How Home Depot Is Using Big Data to Gain a Big Advantage

Home Depot Inc (NYSE: HD) is known for its big stores. In its big stores, customers can find a big selection of innovative and exclusive products. Many customers who frequent Home Depot's big stores are its "Pro" customers, known for spending big bucks on big projects. Home Depot's effort to integrate its website with its brick-and-mortar retail side has been a big hit because it generates big sales. While all of these big factors play their part to drive big returns for shareholders, the company's biggest advantage might come from its use of big data.

At its recent Investor & Analyst Day Conference, Chief Marketing Officer Kevin Hoffman walked through Home Depot's digital marketing efforts based on its accumulation of customer data and the numbers are nothing less than staggering. Hoffman said nearly 50 million households had been active at Home Depot in the trailing twelve months and that, through those interactions, the company was generating 1.7 trillion data points per week. While the data sets grow larger, the intent is for Home Depot to effectively get smaller so it can interact with its customers on a more personal level.

Getting personal

Hoffman says this immense amount of collected data will allow Home Depot to "tailor" its marketing messages to the individual consumer, rather than appealing to the lowest common denominator among a diverse group of customers. In his presentation, transcribed by S&P Global Market Intelligence, Hoffman said:

So, for instance, when these three different types of customers -- an affluent baby boomer, a Pro, and the new millennial homeowner -- go to purchase a new water heater each will be marketed with different material and given a different "Home Depot experience." The baby boomer's experience will be geared toward having a new water heater delivered and installed that day. The Pro will be given information on inventory, pricing, and delivery options. The millennial's experience will be heavy on content, so they can decide on what size and type of water heater might be best for them.

The tailored shopping experience

Home Depot's marketing is so targeted that even when these individuals live on the same street in the same neighborhood and are watching the same game on television, they will see different ads. When customers from different areas of the country visit Home Depot's home page, they will also see different products highlighted. But Home Depot has found ways to tailor marketing beyond just making it more personal for each consumer.

One of the things Home Depot is now experimenting with is weather-triggered ads. As Hoffman says, "These ads are only deployed and invested in when the weather is right." Another thing the company is now deploying is local inventory ads, where ads will display depending on the inventory levels in a given area's stores.

Home Depot has also partnered with popular social media site Pinterest to reach customers when they are in the beginning stage of a home improvement project, looking for ideas and inspiration. Hoffman said this type of partnership is "allowing us to target the customers early on in their home improvement journey, picking up key signals they're giving off, like style cues, product tastes or project interests." All in all, Home Depot's advertising on digital channels is now "well north of 50%" of its total marketing budget.

The Foolish takeaway

Home Depot's digital efforts are now an integral part of the home improvement retailer's operations. For evidence that its integration of its online and traditional retail operations is successful, look no further than the fact that 60% of all sales are first influenced by a digital visit and 10% of online sales begin with an in-store interaction between a sales associate and a customer. Home Depot's online business has grown by approximately $1 billion each of the last four years with an online sales penetration of 6.4%. These interconnected retail efforts have been responsible for about 20% of Home Depot's overall growth the past few years.

Home Depot continues to excel in a tough retail environment and its online efforts are no small part of its overall success. Its cutting-edge marketing techniques and growing database of customers will undoubtedly spur top and bottom line growth for years to come.

And that's a big deal.

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Matthew Cochrane owns shares of Home Depot. The Motley Fool has the following options: short May 2018 $175 calls on Home Depot and long January 2020 $110 calls on Home Depot. The Motley Fool recommends Home Depot. The Motley Fool has a disclosure policy.