Home Depot Pricing Spineometer: 3 of 5 Vertebrae

Home Depot, a retailer of home improvement tools, materials, and appliances, had a negative FY 2023. Revenue fell 3% to $153 billion and earnings before interest and taxes fell 10% to $21.6 billion over the prior year.

A review of Home Depot’s Q4 2023 February 20^th earnings call and associated financial report provided insight regarding the importance of pricing on performance.

Pricing challenges were mentioned by executives, but generally in an indirect manner as pricing itself was not their focal message.

Ted Decker, CEO of Home Depot, focused on staff investment and customer service, managing a disinflationary environment, rightsizing inventory, and pursuing the Pro shopper.  Each of these issues has a pricing dimension, but he did not reveal if or how these issues would impact pricing decisions or price capture.

CEO Decker also alluded to industry fragmentation in Home Depot’s market as an opportunity for growth.  Industry fragmentation is also known to increase competitive pressures and thus keep pricing latitude restricted.

(Note: His comments carefully identified a disinflationary environment as distinct from a deflationary one.  This implies executives at HD anticipate the rate of price increases to slow, not that the prices decrease.  Based on the lost decade in Japan and its experience with deflation, most leading economists would consider this as good news for the U.S. economy.)

Ann-Marie Campbell, Senior EVP of Home Depot, spoke at length about the value Home Depot is striving to deliver to customers.  “In our returns process, we gain efficiencies by reducing transaction time and improving on-shelf availability, enabling better inventory management. We also improve customer service by allowing the customer to start and complete their return however they want. As you’ve heard us say many times, we are focused on making our interconnected experience better and more convenient no matter how our customers choose to engage with us.” She added the goal of being a “convenient physical destination for customers”.

Each of EVP Campbell’s claims of value delivered creates opportunity for value capture.  Whether that value is captured through volume or price is a strategic decision.  This is not a simply “market share versus price capture” decision but could be treated as one of profit optimization over the short and medium term.  The pricing knowledge domain has important insights to improve these decisions.

Richard McPhail. CFO of Home Depot, spoke directly about the relationship between macroeconomic conditions and business performance.  “Personal consumption growth as measured by PCE is expected to decelerate compared to 2023. Our share of PCE also remains slightly elevated relative to 2019 and has been on a glidepath towards 2019 levels. Higher interest rates at the beginning of 2024 relative to last year, will likely continue to pressure demand for larger projects. And the effects from pull forward of demand during the pandemic as well as some project deferral could impact demand into 2024.”

CFO McPhail’s comments demonstrate a keen understanding of the impact of macroeconomics on Home Depot’s business performance.

Home Depot’s business operations imply a need for 300 to 1,500 pricing professionals to be on staff according to industry benchmarks.

1. As a multinational company with 92% of the revenue from US operations and the rest from Mexico and Canada, we would expect at most 25 to 125 pricing professionals to be international.
2. Seasonality and price promotional increase complexity and would drive the staffing requirement up from the baseline metrics. We would expect several pricing professionals to be focused on price promotions to either offload aging inventory or improve foot traffic with seasonal goods.
3. In a fragmented retail market, competitive pricing data captured through scanner check-out data, screen-scrapers, mystery shopping, and other techniques have been found to yield robust data for analysis. Still, individuals must conduct the analysis or interpret the analytical results of data analytics automation tools, now known as AI, to convert this data into decisions.
4. The Pro segment requires a different approach to pricing than the consumer segment. Rebates and loyalty programs would be best practices, though Pro discounts and possibly delivery surcharges may also be used. Each of these commercial policy decisions benefits from pricing analysis.
5. Industry turbulence is known to increase the need for pricing excellence. The relative competitive stability and low business model volatility coupled with the large impact of uncertain macroeconomic conditions on business performance impacts the need for pricing professionals at Home Depot, but hard to determine if it increases or decreases the proper staffing levels.

Research into the investment by Home Depot in pricing yielded challenging results.

1. The number of professionals engaged primarily in pricing was well below the minimum expectations. Though our research is imperfect, we identified fewer than 80 professionals dedicated to pricing at Home Depot of which at most five were based outside of the U.S., while our industry benchmark suggested a minimum of 300 in total and 25 non-U.S.
2. Professionals engaged in pricing at Home Depot focused on many challenges. Many addressed standard retail pricing challenges such as analytics, category management, and online pricing.  A significant number were focused on the Pro market segment. Still others identified the nebulous “strategy” as their focus.  While I suspect someone is managing promotions, conducting economic modeling of macroeconomic conditions’ impact on pricing, and many other issues identified earlier in this article, our research did not find these people identifying pricing decision-making as their core responsibility.
3. Pricing professionals ranged in seniority from analyst and manager to director and senior director. The identification of a VP of Pricing, Assortment Planning, and Merchandising and a VP of Data Science, Ecommerce, and Marketing, coupled with the titles and responsibilities of pricing professionals previously identified, implies that the pricing function is distributed among many business areas.

Pricing as a subordinate support role to many other business functions but having no direct responsibility and accountability itself is suboptimal.

1. For a person working in pricing at Home Depot, they are effectively being told that the route to career advancement is to leave pricing. That is not conducive to the development of deep expertise.
2. As a distributed function, it might be possible to laterally transfer between functional areas in pricing but it is more likely that that expertise developed in one functional area, say e-commerce, is inadequately shared with others, say Pro or merchandising. The analog to the Henry Kissinger quip “Who do I call if I want to call Europe?” is “Who do you call when you have a pricing challenge at Home Depot?”
3. Consider that Home Depot has well over 40 VPs, including those for creative and analytics, and that none of them are specifically charged with addressing pricing challenges. This leaves pricing questions to be a political football between finance, merchandising, Pro sales, marketing, and others demanding immediate answers.  This is a suboptimal approach to addressing a critical business challenge that benefits from slow thinking.

Given the quality of the remarks by Decker, Campbell, and McPhail, I strongly suspect that Home Depot has the necessary skills within its organization.  I question whether it is optimally organized.

Given the importance and capability of pricing at Home Depot as indicated in financial reports, management statements, and our pricing team research, and given their performance, we have come to the following conclusion as of May April 2024.

Home Depot Pricing Spineometer: 3 out of 5 Vertebrae. It is not that Home Depot has demonstrated poor pricing judgment.  It is that the systems and structures at Home Depot are subpar for addressing pricing challenges.

HD (Home Depot, Inc.) rose from 360 the day prior to their earnings call to 370 one week later. FY 2023 revenue of $153 billion with a 14% operating margin and P/E ratio near 19.

For FY 2023, a 1% improvement in price would yield a 7% improvement in operating profits holding all else constant at Home Depot.