← The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
The Investor's Podcast (We Study Billionaires) - The Investor’s Podcast Network
TIP769: How Home Depot’s Founders Built a $300 Billion Company from the Ground Up w/ Kyle Grieve
01:09:00
Kyle discusses the incredible origin story of Home Depot and the visionary founders who built it from nothing.
Loading summary
Transcript12 lines
- [00:01]
Kyle Grieve
You're listening to TIP.
- [00:03]
Since its IPO in 1981, Home Depot has delivered a stellar 28% compounded annual growth rate, assuming dividends were reinvested. That is an extraordinary figure representing one of the greatest long term compounding stories in business history. Now what makes this story so compelling is just how it all began. Bernie Marcus and Arthur Blank, two fired executives, teamed up with financier Ken Langone to bring Bernie's bold new idea to life. And together they turned personal and professional setbacks into an opportunity that reshaped the home improvement industry. In this episode, we're going to explore how Home Depot overcame significant early challenges in raising capital. How retail visionary Pat Farah helped transform their concept into reality, and how the company's early DNA of grit, humility and customer obsession became the foundation of its success. We'll also examine why their everyday low pricing strategy, inspired by Sam Walton, provided them with a lasting competitive edge and how their unique management philosophy centered on empowerment, decentralization and respect for individuals, sustained their growth for decades. We'll discuss how the founders failures inform their culture of resilience, the lessons they learned from both Sears decline and Walmart's rise, and how they use those insights to help build a company that still thrives today. We'll also break down the four pillars that powered Home Depot's enduring success. Operational excellence, supplier partnerships, a customer first mindset, and a culture that just rewarded ownership and accountability. These principles not only built one of America's greatest retail stories, but also offer timeless lessons for investors, entrepreneurs and leaders alike. This episode is for anyone just passionate about entrepreneurship, business culture and long term investing. Whether you're a small business owner looking for inspiration, an investor studying great compounders, or simply just curious about what drives enduring success, you're going to find some very valuable lessons in Home Depot's journey. Now let's get right into this week's episode on the DNA of Home Depot.
- [02:00]
Since 2014 and through more than 180 million downloads, we've studied the financial markets and read the books that influence self made billionaires the most. We keep you informed and prepared for the unexpected. Now for your host, Kyle Grieve.
- [02:19]
Foreign welcome to the Investors Podcast. I'm your host Kyle Grieve and today we're going to discuss the origins of a very, very well known business today which is Home Depot. So multiple things have really gotten me interested in Home Depot and its story. So the first thing is that it's a business that's just pretty boring. The second that despite this business being Very boring. It has an excellent history of growth, especially in its early days. And then third is that the business has just returned a ton of value to shareholders. So today we're going to focus on the DNA of Home Depot, and specifically, we're going to look at the book Built From Scratch, written by Home Depot's two founders, Bernie Marcus and Arthur Blank. Let's start this episode off by discussing these two founders origin stories, because they are, you know, very, very key to what makes Home Depot what it is today. So Bernie Marcus was just a very fascinating guy as a teenager. He showed a propensity for psychiatry. He read all the works by famed psychiatrists like Freud and Young. He even got into hypnosis, which reminds me a lot of Arnold Vandenberg, who was featured in William Green's book Richer, Wiser, Happier. Bernie originally wanted to go into Harvard Medical School to become a doctor, but since he was Jewish, the school required a $10,000 kickback just to admit him. And he just didn't have the money for that. Dejected, unfortunately, by this bad news, Bernie dropped out of school. A year later, his mother convinced him to go back to school, where he studied pharmacology, graduating in 1954. Now, after graduating, he partnered with a friend in the pharmacy business, but this turned out to be a pretty big mistake. He just didn't get along very well with that partner and consistently argued with him. Now, this is a very interesting point because it kind of makes me think of a saying that Stig is very fond of saying, which is, don't do business with friends before the age of 40, then only do business with friends after the age of 40. Perhaps this quote would have applied well to Bernie at this stage of his life. Now, when you are younger and immature, it's hard to get a good read on where your priorities truly lay. And while it can sound like doing business with a friend is the right choice, when you are that young, your ability to just stay focused on the big picture can be a lot more difficult once you have a better idea of where your values are and what you are truly skilled at. I think it's much less risky to work with people that you truly like. But the fact is, you probably won't have a very clear picture of your values and skills until later in life. Of course, there are exceptions, but I would say they aren't the norm. So Bernie was then introduced to someone who helped him better understand the attractiveness of a discount store. Eventually, Marcus spoke with the owner of a business called Two Guys and convinced him to let Bernie take over the cosmetics department, because Bernie just felt like it was very, very poorly run. And he was successful in that. And he began getting more and more responsibilities running other departments such as sporting goods and major appliances. By the time Bernie was 28, he was overseeing approximately a billion dollars worth of sales. So one key business lesson that Bernie learned at this time was just from observing, he noted that he was successful with two guys as well as Home Depot, specifically because he surrounded himself with people who were better than he was. So next year, I want to just look a little bit at Arthur Blank's early days. So Arthur was deeply embedded in business from a very, very young age. His father owned a pharmacy business and unfortunately died when Arthur was only 15 years old. So Arthur's mother was forced to take over the business. Now, as the years passed, Arthur showed additional entrepreneurial interest. He started his own landscaping business to help pay for his college education. He also even had a laundry business where he'd pick up laundry from the campus in the evening. He graduated college as an accountant. Now out of college, he worked for Arthur Young and eventually worked his way up to being considered an audit manager for that firm. But instead of doing that, he went back and joined the family business. Now, the business wasn't a very large growth business, and Arthur also felt it was hard having a business relationship with his mother and brother. Additionally, he just didn't feel like there was much opportunity to grow inside of the family business. Luckily for him, the family business was eventually sold to a corporation called Dalen. And Arthur felt like Dalen offered a lot of upside potential. Now, Arthur would eventually work his way up to the president of his division. Under Dalen, being president helped shape his entrepreneurial spirit of wanting to build things and be actively involved. Unfortunately, in 1974, his division was actually sold off during an economic downturn. Bernie Marcus luckily recruited Arthur into Handy Dan, which was another subsidiary of the Dalen Corporation. So now it's 1976. Ken Langone, a now legendary investor, was a business banker at this time. And he had a very, very special talent for spotting diamonds in the rough. So Handy Dan was this home improvement chain, trading at just 2 times earnings. And the business came across Langone's desk. He was very intrigued by the cheap price of the business. So Langone begins doing his due diligence process. And he absolutely loved the price. He loved the business, and he loved that Bernie Marcus was just such a fantastic operator. Dale. Incorporation, on the other hand, was an area of contention for Langone. Langone simply did not like the Dalen Corporation. The corporation barely turned a profit, and nearly the entire profit it did turn was just a result of handydan. He also just didn't have any admiration for Dalen CEO Sanford Sigeloff, who had a poor reputation of leaning out of fear, which was just a characteristic that didn't resonate at all with Langone. But Langone was a fan of both Bernie Marcus and Arthur Blank because he respected the work that they did on Handy Dan and how they led not by fear, but out of truly caring for their customers and employees. Langone bought up nearly the entire float of Handy Dan shares because it was cheap and he thought it just had a lot more value than the market was giving it credit for. But there was tension brewing inside of handydown. Sigiloff just didn't like Bernie Marcus. He thought that Bernie was getting all the credit for the success of Handy Dan, and that just didn't sit well with him. Dalon eventually bought all of Langone shares, but Langone was hesitant to do it. He knew about the rupture between Sigiloff and Bernie Marcus's relationship. He felt that if he sold his shares, Sigeloff would be able to oust Bernie Marcus. Now, as a deal closed, Bernie Marcus got a vote of confidence from one board member that he was the obvious choice to succeed Sigiloff in the future at Dalen. When that was announced, Bernie knew that his days were numbered because he knew that he was now a threat to Sigiloff's current role as CEO. Sigelov had his lawyers find the mistake that Bernie had made with the labor unions to help justify firing him along with Arthur Blank. And to add insult to injury, Bernie hadn't been getting really that wealthy off of all the great work that he'd done for Handy Dan and Dalen. But people like Ken Langone and Sigiloff had been. But all of Bernie's options were forfeited upon his firing. He contemplated fighting it in court, but Dalen had money and he just didn't. So one day, he was visited by Sol Price, and he helped convince Marcus that trying to fight Dalen would just be futile. He should just focus on the future and leave the past behind him. Now, to most people, this experience would have been an absolute nightmare, and I'm sure it was for Bernie and Arthur at the time. You're in this position where you're building up this top division inside of a successful conglomerate, and then you just get fired for all the great work that you've done because the CEO of The parent company was just jealous of you. On top of that, all your compensation just gets flushed down the toilet. But Ken Langone actually thought of this in a completely different light. He told Bernie Marcus that him getting fired was actually the best news that he'd heard of, because it simply meant that Bernie could now open a concept store that he had been dreaming about. Now, the concept was a giant home improvement warehouse that was much bigger than anything on the market, including Handy Dan. Bernie believed that this was the type of business that would put Handy Dan completely out of business. And it did this by taking advantage of its scale, cutting out the middleman to secure better pricing, and then passing that pricing along to their customers. These scale economies would simply crush their smaller competitors. But the idea was only half formed, and it would require capital that neither Bernie Marcus nor Arthur Blank had at that time. Now, for many businessmen, the firing would have seemed like the end of the road, but in hindsight, it was really the best thing to happen to Marcus and Arthur. The minor setback they had allowed them to risk everything they had to start Home Depot. The first lesson from Home Depot is that bad experiences on the face of things can actually be a catalyst for new and exciting things. While Sigelof believed that he had buried Marcus and Blank, he would later realize that he would have made a much better decision having them on his side rather than as his direct competitors. Now, as I mentioned, Ken was very, very fond of Bernie Marcus. And one day he rang Bernie with an offer for $2 million to help seed his own idea. Now, that investor was Ross Perot, the founder of Electronic Systems, or eds. So Ken helped Perot take EDS public and did a fantastic job at securing an excellent price for eds. So the story goes that Ken Langone was shortlisted as a part of the investment banking firm RW Press Bridge to take EDS public. The race was between him and a competitor. Perot ended up choosing Langone because Langone seemed hungry and would just do anything to help make the deal work out favorably for eds. Now, there's one area of contention in that deal, and that was the share price. Perot wanted to IPO eds at an astronomical valuation of 100 times earnings. Now, Ken was actually able to exceed that multiple on the ipo, and they both did very well from that deal. So you could say that Pro was quite a big fan of Kent's. Now, the problem was that Bernie Marcus saw a lot of his former boss, Sigiloff, in Perot. First off, Perot promised Bernie that he'd field his calls regarding the business and wouldn't hand it off to one of his lieutenants. But during follow up meetings, one of Perot's lieutenants was in attendance. And this immediately rubbed Bernie Marcus the wrong way as he felt Perot was kind of just going against his word. But it was just the first little thing and he just waved it off and tried not to take any offense by it. The next silly point of contention though, that would inevitably blow up the whole deal was this. So Ken was driving a Cadillac car and he was required to buy out the lease or return it as it belonged to Dalon, his former employer. Now, as part of his compensation package, he told Perot that he needed Tim to pay off the car so that he could continue using it. But Perot told him, my people don't drive Cadillacs and he was insistent that Marcus just switch cars. This was just the last straw for Marcus and he told Ken it just wasn't going to work out because he wasn't ready to go from a tyrant in Sigiloft to another tyrant in Perot. So Marcus said, look, Kenny, I know Perot is a very important person in your life, but you have to understand something. If this guy is going to be bothered about what car I am driving, how much aggravation are we going to have when we make a really, really big decision? If we can't be free to run the business the way we know it has to be run, it isn't going to work. I'm never going to have this man for a partner. I would rather starve to death. No way. So the deal was tabled. Now, if I had to give my two cents here, I think Bernie probably made the right decision. Warren Buffett has said you can't make a good deal with a bad person. And Bernie clearly didn't have a very high opinion of how Perot conducted himself here as a partner. So while Bernie was clearly quite desperate for money to start his vision, he also knew that it would never have worked with Perot, who turned out to be an incredible success story in the world of business himself. So I would say that I commend Bernie Marcus's ability to remain patient, even though he wasn't in the best financial position at that time. Now here's where Ken Langone really show in his help of Home Depot. So he told Bernie and Arthur that he would sweeten the deal for them, offering them an even larger ownership stake than the one that he initially had found with Perot while raising the same amount of money. So he did this by leveraging the group of investors who had made bundles of cash from investing in Handy Dan under Bernie Marcus's leadership. That group of investors had bought shares in Handy Dan between $3 and $9, and ended up selling out around $25. So they actually held Bernie and Arthur in very high regard and trusted their business acumen. So Langone got them all together in a room and he told them that he needed their help to support Bernie and Arthur to see if they could strike lightning twice. He even said it was a gamble. But since they all liked gambling anyway, why not put money on the guys who already gave them a win in the first place? The investors eventually invested 2 million in seed money to help start Home Depot. Now, at this point, Bernie and Arthur kind of had this concept and they had the seed money, but there wasn't very much meat on the bone outside of that. They were obviously talented, but they knew that they probably needed a little more help. And that help would come in a very unexpected way in the form of a man named Pat Farah. Now, the beginning of Pat's story with Bernie was actually pretty rocky. To begin with, Pat Farah worked for National Lumber and Supply Company. This company had been a competitor of Handy Dan, which you'll recall Bernie and Arthur worked for. Bernie was interested in acquiring National Lumber and Supply because he had seen the significant impact that Pat had growing that exact business. So Pat had helped National Lumber grow from just two to seven stores and become a serious competitor to Handy Dan. Pat wanted to continue growing National Lumber, but the family that owned the business resisted his growth strategy. Bernie tried unsuccessfully to buy the business because he wished to benefit from Pat's expertise. But all that shifted once Bernie actually met Pat in person. They instantly disliked each other, and any hopes of working with Pat were completely discarded. But eventually, Pat left National Lumber and started his own store called Homeco. So this store was immense at 130,000 square feet with inventory that was just stacked to the ceiling. The launch of the business was so successful that they actually had a 1500 person line at their grand opening. And this showed just how skillful Pat was as a salesman. Now, someone familiar with Homeco told Bernie about the store and told him that he absolutely had to see it. Even though Bernie was initially reluctant to see it based on his own opinion of Pat, he eventually went to see the store with his own two eyes. And what Bernie saw simply amazed him. Pat Farah essentially brought Bernie's dream vision of Home Depot to life before Bernie ever had a chance to do it himself. Bernie writes, despite it being Pat's creation, Homeco was love at first sight for me. I loved the merchandise assortment, the way it was piled from floor to ceiling, the awesome commitment to customer satisfaction, and Pat's offbeat way of promoting it all. After some schmoozing and adult beverages, Pat and Bernie got along like long last buddies, and Pat had the idea that the two should just work together. Bernie was ecstatic about that opportunity, since he was looking straight at his dream store in reality. But unfortunately, it just didn't work out. Homco had bad margins, and while Pat was a fantastic salesman, the actual running of a business was not his strong suit. So Pat assumed his margins were in line with those of other competitors in the 23 range. However, once Arthur obtained the books, they realized the margins were actually nearly half that, at only 12%. They also discovered that the company was essentially insolvent and had very, very little time to survive. They asked Pat to walk away from the business, but Pat just couldn't do that because he had very, very close relationships with his employees and didn't want to leave them looking for new jobs. Unfortunately, three months later, HomeCo filed for bankruptcy. But after it was filed, Bernie immediately called Pat and told him that he still wanted to work together. After some smooth talking, Bernie eventually got him as a partner along with Arthur Blank. Now, this was an interesting chapter because it highlights the importance of people in the business world. Of course, we know that people are essential, but where people are most important are in small businesses. This is where one person can have a disproportionately large impact on the business. I recently attended the Small Cap Discovery conference and spoke with the CEO of a company that I'm not going to mention here by name. And the CEO was accompanied by his wife, who was also deeply involved in the business. Now, I asked about a prior experience that the CEO had with another business adventure that he'd helped build. And being a very humble guy, he said that the guys he left the business with were great and doing a great job. However, his wife interjected with something that was very, very interesting. She said that her husband, when CEO, was essentially doing the job of four people in that business today. And this is an extraordinary, tangible evidence of just how powerful one person can be inside of a small company. Now, was Pat Farah this kind of guy? Probably. And Bernie could see that in him, which was why he was so highly attracted to the thought of them working together. So once Pat Farrow was free of HomeCo, the three of them set out to build their very first Home Depot. Bernie Marcus would own 18 of the share. Arthur Blank, 15, and Pat Farah would own an undisclosed amount, although Bernie mentioned that it was quite close, but not quite equal to Arthur's stake. Now, the first store they would create had a few restrictions. So given the limited capital that they had to work with, they didn't really want to construct the store themselves to avoid that expense. So they needed to find something that was already in place. They ended up settling on Atlanta, being the home of the first location. And while the team drove around looking for great locations, they kept coming across a name that seemed to have the real estate in all the areas that they were considering. And this was a business called Treasure Island. So J.C. penney actually owned Treasure island, and unfortunately they were unable to differentiate themselves much from J.C. penney, and therefore the parent company was looking to actually sublease portions of its Treasure island locations. They were absolutely enormous, just the right size for Home Depot and what they were looking for. However, as negotiations progressed, a hurdle quickly emerged. The representative of Treasure island wanted to sublease four locations. Now, Home Depot was obviously just a concept at this point, and they only really wanted two to start with. But subleasing two just wasn't on the table. It was either four or walk away. So Bernie, Arthur and Pat agreed to take on the four locations, even though it wasn't necessarily the perfect situation. After securing the leases on the four locations, they needed to raise additional capital as they would have no funds remaining to cover inventory costs. Their man Ken Langone promised not to worry about that, but he would find financing for them. Ken saw someone and the deal was almost complete until the lender made terms that Bernie found completely unacceptable. He literally told the guy to get out of the car as they were driving to the airport out of anger. So what were some of the things that Bernie was angered about? So the lender demanded the following. First, they wanted two board people, which didn't really bother Bernie at all. Second, they wanted Bernie, Arthur, Pat not to have any company cars. Now, this just didn't make any sense considering they were required to drive between stores to conduct business. But Bernie felt they could around it by having some sort of other expense on the business. Third, they wanted everyone to take a 10% pay cut. This was where Bernie's blood pressure began rising. But he thought that it was probably possible to do at least in the short term. But the last thing that really broke the camel's back was that the lender said they didn't want to pay for employees or managers medical insurance. This was what prompted Bernie to tell the lender to get out of the car as he was driving him back to the airport. And that deal was obviously canceled. Let's take a quick break and hear from today's sponsors.
- [21:15]
Sponsor - Human Rights Foundation
Ever notice how smart investors hedge against tail risk, but almost never talk about financial repression? Here's the uncomfortable truth. It doesn't matter how careful you build your portfolio, because if the rules around your money can change overnight, you're vulnerable. Just ask the Canadian truckers whose bank accounts were frozen, or Cuban families whose remittances were hijacked by state banks. Or citizens in dozens of authoritarian countries watching their life savings evaporate under hyperinflation. These aren't isolated incidents, they're part of a global pattern. That's why the Human Rights foundation publishes the Financial Freedom Report, a weekly newsletter that tracks how governments weaponize money to control people and how Bitcoin is helping individuals resist financial repression. If you care about sound money, personal sovereignty and Financial Freedom, HRF's Financial Freedom Report is essential reading. This is a report that I'm personally subscribed to and learn a ton from. Sign up for free atfinancialfreedom report.org that's financial freedom Report. Smart investors don't just watch the Fed, they watch the world. Onramp is a full suite bitcoin financial services firm built for long term peace of mind. They offer everything from best in class institutional grade custody and low cost trading to inheritance planning, lending and insurance. All designed to help clients protect and grow their bitcoin over time. At The Core is OnRamp's multi institution custody model backed by Lloyds of London which eliminates single points of failure by distributing keys of multisig vaults across three independent regulated custodians. It's cold storage, on chain, auditable and fully controlled by the end client but without the burdens of private key management. And now with the launch of Onramp Trade, the industry's most effective way to buy Bitcoin, it's easier than ever to onboard friends, family and colleagues who want a secure bit Bitcoin only partner to start their journey. Signing up is seamless and referrals can be entered during onboarding to earn rewards in bitcoin. From initial accumulation to multi generational wealth planning on ramp is where security meets simplicity. Learn more@onrampbitcoin.com that's onramp bitcoin.com startups move.
- [23:38]
Sponsor - Vanta
Fast and with AI they're shipping even faster and attracting enterprise buyers sooner. But big deals bring even bigger security and compliance requirements. A SOC 2 isn't always enough. The right kind of security can make a deal or break it. But what founder or engineer can afford to take time away from building their company? Vanta's AI and automation make it easy to get big deals ready in days. And Vanta continuously monitors your compliance, so future deals are never blocked. Plus, Vanta scales with you backed by support that's there when you need it every step of the way. With AI, changing regulations and buyers expectations, Vanta knows what's needed and when. And they've built the fastest, easiest path to help you get there. That's why serious startups get secure early. With Vanta, our listeners get $1,000 off@vanta.com billionaires. That's V A N T A dot com billionaires for $1,000 off.
- [24:39]
Kyle Grieve
All right, back to the show. Now, even with Ken Langone in their corner, Bernie and Arthur were having a heck of a time coming up with the money that they needed to get Home Depot off the ground in the first place. They ended up going back to one of their bankers and just demanding that they help out. And it actually ended up working. So their banker, a man named Rip Fleming, got the money after being refused multiple times by his own bank. Later, Bernie learned that Rip put his entire career on the line just to secure this loan for Home Depot, which was completely critical for its launch. So after he'd been rejected on the loan for the third time, Rip went into his boss's office and gave his letter of resignation. His boss, realizing that rip had about $400 million of other business, was not someone that he wanted to let go. And the kicker was that this loan was only for three and a half million dollars. Bernie expresses extreme gratitude for Rip in the book, writing that Home Depot would never have existed without his belief in Bernie and Arthur. Now, let's get into some of the very significant characteristics that were in Home Depot's DNA, because many of them were actually pretty surprising to me, but also made a lot of sense. So the first one I have here is when the store opened, one of the store's manager hired cleaning crews and made the store look completely spotless. Bernie and Pat instantly told the people to run forklifts and get the store looking, you know, used. They didn't want Home Depot to look like a hospital. They, they wanted it to look like a warehouse. The second one here was that lumber buyers buy their lumber at the same entrance as everyone else. So you have lumber shavings all over the place. This showed that The Home Depot was a place of action, as Bernie put it. Third was that they wanted do it yourselfers or diyers to know that they got the same price on the product as construction professionals. The Home Depot was priced for everyone, not for specific individuals. And the fourth one here is that they front the products, they don't face them. So this means that they put products out and don't have to bother making them face, you know, towards the customer as this is just more costly as you require labor and people to do that for you. So the Home Depot, right from the get go understood how to be a low cost provider. Instead of using distributors primarily to source their products, 50% of the products were sourced directly from the manufacturer. Now this gave them the low price advantage that obviously many customers absolutely love. The biggest problem for them initially was just getting their name in front of customers. But luckily for them, that problem slowly faded away. And to protect the Home Depot's brand, they kept sales a secret to discourage competitors from entering the arena. Now, I mentioned that Treasure island was subleasing to the Home Depot. Well, Treasure island unfortunately wasn't doing very, very well. And since the Treasure island locations were located adjacent to the Home Depot, once Treasure island began its liquidation, Home Depot received a significant boost in its foot traffic, which it obviously very much liked. Additionally, once Treasure island folded, Home Depot was able to take on extra square footage, increasing on average from 60,000 to 80,000. So I mentioned earlier that attracting foot traffic to Home Depot was very, very challenging. But Pat Farah thought of a simple way to get people in. So he bought a ton of these flush mount fireplace screens, then charged just $2 over cost. He was nearly giving them away for free. They ended up selling 3,000 of them and the entire order was sold in only four days and brought droves of customers, some driving multiple hours to see the store. Now, as with all smaller businesses such as Nike, which I covered on tip 655, cash flow is nearly a universal problem. Growing revenues while increasing cash flow just is not easy. Generally, growth comes from growing your top line. But this top line growth requires capital. And in Home Depot's case, you need more inventory, more stores, and more labor. So it's no surprise that Home Depot had trouble finding financing. The way they worked around this was to obtain multiple $25,000 lines of credit. Then as they reached their limit, they simply requested an increase. And this worked until they actually went public all the way until 1981. Now, the first four stores were performing very, very well, far exceeding Arthur Blank's initial projection of $9 million per store. Instead, they were doing in excess of $12 million per store. They wanted to expand, but expansion obviously costs money. So they actually ended up choosing the path of going public. So the Home Depot, you know, just started as a tiny micro cap stock ipoing at a market cap of about $7 million. Now, part of the reason they took Home Depot public was because they had expansion plans and they needed capital to fund it. South Florida was going to be the next area of focus. They had four stores in mind which would double their store count from four to eight. Now, I mentioned earlier that Treasure island was just kind of this melting ice cube. But the Home Depot was actually promised that these stores wouldn't close down because they knew that the foot traffic from Treasure island was a really nice tailwind for getting new business. But there was a day, unfortunately, that came when JCPenney just couldn't keep these stores open anymore. To make amends, they gave the Home Depot favorable terms on other real estate locations across the entire country. The ones that Bernie liked the most were the South Florida locations. So Even with the four Florida locations, their contact at JCPenney, this man named Bill Harris, had a large stock of available stores nationwide. However, the Home Depot was just stretched as is. So it had to put the brakes on this very, very large opportunity set they had in front of them. Now, this is one of those situations where I think if you had the informational advantage, you'd probably be all over buying their shares in the open market. You're looking at a small business, only eight stores, and they're quickly growing their revenue with very, very high demand for its product. On top of that, they had access at this time to endless supply of other great locations where you'd be able to locate next to a JC Penney or one of their other brands like Marshalls. And even if you didn't have access to this kind of information, there was a deadly simple boots on the ground way that any investor could see that this whole Home Depot concept was probably a winner. If you did some Peter lynch style research and simply just showed up at one of Home Depot's new Florida locations, you would have witnessed a line that was going around the building. A busy store isn't always a key to success, but obviously you'd much rather see a store with a massive line than a store begging for customers to come in. Now, in 1987, Ed Telling, the CEO of Sears, walked into his company's department stores and felt like a complete stranger. The air smelled faintly of rubber and new carpet. The aisles were lined with tools, towels, televisions and tires. For decades, Sears had been the beating heart of American retail. The place where families brought everything from lawnmowers to lingerie. But to Telling, it kind of felt dated, stale, or beneath him. He didn't even like being in the stores while he was a CEO. Instead, he began dreaming of something larger, something grander than a mere department store. Sears, he believed, could be more than just a retail company. It could be an empire of services. A place where the American consumer could buy a washing machine, open a credit card, invest in stocks, insure their car, and buy a new home all under the same roof. So he went shopping. First Telling bought Dean Witter Reynolds, a stock brokerage firm. Then Coldwell Banker, a real estate giant. They already owned Allstate Insurance and soon launched the Discover Card. The plan was bold, A one stop shop for every financial and consumer need. But there was one glaring problem. No one wanted that. Customers didn't want to talk to a stockbroker while buying a toaster. They didn't trust a clothing store with their mortgage. You see, Sears strength was tangible. They had this trust that was earned on the sales floor, not in a boardroom. But telling was kind of detached from that world. And he believed that he could transfer Sears into something by will and acquisition. But along the way, he just, you know, forgot the store. By the 1990s, the Sears empire began to crumble. The financial services floundered. The retail arm was neglected and directionless. Kind of fell behind these leaner, humbler competitors such as the Home Depot. Now, because Home Depot did something different, they made sure that their leaders never forgot the store. Every executive, no matter how senior, was expected to spend time in the aisles, wearing the orange apron, talking to customers, stocking shelves and seeing firsthand what worked and what didn't inside of the business. Home Depot understood something that telling never did. A company's wisdom lives on the floor, not in the clouds. Strategy built in isolation. Without that kind of texture of some sort of reality isn't strategy at all. It's purely fantasy. So Sears, you know, they tried to reinvent themselves from the top down, but Home Depot just kept reinventing itself from the ground up. Now the Home Depot was laser focused on getting customers what they wanted and what they needed, not investing in needs and wants for them. Bernie tells the story of how one customer was exiting one of his stores empty handed. So he caught up with them and asked why they hadn't purchased anything at the Home Depot. The customer told him that they just didn't have what they were looking for. And in a true case of Hustle, Bernie Marcus would make a white lie that they were just out of that product. He would go to the distributor, pick it up, tear off the price tag, and then charge them a lower price than what he paid. Oh, and he also personally delivered it to their home. Now, it was clear that what management was building at the Home Depot was a highly customer centric business that would be very, very hard to compete with. In a heartwarming story that showcased the employee's willingness to go above and beyond, there was a story of this woman who owned about 200 rental units. And she went into Home depot and purchased a 75 chandelier for one of her units. She had it installed by an electrician, but unfortunately just didn't produce enough light for the room. So she returned to the Home Depot, went to the same salesman who sold her the chandelier and told him that she needed a more powerful one. What did you do with the old one? He inquired. She told him that it was just going to stay there because she didn't want to electrocute herself trying to remove it. The employee told her to give him her address and he would go to her place after his shift and remove the old one for her. After this experience, guess who the woman went to when she wanted to remodel all 200 units? The home Depot. And this was why Bernie would go out of his way to over deliver for Home Depot's customers. By the 1990s, Home Depot had grown substantially. Instead of being a regional player, it was now a national player. They had the funds and the market to advertise to nearly everyone in America. As a result of this growth, they could really ratchet up some of their brand recognition through TV and magazines. Here's what Bernie said about Home Depot's evolution in branding. Our understanding of branding has evolved as a Home Depot matured. In the beginning, all we were trying to do was get our names out there, including giving out $1 bills in 1979 just to get people in the front door. Back then, the first components of branding, not that we have even used the term, were big stores, lots of stuff, low prices. That was the brand's catch points back then. It was novel. Over the years we became more sophisticated about customer service and that was an attention getter. We may not have been consciously doing it, but we were building a brand nonetheless. Now, Sam Walton was one of the earliest competitors to regularly visit Home Depot stores as they had multiple competing departments. And he was always eager to see what competitors were doing so he could, you know, clone certain traits and pass them to Walmart. Additionally, Treasure island was a direct competitor of Walmart. So whenever Sam was doing his market research in Atlanta, he'd be right next to a Home Depot location where he would do additional research. Sometime in the 1990s, Bernie Marcus visited Sam Walton and Walmart's HQ in Bentonville, Arkansas to tour the operations and discuss an idea that would be key to the Home Depot's branding. And that was everyday low prices. Now, everyday low prices were critical and helpful to Walmart's operations. Walton told Bernie how it works with manufacturers, how it helps stores, and the positive effect it had on systems and customers. Bernie was sold and Arthur was also on it as well. Arthur obviously was the numbers man and he knew that everyday low prices would probably eat into their margins. But he was also sold an idea that it would help the sales process, make sales more consistent and help make inventory management easier. Now, inventory management was a very, very big deal for the Home Depot. Items that were on sale were just a pain to manage. Often the products would sell out and the customer would show up upset because they're just were no more products available. The Home Depot would still honor its sale by taking down customers information and issuing a rain check, calling them when the stock came back in. But this was obviously a costly and tedious process. Everyday low pricing helped solve this problem. So to offset the margin hit, they needed to cut costs elsewhere. At this time, Home Depot was spending about 3% of its revenue on advertising. Now, before everyday low pricing, they would get customers to come to the store only to leave with just the discounted items. Once they introduced everyday low pricing, they noticed that their customers basket size was starting to increase as they bought additional products. Since customers would spend more money per visit, they could then cut their advertising spend. Arthur pointed out that he was able to halve the advertising spend to align with Walmart's number and get to around 1.5% of revenue. And to this day, Home Depot maintains everyday low pricing, which goes to show how much of a competitive advantage it can be if your business is set up to take advantage of it. So let's talk a little bit here about the competitive landscape that Home Depot had to deal with in its early days. So Lowe's had been one of Home Depot's competitors for multiple decades. In the book, Bernie Margus said that he felt Home Depot was just eating their lunch. He lists the following metrics from around 1998 so store count 7, 61 for Home Depot versus about 484 for Lowe's. Total sales was 30 billion versus 12 billion in favor of Home Depot. And he also points out that at that time, 20 to 25% of Lowe's locations face Home Depot as a competitor, but that only 15 to 20% of Home Depots face lows as a competitor. And then lastly, Home Depot on average got about 40% more volume out of its stores at 40% greater profitability. Now when I read this, I thought, well, I think it'd be really interesting to compare how these two giants at Home Improvement compare today. So today we have a store count of 2, 3, 63 versus 1753 in favor of Home Depot. Total sales 165 billion versus 83 billion also in favor of Home Depot. And then per store sales are about 14 million per store for Home Depot and actually 21 million per store for Lowe's. They have nearly identical gross margins at around 33%. And in terms of profitability, Home Depot has about an 8.9% net margin versus 8.2 for Lowe's. So I would say, you know, Home Depot leads a race, but there seems to be space for two giants in this industry to suck up revenue and profits. And while Home Depot is doing very, very good, they never managed to fully eliminate a business like Lowe's from competing with them. And since Home Depot is so good, it's just a testament to how competitive these industries are that there can be more than one winner. Now, what Bernie felt in his earlier days was that he was using this kind of new type of business model and that incumbents like Sears just weren't prepared for it. He writes. The industry knew we were edging closer and closer to them, but they never prepared for us. They all knew that eventually we would present a direct threat, but they couldn't think in terms other than the way that they had for decades. Now, next to this note in the book, I wrote two simple words. Counter positioning. Now, counter positioning is a power from Hamilton Helmer, 7 Powers. Its basic premise is that one business can succeed over another by utilizing a new or differentiated business model. If the incumbent adopts the new business model, it can actually harm the business rather than help it compete. Bernie notes that incumbents were just too focused on selling less at higher prices, whereas Home Depot was more focused on selling more at lower prices. Home Depot was opening competitors eyes to this business model. And part of the reason a company like Lowe's is still around today is it just began cloning many of Home Depot's practices, which clearly worked incredibly well. But how about competitors that just scared Bernie and Arthur? One such name was Hechinger. So Hechinger had been around for a while and had a really loyal customer base that Home Depot was finding it hard to disrupt. Hatchinger, in Bernie's words, had an enthusiastic consumer following, high quality locations, a classy look and feel, and a very heavy advertising. If they were steak, we were hamburger. Bernie and Arthur considered a merger with Hatchinger, but the reason it never worked out was that the business was family owned and they wanted a president who was also a family member. And on that point, Home Depot could just not agree. So no merger ever happened, even though both sides seemed very interested in getting a deal done. Now, let's go over Home Depot's largest competitor, which we briefly discussed earlier, and that was Sears. So Arthur mentions that he thought being part of Sears could have been a significant win for both Sears and Home Depot. And the reason for that was that Sears had two outstanding brands that were in direct competition with the Home Depot in Craftsman tools and weather beater paint. But these two brands just weren't that big of a priority for Sears at the time because they were focusing on this big conglomerate. Now, Home Depot believed that it could take over its home improvement section and rapidly improve it. They ended up speaking with Al Goldstein, the Sears executive in charge of acquisitions. But unfortunately, a deal never came about. But the fact that it failed was actually a blessing in disguise. As Arthur mentioned in the book, he didn't think that they could handle a deal that was that big at the time. And it showed that growth had to be more thoughtful and maybe slower than they initially thought. The last part of this chapter I want to mention reminds me here a little bit of Michael Jordan and the docu series the Last Dance. So in that show, someone mentions that Michael Jordan would actually invent conversations in his head to motivate himself to go the extra mile and really destroy his opponents. But in the show, it turns out that his opponents never actually said many of the things that Jordan claimed that they did. The thinking is that Jordan did this as part of his DNA so he could go out and outplay everyone. Now, Home Depot didn't actually need to invent competition, as it was always there. Still, they thought competition was good because it kept employees loyal and hungry to beat everybody else. And it ensured that customer service was better than everybody else. If you have no competition, the biggest problem is that you start slacking off in your business. We've seen this with cable Companies like tci, they establish a monopoly in a certain jurisdiction. Then they'd allow their service to get worse and worse because they knew a check was gonna come from their customers no matter what. Now this obviously has two big downsides. So the first one, your product sucks. And this is never good because it opens the door to other hungry entrepreneurs who wanna seal your customers and can easily tell them that there's a better offering. And then second is that you bring in regulation. If the government thinks the business is taking advantage of its customers and capitalism won't fix that problem, then the government will step in and do it on behalf of its constituents. Now, in nature, the story of life is really just the language of competition. Every creature, from the smallest ant to the largest oak, just fights for sunlight, space and survival. And out of that struggle for survival emerges balance. Wolves keep the deer population. Check. Deer trim the grass that feed the soil. And the soil nurtures the roots that hold the forest together. It's really a dance of tension and cooperation. Each species is pushing the other to adapt, to sharpen its instincts, to grow stronger. But without that push, without something to challenge it, the system just collapses under its own weight. And that exact sequence of events is valid both in business and in the human ambition. As I already pointed out with Michael Jordan, he had these imagined rivals that were like nature's predators, forces in his mind, real or not, to help keep him sharp. Home Depot didn't even have to invent competition, but it embraced it. In the way that a forest welcomes a changing season. The constant pressure to outperform rivals kept employees focused. Customers, loyalty and the organization alive and with purpose. Just like bees competing for nectar while pollinating the very flowers that they depend on, Home Depot's rivalry fueled culture created a cycle of growth that benefited nearly everyone connected to it. But when competition disappears, the ecosystem just begins to rot. Just like a river that's damned or forest that's stripped of its predators. Monopolies lose the natural feedback that just drives improvement. Their nutrients stop circulating. Service declines, innovation dries up, and regulation rushes in to fill that void. Nature has a way of reclaiming balance, and so does the market. In both worlds, survival belongs not to the strongest, but to the most adaptable. The ones that really understand that competition isn't a threat to fear, but a necessity that keeps the whole system alive. Now, let's do some storytelling here. So the date is October 30, 1984, and you're Ralph Dillon, the CEO of London based Bowaters American division. And you've successfully just sold a chunk of your hardware store to the Home Depot. As the leader of Bowater Home Centers, you're intimately familiar with the Home Depot brand. Bernie, Arthur and Ken all approach you to take a 15% equity stake in the early years of Home Depot. Let's take a quick break and hear from today's sponsors.
- [45:23]
Sponsor - Vanta
Support for this show comes from public.com you're thoughtful about where your money goes. You've got your core holdings, some recurring crypto buys and maybe even a few strategic options plays on the side. The point is, you're engaged with your investments and Public gets that. That's why they built an investing platform for those who take it seriously. On Public, you put together a multi asset portfolio for the long haul. Stocks, bonds, options, crypto. It's all there plus an industry leading 3.8% APY high yield cash account. Switch to the platform built for those who take investing seriously. Go to public.com WSB and earn an uncapped 1% bonus when you transfer your portfolio. That's public.com WSB paid for by Public Investing Full Disclosures in the Podcast Description Every business is asking the same question. How do we make AI work For us, the possibilities are endless and guessing is too risky. But sitting on the sidelines is not an option because one thing is almost certain. Your competitors are already making their move, so there isn't time to wait. With NetSuite by Oracle, you can put AI to work. Today, NetSuite is the number one AI Cloud ERP trusted by over 43,000 businesses. It's a unified suite that brings your financials, inventory, commerce, HR and CRM into a single source of truth. Intelligently automate routine tasks, cut costs, and make AI powered decisions with confidence. Whether your company earns millions or even hundreds of millions, NetSuite helps you stay ahead of the pack. And if I needed this product, it is what I would use right now. Get their free business guide demystifying AI at netsuite.com study the guide is free to you at netsuite.com study netsuite.com study picture this. It's midnight. You're lying in bed, scrolling through this new website you found and hitting the Add to cart button on that item you've been looking for. Once you're ready to check out, you remember that your wallet is in your living room and you don't want to get out of bed to go get it. Just as you're getting ready to abandon your cart, that's when you see it. That purple shop Button. That shop button has all of your payment and shipping info saved, saving you time while in the comfort of your own bed. That's Shopify. And there's a reason so many businesses, including mine, sell with it. Because Shopify makes everything easier from checkout to creating your own storefront. Shopify is the commerce platform behind millions of businesses all around the world and 10% of all e commerce in the US from household names like Mattel and Gymshark to brands like mine that are still getting started. And Shopify gives you access to the best converting checkout on the planet. Turn your big business idea into reality with Shopify on your side and thank me later. Sign up for your $1 per month trial and start selling today at shopify.com W S B that's shopify.com WSB.
- [48:37]
Kyle Grieve
All right, back to the show. Now, as part of your due diligence process for the Home Depot deal, you got all sorts of access. You got access to all Bernie and Arthur's minds in the thinking processes. You got access to Home Depot's books. You got access to Home Depot stores to see how they were planning on doing things and maybe what would differentiate them from competition. And you had access to the culture that Bernie and Arthur were trying to foster among their employees. So when Ralph was tasked with building out Bowater Home center, he had the blueprint to do so. He also knew that he didn't want to compete directly with Home Depot, so he intelligently chose locations that wouldn't compete directly with Home Depot. So he actually ended up scaling this business to nine locations, and they were located in Louisiana and Texas. But the time came to give up these nine locations, and Home Depot seemed like a good partner. Bowater Home center ultimately sold to Home depot for about $38.4 million. Now, for Bernie and Arthur, this was a growth leader that quickly enabled them to add nine stores in geographies that they had not yet penetrated. But growth for the sake of growth doesn't always work out as planned. And the Bowater integration turned out to be a bit of a nightmare. The stores were in disarray, unkept, and they weren't selling half the volume of a regular Home Depot store. But Bernie and Arthur believe that they could lift these locations up to Home Depot standards. The problem was that they just underestimated the work that would be involved with doing that. They had to remove talent from their stores and transplant them to these Bow Water locations just to improve the look and feel of these places. And because they needed to use the most Talented employees to fix BO Water. It resulted in flat sales at the existing Home Depot locations that they were forced to vacate. The culture of Home Depot and BO Water were like mixing water and oil. Home Depot's culture was to have managers that were out on the floor helping customers and employees solve problems. But BO Water's managers were allergic to being on the floor, preferring instead to stay in the back office and in the words of Arthur Blank, be content as pencil pushers. In the end, Home Depot had to lay off 95% of Bo Water's workforce. But as with all great companies, they learned from that BO Water acquisition. They realized that they shouldn't attempt to grow as fast as they had intended to with that acquisition. So Bernie, Arthur and Ken asked the board to pass a resolution asking management not to grow the business by more than 25%. This was using the board to protect shareholders by changing management's behavior. And I highly, highly respect this action. So Arthur Blank listed four big reasons for the success of Home Depot. First was merchandise. As the lowest cost seller, they had enormous buying power. Since they could pay for merchandise quickly and buy in bulk, they received favorable terms from their suppliers. Second was distribution. Home Depot skipped distributors because it would have lowered their margins. Instead, they went straight to the manufacturer. And third is finances. Home Depot needed a strong balance sheet to think long term. And obviously it wasn't that way in the beginning. But they eventually got there, which helped them grow intelligently over the long run. And fourth is infrastructure. They think of employees as long term expenses that can help generate value for the business years down the road. This is why they put a significant focus on getting the right people inside of the Home Depot as they knew they could do great things given enough time. As you can observe from the bowater acquisition, Home Depot was focusing on geographical expansion to continue scaling up. But from that bowater experience, they were focused on scaling organically through building their own stores, in their own vision, with their own people. Now the Northeast would be their next growth lever. The strategy in the Northeast wasn't too dissimilar from Georgia or Florida. Have a better product assortment, lower prices and better services than the competition. That's all it really came down to. But Home Depot executed on these three things so well that they quickly ate up market share and forced many of their competitors into chapter 11. Because Home Depot could rapidly move volume, it had to find a way to keep increasing the volume of what it sold. It wasn't possible to just move more volume through one location. So they might have had a Store that was modeled to sell $30 million each, but once they opened, they would sell 60 to 80 million each. Now, the solution here was actually just to cannibalize itself. This would allow other locations to steal some market share away from existing locations. But in the grand scheme of things, it just didn't matter that much as long as customers were buying from Home Depot and not a competitor. And an interesting thing happened as they expanded in the Northeast, Their share price absolutely took off. Now, was this because the market liked Home Depot's growth metrics? Or was it because analysts and fund managers who lived in the Northeast could now see for themselves just how much demand there was for Home Depot and maybe do some shopping there themselves? The answer was probably a mix of both. Now, for a business to truly take advantage of scale, it must have a very good relationship with its supplier. In Built to Last, the chapter that discusses this is named Strategic Partners. And that's an interesting choice of words, because if you think of your suppliers as partners and can work together, a company can really help itself, its suppliers, its customers, and ultimately its shareholders as well. Now, I spoke about this on tip 753 when I discussed Ray Kroc and McDonald's. Ray was able to get really good terms from his suppliers. And since McDonald's suppliers could essentially serve just McDonald's, they grew as McDonald's grew, and many suppliers were very, very well rewarded. And Home Depot was doing something kind of similar here. So in the early days of Home Depot, Bernie had to ask for favorable terms from their suppliers. Even though Home Depot started at only four stores, they had big growth ambitions, and they would share this growth narrative with their suppliers to try to get them on board for their journey. For example, if Home Depot had an item that maybe cost $20 to buy from their suppliers, they would then ask for a discount once they met a certain sales volume. For instance, they would go to their suppliers and say, hey, look, if we sell $100,000 of that item, could we get a 2% discount? And if we keep scaling sales, can we get a larger discount down the road? Let's say they could sell $400,000 of an item. Maybe they would ask for a 5% discount. Now, in the early Home Depot stages, their suppliers weren't convinced that they can move that kind of volume. Most of their customers just weren't selling nearly as much volume and therefore weren't getting as big discounts. This is where Home Depot got its advantage and how it worked with everyday low prices, a strategy that they eventually cloned From Sam Walton as I went over already. And the best part about Home Depot success was that it inevitably benefited its customers. If Home Depot could get a 5% discount on an item, they could pass those savings to the customer. If the supplier sold smaller volumes of an item to a Home Depot competitor, they would not get that discounted. So even if they wanted to compete with Home Depot by keeping their growth margins low, they still wouldn't be able to price a product as low as Home Depot could. Another important factor when thinking about how a business like Home Depot fits into an ecosystem is when it becomes powerful enough that vendors are actually hampshining themselves by not selling to them. So 3M was a very good example cited in the book. 3M treated Home Depot like they were going to go bankrupt within a week, and therefore they actually didn't want to do business with them when they were in their infancy. But once Home Depot's business model was validated through its growth, 3M wanted to make Home Depot a customer. Now, this was eight years and several hundred stores after Bernie Marcus felt that he'd been treated poorly by 3M, and they eventually made a deal. But Bernie said they had to pay a very steep price for the opportunity to become a Home Depot supplier. While reading the book, I came upon one part that really got my attention, and that was at Home Depot, a retailer was exhibiting some form of network effects. What would happen was if a manufacturer wasn't selling at Home Depot, they would simply lose customers. The reason was simple. People wanted to buy their equipment from Home Depot because they knew the value proposition was just so good and better than pretty much anything else out there. So if they were using Klein's tools, for instance, their whole life, and then started shopping at Home Depot and needed a new socket wrench, they would just buy whatever soccer wrench Home Depot was selling and not stay loyal to that Klein brand. So here's what Bernie Marcus said. We were not going to buy from any wholesaler or distributor. We had customers coming into our stores who were consumers of many of these products. When they couldn't buy these products in our stores, they would just buy something else. So we had to convince the manufacturers that they had to be in our stores because that's where their customers were. That was our selling point. Just go outside one of our stores and interview our customers. We tell manufacturers, find out how many of them were your customers and are no longer your customers now. I just searched on Home Depot site for Ridgid tools and I got about 554 results. The story of how Ridgid became an exclusive brand for Home Depot is a good one. So there was a company called Emerson Tool Company and it started making Craftsman tools for Sears. And they did this successfully for nearly four decades. Bernie Marcus liked their tools so much that he tried to get them to make tools specifically for Home Depot and just named them something else. But the company's CEO, Chuck Knight, wouldn't do it because he felt that it was simply not the right thing to do, given the relationship that they had with Sears and that Sears was a direct competitor. But one day, Bernie got some excellent news. He heard through the grapevine that Sears had decided to stop selling American made tools like Craftsman. They'd go overseas to get cheaper manufacturing. They informed Emerson that they would no longer need their services. Now keep in mind that some businesses, and obviously this one too, are very, very essential to small towns. And Emerson was one of these. So it employed about 6% of the town's population. So shutting its doors would have been a terrible event for the people working there and their families. So Emerson got to work creating the best possible product lines that they presented to Home Depot's executives and merchants. And the product lines were absolutely exceptional. And that's why they still sell to Home Depot to this day. Now let's shift from Home Depot's advantage with suppliers to the advantages that it had through management, which it learned over decades of experience. So they discussed 14 here in detail. One. The invisible fence. This is a point about the benefits that Home Depot derives from its decentralized business model. The decentralization policy was implemented after Home Depot expanded to the West Coast. As they grew, they realized they needed different regional presidents who could manage their specific geographies. What the fence is, is just making sure that these presidents stay in their lane and don't venture too far outside of it. They have an ample latitude to do things without consulting above. But there is a limit to that freedom. And that is where the invisible fence analogy comes in. If they go outside the limit, they will be zapped by the fence. Regional presidents are given a lot of responsibility and if things go well, then the whole region gets credit. If things go bad, it's the President's fault. Two is called the three bundles. This was a framework that Home Depot cloned from General Electric Chairman Jack Welch. It's three bands of decision making authority inside of the company. The three bundles are non negotiable, entrepreneurial and empowerment. So the non negotiable bundle is uniform across all of Home Depot's locations. And just doesn't change. This ensures that the Home Depot brand is preserved no matter where you go and keeps operations consistent. This includes things like store layout, signage, pricing, safety standards and customer service expectations. The Entrepreneurial bundle helps to encourage management and associates to think like entrepreneurs, to adapt to innovate and find new and better ways to serve customers. This might be innovative advertising like promoting the rigid tool line by creating a mini golf course using blowers or cutting a junk car in half using a power saw and making an in store display from it. This point is important because many of these grassroots ideas can spread into company wide initiatives. The third bundle is the Empowerment Bundle. This is allowing associates to have complete autonomy over how to run their departments or stores on a day to day basis. The purpose of this bundle is to empower employees to act as owners and not just as staff. Ensuring each store feels unique, is full of local energy and pricing, but remains aligned with Home Depot's mission. Number three is hire overqualified people with a view towards future growth. The most crucial part here is future growth. The person who takes you from 100 million to a billion might not be the same person who takes you from 1 billion to 5 billion. You need people who have the energy and inclination to continue taking your business to new heights. Number four is have a financial conscience. Once your business scales, buying an item that will be a necessity across all locations comes with a pretty high price tag. In the book, Arthur Blank mentions that Home Depot had about a thousand locations. If you wanted to buy something for the store that was $1,000, that would actually be a $1 million decision. So focus on where you are spending money and don't spend unnecessarily. 5 one man shows don't cut it. If you have a superstar management, make sure that if changes need to be made, the manager shares their reasoning as to why changes need to be made. There's no point in hoarding information that could improve the business just for yourself. The company only gets better when failures are rectified across the board. Six is open lines of communication. Bernie and Arthur credit having breakfast in front of their entire Home Depot staff as helping them to identify problems throughout the company. So let me explain this. So they would hold a few breakfasts each year between the two of them where they would chat, then stream it to their store locations. During these breakfasts they'd answer key questions from associates that helped improve things such as customer service. 7 is something called Bernie's test. So Bernie had a test where he'd visit Home Depot stores around the country and observe how long it took for people to recognize him. Arthur said that this wasn't about ego, it was about the associates making eye contact with their customers and just serving them properly. If they couldn't make eye contact, Bernie felt like they just weren't being well managed. He'd go into stores asking very simple questions to make sure that associates knew what they were willing to sell and were properly prepared.
- [62:17]
Sponsor - Vanta
8.
- [62:17]
Kyle Grieve
Is honest feedback home Depot managers got input from those above and below them. They helped them improve as managers, which lifted the entire company. They called them the 360 feedback and it helped give insight into where people would be the best fits as they moved up the corporate ladder. 9. Establish ties that bind and strengthen Arthur felt that building great relationships with managers that he entrusted was just vital to the health of Home Depot. So he created these kind of Outward Bound trips such as a visit to a dude ranch in Utah or sailing trips. This helped him develop closer bonds with people that he trusted to help run Home Depot and get to know them in a more personal way outside of business. 10. Shut up and show them what you want. Now I discussed earlier how Home Depot tries to empower its associates and managers so they act more as owners and less as paid labor. One way to do this is to allow associates or middle management to take the initiative and demonstrate how to make rapid improvements. One example of this was when a district manager went into a store, promoted seven employees to assistant managers, then went on a 20 hour binge of re merchandising and cleaning. They rapidly improved the store's look and sold old inventory. Once the manager returned to the store, he saw all the improvements that had been made which lit a fire under him to keep over performing. 11. Kill Bureaucracy Part of Home Depot success came from its decentralization. Arthur knew that bureaucracy would be a death sentence for a business like Home Depot. This is why they gave regional managers such a long leash. It transformed responsibility onto them so Bernie and Arthur could focus more time and energy on things like scaling the business rather than micromanaging. 12. Hire the best. Arthur writes, there is an aversion in most organizations and among most managers to hiring people who are smarter than they are. From the time we started in retail, we have always believed in hiring the best people. Don't just hire good people and let their potential go to waste. Give up responsibility and authority to them. Challenge them to surpass you and every time they show a spark of genius, your own career will take off because you are responsible for them. 13. Inverted pyramid in Arthur and Bernie's view, they are the least important people at Home Depot. They aren't the guys to ask about, you know, hiring a house. Their associates are knowing this. They prioritize serving the stores above all else. And they also emphasize that everyone working at Home Depot has a role in making sure the stores are thriving and have the support needed to continue serving customers as best as possible. And the last One here, number 14, is just respect for the individual. Bernie and Arthur highly respect each other, even though they don't always agree. But because they were both open to improvement, they have worked to continue improving themselves and not really let their egos lead them to becoming complacent. Arthur said they rated themselves as just a 67 out of 100 on how well they were doing. And even though they thought that that was 110 compared to competitors, they felt like there was a lot of room for improvement. Now, those 14 points carry a lot of value. The word that comes to mind when going through all of them is just humility. You have to have humility to run a decentralized business and actively hire people who are smarter than you. But as Home Depot, Berkshire Hathaway and scores of other decentralized companies have compounded value for decades have shown, if you have the humility to pass off responsibility and trust to exceptional people, there's a chance you're going to do exceptionally well. Now, when Built From Scotch was published in 1999, Arthur noted that Home Depot made millionaires from over 1,000 of his associates. This is a very impressive number, and considering the Stock is nearly 10x from the end of 1999, I'd assume there's many more millionaires in Home Depot's ranks. Although it would have been easier to strike it rich in Home Depot in its fast growing days, where now it's more of a blue chip stock. Now, one framework that I've learned from Warren Buffett that I think is incredibly powerful is to look bat that what management has said a few years ago and see how they executed on their initiatives. The best management teams are the ones that say what they're going to do and then do exactly what they're going to say. It's rarer than you would think. So with that thought process in mind, I thought it would be interesting to take a much longer view on Arthur Blank's vision of Home Depot's future. A quarter of a century ago, he named five growth categories. Now, keep in mind, a quarter century is a really long time. I generally look for three to five years and it's kind of harder to get that data cause you know, it's hard to know where Home Depot was five years after he made these growth initiatives. But let's go over them anyways. So the first one is continued expansion of its core business. Second was increased sales to professional customers. Third is international expansion. Fourth was specialty store expansion, and five with convenience stores. So where they shone brightest across all these growth categories was just simply by sticking at what they knew best, the good old US of A. From 1999 to today, they've grown their US store count from 930 to about 2038 for a low but steady CAGR of 3%. We can roughly calculate U. S revenue growth assuming that in 1999100 of revenue was from the U.S. this is most likely a wrong assumption, but X US was probably about less than 1%. Then we can look at U. S revenue today. So during that same time period they grew U. S revenues at about a 5.5% kegger. Now as for the second point on selling to professional customers, it's very difficult to get any data on this, but as professionals would have probably had larger basket sizes, I can see how they would have been very high priority for Home Depot. It's impossible from my standpoint to grade them on this because I just can't see the mix of their customer base. In 1999, two sources I found said that professionals make about 10% of Home Depot's customers, but about 40 to 50% of total sales. Now the book mentions that Canada was their first foray outside of their home country. And the success there opened up management's eyes to the potential of opening stores outside of the U.S. now, while it appears that they attempted to open in places like Chile and China, from my research today the only locations outside of the US that I can find are in Canada and Mexico. So while international expansion didn't go as planned, they still did a good job of expanding into both of these markets. Now according to DIY International Home Depot had about 2317 locations in 2022 of which 323 were outside of the US over the last decade, international sales have gone up at a kegger of about 5% versus a US kegger about 7%. So the reason for this underperformance is things such as foreign exchange considerations, smaller housing markets in Canada and Mexico versus the U.S. smaller international professional home builder penetration, and the fact that Home Depot utilizes a lot of American based products and services that offer better benefits in the U.S. versus outside the U.S. now, the specialty store expansion was a test that they started in 1991, and these were called Expo design centers, and they specialized in kitchen and bath renovations. The test ended up closing in 2009. Another test that they tried was a concept called the Home Depot Crossroads, which sold to more rural markets. But they very quickly regretted that and that initiative closed down swiftly. As for the convenience store aspect, they created a much smaller concept store called Villagers Hardware in 1999. The concept was made because they figured that some customers may not need to spend hundreds of dollars going to a large location, so they might prefer going to a smaller location where they could just get some very high priority options. But this initiative also flopped and they ended up shutting that one down in 2002. So in terms of these initiatives, the one that really worked out was just sticking to the US at the time the book was written, E Commerce was still in its infancy, but it appears that they were ready to accept that some people would want to shop for Home Depot's products without physically entering the stores. So they acquired two direct to consumer businesses that specialized in blinds and wallpaper. It's hard to say how E Commerce has worked for Home Depot as they don't disclose online sales, but I can only assume that they're selling a fair amount of merchandise online. While Home Depot is a great company, I have to say I have zero interest in owning them. The business has a market cap of 383 billion and 20 year keggers of 4% for revenue and 5% for net income. Now, the lack of growth here is just entirely uninteresting to me, especially given that the shares trade for a PE of 26. They have, over that same period, paid some dividends, and those dividends have grown at a 13 compound annual growth rate, and they've retired some shares at about a kegger of 4%. So they're, you know, creating some shareholder value through a mix of earnings growth, dividends and share repurchases, but just not enough to really interest me. For investors who might favor steady businesses that pay a dividend and are likely to be around in 20 years, I can see how this stock might be of interest to you. If we went all the way back to when Home Depot went public and when they had much fewer than 100 locations, you know, they had whatever, four or eight of them, I would definitely be all ears. They had a fantastic concept, a massive market that was barely penetrated. And from its IPO until 1999, adjusting for share splits, the company was a1333 bagger. So the potential would have been interesting when it was a micro cap or small cap, but I can't see returns today that are much higher than the market average now. At its core, Home Depot's DNA is built on humility, hustle and a deep respect for people that's including, you know, customers, employees and suppliers alike. From the very beginning, Bernie Marcus and Arthur Blank refused to let bureaucracy or ego stand in their way of progress. They led directly from the floor, not from the ivory tower or the boardroom. They built a culture where empowerment, ownership and service defined success. Their obsession with low prices wasn't just a business model, it was the cornerstone of Home Depot's philosophy. And their willingness to outwork out, serve and out learn competitors became the foundation for one of America's greatest retail stories. Home Depot's story reminds us that sustainable greatness doesn't come just from grand strategy. It comes from simple, consistent execution rooted in very, very strong values. The orange apron symbolizes more than just a brand. It's a badge of humility and purpose. From four scrappy warehouses in Atlanta to thousands of stores across North America and Mexico, Home Depot's culture of trust, empowerment and relentless customer focus remains the beating heart of its success. Today, that's all I have for you. Want to keep the conversation going? Follow me on Twitter Rational Mrks or connect with me on LinkedIn. Just search for Kyle Grief. I'm always open to feedback, so feel free to share how I can make this podcast even better for you. Thanks for listening and see you next time.
- [72:33]
Thank you for listening to tip. Make sure to follow we study billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com this show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.