbing parts that are each worth only a few dollars.

One drawback, however, is that The Home Depot uses a limited amount of aisle space to display a relatively small number of those products. With little physical room to add, Home Depot could simply install some in-store digital devices with high-definition screens to showcase a much wider range of high-margin products, which would also have the ability to process orders and arrange for shipments or pickups. A tech-enabled physical store can provide a much better in-store shopping experience by allowing customers to simulate the ease of online shopping while retaining the physical feel of strolling and browsing inside a store.

Home Depot can certainly do more than being an old-day warehouse-like operation that leaves some sales opportunities to chance. Incorporating digital technologies into its in-store operations could better serve customers and allow more merchandise choices, and that would be "the power of The Home Depot." As Home Depot's commercials always say, "let's do this", because the company's conventional selling method of "more savings and more doing" may only go so far.

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Jay Wei has no position in any stocks mentioned. The Motley Fool recommends Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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