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1 Reason Why Amazon Can't Mess With Home Depot

By Neil Patel - Apr 25, 2021 at 6:45AM

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It's a pretty simple explanation, and one that investors need to know.

The cause of the so-called retail apocalypse often gets attributed to the efforts of one major company: Amazon (AMZN 1.42%). The $1.7 trillion behemoth has upended numerous shopping categories with its e-commerce excellencefrom apparel to electronics and even groceries. 

But one sizable segment the Seattle-based company hasn't really hurt is home improvement. The largest such retailer in the world, Home Depot (HD 1.38%), has so far been defending its turf. Even as Amazon has increased its dominance over the last few years, Home Depot's revenue and profit have continued to climb. And its stock price has followed, rising 142% since April 2016. 

The key to this success has to do with the exact nature of Home Depot's products and customers, which are paramount to its ability to fend off Amazon.

professional contractor on site at a home wearing a yellow hard hat looking around

Image source: Getty Images.

Home Depot's big advantage 

Compared to most other types of brick-and-mortar stores, Home Depot is a project retailer. This means that its products require more research and consultation before purchasing. Customers need to ensure that they are getting the correct items for whatever they are trying to accomplish, whether it's sprucing up the patio or fixing a plumbing issue. The stakes are higher with home improvement. 

The company's previous investments in supply chain and e-commerce capabilities to bolster the customer experience bore fruit last fiscal year, as digital sales soared 86% compared to fiscal 2019. The main figure, however, is that 60% of these orders were actually picked up in stores. 

Because home improvement products tend to be larger, heavier items, the effectiveness of a delivery strategy is diminished. Sorry, Amazon. 

This buy-online, pickup-in-store consumer behavior is noteworthy for a couple of reasons. First, Home Depot is continuing to invest in fulfillment centers with the goal of providing same-day or next-day delivery to 90% of the U.S. population. Even with this capacity, however, customers' willingness to complete their orders in-store is a blow to Amazon. 

Second, it shows the urgency of needing products as soon as possible. This is particularly true for Home Depot's do-it-for-me customers (what the company calls Pros), who need tools and supplies quickly so that they can finish their home contractor jobs. 

These factors, namely the size of products as well as customers' needs, have kept Amazon at bay and fed Home Depot's competitive advantage. You see the same dynamic at play in the auto parts industry, where businesses like O'Reilly Automotive and AutoZone keep performing very well. 

The takeaway for investors 

There aren't many companies out there that can defend themselves against the giant that is Amazon. It seems as if the e-commerce, cloud computing, and digital streaming juggernaut is infiltrating every single industry, wreaking havoc on established businesses the world over. 

Home Depot is not only surviving the threat, but finds itself thriving in this fast-paced competitive environment. As long as the home improvement retailer can continue leaning on its omnichannel strategy to serve its customers in whatever way they want, I'm not worried about Amazon. 

Shareholders in Home Depot shouldn't worry either.

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The Home Depot, Inc. Stock Quote
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