Retailers may get squeezed by home improvement supply shortages

Marielle Segarra May 19, 2021
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Home improvement stores have a lot of demand but low supply. Spencer Platt/Getty Images

Retailers may get squeezed by home improvement supply shortages

Marielle Segarra May 19, 2021
Heard on:
Home improvement stores have a lot of demand but low supply. Spencer Platt/Getty Images
HTML EMBED:
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Home Depot and Lowe’s just reported earnings for the first quarter of 2021, and both beat estimates, in part because of a boom in home renovations and the housing market.

At the same time, there are serious shortages of many of the things people need for their homes, specifically building materials, like lumber, windows and appliances. That means these retailers don’t have enough products to meet demand.

One solution is to raise prices, which they have done. But many customers have a limit as to how much they will pay.

Take Ed Carroll. He and his wife bought a house in Cleveland in March, and they were hoping to build a fence in the yard so their dogs could run around.

“We do have a fence there now, but it’s not a great one,” he said. “Like, they have actually been able to get out of it before.”

Carroll also wanted to build shelves for some collectibles — video games and bobblehead dolls. Then he found out the price of lumber.

“It would have been easily, like, $200 or $300 to build a couple of the shelves,” he said.

Never mind what the fence would have cost. So they’re going without both for now. The collectibles are still sitting in a cardboard box.

Here’s the conundrum retailers are facing: On the one hand, demand’s not a bad thing.

“You’re much better off with the retailer having too much demand than too little demand,” said Gus Faucher, chief economist at PNC.

But when supply is low and demand is high, suppliers like manufacturers and lumber mills can raise the prices they charge retailers. And they have. 

What should retailers do in response?

“Classical economics would say, “Well, your costs are going up, and there’s more demand in the marketplace. No problem, just raise your prices,'” said Joel Rampoldt, a managing director at the consulting firm AlixPartners.

But, practically speaking, “retailers can only go so far in raising prices before they start really angering their customers and damaging their own price perceptions,” Rampoldt said.

Whether or not customers walk away depends on how flexible they are. If they need lumber for the frame of their house, maybe it’s urgent. If they’re browsing for dishwashers, maybe they decide to start hand washing. 

Yesterday, a Home Depot executive was talking about lumber on the company’s earnings call and said that at this moment, it is hard to predict how many customers will walk away or at what price.

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