Home improvement giant Home Depot (HD) stores seem to open frequently not very far from Lowe’s (LOW) locations. This, as it turns out, is actually deliberate. It is a marketing plan called “clustering,” in which businesses of a comparable type locate near each other’s locations in a bid to attract people to one geographic location for whatever is being sold. Home Depot investors did not seem to think much of this plan, however, as Home Depot shares dropped fractionally in Monday morning’s trading.
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Clustering, noted ArchBridge Family Office president and chief strategist John M. Jennings, allows businesses to pursue the largest proportion of customers in a market by directly pursuing that entire market. If locations were spread out more, then businesses would end up settling into a kind of equilibrium by geography. People who lived on the north side of town would go to one, and those on the south side would go to the other.
And with Home Depot looking to add Wahlburgers service to its store locations, as we found out last week, there may be one more reason for Home Depot customers to bypass Lowe’s stores, even though the two are located fairly close to each other. It is a perfect representation of competition between businesses, and close geographic location helps the two sides compete to the fullest.
Merchandising Frenzy
However, there is one other point to compete on, and that is what is in stock. On that point, Home Depot has an unexpected new competitor in Harbor Freight. Reports note there are several tools that Home Depot locations do not have, but Harbor Freight locations do.
Some of these tools are truly unexpected. Harbor Freight, for example, sells a welding cabinet that supports up to 500 pounds of equipment. Then there is the towable backhoe, which Home Depot might rent out, but does not sell. Watch repair tools, a portable sawmill, and an old-fashioned car horn that offers the “ahooga” sound effect round out the list of stuff you can find at Harbor Freight, but not Home Depot.
Is Home Depot a Good Long-Term Buy?
Turning to Wall Street, analysts have a Moderate Buy consensus rating on HD stock based on 17 Buys, five Holds and one Sell assigned in the past three months, as indicated by the graphic below. After an 8.36% loss in its share price over the past year, the average HD price target of $407.67 per share implies 8.48% upside potential.
