If you ask someone to name the leading home improvement retailer, they will most likely answer either Home Depot or Lowe's. These two competitors have been the twin giants of their industry for decades, sharing the first and second positions in the hierarchy of the world's largest home improvement retailers. In this article, we examine the similarities and differences between these two competing juggernauts, drawing from their most recent annual 10-K filings.

Origins, Locations, and Customer-base

Despite being the larger of the pair, The Home Depot, Inc. (HD) was actually founded over 30 years later than Lowe's Companies, Inc. (LOW)—Home Depot in 1978 and Lowe's in 1946.

Since then, Home Depot has grown to 2,269 stores, of which 1,976 are in the United States, 182 are in Canada, and 111 are in Mexico. Following an unsuccessful expansion attempt that resulted in the closure of its last seven remaining big-box stores in China in 2012, Home Depot does not currently have any retail outlets in that country.

Lowe's has also enjoyed a spectacular history of growth. Today, Lowe's operates 1,840 stores, of which 1,793 are in the United States, 37 are in Canada, and 10 are in Mexico. Like its rival, Lowe's has not yet gained a foothold in China. In addition to its presence in the Americas, Lowe's is also developing a strategic partnership with Woolworths Limited that would see it develop a network of home improvement stores in Australia.

Beyond their target markets, another point of similarity between Home Depot and Lowe's is the gargantuan size of their stores. The average Home Depot store has 104,000 square feet of enclosed space and 24,000 square feet of outdoor space for garden products. Lowe's stores are even larger, with an average enclosed space of 112,000 square feet and 32,000 square feet of garden space.

Inside their stores, however, Home Depot and Lowe's appear to have less in common. Home Depot's stores feature an orange and black color scheme with tall shelves that at times can only be accessed by forklifts. This industrial esthetic gives the impression of a store geared toward professional customers. Lowe's stores have a markedly different appearance. Employing a blue-and-white color scheme, they often feature more elaborate floor displays or themed products such as patio sets or holiday decor items. In light of this, Lowe's has the reputation of being less intimidating for first-time home improvement customers. (For more, see: The Power of Branding.)

Despite their distinctive brands, Home Depot and Lowe's regard themselves as competing for the same customers. In referring to these customers, management from both companies distinguish between two broad categories: retail and professional.

The retail portion can be further broken down into two distinct types of customers. So-called do-it-for-me (DIFM) retail customers are less likely to undertake projects on their own. As such, they are more likely to pay extra for installation services. At the other end of the spectrum are do-it-yourself (DIY) retail customers, who prefer buying raw materials and completing their projects independently.

Professional customers run the gamut from individual contractors to construction managers. Their needs require more complex services, such as the ability to have orders delivered directly to construction sites.

Strategic Priorities

In pursuing this shared customer-base, Home Depot and Lowe's have adopted similar but non-identical strategic priorities.

Among the foremost priorities of Home Depot's management is the continued modernization of their supply chain. For most of their history, Home Depot has had the reputation of lagging behind its main rival in terms of supply-chain efficiency. Home Depot had relied primarily on a decentralized supply chain whereby suppliers shipped products directly to Home Depot stores. Although this decentralized approach did offer some advantages, it also brought significant drawbacks (such as the use of whole trucks to ship relatively small amounts of cargo). However, in 2007, Home Depot began an ambitious modernization program, including a transition to a centralized network of distribution centers.

Today, Home Depot operates 18 mechanized distribution centers in the United States, and one in Canada. By comparison, Lowe's operates 15 mechanized distribution centers in the United States, one in Canada, and one in Mexico. When Home Depot launched its modernization program in 2007, almost all of Lowe's mechanized distribution centers were already in place, giving credence to the perception that Lowe's had enjoyed a logistical advantage over its rival for many years.

Perhaps due to this logistical advantage, management at Lowe's are currently placing less emphasis on the need to modernize their supply chain. Instead, Lowe's has identified improving customer service as one of its principle objectives. Of particular concern are customer-facing initiatives such as improving the quality of in-store displays, ensuring that store inventories anticipate and reflect the local and seasonal preferences of customers, and building stronger ties with professional customers through initiatives such as Lowe's ProServices. (For more, see: Inventory Management - Video.)

Yet despite these strategic differences, there is one major objective that both companies share. Faced with a customer-base that is increasingly active online, both Home Depot and Lowe's are committed to allowing customers to move seamlessly between online and offline channels. For example, a customer might identify a desired product on the company's website and arrange to have it delivered to their nearest store. Or, in the case of a professional customer, they may identify a product in-store and arrange to have it shipped to their worksite.

At present, online sales make up only 4.5% of Home Depot's net sales and only 2.5% of that of Lowe's. Nonetheless, the fact that both companies have prioritized the integration of their online and offline platforms suggests that they regard their online infrastructure as an important driver of future growth.

The Bottom Line

As the world's first and second largest home improvement retailers, Home Depot and Lowe's share many similarities. Competing for a shared customer-base across the United States, Canada, and Mexico, these two giants have developed distinctive brand images and strategic priorities. Although it is impossible to predict how these strategies will unfold, investors in the home improvement sector would be wise to keep both businesses firmly within their sights.