Home Depot and Lowe's were in the midst of supply chain overhauls, each spending more than $1 billion to upgrade their technology and expand fulfillment networks, when the pandemic hit — right at the time the home improvement retailers were gearing up for their busy spring seasons.
As essential retailers, Lowe's and Home Depot were not mandated to close all stores. But many consumers preferred not to shop inside, making curbside pickup and an omnichannel strategy essential to capitalize on spring demand.
Both retailers stood up curbside pickup in a matter of days, their executives said. And in many instances, the pandemic sped up deployment of fulfillment expansions and initiatives across channels.
"We made a lot of change in a short period of time," Home Depot CEO Craig Menear said at Bernstein's Annual Strategic Decisions Conference late last May.
Lowe's CEO Marvin Ellison expressed a similar pace at his retailer. "We've decided to push projects up that drive productivity, and also that impact the improvement of our omnichannel strategy, because we believe that we're behind," he said on an earnings call in August.
Building on a supply chain foundation
Lowe's redirected some capital expenditures to center on omnichannel improvements, said Joe McFarland, executive vice president of stores for Lowe's. The retailer started adding pickup lockers and forming teams at its stores that specifically focused on fulfilling online orders. In February, McFarland said he expects Lowe's to have lockers in all U.S. stores by April.
Home Depot also changed course when online order volumes were booming. A Chicago facility was intended to be a market delivery center and fulfill orders of bulky items. The retailer temporarily converted it to a direct fulfillment center, used for e-commerce orders.
The ability to adjust to shifting channels and soaring demand during the pandemic was thanks in part to years of focus on supply chain and omnichannel strategy before COVID-19.
"This rapid response would not have been possible without the technology we deployed in 2019," McFarland said on the retailer's earnings call in May 2020.
"Most retailers don't have that level of visibility."
Retail Analyst at Forrester
Both retailers had been investing in visibility across channels, according to Sucharita Kodali, retail analyst at Forrester.
"Even before the pandemic, they had really good insight into what was in every store and where it was located and how many units they had," Kodali said in reference to Home Depot and Lowe's. "They had all of those fundamentals."
The two retailers have visibility on the back and front ends. Consumers visiting Lowe's or Home Depot's websites can see the number of a particular SKU in stock at a store location, in addition to its location by aisle and bay.
"Most retailers don't have that level of visibility," Kodali said.
Home Depot and Lowe's executives said their retailers' in-stock positions have improved, even as comp sales grew 25% year over year in Q4 2020 at Home Depot and 28% at Lowe's.
The improved stock levels and granular level of visibility became essential as online orders surged 121% year over year at Lowe's in that same quarter, and 83% at Home Depot. Supply chain executives at both retailers needed visibility to ensure inventory was in the right place at the right time.
Store associates needed visibility at the store level and adequate stock to pick and pack items for pickup. In that quarter, Home Depot fulfilled about 55% of online orders through stores; Lowe's fulfilled 60%.
The complexities of fulfillment
Kodali described fulfilling from store as the "holy grail for a lot of retailers," but with a caveat: "so long as they can continue to do that cost effectively."
Lowe's and Home Depot have the advantage of inventory visibility down to units and bays, which helps store associates pick items from stores.
"They almost treat the store like a warehouse," Kodali said, referring to both retailers.
The two retailers have also added fulfillment centers to aid with store replenishment and keep items in stock, a "retail fundamental," according to Ellison.
While store fulfillment grew in popularity overall among retailers during the pandemic, Kodali said the jury is still out on the method. The concept is relatively new. It picked up steam when stores closed and retailers needed a way to move inventory, as well as when e-commerce boomed.
Just quarters ago, the fulfillment method was regarded skeptically by investors. Analysts were dubious that Target, one of the first retailers to double-down on store-based fulfillment, would be able to scale the model in a cost-effective way. It may take several more quarters for retailers to manage inventory, develop visibility across channels and realize cost benefits of store-based fulfillment.
"Pick from store fundamentally depends on having a really well run store," Kodali said.
"We made a lot of change in a short period of time."
CEO of Home Depot
Store fulfillment and in-stock challenges magnify for retailers with a large number of SKUs. Local stores are less likely to have in stock every item available online. Other SKUs may be online only, making store-based fulfillment unfeasible.
If a consumer places an order with four items, but only two are in stock at a local store, the retailer has to use split shipments or ship from the warehouse to the store, adding to fulfillment costs.
"It just poses much greater complexities from a fulfillment standpoint," Kodali said.
Store fulfillment is not necessarily efficient nor cost effective for all the items home improvement retailers sell, particularly big and bulky appliances. That's why Lowe's is moving to a market-based model for those items, adding dozens of cross docks to take the complexity out of the store.
"Market-based delivery is absolutely the way to go," Ellison said in February. Delivering bulky items from store "is not an optimal way to manage such a large amount of inventory and such a large expense, from a transportation perspective," he said.
Home Depot's approach is similar, employing market delivery centers and operations with cross docks for fulfillment and delivery of bulky items. Meanwhile, direct fulfillment centers pack parcels of smaller items.
Offering numerous fulfillment options has downsides though, which both retailers acknowledged in annual reports filed this month.
Giving consumers the option of direct fulfillment and curbside pickup can reduce foot traffic in stores, which in turn has the potential to lower sales, Home Depot said. Home Depot is the leading retailer in its category, with 2020 sales at $132.1 billion, compared to Lowe's $90 billion. But Lowe's executives say they're gunning for market share.
Maintaining ship or deliver from store, pickup, and direct fulfillment carries the risk that "we cannot guarantee that these or future programs will be maintained and implemented successfully," Home Depot's report stated.
Lowe's named supply chain and fulfillment disruptions as a risk in its latest annual report. Operational issues in the fulfillment network could include delayed inventory, stock-outs and higher delivery costs, and those risks only increase alongside a growing number of fulfillment options.
"As we add fulfillment capabilities or pursue strategies with different fulfillment requirements, our fulfillment network becomes increasingly complex and operating it becomes more challenging," the report states.