Lumber Yard is the number one DIY store in Canada. They operate 300 superstores nationwide selling all kinds of DIY, construction, decorating and gardening supplies.
Lumber Yard has both a much larger market share and is more profitable than its next largest competitor Kit Shed, which has 125 similar-sized superstores nationwide.
However, Kit Shed has recently been purchased by DIY World, which is the largest DIY chain in the United States, with over 2000 superstores nationwide there. All of the Kit Shed premises are to be converted into DIY World stores. DIY World has been incredibly successful in the US, such that the management of Lumber Yard are concerned about their market position and have called us in to advise. They would like to know if Lumber Yard needs to respond to this change and, if so, what that response would look like.
Ensure that the client has a clear understanding of what these kind of DIY superstores look like. The companies here are fictional, but real-world equivalents would be Home Depot in the US and B&Q in the UK, Europe and China.
A sensible way to proceed is to first analyse Lumber Yard’s position within the Canadian market, discovering how it has come to dominate there.
We should then also understand DIY World’s success within the US market. This should allow us to gauge whether that success can be carried over in to the Canadian market.
Lumber Yard and the Canadian Market
The candidate should ask structured, rational questions to gather relevant information about Lumber Yard’s position in the Canadian market.
Lumber Yard and Kit Shed operate across all the same geographical regions.
Average store size is the same for Lumber Yard and Kit Shed.
On average, Lumber Yard and Kit Shed offer very similar prices.
Lumber Yard and Kit Shed have largely identical product assortments. There is slightly more variety in some product types in Lumber Yard.
Lumber Yard and Kit Shed both pay the same purchase costs for each unit of their products.
Lumber Yard and Kit Shed having equivalent labour costs. Labour costs are also largely standard across the industry, so we can ignore them here.
Lumber Yard enjoys higher profits per store than Kit Shed, and thus higher overall profits.
The candidate should note the fact that, despite similar store sizes, product assortment, geographies served, supply and labour costs and pricing levels, Lumber Yard nonetheless enjoys higher profits than Kit Shed.
A likely explanation is that Lumber Yard is managing its stores more effectively than Kit Shed.
The franchise model has led to a different management style. In turn, a recent survey has shown that customers prefer the shopping experience at Lumber Yard. Stores have better layouts, are better maintained and staff working in each section have better knowledge of products so as to usefully advise customers. Customer service in general is considered better than Kit Shed.
The fact that customers prefer to shop at lumber yard drives sales and leads to higher profits per store than Kit Shed.
The key takeaway here is that it is the franchise management model which gives Lumber Yard its advantage within the Canadian market. This has made for a generally better customer experience than its main Canadian rival, Kit Shed; which has in turn led customers to prefer Lumber Yard. As a result, Lumber Yard’s stores enjoy higher sales and thus higher profits.
DIY World and the US Market
The candidate should ask structured, rational questions to understand how DIY World has been so successful in the US market.
DIY World has just over 2000 stores right across the US. Their closest competitor operates around 500 stores nationwide.
DIY World’s stores are known to be huge and will typically have three times the floor space of their nearest competitor’s stores.
From this data, the candidate can estimate that DIY World would have sales around 12 times that of its closest competitor – that is four times the stores with three times the capacity per store.
DIY World pays an average of 20% less for its products due to the very large volumes it purchases.
DIY World prices its products an average of 12% cheaper than its nearest competitor.
DIY World offers a significantly broader selection of products within its huge stores.
DIY World maintains its dominance of the US market due to the lower prices it can offer customers. These prices are made possible by the very large volumes of products they buy from suppliers, allowing them to negotiate significantly lower purchasing prices.
DIY World in the Canadian Market
Success in the US market will not automatically translate north of the border.
Canadian shoppers do not recognise the DIY World brand.
The selection of products carried by Lumber Yard and DIY World is largely identical. Whilst a fraction of the products sold at Lumber Yard are domestically produced Canadian brands, a large fraction are also sourced from the US.
DIY World will face higher distribution costs in moving stock to Canadian stores. These will add around 5% to final product prices.
Again, labour costs will be equivalent for all players and can be ignored here.
As DIY World enter the Canadian market, they will be able to offer lower prices than Lumber Yard, even with the increased distribution costs from the US.
We can expect these prices to be around 7% lower than Lumber Yard (7% = 12% lower in US - 5% additional distribution costs in Canada).
Though DIY World has an advantage on pricing, their brand is not recognised in Canada and Lumber Yard retains its reputation for customer service, stemming from their franchise management model.
In the short term, Lumber Yard will remain the biggest player in the Canadian market. However, they will need to take action if they want to maintain this state of affairs in the longer term.
Initially, having a well-recognised brand and offering an excellent customer experience will preserve Lumber Yard’s market share.
However, as time goes on, price sensitive shoppers will discover and switch to DIY World to avail of their lower prices. This will then contribute to the eventual establishment of DIY World as a recognised brand in Canada, which will further shrink Lumber Yard’s market share.
To prevent this eventuality, Lumber Yard should enact counter measures as soon as possible.
Potential measures include:
- Start a customer loyalty scheme
- Focus on the greater service and useful advice from staff members to drive sales
- Make efficiency savings within the company to allow them to lower prices to compete with DIY World whilst still having the same high purchase costs.