After news broke that The Home Depot (NYSE:HD) is moving from being a primarily brick-and-mortar operation to more of an e-commerce format, investors are probably wondering what this means for the business. According to an interview conducted by Frank Blake, the company's CEO, opening new retail locations does not make sense due to a combination of growing competition and market saturation.
Moving forward, Home Depot's decision to operate electronically could mean a great deal of profit not only for it, but also for shipping companies like FedEx (NYSE:FDX) and UPS (NYSE:UPS). Can Home Depot pave the way to the future of retail, or will it, like other retailers, succumb to the power of e-commerce giant Amazon (NASDAQ:AMZN)?
Ecommerce could make a lot of people happy!
The world of e-commerce is growing rapidly. In 2013, it was estimated that total e-commerce revenue came out to $1.25 trillion. This is expected to grow by 20% to $1.51 trillion by the end of 2014 and could hit as much as $2.36 trillion by 2017. This shifting in customer preference has left a lot of retailers struggling, but specialty stores like Home Depot have been largely immune due to the challenges of shipping their products.
In an effort to stay ahead of the curb, Home Depot decided to refocus its efforts from physical locations to online sites. Between 2012 and 2013, the company saw its online sales jump 50%. Even at this level, though, the operations only account for 3.5% of the company's $78.8 billion in revenue for the year. With the goal of increasing this part of its business, the company is in the process of adding three new direct fulfillment centers to its operations. Each of these centers is capable of holding up to three times the product inventory of a traditional store.
In addition to being a boon for Home Depot's slow-growing operations, management's move has the potential to positively impact other companies like FedEx and UPS. With revenue of $44.3 billion and $55.4 billion, respectively, FedEx and UPS are large package delivery/logistics operations that have a tendency to handle some of Home Depot's smaller packages.
Currently, UPS and the United States Postal Service handle Home Depot's small delivery packages. However, the company also mentions using the services of FedEx on its corporate site. Additionally, Marvin Ellison, an Executive Vice President at Home Depot, serves as a director at FedEx, which could help create stronger ties for future deals. This means that for many of the company's smaller products, a rise in online sales will likely help not only Home Depot, but also UPS and FedEx.
Did Home Depot just open Pandora's box?
Generally speaking, Home Depot's decision to focus more and more on e-commerce sales as opposed to growing its brick-and-mortar footprint seems like good business sense. However, the move does carry with it the risk of other competitors jumping into the fray. Chief among these potential threats is Amazon.
Between 2009 and 2013, Amazon saw explosive growth, as demonstrated by its sales soaring 204% from $24.5 billion to $74.5 billion. In the search for growth, there is the possibility that Amazon intensifies competition in the home improvement space. The company does have appliances and other products for sale on its website that Home Depot provides, but it doesn't appear to place any sort of emphasis on these products at the moment.
To make matters even more interesting, Amazon is in the process of testing the fifth and sixth generation models of drones that it plans to use for home delivery without employing the assistance of major shipping companies. While this method is probably impractical for getting larger goods to consumer's homes, the smaller products Amazon could deliver may pose a threat to Home Depot, FedEx, and UPS.
Based on the evidence provided, it looks like Home Depot's decision to go digital is a smart one even though it's not without some risks. Focusing on e-commerce will likely mean higher sales and larger margins, but if the company's move incites Amazon to jump into the picture then the downside could be great. For this reason alone, the Foolish investor should only consider taking a stake in Home Depot if they are confident the company can maintain a strong lead over both existing and potential new competitors in cyberspace.
Daniel Jones has no position in any stocks mentioned. The Motley Fool recommends Amazon.com, FedEx, Home Depot, and United Parcel Service. The Motley Fool owns shares of Amazon.com. 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.