While the home improvement sector has been thriving in the U.S. for the past two years, the high demand for supplies, inflation, and increasing online competition has put pressure on home centers to pursue innovative solutions to stay relevant.
Supply chain slowdowns that started at the onset of the COVID-19 pandemic in 2020 continue to persist, which also affects the future landscape for home improvement retailers.
Why is the Home Improvement Industry Growing?
Home improvement sales in the U.S. were around $540 billion in 2021, and they are expected to reach more than $620 billion by 2025. The North American Hardware and Paint Association (NHPA) also has high expectations for the home improvement industry, with a forecast of 4.6 percent compound annual growth between 2019 and 2024.
DIY sales have seen an increase over the past two years as the pandemic put a new focus on residential living spaces and gave homeowners more time to tackle projects in the place where they were spending a majority of their time. People were able to migrate because they were working remotely, and this trend, coupled with a crunched housing market, saw many families opting to renovate rather than build new. This benefited the home improvement retail industry across DIY, DIFM, and Pro buyer segments.
Home Improvement Retail Competitive Landscape Analysis
The Home Depot continues to be the leading chain in terms of sales, with Lowe’s, 84 Lumber and Tractor Supply also being big players. Meanwhile, Ace Hardware and Menards rank high in terms of customer satisfaction, although their market shares are smaller. Even independent home centers and retailers have experienced strong sales over the past couple years, with a less than 1 percent rate of closure during the pandemic.
Some of the profitability of hardware stores, home centers and lumberyards over the past year can be attributed to high order volumes paired with staffing shortages. This trend led to higher-than-normal profit margins for companies in the home improvement retail industry, but is not sustainable.
Currently, private spending on home improvement projects remains strong. However, because of two consecutive years of strong DIY growth, pent up demand for larger DIFM projects that require Pro expertise, Pro sales may outpace DIY sales in 2022 and 2023. While professional contractors are themselves in high demand across the country—with many scheduled months in advance for projects—they are dealing with labor shortages and other logistical issues that may affect their ability to take on significant new business, thus prolonging their material spend and carrying sales for the home improvement and building product industry.
For the past 9 months, it has been typical for between 80% and 90% of Pros to purchase materials in store. There has been a stickiness factor in the number of Pros who have purchased materials online for delivery to the jobsite; it is still about 1 in 3 despite some fluctuations.
In store purchases occur at a lower rate among DIYers, with between 75% and 80% of DIYers opting to make an in store purchase over the last 9 months. 1 in 4 DIYers have made home improvement materials purchases online for delivery to their home. Take note, that this statistic is heavily impacted by age. Gen Y are more than twice as likely to purchase home improvement products online than Boomers.
Home centers are here to stay even if the competitive landscape continues to widen with eCommerce and home improvement marketplaces aiding product expansion and broadening options.
Competition Among Home Improvement Retailers
Because of the growth of the home improvement industry, robust competition has the potential to suppress prices and minimize profits for retailers, both large and small.
The retail landscape is unique because it caters to a wide range of consumers through direct sales, and this complicates the price competition. From a monetary standpoint, certain demographics are more desirable than others—and their needs are also different.
Contractors and trade professionals tend to be the more profitable customers for big box home improvement stores, so home improvement retailers, both large and small, are looking for ways to increase their appeal to Professionals. Retailers are investing heavily in improving the customer experience for contractors and reducing friction in their purchase processes.
This is one area where your distribution channel teams should be stepping up and collaborating with retailers to implement solutions that will save contractors time and make their ordering process seamless. Refining contractor pricing will be key to maintaining share of wallet among this important customer segment.
Some retailers, like Home Depot and Ace Hardware, are investing in freestanding distribution centers and other infrastructure to overcome the imbalances in supply lead times and the high demand for products.
The Future of the Home Center
In the future, more home centers may adopt this strategy in an effort to acquire a larger share of the professional market, but there are several logistics to address, such as transporting and delivering supplies. Companies may have to consider new partnerships and systems to offer delivery to professional customers, particularly in rural areas.
Incentivizing Pros to pick-up their online orders is a tactic that home improvement retailers have been focusing on as the labor shortage has coincided with a societal shift towards a preference for self-service options.
The bottom line is that the Pro market is where share of wallet efforts need to be focused heading into 2023 and the next couple of years. As home sales begin to plateau in Q2 and Q3 of 2022, DIY spend is also leveling off compared to 2020 and 2021 spending.
We do not anticipate that growth will come through opening new stores, but rather through investments in warehousing and logistic measures to improve distribution to contractors and builders. This also means that marketing efforts and channel partner initiatives need to refocus on the Professional customers and meet them at their level of expertise. Home Centers see the future of their sales coming from Pros, thus manufacturers need to market to, through, with, and for home centers to capture the attention of these buyers. Providing resources that make their jobs easier will be critical for increasing market share over the next 5 years.
As new freestanding distribution centers are established to support warehousing for bulk orders placed by contractors, home improvement retailers will face new opportunities to cater to the needs of these entirely different buyers.
Take Lowe’s, for example, which introduced a sophisticated video chat tool called “Lowe’s for Pros JobSIGHT,” to facilitate virtual connections between builders and consumers, and a variety of in-store features and services that are tailored to the lucrative professional market, ranging from a dedicated checkout area to trailer parking.
There’s also something to be said for providing industry knowledge and meaningful engagement. Home centers that continue integrating these features are expected to fare better in the future.
The Need for Specialized Home Improvement Marketing
We are seeing another trend in that home improvement retail is being offered by more big box stores. Consumers no longer need to rely on niche stores—like local garden centers and local hardware stores—to get the products they need. Generalized big box operations, such as Walmart and Amazon, are integrating home improvement supplies and equipment into their offerings, and they’ve been able to do so successfully because of the power of product expansion in an increasingly e-commerce focused world.
While big box stores are carrying more categories overall, they are still doing so in a specialized manner by creating departments, launching Pro oriented brands, and refining their home improvement category experiences in such a way that trust is being built in a measured, intentional way. For example, professional painters can find everything they need for a job well done in a set of aisles. Landscapers can get their contractor grade equipment all from the same place. Home builders can consult the Pro Desk for assistance with lumber orders and delivery.
This reality has introduced greater levels of competition to traditional specialty suppliers who have historically been dependent upon trade professionals making intentional visits based on specialty building products and equipment brand-dealer partnerships.
That doesn’t mean home centers are anywhere near being obsolete, especially as research shows a large percentage of home improvement customers prefer going into stores to look at items and shop. However, companies must be innovative in how they market and cater to customers to beat out the convenience of online shopping and provide something unique in terms of user experience.
Getting Further Insights on Home Improvement Retail
Having deeper insights into market shares and industry trends is critical to helping you create successful customer, product, brand and market strategies. The Farnsworth Group provides research solutions to help building product manufacturers and home improvement retailers better understand customer usage and attitudes, brand health, market size, and product development opportunities to develop targeted strategies for growth. Discuss your most pressing research needs with us by booking a consultation here.
