How You Treat Your Customers Counts

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

After a decent earnings report from Home Depot (NYSE: HD) that was largely attributed to an improving housing market, I decided to take a closer look at the company and others that might benefit from a housing turnaround, including Lowe's, Home Depot's main competitor. I went a step further and created a strength, weaknesses, opportunities, and threats analysis for Home Depot that pretty much required a comparison to Lowe's.

In the end, while one of Home Depot's strengths was its name brand, a weakness was that consumers considered its stores less inviting than Lowe's stores. It boils down to the perception that Lowe's employees are nicer and its stores cleaner. I prefer to go to Lowe's myself for these very reasons. This got me thinking about the customer service dynamic and its impact on a company.

A Chink In The Armor
For Home Depot, the largest home improvement chain in the world, it would seem easy enough to dominate its industry. However, it doesn't largely because Lowe's is around. But why go to one over the other? Convenience is one factor that might lead a customer to one over the other, price and product selection are other reasons. However, since these two compete head to head, price and product are roughly similar. Convenience is an issue, but less so as the two encroach further into each others' turfs. Thus, for many, it boils down to the store and its employees.

Although customer service may seem a small factor, it is an important weak link for Home Depot that has provided its competitor a launching pad for growth. Moreover, it provides ample reason for Lowe's to risk going head to head in the same markets with Home Depot's often established stores. Worse, the perception of a better store experience at Lowe's is likely to linger well after Home Depot addresses the issue, if it can. For example, despite the vastly improved quality of domestic cars, most people will still tell you that Japanese cars are made better.

A Discount Disadvantage
Another company for which customer service issues are a major concern is fellow Dow-30 component Wal-Mart (NYSE: WMT). The discount retailer is known for its low prices and what many consider its mistreatment of employees and unkempt stores. Both support the perception of a disaffected staff that doesn't really care. If you have ever been to a Wal-Mart you can make your own assessment of the veracity of these comments, but I, for one, prefer to shop at other stores.

That's a problem. Although I like the cut rate prices I can find at Wal-Mart, I'm not willing to suffer through what I consider cut rate service. So, instead of going to Wal-Mart, I go to Target. And I'm not alone. Target's prices and product offerings are roughly similar to Wal-Mart's, but its stores are much nicer looking and the displays are, for lack of a better term, “hip.” Instead of feeling like I'm going to an off-price box store, I feel like I'm shopping at the trendy department store for the average Joe. As an investor, Target seems like a much better option and one with the ability to compete head to head based on one of Wal-Mart's core weaknesses.

Club Store Problems
The cut rate experience perception is a big issue and one that Wal-Mart's business model simply can't address. Clearly, it provides Target a distinct way to differentiate its stores. However, Target isn't the only one that takes advantage of Wal-Mart's weakness in this way. Costco competes with Wal-Mart's Sam's Club stores in the same manner. While there are other discount club stores around, Costco generally has the image of treating its employees well and those employees, in turn, treat customers well.

I personally made the switch from Sam's to Costco based only on that image and, happily, I haven't been disappointed. The products and pricing the are very similar and I simply prefer a better store experience. This is a big problem for Wal-Mart in the mature U.S. market. It also helps explain the difficultly that stores like K-Mart and Sears are going through, both of which are owned by Sears Holdings (NASDAQ: SHLD). Both chains have older, less desirable formats that simply don't resonate with customers. Moreover, neither stands out for customer service. Thus, customers go elsewhere and will likely continue to do so until the stores improve their images.

A Winner All Around
There are some companies that seem to get the whole customer service angle to the point where they can charge premium prices for their products. Perhaps the best example is Apple (NASDAQ: AAPL). While the strength of its product portfolio is clearly impressive, so too is the perception of its trendy stores, staff, and customer service. In fact, the so-called Genius Bar was so genius that it has been replicated throughout the retail technology sector. Not only do you get a great product, but you get nice people to help you use it when you mess things up or simply need a little helping hand. This was part of the reason I switched to Apple products (though I admit I still use a Windows laptop for writing when I am home, I use my iPad when I'm away from the house and for virtually everything else).

Other companies have this same customer service success. For example, Nordstrom sells wildly overpriced clothing, in my humble opinion, but it can get away with it partly because its stores are a complete pleasure in which to shop. There's a big difference between being pointed in the right direction and having someone walk you over to the display you are looking for, and that attention to detail matters. Privately held Publix shares this kind of service focus, making its shares, only available to employees, a desirable, though unattainable, commodity to some happy customers.

Big Is Good, But It's Not Everything
In the end, size can bring valuable advantages. However, being big isn't everything, particularly if other aspects of the customer relationship get pushed to the back burner. The impact of a bad name can last for years; just ask Ford and General Motors. When you are looking at a company, keep customer service in the back of your mind.


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ReubenGBrewer has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Costco Wholesale, and Ford. Motley Fool newsletter services recommend Apple, Costco Wholesale, Ford, General Motors Company, The Home Depot, and Lowe's Companies. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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