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Home Depot Analysis: Pricing Strategy

Essay by   •  December 18, 2011  •  Case Study  •  1,068 Words (5 Pages)  •  2,919 Views

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The headquarters for The Home Depot is located in Atlanta, GA at 2455 Paces Ferry Road. Arthur Blank and Bernie Marcus created The Home Depot do-it-yourself concept in 1978 and the first store was opened in Atlanta, GA on June 22nd, 1979. The Home Depot is the world's largest home improvement retailer and over 2200 stores are globally located across the United States, the District of Columbia, China, Puerto Rico, the Virgin Islands and Guam, Mexico and in ten provinces in Canada.

Home Depot caters to Do-It-Yourself customers, as well as home improvement, construction and building maintenance professionals. Its competitors are many and include True Value Hardware, Ace Hardware, and Lowe's. The Home Depot's main competitor, however, is Lowe's. Lowe's is the second largest home improvement retailer following The Home Depot and the 7th retailer in the United States. Due to the product similarities, The Home Depot and Lowe's compete for the avid do-it-yourselfers, do-it-for-me and professional customers in construction and the building maintenance markets.

The "orange-box", giant warehouse operates under four business segments: Plumbing, Electrical and Kitchen; Hardware and Seasonal; Building Materials, Lumber and Millworks; and Painting and Flooring. Major exclusive brands and product lines include lighting, ceiling fans and patio furniture from Hampton Bay, kitchen and bath items from Pegasus and Glacier Bay, hardware and power tools from Ryobi, Husky and RIGID, fertilizer from Virgoro, Thomasville cabinetry and paint from Behr and Ralph Lauren. These and other elite brands and products are major revenue for the company and are considered "A" items. These items are in high demand and they produce a high turn which means the product sells as quick as it is received. Often these products are ordered in bulk so that the store can continue to increase turns and profit. On the other hand, E-velocity items are considered dead inventory. These items usually have no GMROI (gross margin return on investment) and are given the title of "E" merchandise. "E" items will eventually be reduced to clearance items when little to no sales revenue is generated on a particular SKU (stock keeping unit) after it sits on the shelf for 6 consecutive weeks. For "E" velocity items the company loses money for these items and receives no return on the investment on the item if it is not sold. These items typically go through a series of mark downs to the customer in order to attempt to retrieve any amount of the cost of the item. These items are considered inelastic due to the fact that although the price has been reduced, there is relatively a small effect on the quantity of the item demanded. If the item becomes a total loss, the item results in complete disposal and the store is not allowed to sale to a customer at that price point. Because The Home Depot, like any other retail store, carries product that doesn't always generate a profit, each store is allotted a mark down budget that allows the incorporation of not only damaged items into the budget, but e-velocity items as well. This helps in that the store does not suffer a total loss. An alternative solution to dealing with E-velocity items is to locate a store that successfully sells the product and transfer the item to that store. The transferring store would still receive full value for the transfer while decreasing

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