Home improvement retailer Lowe’s (NYSE:LOW) demonstrated its Iris suite of home automation products at the Consumer Electronics Show (CES) in Las Vegas last week. The company seems to be betting big on this segment as the next catalyst for growth by competing on innovation rather than just retail sales of other manufacturers’ products. 
With rapid advances in technology and growth in wireless connectivity, the idea of smart homes is increasingly gaining hold. This is not merely for convenience but also energy efficiency. Customers can save a lot on their energy bill with a little upfront investment and a small recurring service charge. As the nation’s second largest home improvement retailer paying special attention to in-house innovation, we think that Lowe’s is poised to capture this space quite well.
The Market Opportunity
Being able to order an electronic or electrical appliance in the house to follow verbal orders without bothering to get up is definitely attractive and convenient. However, it is doubtful that many people would be willing to pay more than just a few dollars if it is only convenience that’s on offer. The good news is that the biggest USP (unique selling point) of home automation is energy savings and not convenience. Customers are bound to be attracted by anything that results in substantial monetary savings. The latest suite of products in the market enable people to monitor their appliances. There are smart energy meters which view and manage power usage, in case of a water leak the water valve shuts down automatically and the water heater turns off once its job is done. Since appliances are automatically turned off when not needed, it results in huge energy savings for customers. 
In the past, using home automation products was prohibitively expensive. However, costs have come down significantly over the last two years so the market for these products is now expected to grow at an annual rate of about 47% over the next four years.
Lowe’s’ Iris System
Lowe’s Iris Home Management System allows homeowners to monitor and control their various devices through a cloud-based remote interface which is available through a Web browser or a smartphone application. The company currently has 40 products in its portfolio in partnership with Honeywell, Schlage and Whirlpool, which can be connected to Iris. The original suite of products included cameras, thermostats and motion sensors. At the CES, Lowe’s introduced a garage door opener and a water shut-off valve as well. All these devices are controllable using an application on the smartphone. 
Lowe’s bundled kit offerings start from a price point of $179 and include 3-8 products, depending on the option chosen. Each additional device outside the kit costs extra if a customer wishes to purchase it. There is also a free monthly basic service that allows basic control of Iris devices and sends email and text alerts to the user if an alarm is triggered. The premium service, which is free for the first two months, offers additional customization services at a monthly fee of $9.99. 
Home Depot, the country’s biggest home improvement retailer and Lowe’s largest competitor, sells a suite of energy management and home automation products. It also offers bundled kits but with a different collection of products so a head-to-head comparison with Lowe’s isn’t possible. 
Other competitors include similar offerings from Time Warner, CPI Security and Revolv. Revolv’s business model is built around integrating popular third-party smart devices, including Philips Hue LEDs, the Nest thermostat, Sonos wireless speakers and Yale locks. This is in contrast to Lowe’s model, which involves building the entire automation ecosystem around its own offerings.
We foresee a crucial battle in the next couple of years or so which will determine whether customers prefer a closed ecosystem or an open one. This could be similar to the battle between the Apple and Android platforms where Apple embodies the closed ecosystem philosophy whereas Android advocates an open ecosystem. However, whereas Apple enjoys a cult status owing to its unique reputation for radical innovation at regular intervals, the home automation space is rather crowded and currently not dominated by a single player. It is quite possible that if a dominant player doesn’t emerges in the closed ecosystem space, open standards will become the norm. This would put companies like Lowe’s at a disadvantage. If Lowe’s takes the initiative and invests enough resources in the home automation space to carve a niche for itself, it may be able to capture a significant chunk of the market and enjoy high profit margins, even as it co-exists with Revolv and other open ecosystem players.
We have a $46 Trefis price estimate for Lowe’s stock, which represents 8% downside to the current market price.Notes:
- Lowe’s pushing home automation at Consumer Electronics Show, Charlotte Observer [↩]
- CES: Lowe’s Sees Iris as a Future Growth Catalyst, The Motley Fool [↩]
- CES 2014: ‘Smart home’ sector finally wises up, USA Today [↩]
- Lowe’s Iris Offerings, Lowe’s Website [↩]
- Home Depot Home Automation Offerings, Home Depot Website [↩]