Home Depot's (NYSE: HD) investments in its sales channels brought down numbers in its third-quarter earnings report, but building up these channels will pay off in the long run. At least that's what management is claiming.
A quick analysis of the company's growth, specifically of its "buy online, pick up in store" (BOPIS) channel, shows that so far, it seems to be working.
Why is BOPIS important?
BOPIS is a growing segment of many retail companies. An Adobe study of Black Friday shopping trends showed that this year, shoppers used a BOPIS service 39% more often than in 2018. Some other relevant highlights:
- A company that offers BOPIS can increase revenue during the holidays by 10%.
- Large companies have a distinct advantage, seeing a 65% boost in sales during the holiday season.
- Customers will do almost 50% of all their holiday shopping on their smartphones.
This makes BOPIS, and specifically an associated mobile application, an important element of any large retailer's sales strategy.
Image source: Getty Images.
Why does BOPIS work so well for home improvement?
BOPIS has become increasingly important in every segment. Jamie Nordstrom, president of stores at Nordstrom (NYSE: JWN), called it the highest-growing segment of his company's business as well as the most profitable.
Customers like to shop online. It's quick and easy, can be done from anywhere, and avoids crowds and lines. The Adobe study showed that e-commerce is growing by 14% versus overall retail growth of 4%. Retail companies everywhere are noting these numbers and planning accordingly.
But it works especially well for the home improvement sector. Why? Much of what stores like Home Depot sell is difficult to ship -- think stand-alone grills and wooden beams. Where that leaves those stores in the digital age: with BOPIS. Using this method, customers can still avoid the lines and shop from home, then easily pick up their packages in the store.
Home Depot offers this service for many products in all of its stores, and makes it easy to use. Customers choose the "Pick Up in Store" option at checkout and get notified when an order is ready. At some locations the company is also testing a locker concept, in which customers can get their packages from dedicated lockers without having to approach a human being.
Layering options for a seamless experience
Additionally, Home Depot knows that its customers like to engage with its website but then finish their purchases at the store. That way, they can investigate options ahead of time, saving time once they arrive, but still experience the products in person before deciding on a purchase.
So besides "buy online, pick up in store" Home Depot customers use a strategy of "peruse online, buy in store" -- a kind of reverse BOPIS. That's why it's so crucial for the company to integrate the physical and the digital.
While other retail stores are downsizing -- Macy's is trimming its footprint and Nordstrom is testing "local" stores with a curated selection of merchandise -- Home Depot is remodeling stores to create a powerful experience for its customers. This is also adding to the company's expenses, but the cost is expected to pay for itself with higher revenue.
Once customers come in the door, Home Depot offers other digital services to help them make smarter purchases. For example, customers can say or type what they need into the app; the app will point out where it is, how to get there, and which other products might fit the bill -- even if they're not in-store.
Good things come to those who wait
Home Depot's third-quarter results were rewarded with a price drop in the blue chip stock: Earnings didn't meet analyst expectations, and the company disclosed that it will struggle to increase margins in the short term, due to its overhaul of its digital capabilities. CEO Craig Minear said that those "investments are significant and long-term in nature."
But Home Depot remains optimistic that profits will increase as the user experience improves. The third-quarter report showed that 50% of orders were picked up in-store, "a testament to the power of our interconnected retail strategy." Paul Stonick, director of online user experience, said that "When user experience is done right, that creates brand loyalty." And the company expects that to translate into higher sales.
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Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool recommends Adobe Systems, Home Depot, and Nordstrom and recommends the following options: long January 2021 $120 calls on Home Depot and short February 2020 $205 calls on Home Depot. The Motley Fool has a disclosure policy.
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