Home Depot (NYSE:HD), the largest U.S. home improvement retailer, is conducting an experiment to connect home improvement professionals to those who require their services. Many home improvement professionals are already customers of Home Depot and source their supplies from it. The idea is to use Redbeacon.com, which Home Depot bought in January, to foster better connections with home improvement professionals, who make up just 3% of Home Depot customers but are responsible for 35% of its sales. ((Home Depot Tries Home Improvement Matchmaking Business, HouseLogic))
How It Works
The service is being launched in four cities: Atlanta, San Francisco, Dallas, and Austin. The finer details of the online matchmaking service vary among the four markets, but the idea is the essentially same. Home owners will visit Redbeacon.com and enter the specifics of the job they want done, and then they will get about three referrals from contractors willing to do it. Redbeacon will do background checks but customers will deal directly with the contractors.
Similar services are offered by Angie’s List, which charges a subscription fee, and Kudzu.com, which is free to customers and lists service providers and customer reviews. Like these two, Redbeacon also is free to consumers, but Home Depot is still trying to figure out the best way to encourage participation of home improvement professionals.
As of now, in Atlanta, contractors can offer quotes through Redbeacon for free, but those in Dallas have to pay a $19.99 monthly subscription fee to make offers for jobs. In San Francisco, Redbeacon awards points to contractors for every dollar spent at Home Depot. The more they spend, the more points they have available to bid for jobs. In Austin, Home Depot is considering a model that combines the paid and points systems, lowering the cost of using the site as the professionals accrue more points. We believe that the model for a broader roll-out will be the one most successful among these. ((Home Depot tries matchmaking business, AJC))
How It Benefits Home Depot
Contractors who use Redbeacon have no obligation to spend money at Home Depot in exchange for using the matchmaking service. Home Depot, however, hopes that by providing contractors with their next job, it will be able to generate a sense of loyalty encouraging the professionals to buy more at its stores rather than a competitor’s.
Redbeacon is a small service right now, and we believe that a roll-out in four cities will not have much impact on Home Depot’s bottom-line in the near future. However, we believe that the long-term potential is huge. When it bought Redbeacon, Home Depot also gained access to a lot of Silicon Valley talent as well as the infrastructure to expand the program nationwide. When shoppers enter the Home Depot stores, they can be introduced to the Redbeacon service and, as more customers start using the site, it will attract more professional contractors who would like access to a large customer base. We believe that Home Depot would be able to further leverage this registered customer base on Redbeacon to push online sales of its in-store products. In time, its e-commerce business would be able to generate a handsome portion of its overall revenues.
We have a Trefis price estimate of $56 for Home Depot’s stock, which is in line with the current market price.