WEBVTT 1 00:00:00.160 --> 00:00:04.240 I'm sorry, I got tripped up. You used power tools, David Rosenthal? 2 00:00:05.680 --> 00:00:15.760 I built this whole door. I got the blank door from Home Depot. I had to cut it down to size to fit a nonstandard size door opening in my studio. 3 00:00:15.760 --> 00:00:16.445 Wow. 4 00:00:16.445 --> 00:00:18.240 I drilled the door handle. I put the doorknob on myself. It all worked great. 5 00:00:18.480 --> 00:00:20.080 We, we've got to get you to the pro desk. 6 00:00:20.400 --> 00:00:25.640 Yeah. And it's been part of every Acquired episode since. 7 00:00:25.640 --> 00:00:26.240 All right, let's do this. 8 00:00:26.240 --> 00:00:40.156 [Music] 9 00:00:43.180 --> 00:00:54.380 Welcome to the Fall 2026 Season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. 10 00:00:54.380 --> 00:00:54.880 I'm David Rosenthal. 11 00:00:54.880 --> 00:01:13.290 And we are your hosts. Home Depot is an astonishingly large company. Before I started this research, I thought of it as a big store at the middle of a bunch of shopping centers, but not really like an important company to the world. But I was wrong. And the stats are large, David. 12 00:01:14.320 --> 00:01:15.320 Yes, large. 13 00:01:15.320 --> 00:01:18.726 It is the world's largest specialty retailer. 14 00:01:18.801 --> 00:01:25.463 The only retailers larger are general, not in a specific vertical like home improvement. 15 00:01:25.538 --> 00:01:28.339 So think Walmart or Amazon or Costco. 16 00:01:28.415 --> 00:01:29.701 Those are bigger. 17 00:01:29.777 --> 00:01:32.502 But the other vertical ones are not. 18 00:01:32.578 --> 00:01:41.888 In fact, Home Depot is the 45th most valuable publicly traded company in the world, period, with a $350 billion market cap. 19 00:01:41.964 --> 00:01:47.490 So that's more valuable than Netflix or Alibaba or Goldman Sachs or LVMH. 20 00:01:47.590 --> 00:01:51.910 Or Disney that we just covered. 21 00:01:51.910 --> 00:01:56.990 [Music] 22 00:01:56.990 --> 00:01:57.490 Yes. 23 00:01:57.490 --> 00:01:59.190 Which is wild because unlike all of those other companies, Home Depot is only in North America. 24 00:01:59.190 --> 00:02:04.930 Yes, home improvement is just a massive category, way, way bigger than I realized. 25 00:02:05.000 --> 00:02:06.470 So here's a fun stat. 26 00:02:06.540 --> 00:02:10.880 Home Depot went public in 1981, one year after Apple Computer. 27 00:02:10.950 --> 00:02:23.060 And astonishingly, if you put $1,000 into Home Depot and Apple and their IPOs and you held them all today, your investment in Home Depot would beat your investment in Apple. 28 00:02:23.130 --> 00:02:30.690 And if you reinvested the dividends that it paid out, it has compounded at nearly 25% per year for 45 years. 29 00:02:30.760 --> 00:02:34.190 I mean, imagine if your stock portfolio did that— 30 00:02:34.190 --> 00:02:37.920 Yeah, Home Depot is an all-timer. I kind of can't believe we haven't done this episode yet. 31 00:02:37.990 --> 00:02:54.070 Right? That makes it the number one performing stock in the S&P 500 in total investment return from the day that it went public to today. So that $1,000 invested in the IPO would be worth about $17 million dollars today. 32 00:02:54.420 --> 00:03:04.020 Not bad. Not bad. Well, we're going to get into as we go who holds that equity, because it's actually a critical part of the company's strategy, or at least it was. 33 00:03:04.150 --> 00:03:04.650 Yeah. 34 00:03:04.650 --> 00:03:09.276 And listeners, if you're trying to contextualize, well, 45 years is a long time. 35 00:03:09.336 --> 00:03:12.019 You know, how does that $17 million stack up? 36 00:03:12.078 --> 00:03:14.284 Ben and David love their index funds. 37 00:03:14.344 --> 00:03:16.251 You know, we love Vanguard here. 38 00:03:16.311 --> 00:03:22.690 If you had bought the S&P 500 with that same $1,000, instead of $17 million today, you would have $170,000. 39 00:03:24.414 --> 00:03:25.414 Wow. 40 00:03:25.414 --> 00:03:28.617 Today we will tell the story of how it happened. 41 00:03:28.683 --> 00:03:48.236 It is an unlikely story of two guys who got unceremoniously fired from their old jobs with little savings and no retirement funds, who then had a revolutionary idea to build a home improvement store in giant warehouses, five times more square footage than any other hardware store at the time, 42 00:03:48.302 --> 00:03:51.372 which seemed risky at best, unthinkable maybe. 43 00:03:51.439 --> 00:03:56.777 And we'll try to answer the question, how and why did that idea become so large? 44 00:03:56.844 --> 00:04:01.582 I mean, of course it's bigger than Lowe's, but also IKEA, Trader Joe's. 45 00:04:01.649 --> 00:04:05.586 It's bigger than nearly all dedicated grocery store chains. 46 00:04:05.652 --> 00:04:09.122 And today they employ an astonishing 470,000 people. 47 00:04:09.189 --> 00:04:19.065 That's more than any big tech company in the US except for Amazon, more than any bank in the world, more than almost every car company, hotel chain. 48 00:04:19.132 --> 00:04:23.603 More employees than any restaurant chain also, including Starbucks. 49 00:04:23.670 --> 00:04:26.740 So listeners, this is the story of Home Depot. 50 00:04:26.740 --> 00:04:27.503 Woo, let's go. 51 00:04:27.580 --> 00:04:32.981 So for all of you who have been asking for visuals to go with our episodes, you are in luck. 52 00:04:33.039 --> 00:04:46.014 We are making our companion PDF a regular thing now, so you can click the link in the show notes or go to library.acquired.fm to get access to all the charts and tables and illustrations from key concepts in this episode. 53 00:04:46.072 --> 00:04:48.949 You can join the email list at acquired.fm/email. 54 00:04:49.008 --> 00:04:56.992 That's where we'll send out all the behind-the-scenes photos of research and past episode corrections and vote on future episode topics. 55 00:04:57.051 --> 00:04:58.577 That is acquired.fm/email. 56 00:04:58.636 --> 00:04:59.517 Join the Slack. 57 00:04:59.575 --> 00:05:02.745 Come discuss it with David and I at acquired.fm/slack. 58 00:05:02.804 --> 00:05:07.560 And before we dive in, we want to thank our brand new presenting partner, Sierra. 59 00:05:08.110 --> 00:05:18.370 Yes, Sierra helps the great companies of the world build better customer experiences and drive stronger business outcomes with AI. And we are so excited to be working with them. 60 00:05:18.370 --> 00:05:32.730 That's Sierra, S-I-E-R-R-A. So with that, this show is not investment advice. David and I may have investments in the companies that we discuss, and this show is for informational and entertainment purposes only. David, take us in. 61 00:05:32.730 --> 00:05:45.720 So the story of Home Depot is kind of like the Acquired version of an Avengers movie. There are these four business and retail superheroes that come together and, you know, save— Well, they don't save the world, but they save customers a lot of money. 62 00:05:45.720 --> 00:05:50.260 They provide extreme value propositions to the American consumer. 63 00:05:50.260 --> 00:05:50.760 Yes. 64 00:05:50.760 --> 00:05:51.110 Yes. 65 00:05:51.110 --> 00:05:55.440 So we start first with Home Depot's founding CEO, Bernie Marcus. 66 00:05:55.510 --> 00:06:05.170 Bernie comes from a poor family of Jewish immigrants in the rough neighborhoods of Newark, New Jersey, in the 1930s during the Depression. 67 00:06:05.240 --> 00:06:18.260 Bernie was actually in a gang as a kid, which I discovered hilariously reading Bernie's book, Kick Up Some Dust, the foreword of which was written by his good friend, the rapper Pitbull. 68 00:06:18.330 --> 00:06:24.420 Like, amazingly, the two of them bonded and became good friends later in Bernie's life. 69 00:06:24.630 --> 00:06:28.070 Yeah, when you sent me that book cover, I had a serious double take at the foreword. 70 00:06:28.070 --> 00:06:28.570 Yeah. 71 00:06:28.570 --> 00:06:40.393 So Bernie, despite his, you know, rough upbringing and gang experience on the streets of Newark, he's super smart and he ends up being the first person in his family to go to college. 72 00:06:40.459 --> 00:06:45.610 He goes to Rutgers down the road from Newark, there in New Jersey, for college. 73 00:06:45.675 --> 00:06:50.240 And his dream is to go on to medical school and become a psychiatrist. 74 00:06:50.305 --> 00:06:56.434 That doesn't work out because his family doesn't have any money to send him to medical school. 75 00:06:56.499 --> 00:06:58.847 So instead, he becomes a pharmacist. 76 00:06:58.912 --> 00:07:04.520 That quickly leads him to becoming a concessionaire in a New York area discount store. 77 00:07:04.585 --> 00:07:07.454 Concessionaire, like a store within a store. 78 00:07:07.519 --> 00:07:09.997 This begins Bernie's retail education. 79 00:07:10.062 --> 00:07:15.344 And from there, he would go on to join the New York area discount chain Two Guys. 80 00:07:15.409 --> 00:07:28.581 Ultimately, this leads him a couple of years later in his 30s to an executive role at the Daylin Corporation, which was a retail conglomerate based in Los Angeles with a whole bunch of different stores. 81 00:07:28.646 --> 00:07:30.667 So we're now here in the 1960s. 82 00:07:30.733 --> 00:07:33.080 This is an exciting time for retail. 83 00:07:33.145 --> 00:07:40.057 All sorts of new concepts are popping up all over the country to replace the outdated general store model. 84 00:07:40.122 --> 00:07:46.969 There are shopping malls being built everywhere in the suburbs across America here in the postwar period. 85 00:07:47.034 --> 00:07:52.251 Sears is building big anchor tenant stores attached to these new shopping malls. 86 00:07:52.316 --> 00:07:55.641 Kmart is rising across the country as a discounter. 87 00:07:55.707 --> 00:08:02.553 Sam Walton and Walmart are starting to emerge down in the rural South, and they're building a powerhouse. 88 00:08:02.618 --> 00:08:04.901 The landscape in retail is dynamic. 89 00:08:04.966 --> 00:08:10.443 The postwar 1960s baby boom American suburbs are alive and well with their shopping. 90 00:08:10.508 --> 00:08:19.637 And Daylin was this holding company that operated almost like, I don't know, like a portfolio or an index fund on all these retail concepts. 91 00:08:19.702 --> 00:08:28.049 So they would go out and acquire small chains of all of these types of post-general store concepts serving the American suburbs. 92 00:08:28.114 --> 00:08:34.570 So yeah, they had pharmacies, hardware stores, clothing, home furnishing, discounters, you name it. 93 00:08:34.570 --> 00:08:48.079 And for the most part, all retail in America at this point, except for Sears, Kmart, some department stores, you really didn't have these big national retail giants the way that we do today. It was kind of these regional chains. 94 00:08:48.079 --> 00:08:48.579 Yep. 95 00:08:48.579 --> 00:08:48.927 Yep. 96 00:08:48.927 --> 00:08:52.126 So Bernie's now a corporate executive at Daylin. 97 00:08:52.196 --> 00:08:54.429 He has no equity in the company. 98 00:08:54.499 --> 00:08:57.639 He's just an employee, but it's a stable job. 99 00:08:57.709 --> 00:08:58.825 He's doing well. 100 00:08:58.895 --> 00:09:02.942 He's certainly moved up in the world from his upbringings. 101 00:09:03.012 --> 00:09:05.245 And then he gets an opportunity. 102 00:09:05.315 --> 00:09:15.154 In 1972, Daylin makes Bernie the CEO of its Handy Dan subsidiary, which is a chain of hardware stores that's also based there in Los Angeles. 103 00:09:15.224 --> 00:09:17.108 So again, he has no equity. 104 00:09:17.178 --> 00:09:19.970 He's the CEO, but he's just an employee. 105 00:09:20.210 --> 00:09:25.030 And also he comes at it from the retail side, not the hardware expertise side. 106 00:09:25.092 --> 00:09:37.268 This is kind of my favorite part of this whole story is of the people who would go on to found Home Depot, none of them are like general contractors or grew up in the hammer manufacturing business. 107 00:09:37.330 --> 00:09:39.370 It's people who just knew retail. 108 00:09:39.370 --> 00:09:39.580 These are retail guys. 109 00:09:39.580 --> 00:09:40.356 Yep. 110 00:09:40.356 --> 00:09:43.580 Exactly. Well, retail and finance guys, as we'll see. 111 00:09:43.580 --> 00:09:44.332 Yes. 112 00:09:44.332 --> 00:09:58.537 So once Bernie becomes CEO of Handy Dan, he quickly recruits another younger company man from within the Daylin empire, a financial whiz named Arthur Blank, to come over to L.A. 113 00:09:58.618 --> 00:10:01.587 and join him as his CFO at Handy Dan. 114 00:10:01.668 --> 00:10:05.841 And Bernie, you know, he knows himself as we'll see. 115 00:10:05.921 --> 00:10:11.540 He is an incredible retailer, an incredible CEO, an incredible leader. 116 00:10:11.620 --> 00:10:13.947 But his weak spot is finance. 117 00:10:14.028 --> 00:10:24.863 Now, you might be wondering, wait a minute, if Handy Dan is a subsidiary of Daylin, why does it have its own CEO, CFO, management team? 118 00:10:24.943 --> 00:10:30.080 Because Handy Dan was also a standalone publicly traded company. 119 00:10:30.080 --> 00:10:33.870 And Daylin didn't own all of it, right? It just owned the majority of the shares? 120 00:10:33.870 --> 00:10:34.370 Yeah. 121 00:10:34.370 --> 00:10:57.421 So Daylin had bought all of it, but then there was this kind of crazy fad going on Wall Street in the '70s here, which we're into now, where conglomerates would spin off these little 19% equity stubs of their various divisions and then float them publicly on the stock market, 19% being below 20%, 122 00:10:57.499 --> 00:11:04.650 so that the parent company could still consolidate the division's financials on their books. 123 00:11:04.650 --> 00:11:10.920 I see. So it actually looks like, oh no, this is a division of ours. 19% of it just happens to be owned by someone else. 124 00:11:10.920 --> 00:11:11.420 Yep. 125 00:11:11.420 --> 00:11:11.744 Yep. 126 00:11:11.744 --> 00:11:22.720 And the idea was that this would unlock value since these conglomerates traded at a discount to the value that they'd otherwise have if all the businesses were independent. 127 00:11:22.785 --> 00:11:25.638 Actually, in reality, it didn't work at all. 128 00:11:25.703 --> 00:11:36.402 In practice, most of these publicly traded little divisional stubs traded at a further discount to the parent company's already discounted holding company valuation. 129 00:11:36.466 --> 00:11:39.968 So why is Daylin doing all this financial engineering? 130 00:11:40.033 --> 00:11:44.247 You know, I thought we just said that times are great for retail. 131 00:11:44.312 --> 00:11:46.776 The American suburbs are booming, etc. 132 00:11:46.841 --> 00:11:48.656 Well, they were in the '60s. 133 00:11:48.721 --> 00:11:51.769 But now here in the '70s, retail is struggling. 134 00:11:51.833 --> 00:11:58.642 So we've talked about this period on a whole bunch of other episodes on Acquired, Vanguard most recently. 135 00:11:58.706 --> 00:12:01.041 But the '70s were brutal in America. 136 00:12:01.105 --> 00:12:08.497 There's the oil crises that hit, there's stagflation, federal interest rates go up into the teens, like the teens. 137 00:12:08.562 --> 00:12:09.600 Can you imagine? 138 00:12:09.600 --> 00:12:13.180 Yeah, they briefly even hit like 18, 19%. 139 00:12:13.180 --> 00:12:34.550 And well, we'll get to the high point in 1980 in a minute because it's right after Home Depot gets founded. But this is bad for America, the economy, etc. This is really bad for suburban retail. Shopping just dries up, and Daylin starts totally sucking wind except for Handy Dan. 140 00:12:34.550 --> 00:12:38.580 Right. It's like this crown jewel within an otherwise withering empire, right? 141 00:12:38.750 --> 00:12:39.250 Right. 142 00:12:39.250 --> 00:12:48.340 And it's all thanks to Bernie and Arthur, because when they take over, as you said, they're not coming from the hardware business. 143 00:12:48.410 --> 00:12:54.220 These guys are seasoned retailers from other parts of, you know, the retail sector. 144 00:12:54.290 --> 00:12:58.840 Hardware, home improvement as a concept wasn't really a term yet. 145 00:12:58.910 --> 00:13:08.290 The hardware store landscape at the time was this patchwork of clubby, regional, not very sophisticated, and not very good businesses. 146 00:13:08.290 --> 00:13:10.147 And they've got limited assortment. 147 00:13:10.200 --> 00:13:12.005 They don't stock that many things. 148 00:13:12.058 --> 00:13:13.650 The market's super fragmented. 149 00:13:13.703 --> 00:13:17.578 And importantly, you couldn't actually go to one place to get everything. 150 00:13:17.631 --> 00:13:24.956 You'd go to some store for lumber, then a different store to get tools, and then another store for plumbing supplies, electrical products. 151 00:13:25.009 --> 00:13:27.610 Lawn and garden was sort of its own entire thing. 152 00:13:27.663 --> 00:13:29.680 These are all little specialty stores. 153 00:13:29.680 --> 00:13:38.460 Yeah. And so, like, if you're a consumer, if you're a suburban homeowner, and you've got a project that you want to work on yourself over the weekends- 154 00:13:38.970 --> 00:13:45.330 Which actually wasn't very many people. That sort of do-it-yourselfer wasn't really a thing yet. 155 00:13:45.330 --> 00:13:45.830 Totally. 156 00:13:45.848 --> 00:14:00.646 I mean, it's Home Depot that unlocks that category, because before Home Depot, you couldn't trust that you could get all the stuff you needed to accomplish your project, to build a deck or retile your bathroom or whatever you wanted to do around your house. 157 00:14:00.703 --> 00:14:04.907 You would walk into these little hardware stores and good luck, you know. 158 00:14:04.964 --> 00:14:10.837 So the biggest operator in the industry at the time was a company out of North Carolina called Lowe's. 159 00:14:10.895 --> 00:14:12.450 You might have heard of it. 160 00:14:12.450 --> 00:14:13.365 Yes. 161 00:14:13.365 --> 00:14:20.308 Lowe's back then, despite being the biggest player in the hardware sector, was not the Lowe's that you think of today. 162 00:14:20.366 --> 00:14:23.191 It had evolved out of the general store concept. 163 00:14:23.250 --> 00:14:31.016 It was all these small store footprints that we're talking about, like a fifth or less of the size of what you know as Lowe's today. 164 00:14:31.075 --> 00:14:37.960 They're mostly in strip malls, and the whole company Lowe's is only doing about $150 million in annual revenue total. 165 00:14:38.270 --> 00:14:51.150 And my understanding of the store concept then is it's basically a hardware store, sort of a small showroom, not, you know, concrete floors and giant ceilings attached to a lumberyard. 166 00:14:51.150 --> 00:14:51.902 Yep. 167 00:14:51.902 --> 00:14:56.570 So you get a lumberyard, a nice little showroom. That's kind of it. The craziest thing about Lowe's is it was founded in 1921. 168 00:14:57.090 --> 00:14:58.530 Yeah, as a general store. Yeah. 169 00:14:58.570 --> 00:15:02.810 Right. By this point in history, it's already 50 years old before The Home Depot has even been founded. 170 00:15:03.330 --> 00:15:03.830 Yep. 171 00:15:03.830 --> 00:15:12.624 So Bernie and Arthur, when they come into Handy Dan and this whole hardware sector, this is like bringing a bazooka to a knife fight. 172 00:15:12.692 --> 00:15:19.293 These guys are much more competitive, much more sophisticated than the whole rest of the industry. 173 00:15:19.360 --> 00:15:21.448 These guys are sharp operators. 174 00:15:21.515 --> 00:15:26.500 They've done concessions, they've done discounting, they've done pharmacy. 175 00:15:26.500 --> 00:15:28.220 Yeah, they're students of retail. 176 00:15:28.220 --> 00:15:28.720 Yep. 177 00:15:28.720 --> 00:15:38.838 So despite this, like, super tough overall retail macro, Bernie and Arthur turn around Handy Dan and make it the best operator in the industry. 178 00:15:38.909 --> 00:15:55.052 But that still doesn't save Daylin, the parent company, because they're so weighed down by their other divisions that they file for bankruptcy in 1975, and they bring in a noted turnaround artist as the CEO to turn it around. 179 00:15:55.124 --> 00:15:57.707 We'll come back to that in a minute. 180 00:15:57.778 --> 00:16:08.110 For the moment, though, let's flash back over to the East Coast to a completely different character, the New York investment banker Ken Langone. 181 00:16:08.430 --> 00:16:12.110 This is your, your third superhero. You've got Bernie Marcus, the retailer. 182 00:16:12.110 --> 00:16:12.900 Yep. 183 00:16:12.900 --> 00:16:19.250 You've got Arthur Blank, the sort of finance and operations genius. And now you've got Ken Langone in New York City. 184 00:16:19.250 --> 00:16:19.750 Yep. 185 00:16:19.750 --> 00:16:24.343 And Ken, I think a lot of listeners will probably know who Ken Langone is. 186 00:16:24.408 --> 00:16:27.180 He is basically the GOAT investment banker. 187 00:16:27.244 --> 00:16:40.591 He came up from nothing as an Italian kid on Long Island, talks his way onto Wall Street, and basically while he's still a kid, he ends up winning the sole IPO manager position for Ross Perot's company, EDS. 188 00:16:40.655 --> 00:16:46.716 People today remember Ross Perot as like, oh yeah, that guy who ran for president in the '90s. 189 00:16:46.780 --> 00:16:50.004 But he was kind of like Larry Ellison of his time. 190 00:16:50.069 --> 00:16:51.810 EDS was this giant company. 191 00:16:52.420 --> 00:16:52.920 Yeah. 192 00:16:52.920 --> 00:16:55.654 I was trying to think about the best way to frame EDS. 193 00:16:55.708 --> 00:16:56.894 Maybe like a Palantir? 194 00:16:56.948 --> 00:16:59.536 They were very involved in government contracts. 195 00:16:59.590 --> 00:17:04.118 I mean, Ross Perot's history—we have to do a whole Ross Perot episode at some point. 196 00:17:04.172 --> 00:17:10.318 But from his time at IBM, he saw people are buying all of these mainframes, but they have no idea how to use them. 197 00:17:10.372 --> 00:17:11.990 I actually have to start like— 198 00:17:11.990 --> 00:17:15.059 Yeah, he was a top salesman at IBM before starting the company. 199 00:17:15.350 --> 00:17:33.270 - a deployment and service arm for enterprise computing and government computing. And that sort of led him down this whole crazy path of building what was then an empire in EDS. Would be small by today's standards, but he was a technology enterprise business magnate at the time. 200 00:17:33.270 --> 00:17:34.101 Yep, totally. 201 00:17:34.165 --> 00:17:35.828 And based in Plano, Texas. 202 00:17:35.892 --> 00:17:37.556 EDS has this long history. 203 00:17:37.620 --> 00:17:42.866 They ultimately get acquired by Hewlett-Packard and become HP Enterprise Services. 204 00:17:42.930 --> 00:17:47.919 So yeah, Ben, exactly what you're talking about—data centers, mainframes, etc. 205 00:17:47.983 --> 00:18:03.657 So fast forward on Ken, he'd end up sitting on the boards of the New York Stock Exchange, General Electric, many other great American companies, and famously Ken has this total loyalty to every customer and every entrepreneur that he works with. 206 00:18:03.721 --> 00:18:08.455 He never sells a share of almost every company he's ever been involved in. 207 00:18:08.519 --> 00:18:12.229 And we're going to talk about the almost in just a minute. 208 00:18:12.293 --> 00:18:16.580 So, all right, back here, we're in the mid-1970s after the EDS IPO. 209 00:18:16.644 --> 00:18:25.408 Ken has just taken public a Philadelphia-based hardware chain, you know, one of these other regional players, a company called Panelrama. 210 00:18:25.472 --> 00:18:28.862 And like everyone else, they've fallen on hard times. 211 00:18:28.926 --> 00:18:37.755 So Ken goes down to Philadelphia to see the CEO, and Ken's like, all right, well, who can we look at in the industry that's actually good? 212 00:18:37.819 --> 00:18:40.890 Like, what does best look like in this industry? 213 00:18:40.890 --> 00:18:43.161 Because it should be a good business. 214 00:18:43.223 --> 00:18:45.433 I mean, we will spoil it now, David. 215 00:18:45.495 --> 00:18:53.846 We spent some time with Ken prepping for this episode, and his comment was, God is good as it pertains to hardware and home improvement. 216 00:18:53.907 --> 00:18:56.057 It's the gift that keeps on giving. 217 00:18:56.118 --> 00:19:01.890 We've built tons and tons of houses in America, and they need just an endless supply of stuff. 218 00:19:01.951 --> 00:19:10.610 It's almost like a subscription of recurring revenue if you're in this business to keep working on a home as the weather and time acts on it. 219 00:19:10.610 --> 00:19:23.900 And market and, you know, whatever changes. The rule of thumb is that homeowners need to reinvest about 1% of the house's then market value into their home every year just in maintenance before you get into improvement. 220 00:19:23.900 --> 00:19:33.180 Right. But in postwar America, they were building more and more houses every year. The old houses they built were getting old. It was a great business to be in, or it should have been anyway. 221 00:19:33.180 --> 00:19:34.219 Should have been. 222 00:19:34.280 --> 00:19:35.319 Should have been. 223 00:19:35.380 --> 00:19:43.266 So Ken says to the CEO of this company, a guy named Gary, he says, all right, Gary, who's the best operator here in the business? 224 00:19:43.327 --> 00:19:45.467 And Gary said, oh, easy, Handy Dan. 225 00:19:45.528 --> 00:19:46.628 Out in California. 226 00:19:46.689 --> 00:19:48.156 Those guys are the best. 227 00:19:48.217 --> 00:19:51.519 And Ken's like, Handy Dan, what are you talking about? 228 00:19:51.580 --> 00:19:52.741 I know Wall Street. 229 00:19:52.802 --> 00:19:54.636 That company's going bankrupt. 230 00:19:54.697 --> 00:19:56.776 And Gary says, no, no, no, no, no. 231 00:19:56.837 --> 00:20:01.116 Their parent, Daylin, is going bankrupt, but Handy Dan is doing great. 232 00:20:01.177 --> 00:20:03.561 So Ken says, okay, wait, wait, hang on. 233 00:20:03.622 --> 00:20:09.735 Let me go get my Moody's manual, because this is how you checked company financials back in the day. 234 00:20:09.796 --> 00:20:14.259 He pulls out his Moody's manual, his little book, and he's going through. 235 00:20:14.320 --> 00:20:16.093 He looks, he finds Handy Dan. 236 00:20:16.154 --> 00:20:17.804 He looks at the financials. 237 00:20:17.866 --> 00:20:19.333 Holy crap, you're right. 238 00:20:19.394 --> 00:20:20.922 This is a great business. 239 00:20:20.983 --> 00:20:23.306 But yeah, it's trading for $3 a share. 240 00:20:23.367 --> 00:20:29.602 And if Moody's is right, this company is going to earn post-tax net income of $1.50 a share this year. 241 00:20:29.664 --> 00:20:33.393 So this company is trading at two years of post-tax earnings. 242 00:20:33.454 --> 00:20:34.310 So Ken's like— 243 00:20:34.440 --> 00:20:35.240 Something has to be wrong. 244 00:20:35.240 --> 00:20:35.740 Something has to be wrong. 245 00:20:35.740 --> 00:20:42.940 Is there like an accounting problem? Is there some trick in the reporting or gimmick here that I don't understand? And I gotta dig into this. 246 00:20:42.940 --> 00:20:43.440 Yeah. 247 00:20:43.440 --> 00:20:47.752 So, so he says, Gary, let's get, let's get Handy Dan on the phone like right now. 248 00:20:47.808 --> 00:20:49.356 I got to talk to these guys. 249 00:20:49.412 --> 00:20:53.118 So Gary calls up Bernie, gets him on the phone, and Ken's like, Mr. 250 00:20:53.173 --> 00:20:55.552 Marcus, are your financial statements true? 251 00:20:55.608 --> 00:20:57.267 Bernie says, yeah, yeah, sure. 252 00:20:57.322 --> 00:20:58.650 Business is doing great. 253 00:20:58.705 --> 00:21:02.190 It's the craziest thing that Wall Street doesn't appreciate us. 254 00:21:02.246 --> 00:21:02.965 Ken says, Mr. 255 00:21:03.020 --> 00:21:06.284 Marcus, would you mind if I come out and see you in person? 256 00:21:06.339 --> 00:21:07.999 Bernie says, yeah, sure, fine. 257 00:21:08.054 --> 00:21:08.939 Ken says, great. 258 00:21:08.995 --> 00:21:10.765 I'm booking my flight right now. 259 00:21:10.820 --> 00:21:12.646 I'll be there for lunch tomorrow. 260 00:21:12.701 --> 00:21:14.029 Bernie's in Los Angeles. 261 00:21:14.084 --> 00:21:15.910 Ken is currently in Philadelphia. 262 00:21:16.190 --> 00:21:18.310 This is classic Ken Langone— 263 00:21:18.310 --> 00:21:29.470 So the next day he flies out. They sit down to lunch. Bernie brings his lawyer with him to make sure he doesn't tell this crazy guy from Wall Street anything he's not supposed to. That's not public information. 264 00:21:29.470 --> 00:21:42.370 Right? If you're the CEO of a publicly traded company and some person who is discussing the price of your stock with you calls you and says, I'm so interested, I'm going to fly across the country right away, it's like, okay, I really gotta watch what I say to this guy. 265 00:21:42.370 --> 00:21:43.170 Yeah, yeah. 266 00:21:43.243 --> 00:21:49.867 So they have lunch and it quickly becomes apparent that Bernie is a gifted retail operator. 267 00:21:49.940 --> 00:21:51.542 Company's doing great. 268 00:21:51.614 --> 00:21:54.599 The financial statements are all correct. 269 00:21:54.672 --> 00:21:59.185 So Ken says to Bernie, Do you have any equity in this company? 270 00:21:59.258 --> 00:22:01.733 Bernie says, no, just an employee. 271 00:22:01.806 --> 00:22:07.120 You know, this is a Daylin subsidiary, even though we're publicly traded. 272 00:22:07.192 --> 00:22:19.859 Ken says, okay, I'm going to go back to New York tonight and tomorrow I'm going to start buying every single publicly traded share of your company that I can get my hands on. 273 00:22:19.931 --> 00:22:29.249 I suggest that you go call up your banker and mortgage your house and do the same because your stock is about to go way, way up. 274 00:22:29.322 --> 00:22:33.762 Now, Bernie, this is exposing his weakness here with finance. 275 00:22:33.835 --> 00:22:43.590 While he's brilliant and street smart, he's also kind of like innocent about Wall Street and finance and investing and all this stuff. 276 00:22:43.590 --> 00:22:47.340 And negotiating, I think in some ways he overtrusts people to— 277 00:22:47.340 --> 00:22:49.500 He's weirdly risk averse in this area. 278 00:22:49.557 --> 00:22:51.717 So he says, oh, well, I can't do that. 279 00:22:51.774 --> 00:22:53.594 That's that's, that's too risky. 280 00:22:53.650 --> 00:22:55.242 You know, I've got a family. 281 00:22:55.299 --> 00:22:56.834 And Ken's like, Bernie, Mr. 282 00:22:56.891 --> 00:23:00.018 Marcus, the stock market is based on supply and demand. 283 00:23:00.075 --> 00:23:01.212 I have enough money. 284 00:23:01.269 --> 00:23:04.908 I'm going to buy every single share that exists of your company. 285 00:23:04.965 --> 00:23:06.159 The price will go up. 286 00:23:06.216 --> 00:23:07.125 There's no risk. 287 00:23:07.182 --> 00:23:09.400 Bernie says, nope, nope, I can't do it. 288 00:23:09.400 --> 00:23:13.246 And interestingly, when I read this, I was thinking, is this insider trading? 289 00:23:13.295 --> 00:23:19.439 I don't think it would have been at the time since Ken is an outsider just telling Bernie that he's going to buy the stock. 290 00:23:19.489 --> 00:23:24.983 So the information is actually market information, not inside information originating from the company itself. 291 00:23:25.033 --> 00:23:28.630 And Bernie's lawyer is, of course, sitting there listening to make sure. 292 00:23:28.930 --> 00:23:45.660 Yep. So Ken says, all right, all right. I told you. He flies back to New York. He does exactly what he said he was going to do. He buys every single publicly traded share of Handy Dan. Except for one block. 293 00:23:47.030 --> 00:23:57.380 All right. So I, I looked this up, David, in the book Built from Scratch- 294 00:23:57.408 --> 00:23:58.408 Yep. 295 00:23:58.408 --> 00:24:05.095 -which is the awesome book that It's kind of the canonical Home Depot story written by Bernie and Arthur. 296 00:24:05.158 --> 00:24:06.814 And so here's how it goes. 297 00:24:06.878 --> 00:24:16.303 There was this little block of 50,000 shares, which was about 2% of the company, owned by the Brooklyn-based Congregation of the Most Holy Redeemer. 298 00:24:16.367 --> 00:24:20.634 So Ken calls the priests like he called up every other shareholder. 299 00:24:20.698 --> 00:24:27.640 And when Ken asks the church's financial officer, who is also a priest, hey, will you sell your shares to me? 300 00:24:27.703 --> 00:24:31.779 The priest pauses and he says, Langone, is that an Italian name? 301 00:24:31.843 --> 00:24:32.926 And he goes, yes. 302 00:24:32.989 --> 00:24:35.155 And he goes, and are you Catholic? 303 00:24:35.218 --> 00:24:36.747 And Ken goes, yes, I am. 304 00:24:36.811 --> 00:24:41.587 And the priest says, then under the pain of hell, tell me what I should do. 305 00:24:41.651 --> 00:24:47.255 And Ken, you know, smiles and laughs and says, well, on these terms, you should keep it. 306 00:24:47.319 --> 00:24:48.020 Don't sell. 307 00:24:48.020 --> 00:24:49.320 You should hang on to your shares. 308 00:24:49.320 --> 00:25:06.830 So Ken started buying at $3 a share, and by the time he was done, he bought almost 20% of the company. The last few shares that he bought were at around $9 with no float and no trading left. So it's essentially locked at that price. There's two plus a church shareholders of this business. 309 00:25:06.830 --> 00:25:19.210 And improbably, Ken going out and buying these shares leads to Bernie and Arthur getting fired and then founding The Home Depot. 310 00:25:19.520 --> 00:25:26.040 Which is in no way Ken's fault, but it is crazy that this is the first domino to tick over in that series of events. 311 00:25:26.040 --> 00:25:31.870 Right. This is how Ken Langone becomes a co-founder of The Home Depot is he gets his buddies Bernie and Arthur fired accidentally. 312 00:25:32.959 --> 00:25:33.959 Accidentally. 313 00:25:33.959 --> 00:25:41.230 But before we tell that story, now is a great time to thank our presenting partner, a company that we are big fans of, Sierra. 314 00:25:41.930 --> 00:25:42.430 Yes. 315 00:25:42.430 --> 00:25:46.916 So on Acquired, we study the leaders of the greatest companies in history. 316 00:25:46.979 --> 00:25:51.839 And today, all of those folks are wrestling with basically the same question. 317 00:25:51.902 --> 00:25:57.141 What is my competitive advantage when everyone has access to the same intelligence? 318 00:25:57.204 --> 00:26:01.370 And what is the right way to turn AI into revenue for our company? 319 00:26:02.120 --> 00:26:02.620 Yep. 320 00:26:02.620 --> 00:26:04.435 And that's where Sierra comes in. 321 00:26:04.495 --> 00:26:08.516 First, your customer relationships are your competitive advantage. 322 00:26:08.577 --> 00:26:17.350 When you deploy Sierra's AI agents, those relationships get deeper with every customer interaction, generating insights that compound over time. 323 00:26:17.411 --> 00:26:24.600 Second, you should pay for outcomes, not tokens, like an insurance claim paid or a sale closed or a customer retained. 324 00:26:25.220 --> 00:26:33.820 Sierra is already the leading platform for customer service agents, everything from account signup to troubleshooting and subscription management. 325 00:26:33.879 --> 00:26:45.719 They work with 40% of the Fortune 50, 1 in 3 of the world's leading banks, 5 out of the 10 largest healthcare companies, and now their agents can handle complex workflows that generate revenue as well. 326 00:26:45.778 --> 00:26:51.550 These are things that can take weeks or months, and they span across voice, chat, email, WhatsApp. 327 00:26:51.609 --> 00:26:59.680 I mean, really complex things like appointment booking or prior authorizations in healthcare or refinancing a loan in financial services. 328 00:27:00.350 --> 00:27:16.030 Yep. And they just launched a super cool new product, Personas. So instead of every AI agent sounding the same, polite but kind of robotic, you can give your agent a distinct voice and personality, tailoring its tone, humor, even the rhythm of how it speaks to your brand. 329 00:27:16.250 --> 00:27:25.050 Great brands have a recognizable character to them. Acquired, for example, has a very different communication tone than, say, a hospital. 330 00:27:25.050 --> 00:27:25.726 Yep. 331 00:27:25.726 --> 00:27:31.290 And, you know, a luxury brand would have yet a completely different one. And the agents at your company should too. 332 00:27:31.640 --> 00:27:51.000 How an agent speaks impacts customer trust. Sierra told us that a customer of theirs, one of the largest telecommunications companies in the world, just introduced a new voice and persona for their agent. And this is wild. The rate it solved customers' problems increased by almost 50%. 333 00:27:51.000 --> 00:27:51.490 Because it had a persona. 334 00:27:51.556 --> 00:27:52.556 Yes. 335 00:27:52.556 --> 00:27:53.056 Wild. 336 00:27:53.056 --> 00:28:03.748 So to find out how you can build standout customer experiences that grow your business with AI, visit sierra.ai/acquired and just tell them that Ben and David sent you. 337 00:28:03.812 --> 00:28:14.940 Okay, David, so how does Ken hoovering up all the shares, even though he's sort of become buddies with Bernie and Arthur, how does that lead to their ousting from Handy Dan? 338 00:28:14.940 --> 00:28:15.440 Yes. 339 00:28:15.440 --> 00:28:24.773 So Ken is essentially like de facto board member now of Handy Dan, and he just loves everything that the guys are doing. 340 00:28:24.851 --> 00:28:26.661 He's super encouraging. 341 00:28:26.739 --> 00:28:35.707 He starts flying out to the West Coast and then around the country as Bernie and Arthur open new Handy Dan stores. 342 00:28:35.786 --> 00:28:38.854 Ken basically becomes part of the crew. 343 00:28:38.932 --> 00:28:46.170 Which is very different than the new Daylin CEO's approach to managing Bernie and Handy Dan. 344 00:28:46.170 --> 00:28:53.060 And quite bothersome. This guy who's the minority shareholder is sort of like, closer with your management team than you are. 345 00:28:53.060 --> 00:28:55.890 Right. That you consider one of your divisions in your company. 346 00:28:55.890 --> 00:28:56.563 Yes, right. 347 00:28:56.563 --> 00:29:10.197 So on one of Ken's trips out to L.A., Bernie says, hey, you should probably go see our actual CEO at Daylin, a guy named Sandy Sigoloff, and, you know, build a relationship with him. 348 00:29:10.272 --> 00:29:16.789 Now, Sigoloff, as we said, was brought in to turn around the company out of bankruptcy. 349 00:29:16.864 --> 00:29:18.363 And he's a bad dude. 350 00:29:18.438 --> 00:29:25.480 He's exactly who you would imagine is the bankruptcy value recovery artist here, shall we say. 351 00:29:25.750 --> 00:29:30.510 Yeah, didn't he give himself a nickname? Was it Ming the Merciless? 352 00:29:30.610 --> 00:29:34.679 Yes, after the villain in the Flash Gordon comic series. 353 00:29:34.752 --> 00:29:45.143 And he called himself that because of how merciless he was to all the employees of these companies that he would slash and burn and get rid of. 354 00:29:45.216 --> 00:29:54.154 So Ken realizes right away that this Sigoloff guy is bad news, but he's got this close to 19% equity position in Handy Dan. 355 00:29:54.226 --> 00:29:57.351 It's like, this guy can't walk all over me. 356 00:29:57.424 --> 00:30:04.836 All this leads to, Ben, as you predicted, quite a lot of conflict between the two of these characters. 357 00:30:04.909 --> 00:30:09.777 And finally, Sigoloff says, all right, Ken, I want you out of here. 358 00:30:09.850 --> 00:30:11.013 I want you gone. 359 00:30:11.085 --> 00:30:15.954 What do I have to do to just buy back this 19% stake that you have? 360 00:30:16.027 --> 00:30:18.280 And Ken loves a good game here. 361 00:30:19.770 --> 00:30:28.930 Okay, so Ken has no intention of selling here. Let's just first say that he, he is now in it with Bernie and Arthur. He thinks it's a great business. 362 00:30:28.930 --> 00:30:31.530 And loyalty is his whole MO. He never sells. 363 00:30:31.530 --> 00:30:32.030 Yes. 364 00:30:32.030 --> 00:30:37.314 So Sigoloff sends his lieutenant, Jeffrey Chanin, to try to negotiate something. 365 00:30:37.382 --> 00:30:40.377 So this is from the book Built from Scratch. 366 00:30:40.445 --> 00:30:44.188 Chanin says, the stock is selling for about $8 a share. 367 00:30:44.256 --> 00:30:46.162 How about if we pay you $10? 368 00:30:46.230 --> 00:30:47.659 No way, Langone says. 369 00:30:47.727 --> 00:30:48.884 The price is $12. 370 00:30:48.952 --> 00:30:50.245 Chanin was shocked. 371 00:30:50.314 --> 00:30:50.994 Forget it. 372 00:30:51.062 --> 00:30:53.784 Langone left and went to the men's room. 373 00:30:53.853 --> 00:30:57.051 Barely 2 minutes later, Chanin followed him in. 374 00:30:57.119 --> 00:30:58.072 Okay, he said. 375 00:30:58.140 --> 00:30:58.640 $12. 376 00:30:58.640 --> 00:31:00.318 Jeff, you don't understand. 377 00:31:00.386 --> 00:31:02.428 You offered to buy it for $10. 378 00:31:02.496 --> 00:31:03.176 I said no. 379 00:31:03.245 --> 00:31:05.695 I offered to sell it to you for $12. 380 00:31:05.763 --> 00:31:06.579 You said no. 381 00:31:06.647 --> 00:31:09.574 Now you are back wanting to buy it for $12? 382 00:31:09.642 --> 00:31:11.480 That offer's off the table. 383 00:31:11.548 --> 00:31:12.432 That is gone. 384 00:31:12.500 --> 00:31:14.474 We had an offer and a denial. 385 00:31:14.542 --> 00:31:15.087 No deal. 386 00:31:15.155 --> 00:31:16.380 Chanin goes, what? 387 00:31:16.448 --> 00:31:20.327 Ken goes, I suggested a price of $12 in my office, right? 388 00:31:20.395 --> 00:31:21.348 Chanin nodded. 389 00:31:21.416 --> 00:31:22.573 And you declined. 390 00:31:22.641 --> 00:31:23.730 Well, that's it. 391 00:31:23.798 --> 00:31:25.500 I don't want to sell now. 392 00:31:25.500 --> 00:31:27.230 We're in the men's room now. Price is different. 393 00:31:27.230 --> 00:31:29.386 Chanin says, you must have some price. 394 00:31:29.442 --> 00:31:30.293 Okay, Ken says. 395 00:31:30.350 --> 00:31:30.850 $14. 396 00:31:30.850 --> 00:31:34.946 Chanin left in such a blind rage that he almost banged his head on the door. 397 00:31:35.003 --> 00:31:37.499 About a week later, Sigoloff called Langone. 398 00:31:37.556 --> 00:31:39.315 Let's not mess around, he said. 399 00:31:39.372 --> 00:31:40.507 We will pay you $14. 400 00:31:40.563 --> 00:31:42.776 Ken goes, Sandy, you guys don't get it. 401 00:31:42.833 --> 00:31:44.422 I offered it to you for $14. 402 00:31:44.478 --> 00:31:45.330 Chanin said no. 403 00:31:45.386 --> 00:31:46.918 That offer's off the table. 404 00:31:46.975 --> 00:31:48.904 I don't understand, Sigoloff said. 405 00:31:48.961 --> 00:31:50.493 Ken goes, it's this simple. 406 00:31:50.550 --> 00:31:51.514 You had a chance. 407 00:31:51.571 --> 00:31:52.649 You turned it down. 408 00:31:52.706 --> 00:31:54.408 I've reconsidered my position. 409 00:31:54.465 --> 00:31:55.656 I don't want to sell. 410 00:31:55.713 --> 00:31:58.210 Sigoloff hung up the phone madder than hell. 411 00:31:59.120 --> 00:32:02.880 It's like, uh, what is it in, uh, Empire Strikes Back of the— 412 00:32:03.010 --> 00:32:08.410 I am altering the deal. Pray I don't alter it any further is the Darth Vader line. 413 00:32:08.410 --> 00:32:15.100 So this continues for a while. And then one day Bernie calls Ken, or Kenny, as he's taken to calling him. 414 00:32:15.100 --> 00:32:15.863 Yes. 415 00:32:15.863 --> 00:32:28.740 He says, Kenny, just do me a favor. Just sell. Just sell to Sigoloff. He's breathing down my neck. This situation's getting bad. It's making my life difficult. Just sell. It's fine. 416 00:32:28.740 --> 00:32:31.620 The business is doing great, so this is actually like my biggest headache. 417 00:32:31.620 --> 00:32:32.120 Yep. 418 00:32:32.120 --> 00:32:34.922 And Ken says, Bernie, what are you talking about? 419 00:32:34.983 --> 00:32:36.267 Don't you understand? 420 00:32:36.328 --> 00:32:40.181 Like, I am the only thing that is protecting you from Sigoloff. 421 00:32:40.242 --> 00:32:43.606 If I sell, he's going to turn around and fire your ass. 422 00:32:43.667 --> 00:32:49.049 He can't stand to see you being successful and getting credit for any success at Daylin. 423 00:32:49.110 --> 00:32:50.639 You know, that's not him. 424 00:32:50.700 --> 00:32:55.103 Bernie, though, again, he's like surprisingly trusting about this stuff. 425 00:32:55.164 --> 00:32:56.632 He says, no, no, no, no. 426 00:32:56.693 --> 00:32:57.610 Sandy needs me. 427 00:32:57.671 --> 00:33:00.301 I'm the only thing propping up the company. 428 00:33:00.362 --> 00:33:01.218 I'm a big boy. 429 00:33:01.280 --> 00:33:02.319 I can handle him. 430 00:33:02.380 --> 00:33:03.420 Please just sell. 431 00:33:03.481 --> 00:33:04.704 Make my life easier. 432 00:33:04.765 --> 00:33:06.050 And it's, it's funny. 433 00:33:06.111 --> 00:33:14.061 I think it's actually this trusting nature of Bernie, even though he's got sort of a rough exterior that makes him a great leader. 434 00:33:14.122 --> 00:33:17.424 And then later on in Home Depot inspires such loyalty. 435 00:33:17.486 --> 00:33:24.580 He puts so much trust in other people, which steers him wrong sometimes, but it makes other people wholly trust him. 436 00:33:24.812 --> 00:33:25.812 Yep. 437 00:33:25.812 --> 00:33:42.150 So Ken says, all right, Bernie, I'll do it. But just know it's your own death warrant that I'm signing. And in early 1978, Ken sells to Sigoloff. And this, I think, is basically the one time that he sells out of a company that he's invested in. 438 00:33:42.150 --> 00:33:44.010 Yeah, but David, how much does he sell for? 439 00:33:44.010 --> 00:33:55.400 Well, even though he's going to sell, Ken is no pushover here. He sells for $25.50. 440 00:33:55.400 --> 00:33:55.900 Yeah. 441 00:33:55.900 --> 00:33:56.700 A share that he started buying at $3. 442 00:33:56.700 --> 00:33:57.500 Do you know over what period of time? 443 00:33:57.500 --> 00:33:57.880 I think it was only about 2 years, this whole saga. 444 00:33:58.050 --> 00:34:01.810 From $3, his average entry price was probably, I don't know, $5, $6— 445 00:34:02.120 --> 00:34:03.480 Yeah, $5, $6, whatever, to— 446 00:34:03.480 --> 00:34:04.574 Up to $25.50 to sell. 447 00:34:04.626 --> 00:34:10.097 And the story is great where Sigoloff finally calls and says, all right, let's just do this on the phone. 448 00:34:10.149 --> 00:34:12.702 You name your price, I will buy it at that price. 449 00:34:12.754 --> 00:34:13.848 And Ken goes, $25.50. 450 00:34:13.900 --> 00:34:15.568 And he goes, why the odd number? 451 00:34:15.620 --> 00:34:19.580 And Ken goes, well, just to look like we had some real hard bargaining here. 452 00:34:21.410 --> 00:34:34.730 So good. So good. So January 1978, Sigoloff buys Ken's shares and now owns just about 100% of the company except for the Catholic Church in Brooklyn. 453 00:34:34.730 --> 00:34:37.340 Yep. And then, just as predicted— 454 00:34:37.340 --> 00:34:37.840 Yep. 455 00:34:37.840 --> 00:34:39.284 Just as predicted. 456 00:34:39.369 --> 00:34:48.415 3 months later, Sigoloff fires Bernie and Arthur and the audit manager at Handy Dan, a guy named Ron Brill. 457 00:34:48.500 --> 00:35:04.056 The reason that Ron gets fired, too, is the pretense that Sigoloff trumps up is an accusation that the 3 of them had violated national labor relations rules in negotiating with unions. 458 00:35:04.140 --> 00:35:13.271 Sigoloff starts a labor relations investigation against his own company to trump up the excuse to fire them. 459 00:35:13.356 --> 00:35:16.400 That is how bad a dude this guy was. 460 00:35:16.830 --> 00:35:30.270 Yeah. And really what was happening here is Sigoloff, I think, couldn't do this while there was still a large outside shareholder who would have disagreed with that decision. But now that he owns basically the whole company, he's like, great, I want to consolidate power. 461 00:35:30.480 --> 00:35:31.280 You guys are out of here. 462 00:35:31.280 --> 00:35:32.030 I need to be the guy here. 463 00:35:32.240 --> 00:35:48.700 Yep. So famously in Home Depot lore, The next day after the firing, Bernie flies out to New York to come see Ken— Kenny. They sit down to breakfast together at Peacock Alley in the Waldorf Astoria Hotel. 464 00:35:49.231 --> 00:35:50.671 This is April 1978. 465 00:35:51.020 --> 00:35:51.520 Yep. 466 00:35:51.520 --> 00:35:53.413 And Bernie is just losing it. 467 00:35:53.484 --> 00:35:54.751 He's freaking out. 468 00:35:54.821 --> 00:35:57.286 He's like, Kenny, this is terrible. 469 00:35:57.356 --> 00:35:58.553 I'm 48 years old. 470 00:35:58.623 --> 00:36:00.383 I don't have any savings. 471 00:36:00.454 --> 00:36:02.214 I didn't have any equity. 472 00:36:02.284 --> 00:36:04.115 I can't support my family. 473 00:36:04.185 --> 00:36:08.057 Sandy's coming after me with this labor relations case. 474 00:36:08.128 --> 00:36:10.451 I don't know, I might go to jail. 475 00:36:10.522 --> 00:36:12.071 What am I going to do? 476 00:36:12.141 --> 00:36:14.112 And Ken says, Bernie, relax. 477 00:36:14.183 --> 00:36:18.055 You just got kicked in the ass with a golden horseshoe. 478 00:36:18.125 --> 00:36:25.800 That's a verbatim quote, by the way, because now we're going to go start that company that you told me about. 479 00:36:25.910 --> 00:36:40.390 So listeners, we haven't revealed yet that in this fast and furious period, a few months before, they had had a conversation when Ken was flying around, going to all these store openings, when Bernie is opening a Handy Dan in, I think it was Houston, Texas. 480 00:36:41.023 --> 00:36:42.463 Houston. Yep. Houston, Texas. 481 00:36:42.463 --> 00:36:45.607 And Bernie should have been all excited about this. 482 00:36:45.669 --> 00:36:48.259 This is the best version of the store yet. 483 00:36:48.321 --> 00:36:52.884 And he's looking at Ken, and Ken's like, why are you melancholy right now? 484 00:36:52.946 --> 00:36:57.077 And Bernie says, because someone's going to put us out of business. 485 00:36:57.139 --> 00:37:02.319 I have in my head the idea of the perfect home improvement store, and this isn't it. 486 00:37:02.380 --> 00:37:13.850 And it's just a matter of time till someone does it, and it's going to destroy this store because it's just a structurally better business model, better idea, better thing for customers. 487 00:37:13.912 --> 00:37:16.008 So, you know, this is fine, but... 488 00:37:16.070 --> 00:37:17.920 And Ken's like, well, tell me. 489 00:37:17.982 --> 00:37:20.757 And Bernie has started to learn a little bit. 490 00:37:20.818 --> 00:37:24.025 He's like, well, well, if I tell you, then you know. 491 00:37:24.086 --> 00:37:25.690 And right now only I know. 492 00:37:25.751 --> 00:37:29.328 So I'm actually, I'm going to, I'm going to hold on to it. 493 00:37:29.390 --> 00:37:32.041 And Ken's like, no, come on, dude, tell me. 494 00:37:32.103 --> 00:37:34.200 And so now Ken knows the idea too. 495 00:37:34.200 --> 00:37:51.550 The reason that Bernie's so bent out of shape about this is he'd just been down to visit one of his buddies, another retail guy down in San Diego. Goes by the name of Sol Price. That Sol Price. 496 00:37:51.550 --> 00:37:54.850 Of Price Club, and then what would eventually become Costco. 497 00:37:54.850 --> 00:37:56.025 Yep, yep, yep. 498 00:37:56.109 --> 00:38:08.876 And Bernie spills the beans to Ken and he says, well, I went to see Sol and he's got this new store concept that he's launching down there in San Diego. 499 00:38:08.960 --> 00:38:15.679 And I'm telling you, man, it's going to revolutionize the whole retail industry. 500 00:38:15.763 --> 00:38:27.102 It's just a matter of time before somebody brings Sol's concept to hardware, puts us out of business, to all sorts of other categories. 501 00:38:27.186 --> 00:38:30.545 We're all going the way of the dinosaur. 502 00:38:30.629 --> 00:38:35.920 He's calling this thing Price Club, and the idea is warehouses. 503 00:38:36.004 --> 00:38:38.272 The warehouse is the store. 504 00:38:38.356 --> 00:38:43.900 Customers come in and shop the warehouse, so there's no back room. 505 00:38:43.900 --> 00:38:49.430 All the square footage that we're paying money on, on our lease is shoppable square footage. 506 00:38:49.430 --> 00:38:49.930 Yep. 507 00:38:49.930 --> 00:38:55.094 And even more than that, there's no distributors or wholesalers or anything. 508 00:38:55.164 --> 00:38:57.193 Price Club is the wholesaler. 509 00:38:57.262 --> 00:39:07.333 They're buying the goods directly from the manufacturers at wholesale pricing and then marking it up just a little bit, selling it to consumers. 510 00:39:07.403 --> 00:39:11.670 This is blowing everybody else in San Diego out of the water. 511 00:39:11.670 --> 00:39:24.600 They're not even paying people to walk around and put the labels out. I mean, it's literally just people coming into the warehouse and buying stuff right off the pallet. There's like no cost in this business. 512 00:39:24.720 --> 00:39:25.220 Yep. 513 00:39:25.220 --> 00:39:29.030 And there's no reason why it shouldn't work just as well in hardware. 514 00:39:29.088 --> 00:39:32.233 And someday soon, somebody is going to see Price Club. 515 00:39:32.291 --> 00:39:36.776 They're going to do this for hardware, and we're going to be out of business. 516 00:39:36.834 --> 00:39:42.076 So cut back a couple of months later here to breakfast at the Waldorf Astoria in New York. 517 00:39:42.134 --> 00:39:47.143 Ken's like, Bernie, you getting fired is the opportunity of a lifetime for both of us. 518 00:39:47.201 --> 00:39:48.133 You, me, Arthur. 519 00:39:48.192 --> 00:39:49.706 Let's bring Ron along too. 520 00:39:49.764 --> 00:39:51.919 We're going to go start that company. 521 00:39:51.977 --> 00:39:53.900 We got the golden horseshoe here. 522 00:39:53.900 --> 00:39:54.751 Yep. 523 00:39:54.751 --> 00:40:10.390 So Bernie's excited, but he says, well, there's one problem. What about the money? Arthur and I don't have any. And this isn't a Handy Dan concept here. We're talking about a warehouse, but also a lot of stuff that we got to put in it. 524 00:40:10.390 --> 00:40:11.042 Yeah. 525 00:40:11.042 --> 00:40:21.070 And this isn't Price Club. We're not selling toilet paper and water bottles. We're selling expensive stuff like power tools and lumber. We need a lot of capital to put into this thing. 526 00:40:21.070 --> 00:40:31.844 Yeah, Bernie and Arthur had gone away, done a little work, sketched out what the economics could be, and they realized even the best Handy Dan did about $3 million in annual revenue. 527 00:40:31.903 --> 00:40:40.487 I think these stores can do $7, $8, $9 million in revenue, and we're not just going to stock like 8,000 items, we're going to stock 25,000 items. 528 00:40:40.546 --> 00:40:43.742 It's not a 10,000-foot store like Lowe's or Handy Dan. 529 00:40:43.802 --> 00:40:46.466 This is going to be like a 60,000-foot store. 530 00:40:46.525 --> 00:40:49.130 I mean, we need capital to make this happen. 531 00:40:49.130 --> 00:41:04.470 Yep. So Ken says, don't worry about the money. That's my job. I got it covered. More on that in a sec. So Bernie's, he's in. He says, okay, but there's someone I need to go talk to first. I need to go back down to San Diego and see Sol. 532 00:41:05.424 --> 00:41:06.424 Yep. 533 00:41:06.424 --> 00:41:08.647 Bernie goes back down to San Diego. 534 00:41:08.710 --> 00:41:11.061 He sits down, he has dinner with Sol. 535 00:41:11.124 --> 00:41:18.111 He explains the whole situation, the firing from Handy Dan, the labor relations suit from Sigoloff, etc., etc. 536 00:41:18.175 --> 00:41:22.939 Sol listens to all of it and he says, Bernie, do you think you're talented? 537 00:41:23.002 --> 00:41:25.480 Bernie says, yes, I think I'm talented. 538 00:41:25.543 --> 00:41:27.512 I did a great job at Handy Dan. 539 00:41:27.576 --> 00:41:34.436 Sol says, do you think you have the ability to build something, to create something, to do this on your own? 540 00:41:34.500 --> 00:41:38.629 Bernie says, yeah, yeah, I think this could be really successful. 541 00:41:38.692 --> 00:41:43.075 Sol says, then tell Sigoloff to go f- himself and just do this thing. 542 00:41:43.139 --> 00:41:45.680 And so with Sol's blessing, Bernie's in. 543 00:41:45.990 --> 00:41:56.390 And this is kind of important to keep Sol Price in the loop because Bernie is trying to ascertain, are you also going to meaningfully add home improvement to your concept here? 544 00:41:56.390 --> 00:41:57.152 Yes. 545 00:41:57.152 --> 00:41:58.914 I mean, it's an eerily similar thing. 546 00:41:58.962 --> 00:42:02.344 They would diverge over time, and we'll talk about all the differences. 547 00:42:02.391 --> 00:42:06.678 The pitch is customers are going to love it because we're going to have the lowest prices. 548 00:42:06.726 --> 00:42:12.299 We're only going to make a 30% gross margin instead of what's industry standard in hardware retail at that time, 45%. 549 00:42:12.347 --> 00:42:18.301 It's going to be a little bit different than Price Club in that they actually think they're going to have the best selection. 550 00:42:18.349 --> 00:42:20.350 We're going to have tons and tons of SKUs. 551 00:42:20.500 --> 00:42:24.460 We're going to have tons of SKUs versus Price Club and Costco's famous low SKU count. 552 00:42:24.460 --> 00:42:40.430 We're going to have the best selection. I mean, Bernie thinks that is essential to making this model work because it has to be a one-stop shop- 553 00:42:40.430 --> 00:42:40.930 Yes. 554 00:42:40.930 --> 00:42:44.130 -for any job that you want to get done. You don't want to go to the outdoor lawn and garden store and over to the lumberyard and to the tool store, right? 555 00:42:44.130 --> 00:42:47.220 And the plumbing store, etc., etc. Yeah, being a warehouse unlocks putting all this stuff together under one roof for the first time. 556 00:42:47.220 --> 00:42:51.863 But it is different than the Price Club model of only having 4,000 items. 557 00:42:51.927 --> 00:43:06.877 They're going to have to have 25,000 SKUs in these warehouses and work with tons and tons of suppliers to make good on the promise that if you're doing something, it is the all-in-one place to shop for the job that you're getting done. 558 00:43:06.940 --> 00:43:09.612 And there is one other big difference too. 559 00:43:09.676 --> 00:43:13.747 People know how to buy toilet paper and how to use toilet paper. 560 00:43:13.811 --> 00:43:17.946 They know how to buy a big jar of nuts and eat a big jar of nuts. 561 00:43:18.009 --> 00:43:20.300 They don't know how to build a deck. 562 00:43:20.335 --> 00:43:21.335 Yep. 563 00:43:21.335 --> 00:43:29.880 They don't know how to install blinds. They don't know how to put in a floor. You need real expertise on the floor to make that happen. 564 00:43:30.630 --> 00:43:31.630 Yep. 565 00:43:31.630 --> 00:43:46.240 So we already can kind of see there's two giant differences that I think Bernie is just trying to check on and say, you're not doing this right, because Price Club actually isn't set up to have an army of people with expertise and carry tons and tons of SKUs. 566 00:43:46.240 --> 00:43:52.480 Yeah, I think Bernie both really did need the pep talk from Sol, and he also wanted to make sure- 567 00:43:53.154 --> 00:43:54.154 Yeah. 568 00:43:54.154 --> 00:43:55.560 Sol wasn't going to do this too. 569 00:43:55.560 --> 00:43:56.480 Yeah. 570 00:43:56.480 --> 00:44:14.770 All right, so back to the money. So who does Kenny know who has a lot of money and a lot of liquidity and is also just crazy enough to back a new retail concept here in the '70s with all this inflation and interest rates at 20%? 571 00:44:14.770 --> 00:44:19.710 And listeners, this is the part of the episode where we tell the story of how Ross Perot almost owned the majority of Home Depot. 572 00:44:19.850 --> 00:44:33.780 Yeah, 70% of Home Depot, because Ken flies everybody to Dallas. They meet with Ross, and they hammer out a deal for Perot to put up the money for what would become Home Depot- 573 00:44:33.780 --> 00:44:34.280 $2 million. 574 00:44:34.280 --> 00:44:34.780 $2 million. 575 00:44:34.780 --> 00:44:35.093 In return for 70% of the company. 576 00:44:35.111 --> 00:44:36.051 Except at the last minute, Bernie blows up the deal. 577 00:44:36.069 --> 00:44:37.587 He and Ross get into this big fight over management style and management philosophy. 578 00:44:37.605 --> 00:44:39.792 And ultimately the sticking point— you can't make this up, it's all in Built from Scratch— is the car that Bernie drives. 579 00:44:39.810 --> 00:44:40.310 He drives an old Cadillac. 580 00:44:59.080 --> 00:45:10.280 Which was actually his Cadillac from Handy Dan that was his company car there that somehow in the separation he managed to keep. But like old, this is not an expensive car. 581 00:45:10.280 --> 00:45:13.440 Yes. Not a new, you know, fancy Cadillac. 582 00:45:13.440 --> 00:45:13.977 Yes. 583 00:45:13.977 --> 00:45:27.680 This is an old fancy Cadillac. And Perot says, hey, well, this is important to me. My guys, my guys here at EDS, they don't drive Cadillacs. They only drive Chevrolets. We're scrupulous here about our costs. Bernie's like, cost? What are you talking about? This is an old Cadillac. 584 00:45:28.010 --> 00:45:32.410 Right. Practically, pragmatically, this is actually exactly in line with your ethos. 585 00:45:32.800 --> 00:45:35.680 Yep. And Ross is like, no, no, it's the principle of the thing. 586 00:45:35.770 --> 00:45:42.010 And it's a sticking point of two things. One, Bernie's like, no, we should be pragmatists. We shouldn't follow some dumb- 587 00:45:42.010 --> 00:45:42.860 Yes. 588 00:45:42.860 --> 00:45:48.790 Virtue signaling thing, but two, you're treating this like this is a division of your company, isn't it? 589 00:45:48.790 --> 00:45:50.810 Exactly. You're treating me like an employee again. 590 00:45:50.810 --> 00:45:55.670 This is, this is our company. You're the financier. This doesn't feel right. 591 00:45:55.930 --> 00:46:08.770 Yep. So he blows up the deal. And this might be the most expensive disagreement in all of business history. 592 00:46:08.770 --> 00:46:16.800 Let's see, I'll do the math here live on air. So 70% of a market cap of $350 billion. 593 00:46:16.800 --> 00:46:17.452 Yep. 594 00:46:17.452 --> 00:46:33.120 They did a ton of dilution along the way, but then counteracted with a ton of buybacks after that. It ends up being that the original seed investors in Home Depot today, if they held all the way through, would have had about 91% of their original percentage of the company. 595 00:46:33.592 --> 00:46:34.592 Yep. 596 00:46:34.592 --> 00:46:41.480 So Ross Perot insisting on a Cadillac cost him $223 billion— 597 00:46:42.280 --> 00:46:43.280 Yeah— 598 00:46:43.280 --> 00:46:45.480 Assuming he held, assuming he would have held. 599 00:46:45.480 --> 00:46:57.230 Right, right. Which Ken did, by the way. Still holds all of his shares. Yeah, you didn't mishear, Ben, there. $230 billion. That's with a B dollars. Oh, man. 600 00:46:58.480 --> 00:47:06.200 So they're screwed, right? I mean, there's not a lot of places to find the capital. This thing requires a ton of money to get off the ground. 601 00:47:06.200 --> 00:47:07.938 Yeah, for ordinary people. 602 00:47:08.005 --> 00:47:12.954 But they got Ken Langone here, the greatest investment banker of all time. 603 00:47:13.020 --> 00:47:14.960 So he says, nah, no big deal. 604 00:47:15.027 --> 00:47:17.033 All right, you know, I get it. 605 00:47:17.100 --> 00:47:20.243 You know, that was pretty heavy-handed of Ross. 606 00:47:20.309 --> 00:47:26.528 I'll just go round up a bunch of other investors instead, and we'll put a syndicate together. 607 00:47:26.595 --> 00:47:29.738 And all right, let's rewrite the deal for this. 608 00:47:29.805 --> 00:47:34.419 Rather than the investors getting 70%, Let's give them 50% this time. 609 00:47:34.486 --> 00:47:42.444 And Arthur looks at him and he's like, wait, you mean we're going to get a better deal by walking away from Ross Perot? 610 00:47:42.511 --> 00:47:49.332 To which Ken replies, Arthur, in the retail business, when you can't sell something, you mark it down. 611 00:47:49.398 --> 00:47:53.411 In my business, when we can't sell something, we mark it up. 612 00:47:53.478 --> 00:47:54.080 So great. 613 00:47:54.490 --> 00:48:02.490 Which is a little facetious. In my mind, what happened here is when you're negotiating with one counterparty that's coming in for all the capital— 614 00:48:02.558 --> 00:48:03.998 They have leverage. Yeah. 615 00:48:03.998 --> 00:48:09.090 They have leverage. But Ken goes out and he finds 40 individual people. 616 00:48:09.090 --> 00:48:11.930 Yep. To put in $50,000 chunks. 617 00:48:11.930 --> 00:48:20.219 Yeah, and so Ken basically writes the term sheet and then is just going around to all these people and saying, do you want to be in on these terms? 618 00:48:20.275 --> 00:48:36.346 It's kind of the— if you're a venture investor or you're a startup, it's the difference between you writing your own terms for the SAFE and writing in the number of the valuation and then just having people pile in on that number versus the lead investor coming in with a priced round, 619 00:48:36.403 --> 00:48:39.730 they get to dictate the number, and that number is usually- 620 00:48:39.730 --> 00:48:40.230 Lower. 621 00:48:40.230 --> 00:48:41.830 -not as friendly to you, yeah, as the number that you write on your own SAFE. 622 00:48:41.830 --> 00:48:42.530 Yep. It's still a great line, though. 623 00:48:42.530 --> 00:48:43.030 It's a great line. 624 00:48:43.030 --> 00:48:48.670 Totally sums up Kenny. All right. So Ken gets the money. They all get back together in L.A., and they get to work. 625 00:48:48.670 --> 00:49:01.570 And the way the cap table breaks down now is the investors own 50%, Ken gets 5%, in exchange for, you know, putting this deal together, finding the capital. And I think he put in something like $100K of his own. 626 00:49:01.570 --> 00:49:04.550 Yep, he put in $100K. 627 00:49:04.550 --> 00:49:13.890 And then Arthur, Bernie, the rest of the management team would get 45%. And at this point, the founders of The Home Depot are set. It's Bernie, Arthur, and Ken. 628 00:49:14.417 --> 00:49:15.497 For the moment. 629 00:49:15.610 --> 00:49:23.730 Yes, they are missing one superpower that you need in an Avengers of Retail team. 630 00:49:23.730 --> 00:49:24.230 Yes. 631 00:49:24.230 --> 00:49:24.562 Yes. 632 00:49:24.562 --> 00:49:25.992 Well, let's get to that. 633 00:49:26.059 --> 00:49:28.455 So Bernie and Arthur go back to L.A. 634 00:49:28.521 --> 00:49:29.919 and they get to work. 635 00:49:29.986 --> 00:49:36.708 And the first question is, all right, where are we going to put the first store, the first warehouse? 636 00:49:36.774 --> 00:49:40.035 And as we talked about, warehouses are expensive. 637 00:49:40.102 --> 00:49:40.602 L.A. 638 00:49:40.602 --> 00:49:43.829 isn't great because real estate is super expensive. 639 00:49:43.895 --> 00:49:47.423 There are not a lot of empty warehouses lying around. 640 00:49:47.489 --> 00:49:49.752 And also Handy Dan is still there. 641 00:49:49.819 --> 00:49:53.346 Handy Dan is still the best operator in the industry. 642 00:49:53.413 --> 00:49:57.273 Maybe not great if we start in our previous backyard here. 643 00:49:57.339 --> 00:50:00.201 We should go somewhere else in the country. 644 00:50:00.268 --> 00:50:07.522 So they start scouting around looking for other cities to go to before they can decide on a location, though. 645 00:50:07.589 --> 00:50:21.499 While they're still in L.A., they get wind that someone else has beat them to the punch, has been down to San Diego, seen Price Club, and has gone out and started Price Club for hardware, for home improvement. 646 00:50:21.565 --> 00:50:23.429 And it's right there in L.A. 647 00:50:23.495 --> 00:50:28.487 It's a store called HomeCo, and it's run by this wild man named Pat Farrah. 648 00:50:28.553 --> 00:50:32.880 So Bernie and Arthur, they go to see the store, they walk in and— 649 00:50:33.150 --> 00:50:37.430 It's the exact vision that Bernie had. 650 00:50:37.430 --> 00:50:40.490 Yep. It's a 130,000-square-foot warehouse. 651 00:50:40.490 --> 00:50:41.156 Which is way bigger— 652 00:50:41.850 --> 00:50:44.010 It's not even Home Depot then. It's Home Depot today. 653 00:50:44.010 --> 00:50:44.941 Right? 654 00:50:44.941 --> 00:50:45.150 Yeah. 655 00:50:45.150 --> 00:50:49.360 It's way bigger than those early Home Depot's that would open that were like 60,000, 65,000 feet. 656 00:50:49.360 --> 00:51:06.820 Yep. It's got every hardware and home improvement item that you can imagine piled up high to the ceilings and priced cheaper than consumers had ever seen it before. In retail parlance, the strategy here is known as stack 'em high, watch 'em fly. 657 00:51:07.090 --> 00:51:12.290 I mean, it's a bonanza. The consumers walk in and they're like, oh, what? This is crazy. 658 00:51:12.290 --> 00:51:13.076 Yep. 659 00:51:13.076 --> 00:51:17.730 This is fun. It's like our Walmart episode where they were doing crazy stunts in the parking lot to attract people. 660 00:51:17.730 --> 00:51:19.380 It's a party. Yeah, it's a feeding frenzy. 661 00:51:19.913 --> 00:51:20.913 Yes. 662 00:51:20.913 --> 00:51:23.110 So Bernie and Arthur call up Ken. 663 00:51:23.177 --> 00:51:30.170 They say, hey, I know this isn't the plan, but we already found this thing fully baked right here in L.A. 664 00:51:30.237 --> 00:51:30.770 Fly out. 665 00:51:30.836 --> 00:51:36.497 Let's the three of us go talk to this guy Pat and see if we can just buy it from him. 666 00:51:36.564 --> 00:51:38.296 Buy the store, buy HomeCo. 667 00:51:38.362 --> 00:51:44.157 So Ken flies in and I'm just gonna read Bernie's description of what happens next here. 668 00:51:44.223 --> 00:51:51.217 Pat, the HomeCo owner-operator here, was an hour late getting to his own store when he finally showed up. 669 00:51:51.283 --> 00:51:59.409 The wild man with the huge afro haircut was wearing a powder blue velvet leisure suit that was one size too small for him. 670 00:51:59.475 --> 00:52:02.139 His ass stuck out the back of his pants. 671 00:52:02.206 --> 00:52:09.932 His shirt was unbuttoned halfway down his chest, and he displayed a variety of gold chains and a big old gold watch. 672 00:52:09.998 --> 00:52:14.261 Kenny shot Arthur a look that said, Is this your idea of a joke? 673 00:52:14.327 --> 00:52:19.189 But Pat Farrah is one of the most creative people any of us had ever met. 674 00:52:19.256 --> 00:52:22.520 Pat is to retailing what Michelangelo was to art. 675 00:52:22.586 --> 00:52:26.582 At least that's what Ken said by the time the meeting ended. 676 00:52:26.649 --> 00:52:32.910 Or the way I've heard Ken describe this is Pat was crazier than a bedbug, but he was a genius. 677 00:52:34.000 --> 00:52:38.000 I mean, crazy, yes, but this is the missing piece of the puzzle. 678 00:52:38.000 --> 00:52:38.862 Yes. 679 00:52:38.862 --> 00:52:56.142 You've got Bernie the retailer, Arthur finance and operations, Ken finds the money and is sort of the spiritual glue holding this team together. 680 00:53:05.606 --> 00:53:11.366 But they don't yet have the genius merchandiser- 681 00:53:14.460 --> 00:53:14.960 Yep, Pat is the merchandiser. 682 00:53:14.960 --> 00:53:18.786 -who is going around to suppliers, figuring out what the best stuff you can get from them at the best terms, having a crazy nose for what consumers want and making sure to find those items from the suppliers, 683 00:53:18.805 --> 00:53:21.160 cleverly figuring out how to display it and what the pricing and packaging looks like to whip consumers up into a buying frenzy. 684 00:53:21.160 --> 00:53:21.860 You gotta create heat in the store. 685 00:53:21.860 --> 00:53:22.860 Yes, yes, this is all of the universe of Pat. 686 00:53:22.860 --> 00:53:27.790 All Pat. And, oh man, there's so many legends about Pat, including driving forklifts through walls, etc., etc., etc. 687 00:53:27.900 --> 00:53:33.900 Yeah, wasn't that like they wanted to tear down a wall, but they couldn't get a permit? 688 00:53:33.900 --> 00:53:34.566 Yeah. 689 00:53:34.566 --> 00:53:37.100 And so Pat just drove a forklift into it. And when the inspector came out, he said, I don't know, someone just— 690 00:53:37.493 --> 00:53:38.493 Something happened. 691 00:53:38.493 --> 00:53:40.380 It was an accident, but we definitely gotta take out this wall now. 692 00:53:40.380 --> 00:53:56.200 Yeah. Yep. So despite the reservations about Pat's character, they sign an LOI, letter of intent, to buy HomeCo from Pat with this new well-funded company that Bernie and Arthur and Ken have started. 693 00:53:56.200 --> 00:53:57.070 Well-funded. They got $2 million. That's not nearly enough to do anything that they— I mean, they're operating on a shoestring budget here, but I'll come back to that. 694 00:54:03.090 --> 00:54:25.850 Yes. Yes. So they start digging in on due diligence on HomeCo, and they discover that while Pat is a genius, all the revenue, all the sales, all the customer demand, it's all real. The store itself is actually insolvent because Pat has not been paying any of his suppliers. 695 00:54:25.850 --> 00:54:26.880 Ugh, Pat needs an Arthur. 696 00:54:26.880 --> 00:54:35.660 Yes. Yes, he does. He has just been ignoring the invoices that the suppliers were sending him, you know, 30, 60, 90 days later. 697 00:54:35.890 --> 00:54:41.850 I mean, that sounds malicious. I get the sense a lot of what he was doing was incompetence, not— 698 00:54:41.850 --> 00:54:51.620 Yes. No, he— yeah. Yes. It wasn't that he was trying to steal the money. It was that he genuinely didn't know how to operate a business. He's like, I just go and get the stuff and then I sell it. 699 00:54:51.620 --> 00:55:09.950 And they bring in as a part of the due diligence on this, auditors to look at, hey, are these financial statements correct? And the auditors determine, no, the margins at this store are not anywhere near what this owner thinks the margins are. And Bernie and crew have to break this news to Pat. 700 00:55:09.950 --> 00:55:10.770 Yes. 701 00:55:10.770 --> 00:55:16.830 And Pat's like distraught. He's like, what do you— what do you mean? I— this thing's going to run out of cash in the next few months. I'm doing great. And they're like, you're not doing great, man. 702 00:55:18.090 --> 00:55:18.590 Yep. 703 00:55:18.590 --> 00:55:19.598 But God bless them. 704 00:55:19.661 --> 00:55:22.804 And this is Bernie's trusting nature and optimism. 705 00:55:22.867 --> 00:55:25.758 They say, okay, we're not going to buy HomeCo. 706 00:55:25.821 --> 00:55:29.781 You're going to go bankrupt, but we got to get you on the team. 707 00:55:29.844 --> 00:55:30.850 You are special. 708 00:55:30.913 --> 00:55:37.073 After you file for bankruptcy, we want you to come in and join us as our 4th full co-founder here. 709 00:55:37.136 --> 00:55:39.713 And you're going to handle merchandising. 710 00:55:39.776 --> 00:55:43.045 We're going to take care of finances and operations. 711 00:55:43.108 --> 00:55:45.748 You're not going to go anywhere near that. 712 00:55:45.811 --> 00:55:52.160 But you are going to come in, you're going to stack them high, and we're all going to watch them fly. 713 00:55:52.160 --> 00:56:10.880 Yep. So I mentioned $2 million is not that much capital. They have to start getting really creative as they're thinking about the first store to make the business work on that. So it kind of has two things it forces. One, they got to get the longest possible financing terms from suppliers. 714 00:56:10.880 --> 00:56:11.682 Yep. 715 00:56:11.682 --> 00:56:18.309 So, you know, once the goods arrive at the store, it's like a ticking clock to make sure that they can move these goods. 716 00:56:18.364 --> 00:56:23.390 So they don't want them arriving anywhere, you know, other than the day before opening day. 717 00:56:23.445 --> 00:56:32.668 Two, they have to try to turn their inventory as fast as possible so they can get as much cash in the door from customers to pay the suppliers when the bills came due. 718 00:56:32.724 --> 00:56:34.436 This is what Pat was not doing. 719 00:56:34.491 --> 00:56:42.610 So this resulted in about half of The Home Depot's inventory at any given time actually being financed by the suppliers, which is still true today— 720 00:56:43.665 --> 00:56:44.665 Yep. 721 00:56:44.665 --> 00:56:51.650 Just based on payment terms, because they can sell about half the items before they have to owe those dollars to the manufacturers. 722 00:56:51.703 --> 00:56:56.129 Two, they realized they couldn't afford to extend payment terms to their customers. 723 00:56:56.182 --> 00:57:10.420 Now, they were already thinking this way, but what it did mean is they had to focus on retail customers, like consumers who would just pay cash or, you know, credit cards when they're buying an item so that The Home Depot could get money right away versus businesses. 724 00:57:11.510 --> 00:57:12.390 That are gonna want credit— 725 00:57:12.390 --> 00:57:17.300 Because the expectation with a business is I get credit at your store. They don't have the ability to offer credit at the store. 726 00:57:17.300 --> 00:57:18.164 Right? Right. 727 00:57:18.164 --> 00:57:24.491 So it's like, sure, if you're like a little pro contractor and you're expecting to pay in cash, we can deal with you. 728 00:57:24.545 --> 00:57:26.979 But we can't really deal with big businesses. 729 00:57:27.033 --> 00:57:35.200 They just have to be generally very scrappy in every area of their business to get the most bang for their limited bucks, especially in the early days. 730 00:57:35.920 --> 00:57:36.420 Yep. 731 00:57:36.420 --> 00:57:36.846 Yep. 732 00:57:36.846 --> 00:57:42.226 And thus the founding team, the Avengers of retail, is complete. 733 00:57:42.311 --> 00:57:44.186 They're all assembled. 734 00:57:44.271 --> 00:57:46.402 Bernie, Arthur, Ken, Pat. 735 00:57:46.487 --> 00:57:54.157 There's just a couple more things they need, you know, like an actual location and a name. 736 00:57:54.242 --> 00:58:02.850 But before we tell those stories, now is a great time to thank one of our favorite companies, WorkOS. 737 00:58:03.130 --> 00:58:03.630 Yes. 738 00:58:03.630 --> 00:58:10.164 So listeners, there's this decision that every company faces once you find product-market fit and you start scaling. 739 00:58:10.223 --> 00:58:11.385 What do you do next? 740 00:58:11.443 --> 00:58:16.036 Well, one big answer is move upmarket and find your first enterprise customers. 741 00:58:16.095 --> 00:58:23.130 Actually, it's funny, the way this fits into Home Depot is going after the first pros, not just these consumer customers. 742 00:58:23.130 --> 00:58:23.630 Yep. 743 00:58:23.630 --> 00:58:25.977 And today, the way you do that is WorkOS. 744 00:58:26.039 --> 00:58:35.387 They make it easy to add all the things that enterprise customers require: single sign-on, SCIM, permissions, audit logs, all with simple drop-in APIs. 745 00:58:35.449 --> 00:58:42.135 And this matters even more in the AI era, where products need deep access to sensitive data to be impactful. 746 00:58:42.197 --> 00:58:43.683 But there's a new twist. 747 00:58:43.745 --> 00:58:48.573 It's not just your customers' employees who need to get into your app anymore. 748 00:58:48.635 --> 00:58:49.750 It's their agents. 749 00:58:50.330 --> 00:58:51.330 Buh-nuh-nuh. 750 00:58:51.330 --> 00:58:51.693 Duh, duh. 751 00:58:51.693 --> 00:59:01.420 Which actually is a very Home Depot problem. About half of what Home Depot sells goes to a pro contractor who is buying on behalf of a homeowner. 752 00:59:01.420 --> 00:59:01.828 That's right. 753 00:59:01.828 --> 00:59:09.660 It's someone else's money for someone else's kitchen that you're building and the scope of work that the pro and their end customer agree to. 754 00:59:09.660 --> 00:59:10.160 Yep. 755 00:59:10.160 --> 00:59:12.172 Agents are like the pros of software. 756 00:59:12.232 --> 00:59:16.360 They log in and take actions on behalf of the people who deploy them. 757 00:59:16.420 --> 00:59:22.701 Except the way most teams wire them up today is a shared API key or a borrowed human session, even worse. 758 00:59:22.761 --> 00:59:29.940 This is like handing your contractor a credit card and your house keys and just hoping a house comes out the other side. 759 00:59:30.550 --> 00:59:33.030 Or my new bathroom, or yeah. 760 00:59:33.030 --> 00:59:33.950 Yeah. 761 00:59:33.950 --> 00:59:37.281 Authentication used to just mean proving that you are you. 762 00:59:37.339 --> 00:59:43.428 Now it means proving that your agent is allowed to do this specific thing, as you, right now, with limits. 763 00:59:43.486 --> 00:59:46.588 And that is what WorkOS has built the whole stack for. 764 00:59:46.645 --> 00:59:51.586 So their new system, WorkOS Airlock, doesn't just check which tools an agent can call. 765 00:59:51.643 --> 01:00:00.720 It checks the user's original intent so that the agent that you sent in to redo the kitchen doesn't decide to take out a load-bearing wall in the dining room. 766 01:00:00.720 --> 01:00:10.890 Which, you know, permissions tell you what an agent can do. WorkOS Airlock checks it was actually asked to do it. Turns out those are very different questions. 767 01:00:10.890 --> 01:00:15.162 Getting agent identity right is how you get in the door with enterprises now. 768 01:00:15.218 --> 01:00:23.263 It is why OpenAI, Cursor, Perplexity, and friends of the show at Sierra and Anthropic, along with hundreds of other AI startups, build on WorkOS. 769 01:00:23.319 --> 01:00:27.758 You can learn more at workos.com and just tell them that Ben and David sent you. 770 01:00:27.814 --> 01:00:30.588 All right, so how is this company born in Atlanta? 771 01:00:30.643 --> 01:00:33.030 So far we've been talking about California. 772 01:00:33.820 --> 01:00:38.980 So after the HomeCo interlude and bringing Pat on the team— 773 01:00:38.980 --> 01:00:52.604 Who, by the way, we should say, all those investors who lost money, Pat felt so bad that later on he would give them shares of his Home Depot stock equivalent to the value that they had lost in his first venture to make them whole. 774 01:00:52.663 --> 01:00:58.090 And, you know, if they held, that would be giant amounts of wealth for them in the long run. 775 01:00:58.090 --> 01:00:58.700 They got very, very wealthy if they held. Yes. 776 01:00:58.848 --> 01:00:59.848 Yeah. 777 01:00:59.848 --> 01:01:05.737 So pretty quickly they all decide on Atlanta, as you said, Ben, for two reasons. 778 01:01:05.810 --> 01:01:10.375 So one, the demographics of the Southeast are good, promising. 779 01:01:10.448 --> 01:01:16.853 It's poised for lots of suburban expansion, even despite the tough climate of the '70s. 780 01:01:16.927 --> 01:01:27.160 But unlike California and the Northeast, which are already built up, good real estate locations are still pretty cheap and available there— 781 01:01:28.133 --> 01:01:29.133 Hmm. 782 01:01:29.133 --> 01:01:43.080 Which leads us into the second reason they choose Atlanta. Speaking of good real estate locations, they end up getting a sweetheart deal from J.C. Penney, you know, like the big national department store chain— 783 01:01:43.080 --> 01:01:44.048 Oh yeah. Yep. 784 01:01:44.200 --> 01:01:56.030 To sublease a couple of their locations in Atlanta. J.C. Penney had started a Kmart copycat subsidiary. 785 01:01:56.030 --> 01:01:57.230 Is that what Treasure Island was? 786 01:01:57.230 --> 01:01:59.030 Yeah, I think it was a Kmart copycat. 787 01:01:59.030 --> 01:01:59.150 I was trying to figure it out. 788 01:01:59.830 --> 01:02:00.830 Yep. 789 01:02:00.830 --> 01:02:01.190 Ah. 790 01:02:01.190 --> 01:02:01.690 Yep. 791 01:02:01.690 --> 01:02:07.343 And it was in the Southeast and it was called Treasure Island, and they had great locations. 792 01:02:07.407 --> 01:02:08.168 I mean, J.C. 793 01:02:08.231 --> 01:02:13.497 Penney was like a big company, big national retailer, had a great real estate team. 794 01:02:13.560 --> 01:02:18.001 But the Treasure Island subsidiary wasn't working, and it was failing. 795 01:02:18.065 --> 01:02:24.980 So they offer these crazy hardware startup guys four of the Treasure Island locations in the Atlanta suburbs. 796 01:02:24.980 --> 01:02:26.096 As a sublease, right? 797 01:02:26.140 --> 01:02:26.640 Yep. 798 01:02:26.640 --> 01:02:27.279 As a sublease. 799 01:02:27.339 --> 01:02:27.839 Yep. 800 01:02:27.839 --> 01:02:28.719 At least to start. 801 01:02:28.779 --> 01:02:32.378 So Bernie, Arthur, and Pat, they all pack up their families. 802 01:02:32.438 --> 01:02:35.677 They move to Atlanta, but now they really need a name. 803 01:02:35.737 --> 01:02:37.296 They've got the locations. 804 01:02:37.356 --> 01:02:39.456 They're going to open these stores. 805 01:02:39.516 --> 01:02:43.534 So they hire a marketing consultant who comes up with a great idea. 806 01:02:43.594 --> 01:02:45.814 Can't wait to present it to the team. 807 01:02:45.874 --> 01:02:47.253 Bad Bernie's Build-All. 808 01:02:47.313 --> 01:02:48.393 It's alliterative. 809 01:02:48.453 --> 01:02:48.953 Get it? 810 01:02:48.953 --> 01:02:49.713 It's awesome. 811 01:02:49.773 --> 01:02:50.612 You're Bernie. 812 01:02:50.672 --> 01:02:51.752 You're Bad Bernie. 813 01:02:51.812 --> 01:02:57.090 And we're going to have all this advertising that's going to be you behind bars in jail. 814 01:02:57.150 --> 01:02:59.370 They put me in jail for these prices. 815 01:02:59.430 --> 01:03:00.450 They're too good. 816 01:03:00.770 --> 01:03:02.290 Is that what the shtick was? I— 817 01:03:02.290 --> 01:03:03.810 That was what the shtick was going to be. 818 01:03:03.810 --> 01:03:08.110 I could not figure out why they would want to call it Bad Bernie. 819 01:03:08.110 --> 01:03:08.697 Yeah. 820 01:03:08.697 --> 01:03:09.447 Oh, that is awful. 821 01:03:09.447 --> 01:03:12.210 It's like he must be a crook because these prices are too low. 822 01:03:14.070 --> 01:03:17.990 Which, of course, is exactly what the loan officer wants to hear at the bank when you're— 823 01:03:17.990 --> 01:03:18.863 Yeah, exactly. 824 01:03:18.863 --> 01:03:32.520 I mean, speaking of being scrappy, they're just constantly going to lenders and trying to get capital so that they can buy inventory, but they're just trying to get loans so they can run the business. 825 01:03:32.520 --> 01:03:33.020 Yep. 826 01:03:33.020 --> 01:03:33.453 Yep. 827 01:03:33.453 --> 01:03:44.832 So obviously Bad Bernie's Build-All is not going to cut it, so Ken goes to the investor group that he put together to solicit ideas. 828 01:03:44.919 --> 01:03:51.509 And the wife of one of the investors suggests The Home Depot, and it sticks. 829 01:03:51.595 --> 01:04:00.266 Now, none of the guys ever wrote about this, so I don't know if this was part of the process or not. 830 01:04:00.353 --> 01:04:03.994 I don't know if it was intentional or not. 831 01:04:04.081 --> 01:04:07.550 But what are the initials of Home Depot? 832 01:04:08.330 --> 01:04:10.690 And the stock ticker today. 833 01:04:10.690 --> 01:04:18.920 And the stock ticker. Yeah. HD. Where did they get fired from by Sandy Sigoloff? Handy Dan HD. Nice little— 834 01:04:19.925 --> 01:04:20.925 Homage. 835 01:04:20.925 --> 01:04:22.360 Tweak, shall you say. A little nod. 836 01:04:22.360 --> 01:04:23.120 Yes. 837 01:04:23.120 --> 01:04:24.440 Yeah. Let's put it in a positive spin. A little nod. 838 01:04:25.806 --> 01:04:26.806 Yes. 839 01:04:26.806 --> 01:04:33.409 Turns out, though, the consultant who came up with Bad Bernie's Build-All wasn't a total waste because he's the one who suggests that they adopt the color orange as their company color because it would stand out. 840 01:04:33.440 --> 01:04:39.421 And because, Ben, like you're saying, they're trying to be so cheap, they could buy circus tent material like canvas for orange circus tents and use it as their signage and save money on that. 841 01:04:39.452 --> 01:04:41.010 And that's how orange became The Home Depot color. 842 01:04:56.172 --> 01:04:57.172 Perfect. 843 01:04:57.172 --> 01:04:57.983 Which is totally brilliant. 844 01:04:58.027 --> 01:04:59.027 It's distinctive. 845 01:04:59.027 --> 01:05:00.850 I mean, the orange apron stands out. It's distinctive. It's great. 846 01:05:02.647 --> 01:05:03.647 Yep. 847 01:05:03.647 --> 01:05:27.040 So that leads right into the opening of the first 2 Home Depot's in Atlanta on June 22nd, 1979. They opened 2 stores same day. And this all happened like pretty fast. This is just over 1 year from when Bernie and Arthur and Ron get fired from Handy Dan. 848 01:05:27.040 --> 01:05:41.850 And it is obvious that it happened fast when you look at some of these pictures. Listeners, we'll put some in the email. It's very clearly a big hardware store operating inside of a Kmart. 849 01:05:42.523 --> 01:05:43.523 Yeah. 850 01:05:43.523 --> 01:05:59.370 I mean, it looks like that. They describe the concept in all the books they've written and all these accounts of early Home Depot as this vast warehouse with tall ceilings and merchandise piled to the ceiling. But the early pictures are, I swear, Kmarts or even kind of J.C. Penney's. 851 01:05:59.370 --> 01:06:00.133 Yep. 852 01:06:00.133 --> 01:06:23.970 Like, it's pretty low ceilings. The racks that things are on are like standard Kmart-style racks. It's nothing like The Home Depot that you know of today. The floors are this sort of like linoleum-type floors. And so, yeah, they're selling table saws and hammers and lumber out of a discount— 853 01:06:23.970 --> 01:06:24.505 Kmart knockoff. 854 01:06:24.505 --> 01:06:25.528 Kmart knockoff, right. 855 01:06:25.863 --> 01:06:26.863 Yep— 856 01:06:26.863 --> 01:06:27.415 Second-use real estate. 857 01:06:27.750 --> 01:06:28.867 Yep, yep, yep. 858 01:06:28.947 --> 01:06:44.594 There are some pretty fun legends around all this, around the first store openings, the first of which is that they decide they're going to go big, blow a lot of the budget on a huge newspaper ad. 859 01:06:44.674 --> 01:06:50.422 In the weekend paper that week to really drive homeowners to your store. 860 01:06:50.501 --> 01:06:56.090 Well, weekend newspaper delivery highly correlated with homeownership. 861 01:06:56.460 --> 01:07:08.360 Which is why they did four stores. I mean, two right now, but then quickly two more in one metro. Because they wanted to, much like our Trader Joe's episode, amortize the cost of their advertising. 862 01:07:08.360 --> 01:07:09.116 Exactly. 863 01:07:09.116 --> 01:07:24.584 If you blitz one local geography's radio, TV, newspapers, then you can kind of justify the cost of all of that marketing expense if you have stores in different zip codes around the city that can all benefit from that same marketing. 864 01:07:24.650 --> 01:07:35.737 And this is actually the playbook that they would run for the next 45 years is open in one city, saturate that city, become number one, and then move to the next city. 865 01:07:35.803 --> 01:07:38.591 Don't sprinkle some stores here and there. 866 01:07:38.658 --> 01:07:40.650 No, go into a city with force. 867 01:07:40.650 --> 01:07:49.150 Yep, yep, yep. So all this sounds good on paper, except there's a mix-up and the newspaper ad doesn't run. So they got— 868 01:07:49.703 --> 01:07:50.703 Oops. 869 01:07:50.703 --> 01:07:53.439 Nobody knows about these stores opening. 870 01:07:53.507 --> 01:08:10.539 Instead, Bernie and the store associates, like the retail workers on the floor in the stores, they go out into the parking lots of the two stores with a bunch of signs advertising that they're giving away free $1 bills to lure people into the store. 871 01:08:10.607 --> 01:08:13.480 Inauspicious beginning to Home Depot here. 872 01:08:13.549 --> 01:08:23.262 The other great legend around the first store openings is that the night beforehand, the two store managers of the two locations get together. 873 01:08:23.330 --> 01:08:25.040 They've got a great idea. 874 01:08:25.109 --> 01:08:35.848 They're going to impress the founders, they have a cleaning crew come in and polish up the linoleum floors as a surprise for everybody coming in the morning. 875 01:08:35.916 --> 01:08:37.900 It's all going to look great. 876 01:08:37.968 --> 01:08:42.893 And Pat Farrah comes in at like 4 in the morning the day of the opening. 877 01:08:42.961 --> 01:08:46.040 He sees the polished floors and he goes nuts. 878 01:08:46.160 --> 01:08:52.720 Oh yeah, that was like a thing with this entire company for decades is that they all worked from like the wee hours of the morning. 879 01:08:52.785 --> 01:08:53.785 Yes. 880 01:08:53.785 --> 01:09:03.280 And it was just like expected of the entire culture is if you're not sleeping, you're here working. And also it's fun. Like it's a party and we just work all the time and all of us do it. 881 01:09:03.280 --> 01:09:03.780 Yep. 882 01:09:03.780 --> 01:09:07.349 So when Pat sees these sparkling clean floors, he loses it. 883 01:09:07.412 --> 01:09:19.810 He calls Bernie and Arthur, he gets them out of bed, and the three of them come in and they start careening forklifts around the store floor to scuff up the linoleum so it looks like it was busy. 884 01:09:19.874 --> 01:09:22.417 Pat's like, we can't have this be clean. 885 01:09:22.481 --> 01:09:24.770 It looks like nobody's been in here. 886 01:09:24.770 --> 01:09:27.930 And it sends the wrong message. 887 01:09:27.930 --> 01:09:28.461 Exactly. 888 01:09:28.461 --> 01:09:30.475 I think they sprinkled some sawdust too. 889 01:09:30.525 --> 01:09:42.055 This is supposed to be a place where people who are actively working on projects come in the middle of their project, and they're like in work boots, and, you know, the store should feel like a place you're not afraid to mess up. 890 01:09:42.105 --> 01:09:44.120 We need it scuffed up like a Home Depot. 891 01:09:44.120 --> 01:09:48.740 Yep. Bernie's quote about this that he would write is, "Our stores are action places." 892 01:09:48.740 --> 01:10:03.080 Yeah. And also, we're going to get to this later, but part of The Home Depot's business model and part of the big giant reason that it works is if you are mid-job, The Home Depot is the place that you use for real-time replenishment. 893 01:10:03.080 --> 01:10:03.961 Yep. 894 01:10:03.961 --> 01:10:09.470 So sometimes that means if you are swinging by every morning on the way to your job site. Sometimes it means that— 895 01:10:09.470 --> 01:10:10.069 If you're a pro. Yep. 896 01:10:10.510 --> 01:10:18.321 If you're trying to fix a deck and you realize, "Oh crap, I've got the wrong nails," then you can go get the nails mid-project. 897 01:10:18.382 --> 01:10:32.590 But they wanted it to be a place where they could treat it like the outsourced back office storeroom inventory that was reliable and you could count on and you could get in a just-in-time way whenever you were working on a project. 898 01:10:32.640 --> 01:10:34.560 Yep. Whether you're a pro or a homeowner. 899 01:10:34.840 --> 01:10:37.320 Yes, and it sure better feel like that. 900 01:10:37.328 --> 01:10:38.328 Yep. 901 01:10:38.328 --> 01:10:52.760 Another classic story is they're capital constrained. They don't have enough to actually buy all this merchandise and store a huge amount of inventory and stack it all the way to the ceilings. But they want to create the illusion that they do for customers. 902 01:10:52.760 --> 01:10:53.193 That's right. 903 01:10:53.193 --> 01:10:59.919 And so a week before opening, they didn't have enough merch to fill the whole store. 904 01:11:00.000 --> 01:11:10.570 So Pat Farrah calls the Del Mar Cabinet Company and asked if they can borrow, not even buy, borrow 500 boxes of all different sizes. 905 01:11:10.651 --> 01:11:18.018 So the team stays up all night folding them and putting them on the racks around the stores. 906 01:11:18.098 --> 01:11:33.955 And apparently, I haven't seen this video, but they filmed themselves walking around the store because it looks so, in their words, fabulously legitimate that they had this big expanse of inventory. 907 01:11:34.035 --> 01:11:37.719 And they did the same thing with paint stacks. 908 01:11:37.799 --> 01:11:38.600 Pat found- 909 01:11:38.600 --> 01:11:39.100 Yeah, empty paint cans. 910 01:11:39.100 --> 01:11:41.900 -2,000 empty paint cans for each store and they put special little labels so they would know not to investigate too significantly, but stacked them 10 feet high. 911 01:11:41.900 --> 01:11:45.470 Whenever I go to Home Depot now, I'm going to have to start like knocking on cans and boxes and make sure that they're, they're actually full. 912 01:11:45.470 --> 01:11:47.760 Well, capital constraint is no longer their issue. 913 01:11:47.760 --> 01:11:48.260 Yeah. 914 01:11:48.260 --> 01:11:57.132 So despite the rocky launch of the first few stores, within a couple of months, they do get all these kinks ironed out. 915 01:11:57.207 --> 01:11:59.832 And the first stores start humming. 916 01:11:59.907 --> 01:12:14.304 By the end of the year, that first year there in 1979, they open the third store in Atlanta and they do $7 million in total sales for just that like 6-month operating period of the first year. 917 01:12:14.379 --> 01:12:23.827 So like startup retailer, $7 million in sales across two, and then at the very end of the year, bringing online a third store. 918 01:12:23.902 --> 01:12:33.650 This is right on with their aggressive financial projections that, Ben, you were talking about that they needed to make this work. 919 01:12:33.650 --> 01:12:36.821 And part of the appeal is they're blowing stuff out. 920 01:12:36.882 --> 01:12:52.678 I mean, friend of the show Arvind Navaratnam, who I'll bring up several times on this episode for his extensive research on the retail sector and especially Home Depot, he found that they were in the early days 10 to 25% below the prices of their competitors. 921 01:12:52.739 --> 01:12:56.459 And they did this through all the ways that you would expect. 922 01:12:56.520 --> 01:13:10.487 And we've talked about on the Costco episode, they're getting deliveries directly from the manufacturers on a pallet into the store so they can take relatively low margins, not Costco low, but 30% gross margins on these products. 923 01:13:10.548 --> 01:13:13.048 And they can offer these screaming deals. 924 01:13:13.109 --> 01:13:16.342 I mean, 10% to 25% below that of competing retailers. 925 01:13:16.403 --> 01:13:18.781 This should create crazy word of mouth. 926 01:13:18.842 --> 01:13:20.367 You got to see the store. 927 01:13:20.428 --> 01:13:21.526 I just went there. 928 01:13:21.587 --> 01:13:22.867 They have everything. 929 01:13:22.928 --> 01:13:27.076 I could— I'm like discovering new projects to do and it's all cheap. 930 01:13:27.137 --> 01:13:27.930 It's amazing. 931 01:13:27.930 --> 01:13:33.510 Yep. I mean, just like Costco, no-brainer proposition to the buying public. 932 01:13:33.510 --> 01:13:39.385 And it's a different take on the classic retail triangle of price, selection, and convenience. 933 01:13:39.447 --> 01:13:47.198 You usually have low prices, large selection, and high convenience, and they definitely have low prices and large selection. 934 01:13:47.260 --> 01:13:56.198 It's in some ways not high convenience, because what's high convenience to me is I can walk literally two blocks from here to a hardware store. 935 01:13:56.261 --> 01:13:59.011 Granted, it's low SKU count, but it's close. 936 01:13:59.074 --> 01:14:11.824 This element, this twist on convenience is, yeah, you're going to have to drive kind of out into the sticks, or here in Seattle, down south of downtown in the neighborhood of SoDo, you can get everything. 937 01:14:11.887 --> 01:14:13.950 You only need to go to one store. 938 01:14:13.950 --> 01:14:15.810 Yeah, it's one trip like we've been talking about. 939 01:14:15.810 --> 01:14:16.706 Yes. 940 01:14:16.706 --> 01:14:23.194 So the model starts to work quickly and the flywheel here is getting spun up in Atlanta. 941 01:14:23.268 --> 01:14:25.922 And then the next year in 1980, J.C. 942 01:14:25.996 --> 01:14:34.770 Penney calls him back again and says, "Hey, we're finally going to pull the plug totally on this Treasure Island thing. 943 01:14:34.844 --> 01:14:40.374 We got a bunch of locations that are now going to be empty down in Florida. 944 01:14:40.448 --> 01:14:44.430 Do you want them?" And yeah, of course they want them. 945 01:14:44.430 --> 01:14:44.753 Right, right. 946 01:14:44.753 --> 01:14:48.910 Like, the whole plan here is expand nationally and this is great real estate. Like, we should jump on this. 947 01:14:50.300 --> 01:14:51.300 Yep. 948 01:14:51.300 --> 01:14:56.061 There's just one problem, which is they are maxed out on capital. 949 01:14:56.134 --> 01:15:03.239 So in 1979, that first 6-month period that the company was operating, they lost about $1 million. 950 01:15:03.312 --> 01:15:08.073 So $1 out of the $2 million of startup capital was blown in 1979. 951 01:15:08.147 --> 01:15:12.249 In 1980, this next year, they made $1 million in profit. 952 01:15:12.322 --> 01:15:14.153 Like, this is incredible. 953 01:15:14.226 --> 01:15:17.230 This shows how well the model is working. 954 01:15:17.230 --> 01:15:28.490 It's already profitable, and I think basically would be profitable for every year here on forward. I think they had one year where they had negative earnings, and then after that, they've been a profitable company their entire life. 955 01:15:28.880 --> 01:15:29.380 Yep. 956 01:15:29.380 --> 01:15:31.303 Going like gangbusters. 957 01:15:31.389 --> 01:15:40.303 But that's not enough capital to take over all these leases and this great real estate down in Florida. 958 01:15:40.390 --> 01:15:45.323 So once again, Ken Langone says, "No problem, I got this. 959 01:15:45.409 --> 01:15:50.861 We'll just go public." Now, this is a crazy idea in any market. 960 01:15:50.948 --> 01:15:57.179 The pitch here, to be clear, is we are going to take a four-store chain. 961 01:15:57.265 --> 01:16:09.208 They've now opened the fourth store in Atlanta public in 1981 here when interest rates are hitting their all-time peak of 20-plus percent. 962 01:16:09.295 --> 01:16:12.930 Can you imagine this pitch to Wall Street? 963 01:16:13.130 --> 01:16:17.711 You know what people don't like to do when interest rates are really high? 964 01:16:17.773 --> 01:16:25.078 Buy speculative new IPOs, even though in theory, valuations should actually be depressed when interest rates are high. 965 01:16:25.140 --> 01:16:34.550 So it's actually a great time to be investing because you can pick up equities and income-generating assets for cheaper than in low interest rate times. 966 01:16:34.700 --> 01:16:39.620 Ben, are you suggesting that recessions are the best time to push your chips in? 967 01:16:39.620 --> 01:16:40.950 Look, call me Warren Buffett over here, David. 968 01:16:40.950 --> 01:16:41.450 Yeah. 969 01:16:41.450 --> 01:16:51.890 So, you know, once again, Ken is like, "I got this." But by this point in time, he is no longer an active investment banker himself. 970 01:16:51.969 --> 01:16:57.440 He's just a principal investor now, so he can't lead the IPO himself. 971 01:16:57.519 --> 01:17:04.971 He calls up his buddies at Bear Stearns and he strong-arms them into taking on this crazy IPO. 972 01:17:05.051 --> 01:17:09.570 Bear agrees, and they set a target of raising $6 million. 973 01:17:09.570 --> 01:17:15.120 And I think Bear was not interested, but then Ken called some other investment banks who said, "Oh, we're interested." And then Bear got interested. 974 01:17:15.403 --> 01:17:16.403 Yeah— 975 01:17:16.403 --> 01:17:17.078 As it always works. 976 01:17:17.078 --> 01:17:18.500 Ken knows how to get deals done. 977 01:17:18.500 --> 01:17:19.470 Yes. 978 01:17:19.470 --> 01:17:29.961 So of the $6 million target, the plan is that half of that is going to be for expansion capital to go down into Florida and take over these leases. 979 01:17:30.032 --> 01:17:36.098 And half of that money is going to go to the initial seed investors to cash them out. 980 01:17:36.170 --> 01:17:41.380 At close to a 2x in, you know, call it a year and a half, two years here. 981 01:17:41.412 --> 01:17:42.412 Great deal. 982 01:17:42.412 --> 01:17:42.912 Great deal. 983 01:17:42.912 --> 01:17:42.933 Great deal, right? 984 01:17:42.933 --> 01:17:42.967 Fortunately for those investors, the week before the IPO, Bear calls up Ken and they say, "Hey, we took this thing on as a favor to you, but in this environment, we can't— we can't get the full $6 million deal done. 985 01:17:42.967 --> 01:17:43.353 We're going to have to cut this thing in half. 986 01:17:43.353 --> 01:17:43.437 We can only sell $3 million." So Ken goes back to the existing investors and says, "We're just going to let our investment ride rather than cashing out at slightly less than a 2x." 987 01:18:19.070 --> 01:18:26.630 You have to stay invested. We need all $3 million that we were able to raise to go to the balance sheet so that we can do this expansion. 988 01:18:26.630 --> 01:18:55.220 Yep. Which, if you do the math, that $2 million from the initial Home Depot investor group bought 50% of the company in 1978. By not cashing out here at a 2x return, those investors, if they held to today, would have gotten well north of a 50,000x return on their capital. 989 01:18:55.220 --> 01:18:57.320 Which— check my calculator, but I think it's better than a 2x. 990 01:18:57.610 --> 01:19:11.650 Yep. So the IPO gets done. They end up raising a little bit more than $3 million. They raise $4 million in total in the IPO at a $32 million initial market capitalization post-offering. 991 01:19:12.280 --> 01:19:20.960 Which this, listeners, is part of the reason why it's a better investment than Apple since IPO and, you know, since many other companies. 992 01:19:20.960 --> 01:19:21.846 Nvidia, etc. 993 01:19:21.846 --> 01:19:28.326 It went public at a tiny, tiny market cap. 994 01:19:29.129 --> 01:19:30.129 Yep. 995 01:19:30.129 --> 01:19:34.792 I mean, you could get in as a public shareholder at a $32 million valuation. 996 01:19:34.854 --> 01:19:39.088 I mean, even if you inflation adjust that, that's $122 million today. 997 01:19:39.149 --> 01:19:40.499 Just think about that. 998 01:19:40.561 --> 01:19:44.243 A company went public at a total market cap of $122 million. 999 01:19:44.304 --> 01:19:46.759 It had so much running room ahead of it. 1000 01:19:46.820 --> 01:19:51.730 That is how you get that giant multiple since IPO that the public had access to. 1001 01:19:52.300 --> 01:20:00.460 Yep. But you needed to be— well, I was going to say crazy, but you needed to have vision to do this. 1002 01:20:00.460 --> 01:20:01.258 Yes. 1003 01:20:01.258 --> 01:20:05.660 I mean, it's IPOing as a four-store hardware chain in Atlanta. 1004 01:20:06.306 --> 01:20:07.306 Right, right. 1005 01:20:07.340 --> 01:20:11.700 This is not Anthropic here where everybody knows them and they're giant. 1006 01:20:11.700 --> 01:20:15.060 A household name, right? This is a four-store chain in Atlanta. 1007 01:20:15.060 --> 01:20:15.560 Yep. 1008 01:20:15.560 --> 01:20:18.678 So after the IPO, they go to Florida, goes great. 1009 01:20:18.745 --> 01:20:25.110 Next, they go to Texas by actually acquiring a copycat chain that had sprung up called Bowater. 1010 01:20:25.177 --> 01:20:30.337 That was a bad idea and cost the company a lot of time remaking those stores. 1011 01:20:30.404 --> 01:20:32.012 But they turn it around. 1012 01:20:32.079 --> 01:20:33.955 They're successful in Texas. 1013 01:20:34.022 --> 01:20:36.100 Then they go to the West Coast. 1014 01:20:36.167 --> 01:20:37.976 They go back to California. 1015 01:20:38.043 --> 01:20:39.383 They beat Handy Dan. 1016 01:20:39.450 --> 01:20:41.125 They go to the Northeast. 1017 01:20:41.192 --> 01:20:43.537 Then national, rest of the country. 1018 01:20:43.604 --> 01:20:45.950 The company is just like on a tear. 1019 01:20:46.320 --> 01:20:59.680 Yep. As of the IPO, they were tripling year over year in revenue. In 1984, they hit 31 stores. So that's Georgia plus Florida plus Texas. They're solidly a multi-regional chain here— 1020 01:20:59.950 --> 01:21:06.070 Yep. And then quickly after that, in 1986, they hit $1 billion in sales. 1021 01:21:06.070 --> 01:21:06.967 With 60 stores. 1022 01:21:07.160 --> 01:21:22.120 They don't stop there. In 1989, they pass Lowe's to become the largest home improvement retailer in America. Also in 1989, Handy Dan goes out of business. They finally get their clock cleaned by the new HD. 1023 01:21:22.730 --> 01:21:26.410 Meanwhile, Home Depot is now up to 118 stores nationally. 1024 01:21:26.584 --> 01:21:27.584 Yep. 1025 01:21:27.584 --> 01:21:33.450 So there's this interesting question here. We've talked about how they speed ran to $1 billion in revenue and 100+ stores. 1026 01:21:33.970 --> 01:21:36.650 National market leader in less than 10 years. 1027 01:21:36.650 --> 01:21:37.150 Right. 1028 01:21:37.150 --> 01:21:39.060 Kind of, kind of ridiculous. 1029 01:21:39.129 --> 01:21:44.157 The model, at least as we've explained it so far, clearly works at scale. 1030 01:21:44.226 --> 01:21:54.282 But there, you should sort of have this question in your head of, well, how did they do all that when they had $2 million and just a scrappy team? 1031 01:21:54.351 --> 01:21:57.312 I mean, this was a shoot-the-moon strategy. 1032 01:21:57.381 --> 01:22:00.687 It needed to grow fast in order to make it work. 1033 01:22:00.756 --> 01:22:09.503 They needed to have a flood of customers on day one at the store in order to justify all the different inventory that they had. 1034 01:22:09.572 --> 01:22:19.421 And they needed to have suppliers give them great deals, even though they actually didn't have any proof points that they could sell in volume. 1035 01:22:19.490 --> 01:22:28.720 So I, I don't know, how do you think about why they were able to sort of act like a scale company even when they weren't at scale yet? 1036 01:22:28.720 --> 01:22:43.670 I think it was that they combined Pat Farrah's aggressiveness that he put together at HomeCo with Bernie and Arthur's operations and finance genius to just barely make it all work. 1037 01:22:44.090 --> 01:22:48.410 And a lot of illusion along the way- 1038 01:22:48.783 --> 01:22:49.783 Yep. 1039 01:22:49.783 --> 01:22:52.490 -where they could sell the dream. And selling the dream is fine if the dream comes true. 1040 01:22:52.490 --> 01:22:53.392 Yep. 1041 01:22:53.392 --> 01:22:57.720 It's only bad if you promise people all this volume and then you can't get any volume. But, you know, as long as— 1042 01:22:57.720 --> 01:23:01.560 Yep. Specifically selling the dream to their suppliers, to the manufacturers. 1043 01:23:01.560 --> 01:23:08.080 Suppliers, suppliers and to financiers to like max out the amount of debt that they would extend this company. 1044 01:23:08.080 --> 01:23:09.640 Right. All the debt capital they were raising. 1045 01:23:09.640 --> 01:23:20.012 So there's a great quote in Built from Scratch that I think kind of addresses this point, because this was a disconnect I had the whole time of, in theory, you shouldn't be able to start like this. 1046 01:23:20.064 --> 01:23:22.907 And I think it addresses the uniqueness of the people. 1047 01:23:22.960 --> 01:23:27.751 We had to be psychologists, lovers, romancers, and con artists to get our suppliers aboard. 1048 01:23:27.804 --> 01:23:39.334 Our ability to paint a picture of how that would take place: the lowest prices, the widest selection, and great customer service was what convinced skeptical manufacturers to sell merchandise to us in those early years. 1049 01:23:39.387 --> 01:23:42.704 We didn't have the buying power of our established competitors. 1050 01:23:42.756 --> 01:23:47.811 On paper, we couldn't compete with Handy City or Handy Dan, but we were good at selling futures. 1051 01:23:47.864 --> 01:23:53.076 "You need to do this for us now," we'd tell vendors, "because down the road we will have 50 stores. 1052 01:23:53.129 --> 01:23:55.814 Eventually, we will be the biggest in the industry. 1053 01:23:55.866 --> 01:24:04.817 So now is the time to get on board." And as in any long-term relationship, the key was getting to know the vendors and at the same time understanding what motivated them. 1054 01:24:04.870 --> 01:24:06.080 Then we motivated them. 1055 01:24:06.133 --> 01:24:07.555 We appealed to their greed. 1056 01:24:07.607 --> 01:24:10.187 We appealed to their enthusiasm for new concepts. 1057 01:24:10.240 --> 01:24:13.188 We appealed to their need to get their products exposed. 1058 01:24:13.241 --> 01:24:19.770 It's like sheer force of will keeping all these plates spinning and convincing everyone in your ecosystem that you're legit. 1059 01:24:19.770 --> 01:24:22.310 It's why you needed the Avengers to do this. 1060 01:24:22.310 --> 01:24:25.740 Right. And it's fine to sell the future as long as you make the future come true. 1061 01:24:26.350 --> 01:24:33.790 American enterprise system here. The worst thing that happens if it doesn't work is you declare bankruptcy and like Pat Farrah, you go join the next thing. 1062 01:24:35.192 --> 01:24:36.192 Yes. 1063 01:24:36.192 --> 01:24:47.360 So I think this is actually the perfect place to really talk about what the model is- 1064 01:24:47.360 --> 01:24:47.928 Yes. 1065 01:24:47.928 --> 01:24:59.520 -and why here now we're in the late 1980s. There is capital available. It's the Go-Go 1980s. Why are copycats not emerging well-funded with a lot of capital to just come eat their lunch and do this too? 1066 01:24:59.750 --> 01:25:09.790 Well, there were copycats. I mean, there were other large-format hardware home improvement stores. I mean, I, I've been to a Builders Square, I think, when I was a kid. 1067 01:25:09.790 --> 01:25:27.870 Yeah, yeah, yeah. So, yes, exactly. This did happen. A lot of capital rushed into the space trying to do this. Yeah. Builders Square, Home Club, Home Quarters Warehouse, Mr. HOW Warehouse. These are all copycats spun up in the 1980s. None of them are around today? 1068 01:25:28.410 --> 01:25:29.490 Okay, so why? 1069 01:25:29.630 --> 01:25:35.001 The answer is that as Home Depot scales, it's not just Costco for hardware. 1070 01:25:35.073 --> 01:25:44.098 Costco is a general merchandise retailer, like you said in the intro, Ben, and Home Depot is a specialty merchandise retailer. 1071 01:25:44.169 --> 01:25:51.403 On the surface, these things look kind of similar, like a Home Depot store looks like a Costco store. 1072 01:25:51.475 --> 01:26:03.723 But in specialty retailing, it's not enough just to have the classic holy trinity of price, selection, and convenience that Walmart and Costco and Amazon are all built on. 1073 01:26:03.795 --> 01:26:11.315 You also need to serve the customer in ways that are wholly unique and specific to each specialty market. 1074 01:26:11.387 --> 01:26:20.268 So if you think about like tire and auto shops, they need to offer fast quality installation of tires and auto parts, right? 1075 01:26:20.340 --> 01:26:21.558 Or beauty, right? 1076 01:26:21.629 --> 01:26:28.147 Like beauty needs to offer in-store sampling and makeovers or even like Apple and Best Buy. 1077 01:26:28.219 --> 01:26:37.602 They need to offer the Genius Bar and the Geek Squad to help with troubleshooting, specifically expertise that serves the customer. 1078 01:26:37.673 --> 01:26:42.759 Nobody's serving the customer in a Costco except at the checkout aisle. 1079 01:26:42.830 --> 01:26:46.770 It's like you go grab your toilet paper, you check out. 1080 01:26:46.770 --> 01:26:50.510 Right. The whole point is that we don't actually need to have that many people in the store serving you. 1081 01:26:50.510 --> 01:26:51.182 Right, right. 1082 01:26:51.182 --> 01:26:54.510 That's how we can pay our associates so much. That creates so much goodness in the model. 1083 01:26:54.880 --> 01:27:14.800 Yep, yep. Home Depot basically invented what serving the customer looks like in home improvement. Before Home Depot, there basically was no customer servicing in hardware. It was like you walked into a hardware store and good luck. If you knew where things were, good. You know, if not— 1084 01:27:15.010 --> 01:27:16.499 And we're generalizing here. 1085 01:27:16.552 --> 01:27:26.022 I'm sure there were amazing associates at amazing hardware stores all over the place, but there wasn't this idea that I went to a Home Depot last week as I was prepping for this. 1086 01:27:26.075 --> 01:27:35.439 And this was after I had, you know, read some books and I had seen all the stuff about Home Depot's unique culture and their obsession with serving the customer above all else. 1087 01:27:35.492 --> 01:27:38.259 And we drop everything in order to serve a customer. 1088 01:27:38.312 --> 01:27:52.517 And there's even stories about people at headquarters who will pick up the phone in the middle of a meeting and interrupt corporate work because they actually need to take a call from someone who is on the floor with a customer to address a customer-specific concern. 1089 01:27:52.570 --> 01:27:56.720 I mean, the culture is this sort of service and customer-obsessed orientation. 1090 01:27:56.720 --> 01:28:00.220 Ben, I noticed you said headquarters there. I don't think Home Depot has a headquarters. 1091 01:28:00.360 --> 01:28:06.960 That is correct. They have a store support center because headquarters merely exists to support the stores. 1092 01:28:06.960 --> 01:28:14.830 Yes, yes. Atlanta for Home Depot. The corporate address is the store support center, not- 1093 01:28:14.830 --> 01:28:15.330 Yes. 1094 01:28:15.330 --> 01:28:15.830 -the headquarters of the company. 1095 01:28:15.830 --> 01:28:16.330 But that's powerful- 1096 01:28:16.330 --> 01:28:16.830 Yep. 1097 01:28:16.830 --> 01:28:18.230 -to name it that and sort of instill that in the culture. 1098 01:28:18.230 --> 01:28:18.860 Totally, totally. 1099 01:28:18.860 --> 01:28:26.143 So I promise you, I wasn't like secret shopping and trying to prod for these questions, but I was making a copy of a key while I was there. 1100 01:28:26.196 --> 01:28:28.711 And I asked the associate how his day was going. 1101 01:28:28.764 --> 01:28:33.218 And this was like the eighth associate that walked by and it was chock full of staff. 1102 01:28:33.270 --> 01:28:36.624 And this guy, the words out of his mouth were, "It's going well. 1103 01:28:36.676 --> 01:28:39.192 I have like eight things on my to-do list today. 1104 01:28:39.244 --> 01:28:49.830 I've gotten to none of them because Customer always comes first, and I've had so many interesting customer problems come up today." I mean, it is this like very real customer service-oriented mentality. 1105 01:28:49.830 --> 01:28:50.330 Yep. 1106 01:28:50.330 --> 01:28:58.025 And I would say that's the culture still to this day with some bumps along the road that we'll get to as we go. 1107 01:28:58.095 --> 01:29:12.578 But what I mean, though, when I say that Home Depot invented what servicing the customer means in this segment was that before Home Depot, nobody would teach the customers how to accomplish their projects. 1108 01:29:12.648 --> 01:29:21.903 Like if you were just a DIY homeowner, you had no way of obtaining knowledge about how to build a deck or how to retile a bathroom. 1109 01:29:21.974 --> 01:29:26.283 Like maybe you could go to a bookstore and buy a how-to book. 1110 01:29:26.354 --> 01:29:26.854 Maybe? 1111 01:29:26.854 --> 01:29:28.050 If you found one- 1112 01:29:28.050 --> 01:29:28.550 Right. 1113 01:29:28.550 --> 01:29:29.150 -for what you were looking for. 1114 01:29:29.150 --> 01:29:29.600 No, you're hiring a contractor who knows how. 1115 01:29:29.600 --> 01:29:30.549 Right, exactly. 1116 01:29:30.612 --> 01:29:33.335 But people want to work on their own homes. 1117 01:29:33.398 --> 01:29:37.639 This is the unique thing that Home Depot figures out as they scale. 1118 01:29:37.703 --> 01:29:43.653 They actually need to bundle education with the products that they're selling their customers. 1119 01:29:43.717 --> 01:29:58.530 And rather than going out and hiring separate teachers that are going to run clinics in Home Depot's, they just recruit employees from the trades who are professional tradesmen, contractors to come be their retail staff in the stores. 1120 01:29:58.593 --> 01:30:06.570 And then they create a culture of, hey, any time a customer comes in and asks you how to do something, stop what you're doing. 1121 01:30:06.633 --> 01:30:09.988 You know how to do this stuff and explain it to them. 1122 01:30:10.052 --> 01:30:15.180 Show them, get some products out, show them how to build what they want to build. 1123 01:30:15.180 --> 01:30:25.640 Which is crazy, right? If you have a reasonably high-paying job as a contractor, switching gears and taking a retail job is typically not on people's bingo card. 1124 01:30:25.640 --> 01:30:26.399 Good point. 1125 01:30:26.469 --> 01:30:32.686 You would think on the surface that this is crazy, and this is what all the copycats miss. 1126 01:30:32.755 --> 01:30:40.009 They just hire regular retail employees like Walmart does or Costco does or Target does or what have you. 1127 01:30:40.078 --> 01:30:48.437 Actually, though, if you're a tradesperson, there's a pretty good chance that a Home Depot job might be appealing to you. 1128 01:30:48.506 --> 01:30:51.960 So back here in, I don't know, call it 1985, 1990. 1129 01:30:52.029 --> 01:30:57.142 Imagine you're a plumber, you're an electrician, maybe you're a carpenter. 1130 01:30:57.211 --> 01:31:02.668 Sure, you can make more money in your trade than you can working at Home Depot. 1131 01:31:02.737 --> 01:31:07.366 But being a contractor is not easy, like even if you're successful. 1132 01:31:07.435 --> 01:31:08.886 One, it's not steady. 1133 01:31:08.955 --> 01:31:11.511 Cash flow is lumpy and unpredictable. 1134 01:31:11.580 --> 01:31:13.929 Two, it requires a lot of driving. 1135 01:31:13.998 --> 01:31:16.347 And then three, it's manual labor. 1136 01:31:16.416 --> 01:31:19.594 Like, what are you going to do if you get old? 1137 01:31:19.663 --> 01:31:22.495 What are you going to do if you get hurt? 1138 01:31:22.564 --> 01:31:25.535 What are you going to do if you can't work? 1139 01:31:25.604 --> 01:31:27.676 Do you have a retirement plan? 1140 01:31:27.745 --> 01:31:33.618 Well, if you're in a union job at like a big, you know, commercial constructor, sure. 1141 01:31:33.687 --> 01:31:38.246 But if you're working residential, you're probably not in a union. 1142 01:31:38.315 --> 01:31:41.217 You probably don't have a retirement plan. 1143 01:31:41.286 --> 01:31:44.464 You probably don't have a fallback of savings. 1144 01:31:44.533 --> 01:31:48.540 Okay, now Home Depot comes to town and they're recruiting. 1145 01:31:48.609 --> 01:31:53.030 It's a stable job with regular hours with other people like you. 1146 01:31:53.099 --> 01:31:55.241 You don't need to drive around. 1147 01:31:55.310 --> 01:31:57.590 You don't need to manage clients. 1148 01:31:57.590 --> 01:31:58.375 Yep. 1149 01:31:58.375 --> 01:32:02.220 You need to stock the shelves, but it's not hard labor. It's pretty attractive. 1150 01:32:02.220 --> 01:32:05.863 And there's all sorts of benefits to The Home Depot long-term of doing this. 1151 01:32:05.911 --> 01:32:15.066 The most obvious of which is if a former tradesperson works in your store and they meet with a customer trying to do a pretty simple project, hey, I need to paint the walls of my living room. 1152 01:32:15.114 --> 01:32:20.483 You do that and you have a pro help you pick out all the right stuff you need and get the right amount of paint. 1153 01:32:20.531 --> 01:32:23.359 You suddenly feel empowered and you're like, you know what? 1154 01:32:23.407 --> 01:32:25.085 I'm going to try drywall next time. 1155 01:32:25.133 --> 01:32:32.180 And your basket size at Home Depot over the years and the scale of your projects goes up and up and up if you have good education and good service. 1156 01:32:32.180 --> 01:32:36.663 So today, all this that we're talking about sounds like, sure, nice. 1157 01:32:36.729 --> 01:32:44.642 I can go talk to the associates at Home Depot and they used to work in the trades and they can help me with my projects. 1158 01:32:44.708 --> 01:32:57.500 You got to imagine back in the '80s and '90s, before the internet and before YouTube, this was the only way that you were going to be able to even attempt to learn how to do this as a homeowner. 1159 01:32:57.500 --> 01:32:58.214 Yep. 1160 01:32:58.214 --> 01:33:06.260 And so unless you copied Home Depot's labor employment model, you weren't actually going to be able to make the model work like they did. 1161 01:33:06.620 --> 01:33:11.740 And it's not just the employment model. There's a lot of other elements that kind of have an escape velocity component. 1162 01:33:11.740 --> 01:33:12.583 Yep. 1163 01:33:12.583 --> 01:33:15.093 So we've talked about who's in the stores. 1164 01:33:15.153 --> 01:33:17.126 Then there's what's in the store. 1165 01:33:17.186 --> 01:33:19.577 At its core, it's the warehouse concept. 1166 01:33:19.637 --> 01:33:21.370 You're eliminating middlemen. 1167 01:33:21.430 --> 01:33:23.283 You're not paying distributors. 1168 01:33:23.343 --> 01:33:25.674 You're shipping directly to the stores. 1169 01:33:25.734 --> 01:33:28.065 You're passing savings on to customers. 1170 01:33:28.125 --> 01:33:30.815 Lower margins than elsewhere in the industry. 1171 01:33:30.875 --> 01:33:33.446 This leads to you having the lowest prices. 1172 01:33:33.505 --> 01:33:44.206 This is a well-understood warehouse model at this point, but they have something working against them, which is super high SKU count and lots of associates doing all this service. 1173 01:33:44.266 --> 01:33:48.690 So they sort of have to figure out how to succeed despite two big strikes- 1174 01:33:48.690 --> 01:33:49.190 Yep. 1175 01:33:49.190 --> 01:33:49.225 -short-term against the business model. Those are great— 1176 01:33:49.225 --> 01:33:51.440 Yep. Against the economics of the model. Yep. 1177 01:33:51.440 --> 01:33:55.658 Long-term, right, but it is horrible operationally having lots of SKUs. 1178 01:33:55.717 --> 01:33:57.856 It's hard to turn them over quickly. 1179 01:33:57.916 --> 01:34:02.788 You have a bigger payroll at each store than you would in a price club-like model. 1180 01:34:02.847 --> 01:34:07.898 So what are all the elements that make up for it and make it worth those investments? 1181 01:34:07.957 --> 01:34:10.215 You have to encourage a buying frenzy. 1182 01:34:10.274 --> 01:34:12.651 That is a huge part of making this work. 1183 01:34:12.710 --> 01:34:17.642 When you have so many SKUs, you have to have reasons for people to buy all of them. 1184 01:34:17.701 --> 01:34:26.257 And if you have low gross margin percentages, that can be okay as long as people are buying lots of items and coming back and buying them often. 1185 01:34:26.317 --> 01:34:34.100 Because it's not the gross margin percentages that put food on the table, it's the gross margin dollars that put food on the table. 1186 01:34:34.160 --> 01:34:44.736 So you're just trying to sell enough volume and turn everything over fast enough that those gross margin dollars add up and justify holding all of that inventory at a Home Depot. 1187 01:34:44.795 --> 01:34:51.390 So it's the crazy stunts, it's the heat in the store, it's the one-stop shopness, so you buy a bunch of things. 1188 01:34:51.450 --> 01:34:58.520 It's starting to work with pro contractors as customers because they're going to buy huge amounts of things every week. 1189 01:34:58.579 --> 01:35:00.600 They're going to be repeat buyers. 1190 01:35:00.659 --> 01:35:05.769 Again, the whole goal here is, we actually don't generate that much margin percentage. 1191 01:35:05.828 --> 01:35:12.839 We have lots of SKUs and we have lots of inventory of each of those SKUs, so how do we get as much volume as possible? 1192 01:35:12.899 --> 01:35:22.049 So if you succeed in that and you're doing your job and you have stuff flying off the shelves, that means you can place ever larger orders with suppliers. 1193 01:35:22.108 --> 01:35:26.208 And that means you can ask for ever lower prices on your bulk orders. 1194 01:35:26.267 --> 01:35:39.814 So you either can harvest that extra margin for yourself or what The Home Depot did, at least for a very long time, is pass that along to the customer, make the whole thing spin faster of, oh my God, they have even lower prices. 1195 01:35:39.873 --> 01:35:52.470 So to summarize all this, a friend of the show, Arvind Navaratnam at Worldly Partners, has studied this company at length, and I'm just going to quote from his 100-page study that we'll link to in the show notes. 1196 01:35:52.529 --> 01:36:01.798 The big box warehouse format itself was the most visible innovation at the time in '79, but the more enduring advantage was the operating system beneath it. 1197 01:36:01.857 --> 01:36:18.613 Home Depot built a high-volume model and shared the benefits of scale with customers, generated greater traffic, strengthened supplier relationships, supported a broader assortment, and reinvested the resulting productivity into stores, associates, logistics, technology, and price, 1198 01:36:18.672 --> 01:36:25.030 creating a self-reinforcing flywheel that became increasingly difficult to replicate as the company scaled. 1199 01:36:25.620 --> 01:36:45.946 And there's one more element too that turbocharges the whole thing, which is the company's stock price and the fact that employees all the way down to and including the retail associates on the floors, the good jobs for the former tradespeople, are getting equity in the company. 1200 01:36:46.019 --> 01:36:49.370 So you're probably listening like, wait, what? 1201 01:36:49.443 --> 01:36:54.033 How does the company's stock price make this model work better? 1202 01:36:54.106 --> 01:37:08.167 A big portion of the associate onboarding and training was about the stock and the stock price and what equity is and building the connection between the stock price and your work on the floor. 1203 01:37:08.240 --> 01:37:12.830 And it's all possible because the company went public so early. 1204 01:37:13.290 --> 01:37:15.730 Right, there was so much upside remaining. 1205 01:37:15.730 --> 01:37:16.230 Yes. 1206 01:37:16.230 --> 01:37:28.895 So for these early associate employees of the company, they build this real link and culture among the labor force of, hey, I serve my customers well on the floor of the store. 1207 01:37:28.968 --> 01:37:31.586 I help them complete their projects. 1208 01:37:31.659 --> 01:37:33.841 They come back, they buy more. 1209 01:37:33.914 --> 01:37:37.623 My store sales grow, the company's revenue goes up. 1210 01:37:37.696 --> 01:37:45.406 And the company was small enough back in the early days that this made an impact on the company's revenue. 1211 01:37:45.479 --> 01:37:49.916 The stock then goes up and then I get rich, like really rich. 1212 01:37:49.988 --> 01:37:57.990 There are thousands and thousands of early Home Depot associates who became multimillionaires because of this. 1213 01:37:57.990 --> 01:37:58.822 Yeah. 1214 01:37:58.822 --> 01:38:05.420 When we were talking to Ken in research for this, he put it this way to us. When you tap into people's basic instincts, good things happen. 1215 01:38:05.790 --> 01:38:13.550 Yeah. I mean, if you come from a Silicon Valley tech startup, this is second nature to you. 1216 01:38:13.550 --> 01:38:14.293 Yep. 1217 01:38:14.293 --> 01:38:16.360 But this really wasn't done in retail. 1218 01:38:16.414 --> 01:38:25.607 This is really the first time that a scaled company sort of at mass employment has retail employees who are participating in this, like, giant wealth generation machine. 1219 01:38:25.661 --> 01:38:31.700 And because it was compounding at 25% per year, I mean, it's the best thing they could have put their money in. 1220 01:38:31.700 --> 01:38:39.098 The way it worked was if you were a salaried employee, which started at assistant store manager, you got stock options. 1221 01:38:39.160 --> 01:38:55.201 If you were an hourly employee, you couldn't be granted stock options, but you got this stock purchasing program, which in the early days they set up as you can buy stock at a 15% discount to the current trading price, and we'll give you a no-risk guarantee. 1222 01:38:55.263 --> 01:39:00.859 So if the price ever goes down below what you bought it for, we will fill the gap for you. 1223 01:39:00.921 --> 01:39:06.890 And then they did all this education to the associates and say, hey, you really need to do this. 1224 01:39:06.890 --> 01:39:11.379 And the whole thing works because they were able to position it to Wall Street as a growth stock. 1225 01:39:11.425 --> 01:39:21.330 If you don't have a financier who's doing that, or you don't have the business results to justify it, then this cool party trick doesn't do anything for you because the people aren't in the break room getting rich. 1226 01:39:21.890 --> 01:39:29.750 Yes. And it all comes back to the specialty retailer model versus general merchandise. 1227 01:39:29.935 --> 01:39:30.935 Hmm. 1228 01:39:30.935 --> 01:39:33.071 Let's say you're Costco or Walmart. 1229 01:39:33.132 --> 01:39:34.719 You set up the same thing. 1230 01:39:34.780 --> 01:39:43.630 No associate on the floor is going to be that good at customer service that a customer is going to come in and buy $10,000 worth of toilet paper. 1231 01:39:43.691 --> 01:39:46.316 Hardware and home improvement is different. 1232 01:39:46.377 --> 01:39:49.185 So there are these legends within the company. 1233 01:39:49.246 --> 01:39:54.251 The one that gets told often is the faucet washer that leads to a kitchen remodel. 1234 01:39:54.312 --> 01:40:00.415 So legend is customer comes into the store with a faucet that he's brought in from his kitchen sink. 1235 01:40:00.476 --> 01:40:02.613 He says, hey, my faucet is leaking. 1236 01:40:02.674 --> 01:40:04.383 I think I need a new faucet. 1237 01:40:04.444 --> 01:40:07.984 I know it's probably going to be a couple hundred dollars. 1238 01:40:08.045 --> 01:40:15.492 And the store associate who has plumbing experience looks at the faucet and says, oh, no, no, you don't need a new faucet. 1239 01:40:15.553 --> 01:40:16.895 Like, we can fix this. 1240 01:40:16.956 --> 01:40:18.543 Let's go get a new washer. 1241 01:40:18.604 --> 01:40:19.825 That's all you need. 1242 01:40:19.886 --> 01:40:21.290 We'll get a new washer. 1243 01:40:21.351 --> 01:40:22.022 It's $0.25. 1244 01:40:22.084 --> 01:40:22.755 Install it. 1245 01:40:22.816 --> 01:40:25.563 And, you know, you're going to be good to go. 1246 01:40:25.624 --> 01:40:26.124 They do. 1247 01:40:26.173 --> 01:40:27.699 The customer is so happy. 1248 01:40:27.760 --> 01:40:28.553 He goes home. 1249 01:40:28.614 --> 01:40:30.385 He tells his wife and family. 1250 01:40:30.446 --> 01:40:37.953 Next thing you know, a couple of weeks later, he's back and he says, you know, we've been thinking about a kitchen remodel. 1251 01:40:38.014 --> 01:40:41.310 We're going to do it with you guys here at Home Depot. 1252 01:40:41.371 --> 01:40:46.437 And it's a $100,000 sale because of hardware and home improvement in this category. 1253 01:40:46.498 --> 01:40:50.100 This stuff happens and customer service directly drives it. 1254 01:40:50.160 --> 01:40:51.977 Yep, yep, that's a great point. 1255 01:40:52.036 --> 01:40:59.073 The continuation of that story is that someone makes a comment like, boy, your, your boss is going to probably fire you. 1256 01:40:59.131 --> 01:41:06.696 You could have sold a $200 faucet and you only made $0.25 on the washer, you're probably going to get fired for losing that sale. 1257 01:41:06.755 --> 01:41:12.150 Bernie Marcus hears about this and he calls the guy and says, I think we should promote you. 1258 01:41:12.150 --> 01:41:12.650 Yeah. 1259 01:41:12.650 --> 01:41:13.550 I think that's the exact right customer service mentality. 1260 01:41:13.550 --> 01:41:15.300 We're going to give you another equity grant right now. 1261 01:41:15.300 --> 01:41:29.230 Right. So listeners, a fun aside, one fellow listener and friend of the show is Frank Blake, who famously was the Home Depot CEO going into and navigating the company through the Great Recession. 2007 through 2014. 1262 01:41:29.708 --> 01:41:30.708 Yep. 1263 01:41:30.708 --> 01:41:43.230 And he gave us this great quote when we were talking to him for research. He said, the best sign of cultural health is walking into the break room and seeing the associates watching the stock price. 1264 01:41:44.257 --> 01:41:45.257 Yep. 1265 01:41:45.257 --> 01:41:51.017 Like, we want that. We encourage that here. 1266 01:41:59.520 --> 01:42:01.940 Yeah, it's like the opposite of prevailing Silicon Valley wisdom where like, oh, you don't want your employees checking the stock price. 1267 01:42:01.958 --> 01:42:05.020 At Home Depot, at least for many decades, it was, no, we, we very much want our employees checking the stock price and thinking about how their day is going to impact that. 1268 01:42:05.020 --> 01:42:14.769 So the last thing that I think is fascinating about this model is the original hunch of why the business would work despite all the trade-offs was correct. 1269 01:42:14.832 --> 01:42:21.058 In 1980, Home Depot's were twice as large as Lowe's, and they carried three times as many products. 1270 01:42:21.121 --> 01:42:26.153 Which, if you know us and our Costco zealotry, that sounds like a lot of danger. 1271 01:42:26.216 --> 01:42:28.166 These are all downsides, right? 1272 01:42:28.229 --> 01:42:34.707 But what ended up happening is they had four times as many transactions as those smaller Lowe's stores. 1273 01:42:34.770 --> 01:42:46.092 So there really was this benefit where when you made those investments in more square footage, more inventory, more SKUs, the return on that investment actually increased at scale. 1274 01:42:46.155 --> 01:42:59.237 As you added more things, the word of mouth, the one-stop shopping, the feeling of the buying frenzy, it more than paid for all that additional allocation that you were making in inventory and square footage. 1275 01:42:59.300 --> 01:43:04.710 That was a Bernie hunch before they actually opened the first store, but he was right. 1276 01:43:05.516 --> 01:43:06.516 Yep. 1277 01:43:06.516 --> 01:43:16.690 That is the key insight behind the whole thing, is that actually, there are returns to your investment that increase once you get out beyond a certain SKU count and out beyond a certain square footage. 1278 01:43:17.070 --> 01:43:32.890 Yep. And again, was super unique to home improvement because there's no cap on the amount that a customer can spend. You will get super whale transactions happening of hundreds thousand-dollar kitchens, home remodels, etc., etc. 1279 01:43:33.330 --> 01:43:44.240 Yep. So this is basically the core model that takes Home Depot to the $350 billion market cap company today. Except— 1280 01:43:44.410 --> 01:43:48.010 Except it's not exactly a straight line. 1281 01:43:48.960 --> 01:43:55.023 Yes, there is a fall from grace coming, listeners, before we get to the Home Depot of today. 1282 01:43:55.089 --> 01:44:00.824 But first, now is a great time to thank our friends at Anthropic, the makers of Claude. 1283 01:44:00.889 --> 01:44:09.985 So David, Anthropic published a number over the summer that I have not been able to stop thinking about since I saw it for the first time. 1284 01:44:10.051 --> 01:44:18.949 They looked at 1.2 million Claude Cowork sessions over the course of three weeks across a ton of companies, like 600,000 organizations. 1285 01:44:19.015 --> 01:44:25.672 Software development, which I thought would be a huge part of it, was less than 9% of those sessions. 1286 01:44:25.738 --> 01:44:27.650 I assumed it'd be way higher. 1287 01:44:27.650 --> 01:44:45.510 I know the biggest category by a mile was business process and operations, which was about a third of all Cowork usage. Then content and writing was the next highest. So, you know, if your mental model is still AI writes code, like, this is very different in the data. 1288 01:44:45.510 --> 01:44:49.929 Yeah, and it's a perfect lens for the company that we're covering today with Home Depot. 1289 01:44:49.979 --> 01:44:55.352 Home Depot has thousands of employees and very few of them are ever going to open a command line interface. 1290 01:44:55.403 --> 01:45:01.228 Their job might be merchandising or supply chain or figuring out what their stores should be putting on the shelves. 1291 01:45:01.278 --> 01:45:06.150 And so there's a lot of use cases there for AI, even though almost none of them are writing code. 1292 01:45:06.600 --> 01:45:21.110 Yep, these are all types of cases that require analysis in documents and spreadsheets, all day long. And that is exactly what Claude Cowork is built for. On your desktop, working in your actual folders, not just a chat window. 1293 01:45:21.110 --> 01:45:23.900 And that's the important part for you listeners. 1294 01:45:23.958 --> 01:45:30.469 As is so often the case, you are waiting on engineering resources to free up in your company to build some tool. 1295 01:45:30.527 --> 01:45:31.108 No longer! 1296 01:45:31.166 --> 01:45:35.817 With Cowork, Claude can build you the tools that you need to do your job better. 1297 01:45:35.875 --> 01:45:39.480 And in fact, that is even the case for us here at Acquired HQ. 1298 01:45:39.480 --> 01:45:40.459 Absolutely. 1299 01:45:40.459 --> 01:45:49.682 We have a bunch of proprietary tools that live in web dashboards that Claude has just built for us that handle tons of our process and automation. 1300 01:45:49.745 --> 01:46:01.370 So, if you want to be like us and build tools using Claude Cowork to make your organization work better, you can go to claude.ai/acquired and just tell 'em that Ben and David sent you. 1301 01:46:01.370 --> 01:46:06.864 So, back to Home Depot not exactly being a straight line from here. 1302 01:46:06.946 --> 01:46:09.980 So, at first, things are going great. 1303 01:46:10.062 --> 01:46:16.295 As we talked about, once the model's in place, the whole company is humming. 1304 01:46:16.377 --> 01:46:23.019 By 1996, Home Depot is doing $20 billion in sales annually and expanding rapidly. 1305 01:46:23.101 --> 01:46:27.530 They're averaging a new store opening every four days. 1306 01:46:28.060 --> 01:46:33.220 They have over 600, approaching 700 stores. They have 32 international. 1307 01:46:33.220 --> 01:46:33.720 Yep. 1308 01:46:33.720 --> 01:46:47.394 That year is a big year for the company because the Olympics come to Atlanta, to their hometown, and they see it as the perfect moment to really put their foot on the gas on national advertising, becoming a big brand. 1309 01:46:47.458 --> 01:46:53.460 So, they become a major Olympic sponsor, like right up there with Visa and Coca-Cola and Nike. 1310 01:46:53.524 --> 01:46:54.024 And— 1311 01:46:54.024 --> 01:46:55.016 Now, J.P. Morgan. 1312 01:46:55.016 --> 01:46:56.296 Yep, that's right. 1313 01:46:56.367 --> 01:47:05.755 And Ben, as you alluded to, this era is when they really start serving the pro contractor market as well as the DIY weekend warrior. 1314 01:47:05.826 --> 01:47:08.386 They offer business credit accounts. 1315 01:47:08.457 --> 01:47:13.578 They're finally on solid enough financial footing that they can do that. 1316 01:47:13.649 --> 01:47:18.699 They start carrying more pro-line tools like DeWalt or Milwaukee tools. 1317 01:47:18.770 --> 01:47:31.430 This actually only boosts the DIY weekend warrior market because it turns out there's some segment of consumer homeowners who also want pro-level tools and hardware and supplies. 1318 01:47:31.770 --> 01:47:37.770 People with high willingness to pay for the best, or if they want to have a tool for 20 years, sure, I want what the pros use. 1319 01:47:38.635 --> 01:47:39.635 Absolutely. 1320 01:47:39.635 --> 01:47:46.010 They also hire dedicated salespeople to handle pros. They stand up a pro desk- 1321 01:47:46.010 --> 01:47:46.684 Yep. 1322 01:47:46.684 --> 01:47:50.010 -in a lot of their stores. They offer— this is a big change for them— pro pricing. 1323 01:47:50.401 --> 01:47:51.401 Yep. 1324 01:47:51.401 --> 01:47:54.650 So, they start offering bulk deals if you are coming to the pro desk. 1325 01:47:54.960 --> 01:48:04.680 I think importantly, though, that bulk pricing is available to DIY customers too. You just have to buy in a certain amount. 1326 01:48:04.680 --> 01:48:05.180 Right. 1327 01:48:05.180 --> 01:48:14.784 They also start offering for the first time job site delivery, since not everyone wants to come into the store for everything, especially if you're building a shed like the one you're recording in right now, David. 1328 01:48:14.830 --> 01:48:19.539 You know, you don't want to have to go to the store and load up a car with all of that or rent a truck. 1329 01:48:19.585 --> 01:48:22.100 It'd be nice to just have it delivered to the job site. 1330 01:48:23.057 --> 01:48:24.057 Yep. 1331 01:48:24.057 --> 01:48:49.769 And pros would go on to be this giant driver of the business, whereas— and this is a 2015 stat, so we're flashing forward, but I think it's still a relevant data point— the average Home Depot DIY customer interacts with the company about five times a year, spends about $330. 1332 01:48:49.862 --> 01:48:55.940 The average professional customer would interact 66 times a year- 1333 01:48:55.940 --> 01:48:56.440 Yep. 1334 01:48:56.440 --> 01:48:57.040 -with an annual spend of $6,500. 1335 01:48:57.040 --> 01:49:00.020 Yep. Sounds right. And of course, there are pros that spend hundreds of thousands of dollars a year. 1336 01:49:00.020 --> 01:49:00.813 Yep. 1337 01:49:00.813 --> 01:49:20.780 So, on the back of all this train of success, great stuff. Bernie says, all right, time to declare victory. He retires as CEO, hands the title over to Arthur in 1997. 1338 01:49:20.780 --> 01:49:21.280 So, almost 20 years. 1339 01:49:21.280 --> 01:49:24.854 Yep, almost 20 years in, and he goes out on top. 1340 01:49:24.929 --> 01:49:36.919 And that's when some cracks start to emerge in the Home Depot foundation, because there actually were a bunch of problems that this very rapid growth had masked. 1341 01:49:36.994 --> 01:49:48.612 So first, that same year, in 1997, the company agreed to one of the largest corporate gender discrimination lawsuit settlements in history up to that point. 1342 01:49:48.687 --> 01:49:55.389 Bernie and Arthur dispute the claims in Built from Scratch, in the memoir that they wrote. 1343 01:49:55.464 --> 01:50:06.486 But even just the fact that the company ended up in this position shows that corporate management wasn't exactly tip-top, shall we say, in this era. 1344 01:50:06.561 --> 01:50:10.210 And the lawsuit also kind of reflects the stores. 1345 01:50:10.285 --> 01:50:15.125 I mean, Home Depot's up to this point were like a, a man's place. 1346 01:50:15.200 --> 01:50:19.520 You know, it was guys buying hardware from other guys and— 1347 01:50:19.690 --> 01:50:23.490 Which Lowe's would go on to exploit cultivating women as customers. 1348 01:50:23.490 --> 01:50:31.400 Absolutely. Which we're going to get to in just a second. And so, yeah, this whole dynamic ends up coming back to bite Home Depot pretty quickly. 1349 01:50:31.400 --> 01:50:41.350 There's also all of Bernie and Arthur's accounts in their book of the early days of the like partying hard in stores and like drinking after hours. And obviously, they cleaned all that up over time, but— 1350 01:50:41.610 --> 01:50:45.930 Yeah, it was there for sure. 1351 01:51:01.660 --> 01:51:02.160 Yep. 1352 01:51:02.160 --> 01:51:06.460 Yep. So, okay, that's problem number one. Problem number two, we didn't talk about this as much in the model because it didn't survive the early days, but part of the philosophy of Home Depot as it was getting built was radical decentralization. 1353 01:51:06.460 --> 01:51:14.935 And it's awesome because the stores get to use their local knowledge of the market to make sure that they're buying all the right stuff, the right quantities, that they're super in touch with the customer. 1354 01:51:14.976 --> 01:51:20.310 And that leads to— I think Bernie estimated 15 to 20% higher sales per store because the regions were making their own decisions. 1355 01:51:20.820 --> 01:51:38.100 Yep, yep. But as Home Depot scales, the benefits of doing that really start to get outweighed by what you're leaving on the table- 1356 01:51:38.560 --> 01:51:39.060 Absolute chaos. 1357 01:51:39.060 --> 01:51:40.660 -in terms of scale economies with purchasing power if you were to centralize your merchandising organization. 1358 01:51:40.660 --> 01:51:52.923 Right, so there's chaotic operations, there's lack of being able to use technology and systems because it's so fragmented everywhere, there's a zillion decision-makers and a zillion negotiators with all these different vendors, and the thing you're talking about, David, 1359 01:51:52.968 --> 01:51:55.240 you can't get the best prices from your suppliers. 1360 01:51:55.240 --> 01:52:01.690 Yeah, from your suppliers. If you've got 57 different regional or even store-level buyers negotiating with them. 1361 01:52:01.690 --> 01:52:08.220 Which wasn't an issue at any other store because Home Depot invented the concept of the national hardware store chain. 1362 01:52:08.220 --> 01:52:15.021 Right, there wasn't even an opportunity to do national buying for hardware before Home Depot because nobody was buying nationally. 1363 01:52:15.073 --> 01:52:16.277 Like, sure, absolutely. 1364 01:52:16.329 --> 01:52:21.247 There were still regional differences in what, like, Arizona needed versus what Alaska needed. 1365 01:52:21.299 --> 01:52:23.183 But like a table saw is a table saw. 1366 01:52:23.235 --> 01:52:26.950 You don't need different table saws for different parts of the country. 1367 01:52:27.490 --> 01:52:28.490 Yep. 1368 01:52:28.490 --> 01:52:46.430 So that's two. And then three, the market is changing. As we get into the end of the 1990s and into the early 2000s, the US housing market is rapidly inflating. This is everything that would lead to the financial crisis and the subprime crisis. 1369 01:52:46.430 --> 01:52:53.030 Yeah, you're putting down no cash and managing to get a house because they're willing to lend against invisible earnings. 1370 01:52:53.120 --> 01:53:03.800 Yes. Yes. So obviously that contained a lot of bad things for the American economy and for home improvement retailers to come. But during the run-up— 1371 01:53:03.800 --> 01:53:05.640 Right, they're building houses at an unmatched clip. 1372 01:53:05.920 --> 01:53:19.940 Yep. And it reopens the market for Lowe's to come back as a real competitor. So while the housing market is inflating here in the late '90s and early 2000s, Lowe's completely changes their strategy. 1373 01:53:19.940 --> 01:53:23.516 Yeah, in 1990, they got wise to what was happening to all of their regional competitors and the smaller format stores. 1374 01:53:23.546 --> 01:53:26.304 Stores, and they basically studied Home Depot and said, that is the correct way to do this. 1375 01:53:26.334 --> 01:53:29.365 So I think it was 1990, they opened their first warehouse store, and they did a complete about-face. 1376 01:53:29.395 --> 01:53:37.700 Obviously, when you go to a Lowe's today, it's a very, very similar concept, but this is like a real innovator's dilemma impressive thing that they did to shed their old operations and formats and close those and open only Home Depot-style stores starting in the early '90s. 1377 01:53:53.110 --> 01:54:08.150 Yep. And here, as the market is changing, you're getting younger buyers of homes, you're getting more women buyers of homes. What they want and need from home improvement is actually starting to shift a little bit from what Home Depot is offering. 1378 01:54:08.240 --> 01:54:12.680 Didn't Lowe's come in with a slogan, uh, improving home improvement? 1379 01:54:12.680 --> 01:54:13.219 Exactly. 1380 01:54:13.287 --> 01:54:13.826 Exactly. 1381 01:54:13.894 --> 01:54:20.236 Tracking the slogans in this industry will tell you everything that is going on strategically. 1382 01:54:20.303 --> 01:54:20.803 Yeah. 1383 01:54:20.803 --> 01:54:29.748 Improving Home Improvement is aimed directly at Home Depot and directly at appealing to younger, more casual, often more women buyers. 1384 01:54:29.815 --> 01:54:33.931 These are buyers that aren't necessarily doing home remodels. 1385 01:54:33.998 --> 01:54:37.304 They're doing home makeovers or home refinishing. 1386 01:54:37.371 --> 01:54:41.015 They're like weekend sprucers versus weekend warriors. 1387 01:54:41.082 --> 01:54:46.007 So, you know, they're buying more kitchen and bath products, furnishings. 1388 01:54:46.074 --> 01:54:50.460 They're not buying lumber and plumbing pipes and stuff like that. 1389 01:54:50.460 --> 01:55:07.820 Right. So Lowe's starts to shift. They actually used to appeal more to pros, and then in this era, they really start shifting more to the end consumer, the DIY casual consumer, and having a more pleasant shopping experience than Home Depot's sort of rugged, appealing to pros environment. 1390 01:55:07.820 --> 01:55:29.500 Yep. And what does it also coincide with? The internet. So all of a sudden, for the first time, there's a way to get educated as a consumer, as a DIYer, about how to complete these projects without needing to go to these tough, burly former pros that are staffing. The Home Depot. 1391 01:55:29.870 --> 01:55:40.510 Now, it'd be a while still before YouTube was founded. This is, you know, the late '90s, not the 2010s. 1392 01:55:40.510 --> 01:55:41.010 Yep. 1393 01:55:41.010 --> 01:55:42.410 But you start to get people sharing information on forums and things like that. 1394 01:55:42.410 --> 01:55:45.340 Yep. All of this in aggregate, though, opens up the market for a real competitor for the first time. 1395 01:55:45.700 --> 01:55:46.700 Yep. 1396 01:55:46.700 --> 01:55:58.108 So once Arthur takes over Home Depot, he runs the company for a couple of years, but these issues start piling up, and he's also getting tired, just like Bernie when Bernie retired. 1397 01:55:58.171 --> 01:56:01.323 And the company is just getting bigger and bigger. 1398 01:56:01.386 --> 01:56:04.033 By 2000, it's over $40 billion in revenue. 1399 01:56:04.096 --> 01:56:07.563 They have over 1,000 stores and over 200,000 employees. 1400 01:56:07.626 --> 01:56:15.946 And so one day at a board meeting, Ken asks Arthur about succession, like, hey, man, you seem like you're kind of getting tired too. 1401 01:56:16.009 --> 01:56:22.250 If you need to step down tomorrow, is there anybody here at the company that could take your place? 1402 01:56:22.250 --> 01:56:26.280 Right, when Bernie stepped down, we had you, but who's after you? 1403 01:56:26.280 --> 01:56:31.776 And so Arthur goes away, thinks about it, comes back and he's like, Oh man, Ken, you're right. 1404 01:56:31.835 --> 01:56:33.413 Actually, the answer is no. 1405 01:56:33.472 --> 01:56:35.460 Pat certainly can't take my place. 1406 01:56:35.518 --> 01:56:39.202 And you can, you know, we love you, but you're not an operator. 1407 01:56:39.261 --> 01:56:41.190 You can't be CEO of this company. 1408 01:56:41.249 --> 01:56:48.500 And Yeah, I guess we haven't really cultivated an executive bench here in the company of someone who could take over as CEO. 1409 01:56:48.500 --> 01:56:55.037 It is worth saying they very impressively figured out a management track for store managers. 1410 01:56:55.108 --> 01:57:03.706 75% of store managers at Home Depot don't have a college degree because they have figured out how to promote from within. 1411 01:57:03.777 --> 01:57:11.310 And so you can, you know, come to Home Depot as an 18-year-old retail employee and become a store manager. 1412 01:57:11.461 --> 01:57:12.461 Yep. 1413 01:57:12.461 --> 01:57:15.310 And that works super well. But what they didn't cultivate, at least in this era, was who's going to succeed these founders. 1414 01:57:15.990 --> 01:57:25.416 So the board and Arthur together decide, Hey, we gotta bring in an external search firm and bring some more management talent into the company. 1415 01:57:25.482 --> 01:57:33.985 And the plan is that they're going to go recruit a president and COO, basically somebody to replace Arthur's old job as number 2. 1416 01:57:34.051 --> 01:57:42.423 Now that Arthur is CEO and this new person will be next in line to take the helm of the company when Arthur is ready to retire. 1417 01:57:42.489 --> 01:57:46.180 And Arthur actually chairs the search committee himself. 1418 01:57:46.246 --> 01:57:48.620 And the first target is Jamie Dimon. 1419 01:57:48.935 --> 01:57:49.935 It's amazing. 1420 01:57:49.935 --> 01:57:52.940 Who has just gotten fired by Sandy Weill at Citigroup. 1421 01:57:53.330 --> 01:57:53.830 Yes. 1422 01:57:53.830 --> 01:57:58.750 And Jamie loved the Home Depot founders, as he told us on stage at our Radio City show last year. 1423 01:57:58.803 --> 01:58:06.349 But the other thing that he said right after that was, you know, I've never actually been to a Home Depot before considering this opportunity. 1424 01:58:06.402 --> 01:58:12.407 And I think he went in once because a friend told him like, Oh, you need to go upstate and go to that Home Depot. 1425 01:58:12.460 --> 01:58:13.470 And it just didn't. 1426 01:58:13.523 --> 01:58:15.330 He was like, what am I doing here? 1427 01:58:15.330 --> 01:58:15.911 Yeah, he was like- 1428 01:58:15.911 --> 01:58:17.650 I'm like pretending to be a home improvement. 1429 01:58:18.790 --> 01:58:34.750 Yeah. But this does burn a bunch of time. The whole process of meeting Jamie, wooing him, recruiting him. And they really do vibe. Jamie will say to this day that he loved everything about Home Depot, the culture, the philosophy as a company. 1430 01:58:34.750 --> 01:58:46.830 He talks about the store support center thing all the time. When we were preparing for Radio City, I watched 50 Jamie Dimon interviews, and he references how awesome it is that their HQ is called Store Support Center, and that's a cultural indicator. 1431 01:58:46.830 --> 01:58:47.330 Yep. 1432 01:58:47.330 --> 01:58:51.949 So the company burns about 6 months on the Jamie process. 1433 01:58:52.031 --> 01:59:00.371 At the end of it, they've still got nobody and the board is starting to get a little frustrated here. 1434 01:59:00.454 --> 01:59:12.344 Now, it just so happened that Ken in addition to now being the lead director of The Home Depot board, was also on the board of General Electric. 1435 01:59:12.426 --> 01:59:21.840 And at the time, GE was going through its own very public succession drama of who was going to succeed Jack Welch. 1436 01:59:22.480 --> 01:59:25.720 The most storied CEO in America at the time. 1437 01:59:25.720 --> 01:59:32.040 Yeah, history has kinda forgotten this now because GE frankly has fallen apart. But— 1438 01:59:32.330 --> 01:59:35.450 Like literally got broken into 3 pieces. So that's not a controversial statement. 1439 01:59:35.939 --> 01:59:37.379 Yes, yes, it actually— 1440 01:59:37.379 --> 01:59:43.730 And before that incinerated more market cap than any other company before it in history. 1441 01:59:43.960 --> 01:59:46.200 Or at least until some of the Nvidia drawdowns, right? 1442 01:59:46.200 --> 01:59:53.370 Oh, but yeah, these days, like these, these drops that happen at big tech companies is, you know, dwarfs everything in comparison. 1443 01:59:53.370 --> 01:59:53.842 Yeah. Makes GE look quaint. 1444 01:59:53.842 --> 02:00:02.270 But at the time that, that was the story is post-Jack Welch GE just completely destroying shareholder value. 1445 02:00:02.270 --> 02:00:20.200 Yep. But here we are in 1998, 1999, 2000. I mean, Fortune magazine crowned Jack Welch the manager of the century in its millennium issue at the end of 1999. That's how vaunted GE was. 1446 02:00:20.200 --> 02:00:20.703 Yep. 1447 02:00:20.703 --> 02:00:33.370 And it was all driven by a culture of operational excellence, as embodied in GE's famous Six Sigma approach to defect-free output. 1448 02:00:33.370 --> 02:00:34.356 Sounds great. 1449 02:00:34.530 --> 02:00:51.450 Yes, sounds great, right? Well, we'll see. So back to Home Depot. So here's Ken and The Home Depot board thinking, Man, we sure could use some of that operational excellence stuff around here. I think that would really be good for the company. 1450 02:00:51.770 --> 02:01:02.170 And if you're gonna go cherry-pick the best corporate leadership that you could possibly get, the GE bench is probably the place to go hunting. You couldn't get Jamie Dimon. We don't have it here. Let's start at the top. 1451 02:01:02.570 --> 02:01:07.010 GE is the consensus best place to look in America for management. 1452 02:01:07.010 --> 02:01:16.650 Which is crazy looking at the 3 choices to succeed Jack Welch and how disastrous it was for all 3 of them. 1453 02:01:16.650 --> 02:01:17.150 Yes. 1454 02:01:17.150 --> 02:01:17.750 In the 3 places they went. 1455 02:01:17.750 --> 02:01:38.740 Yes. So in November of 2000, Jack Welch announces that Jeffrey Immelt will be his successor to take over as GE's next CEO. And Ben, as you were alluding to, the other 2 candidates for the GE job were James McNerney, who quickly leaves to become the CEO of 3M— 1456 02:01:39.040 --> 02:01:45.790 You may know his name because he would then leave 3M to go and become the CEO of Boeing. 1457 02:01:45.790 --> 02:01:48.942 Yeah, we all know how that turned out. 1458 02:01:49.025 --> 02:01:59.560 And then the other candidate, Bob Nardelli, who Ken Langone, again being on the GE board here, knows well and loves— loves Bob. 1459 02:01:59.643 --> 02:02:11.921 So immediately after the succession news comes out at GE, Ken calls up Nardelli and pulls out the same line that he used on Bernie 20 years earlier. 1460 02:02:12.004 --> 02:02:16.650 You've just been hit in the ass with a golden horseshoe. 1461 02:02:17.360 --> 02:02:19.720 Guess where you get to go work now? 1462 02:02:19.720 --> 02:02:25.547 Guess what we are gonna do together now that you didn't get the GE CEO job? 1463 02:02:25.625 --> 02:02:28.422 I'm gonna bring you into Home Depot. 1464 02:02:28.500 --> 02:02:30.986 So the board immediately pivots. 1465 02:02:31.064 --> 02:02:39.300 And offers Nardelli the president and COO job and says, you'll come in, you'll be here for a little while. 1466 02:02:39.378 --> 02:02:41.087 Arthur's gonna retire. 1467 02:02:41.165 --> 02:02:43.962 You will be his appointed successor. 1468 02:02:44.040 --> 02:02:52.199 And so to incentivize Nardelli to take this job, they say, we'll make you whole on your GE stock options. 1469 02:02:52.276 --> 02:02:57.948 We're gonna give you $150 million equity package to come join Home Depot. 1470 02:02:58.026 --> 02:02:59.736 Bob says, okay, great. 1471 02:02:59.813 --> 02:03:02.300 I clearly can't stay here at GE. 1472 02:03:02.377 --> 02:03:02.921 I'm in. 1473 02:03:02.999 --> 02:03:21.259 And then at the last minute, after they've already agreed on a deal for Nardelli to come in and be president and COO under Arthur, Nardelli calls the recruiter and has the recruiter tell The Home Depot board that he's changed his mind. 1474 02:03:21.336 --> 02:03:26.154 He's only going to come on board if he becomes CEO right away. 1475 02:03:26.232 --> 02:03:28.019 He's not going to wait. 1476 02:03:28.096 --> 02:03:37.498 This leads to an awkward, shall we say, Home Depot board meeting where the board presents this new development to Arthur. 1477 02:03:37.576 --> 02:03:40.062 He says, okay, I'm okay with it. 1478 02:03:40.140 --> 02:03:42.083 Bob can have the CEO job. 1479 02:03:42.160 --> 02:03:45.579 But deep down, he's not really okay with it. 1480 02:03:45.657 --> 02:03:50.474 And part of it, I think, was Arthur not being ready to let go. 1481 02:03:50.552 --> 02:04:00.187 The other part of it, I think, was a genuine spidey sense that, Hey, what is this last-minute bait and switch from Nardelli? 1482 02:04:00.265 --> 02:04:02.130 Is this a red flag here? 1483 02:04:02.440 --> 02:04:08.440 Well, Arthur would later say, A, this is faster timing than I was thinking- 1484 02:04:08.440 --> 02:04:09.114 Yep. 1485 02:04:09.114 --> 02:04:16.760 -for me to leave. But B, Arthur would later say in an interview, I thought he was the wrong choice by a lot, even though I'm the one who initiated an external search. 1486 02:04:16.760 --> 02:04:17.750 Yep. 1487 02:04:17.750 --> 02:04:26.750 To your point, though, I think the, Yeah, yeah, I'm okay with it is a little bit of like a test to the board of- 1488 02:04:26.750 --> 02:04:27.250 Yep. 1489 02:04:27.250 --> 02:04:30.750 -what I would like is you to come back to me and say, actually, we love you so much. Who is this guy? No, get him out of here. We think you should stay CEO. 1490 02:04:30.750 --> 02:04:35.860 Who does he think he is? Yep. Yep. Well, that's not what the board says. 1491 02:04:36.780 --> 02:04:41.100 They take him at his word. 1492 02:05:15.950 --> 02:05:16.450 They take him at his word. 1493 02:05:16.462 --> 02:05:18.851 This leads to a big fight, like a big fight between Arthur and Bernie and Ken, as chronicled in Ken's book, I Love Capitalism. 1494 02:05:18.870 --> 02:05:21.165 Because Bernie's still on the board at this point, and I think pretty severely damages their relationships going forward. 1495 02:05:21.184 --> 02:05:22.075 Regardless, the board does bring Bob in as CEO. 1496 02:05:22.094 --> 02:05:24.806 Arthur resigns as CEO but stays on the board for just a couple of months, and within 6 months he fully steps away and is gone from the company. 1497 02:05:24.825 --> 02:05:25.850 We'll come back to Arthur all the way at the end, but— 1498 02:05:25.850 --> 02:05:26.450 He's got his own golden horseshoe. 1499 02:05:26.450 --> 02:05:26.950 Golden horseshoe. Yeah. 1500 02:05:26.950 --> 02:05:28.550 Spoiler alert, he would, I think, become the highest net worth of any of these folks. 1501 02:05:28.550 --> 02:05:35.575 So Nardelli comes in as the new Home Depot CEO, and to the outside world, this looks like a huge win. 1502 02:05:35.644 --> 02:05:43.713 I mean, they got essentially the most eligible corporate bachelor in America, one of the 2 runners-up to the GE job. 1503 02:05:43.782 --> 02:05:53.590 And as you're imagining, that's probably not a great dynamic you want to enter into for a new relationship, be it romantic or in a boardroom. 1504 02:05:53.820 --> 02:05:58.820 I wanted that job, but I got this one. So I'm going to try to make this job like the one that I wanted. 1505 02:05:58.820 --> 02:06:05.550 Yeah. Yeah. Now, to be fair, the first couple of years of Nardelli's tenure are great. 1506 02:06:05.550 --> 02:06:09.790 Maybe even the first three or four. 1507 02:06:09.790 --> 02:06:10.806 Yeah, yeah, yeah. 1508 02:06:10.866 --> 02:06:17.387 Ken Langone still says to this day that for the first four years, everything Nardelli touched turned to gold. 1509 02:06:17.447 --> 02:06:27.078 It turns out that a lot of the issues that had been popping up in the company that we talked about a minute ago could be fixed with great operational excellence. 1510 02:06:27.138 --> 02:06:30.010 And there was a lot of low-hanging fruit around. 1511 02:06:30.010 --> 02:06:43.560 Yeah, when he came in 2000, there had been four consecutive quarters of slowing comparable store sales growth. There's clearly some serious underlying issue there. The older stores, they were getting really rundown. 1512 02:06:43.560 --> 02:06:47.430 And yeah, this is where Lowe's was coming back and beating Home Depot. 1513 02:06:47.430 --> 02:06:51.579 The extreme decentralization made things very chaotic. 1514 02:06:51.656 --> 02:06:58.802 Nardelli referred to the company in an interview as having been in startup mode for 20 years. 1515 02:06:58.879 --> 02:07:06.409 Clearly, what Nardelli missed is how important being entrepreneurial was to the company's success. 1516 02:07:06.486 --> 02:07:17.090 He was about to embark on a mission of operational excellence, but you can operationally excellence yourself out of being entrepreneurial. 1517 02:07:17.090 --> 02:07:17.590 Yeah. 1518 02:07:17.590 --> 02:07:20.590 I mean, if you take away all of people's ability to take ideas and act on them and have fun and all that stuff, like, you—that could kill the company. 1519 02:07:20.590 --> 02:07:21.090 Yeah, yeah. 1520 02:07:21.090 --> 02:07:23.287 The other things he did was just this. 1521 02:07:23.345 --> 02:07:30.284 If you look across every system, purchasing, replenishment, merchandising, all operating functions, he would centralize. 1522 02:07:30.342 --> 02:07:37.744 He took nine separate buying offices and folded them into one, so they were suddenly getting better prices from their suppliers. 1523 02:07:37.802 --> 02:07:40.635 He invested in a bunch of new technology systems. 1524 02:07:40.693 --> 02:07:43.989 I mean, the answer here isn't decentralize or centralize. 1525 02:07:44.047 --> 02:07:55.786 You have to have the balance where you centralize where there's actually a benefit of getting all the data in one place or doing a bulk negotiation or doing analysis on one dataset in a system of record, 1526 02:07:55.844 --> 02:08:06.080 but you definitely don't want to centralize it when you can push decision-making closest to the customer where people can see like all the idiosyncrasies of any given situation. 1527 02:08:06.080 --> 02:08:06.580 Yep. 1528 02:08:06.580 --> 02:08:06.967 Yeah. 1529 02:08:06.967 --> 02:08:09.954 Here's the way I would characterize it. 1530 02:08:10.031 --> 02:08:14.138 There was a bunch of low-hanging fruit operationally. 1531 02:08:14.215 --> 02:08:22.428 Nardelli was excellent at implementing all the changes that needed to be made on that front at Home Depot. 1532 02:08:22.506 --> 02:08:27.542 But he was all about Six Sigma, all about operational excellence. 1533 02:08:27.619 --> 02:08:31.184 I mean, he was the GE guy through and through. 1534 02:08:31.261 --> 02:08:37.770 And operating The Home Depot was not the same thing as manufacturing turbines at GE. 1535 02:08:38.514 --> 02:08:39.514 Right. 1536 02:08:39.514 --> 02:08:46.570 So if you go back to the whole thesis of Home Depot here and this idea of being a specialty retailer— 1537 02:08:46.950 --> 02:08:48.030 With great service. 1538 02:08:48.090 --> 02:09:01.520 Meaning you need to service your customers. It's not to say that GE doesn't service their customers, but it's a very different dynamic. At GE, line-level employees are completely replaceable. 1539 02:09:01.520 --> 02:09:01.597 Right by design. 1540 02:09:01.760 --> 02:09:25.960 This is the whole point of Six Sigma Black Belt. We are going to drive out costs and inefficiencies ruthlessly within the organization. It's the system; it's not the people. That's the opposite of the 25-cent kitchen sink washer sale- 1541 02:09:25.960 --> 02:09:26.525 Yeah. 1542 02:09:26.525 --> 02:09:32.320 -leading to a $100,000 kitchen remodel on the sales floor at Home Depot. You just can't measure that in a Six Sigma spreadsheet management process kind of way. 1543 02:09:32.320 --> 02:09:40.225 It reminds me of why Jeff Bezos doesn't like to have his meetings have a hard end time because he likes to be able to wander, to invent and. 1544 02:09:40.281 --> 02:09:43.556 Wander, and if you're going to invent, you need to wander. 1545 02:09:43.613 --> 02:09:57.730 It's like the— if the job of The Home Depot store is to have an associate wander with a customer who's trying to figure out how to solve some problem or dream up some project, that is really hard to optimize because it's kind of an unbounded problem. 1546 02:09:58.370 --> 02:09:58.870 Yep. 1547 02:09:58.870 --> 02:10:00.888 So what does Nardelli do? 1548 02:10:00.972 --> 02:10:11.128 He replaces huge swaths of the associate on the floor retail workforce in Home Depot with part-time general retail labor. 1549 02:10:11.212 --> 02:10:30.099 So doing away with the whole philosophy that made Home Depot of we have knowledgeable people who are going to make that $0.25 washer sale and fix a customer's kitchen sink and have that lead to something bigger down the line. 1550 02:10:30.183 --> 02:10:32.113 All that's going to go. 1551 02:10:32.197 --> 02:10:40.340 We're going to bring in 16-year-olds on part-time jobs to just ring them up at the cash register. 1552 02:10:40.340 --> 02:10:51.110 And not only that, there's just going to be less of them, period. According to Arvind's research, associates per store dropped from 200 to 170 over the course of 2000 to 2006. 1553 02:10:51.783 --> 02:10:52.783 Yep. 1554 02:10:52.783 --> 02:10:57.430 A 15% reduction in headcount, just like, all right, we have fewer people to help you solve your problems now. 1555 02:10:57.900 --> 02:10:58.400 Yep. 1556 02:10:58.400 --> 02:11:00.852 So those are the associates on the floor. 1557 02:11:00.917 --> 02:11:02.393 Now the store managers. 1558 02:11:02.457 --> 02:11:13.948 Before Nardelli, all the store managers were promoted up, Ben, as you said, from store associates, and they were focused on their stores, the customers, doing what was right, etc. 1559 02:11:14.013 --> 02:11:20.240 Nardelli changes the criteria for store managers, now preferring candidates with college degrees. 1560 02:11:20.680 --> 02:11:33.820 So now there's no promotion path because no one's starting on the floor with a college degree. Every single person that you're hiring into those associate jobs doesn't have one. So what you're just telling them is like you're locked in this forever job with no path now. 1561 02:11:33.820 --> 02:11:49.410 And think back to the old workforce, all these tradespeople who are highly educated, highly knowledgeable. They have trades degrees if they have degrees at all. They don't have college degrees. That has nothing to do with either knowing about hardware and home improvement or being a great retailer. 1562 02:11:49.410 --> 02:11:51.599 Yeah, I mean, it weakened the culture. 1563 02:11:51.657 --> 02:12:00.590 Zooming out, there's a great case to be made that the only sustainable competitive advantage this company had were their scale economies and their culture. 1564 02:12:00.647 --> 02:12:03.471 This entrepreneurial, we can figure it out thing. 1565 02:12:03.529 --> 02:12:09.350 This is heavily destructive to that in a way that you may never be able to fully rescue and get back. 1566 02:12:09.350 --> 02:12:20.326 So a couple of years into Nardelli's tenure, customer satisfaction among Home Depot shoppers falls to the lowest level of any major US retailer. 1567 02:12:20.402 --> 02:12:32.751 So all the major US retailers, you know, there's annual surveys of customer satisfaction at everything from Best Buy to Costco to Walmart to Home Depot to Lowe's. 1568 02:12:32.827 --> 02:12:36.410 Home Depot goes from near the top to dead last. 1569 02:12:37.400 --> 02:12:51.290 But David, they doubled their revenue and their profits, and they grew from 1,100 stores to 2,000 stores in five years. What do you mean there are problems? All the charts are up and to the right. 1570 02:12:51.290 --> 02:12:52.086 Yeah, yeah. 1571 02:12:52.158 --> 02:12:56.575 So that then leads into the issue of Nardelli's compensation. 1572 02:12:56.648 --> 02:13:10.550 So on top of the huge equity grant that he got when he joined Home Depot from GE, Nardelli also gets paid roughly $200 million by the board over the six years of his tenure running Home Depot. 1573 02:13:10.622 --> 02:13:24.814 And the board would always give him bigger bonuses and pay him more than they were contractually obligated to because Nardelli would always make the argument to them, hey, I'm crushing my numbers. 1574 02:13:24.886 --> 02:13:28.289 Revenue's up, profits are up, I'm beating plan. 1575 02:13:28.362 --> 02:13:29.810 Everything is great. 1576 02:13:29.882 --> 02:13:37.920 He would refuse, however, when the board would ask to tie any of his compensation to the company's stock price. 1577 02:13:38.620 --> 02:13:40.908 Which I will say is, is in some ways fair. 1578 02:13:40.962 --> 02:13:53.656 I know it's misaligned with shareholders, but it is in some ways fair because it is incentivizing you on the things you can control, because a stock price is just what the outside world thinks of you, not actually what you are doing. 1579 02:13:53.710 --> 02:13:59.540 It always has struck me a little bit weird that I— you're comped on what other people think of the company. 1580 02:14:00.090 --> 02:14:04.076 Ben, it's like you're reading from Nardelli's script right here. 1581 02:14:04.139 --> 02:14:11.053 So Businessweek would report on this because this was uncommon for major CEOs at the time and through to today. 1582 02:14:11.116 --> 02:14:17.594 And Nardelli would always say, hey, this is the one measure of company performance that I can't control. 1583 02:14:17.657 --> 02:14:21.021 So I'm not going to agree to my comp to be tied to it. 1584 02:14:21.083 --> 02:14:29.680 The problem in Home Depot is that this is fundamentally going against a key part that we talked about a minute ago of the company's model. 1585 02:14:29.680 --> 02:14:31.990 No stock go up, no machine work. 1586 02:14:31.990 --> 02:14:32.595 Exactly. 1587 02:14:32.670 --> 02:14:47.499 And so for all the associates on the store floor now, those of them who are left with equity, their promise has always been, I do good work, I see the results, the stock price goes up, I get rich. 1588 02:14:47.574 --> 02:14:58.166 Now here's this bigwig former GE guy coming in as CEO and saying, yeah, I'm going to get rich regardless of whether the stock price goes up. 1589 02:14:58.242 --> 02:15:00.890 And the stock price stops going up. 1590 02:15:00.890 --> 02:15:02.690 Yeah, why did the stock price stay flat during this time? 1591 02:15:03.090 --> 02:15:13.030 Well, here's what's going on. Even though he doubles revenue and profits, he actually mostly does it by doubling store count. 1592 02:15:13.030 --> 02:15:13.730 Hmm. 1593 02:15:13.730 --> 02:15:20.034 Ben, as you had said, same-store sales comps had already trended flat before Nardelli joins. 1594 02:15:20.103 --> 02:15:22.775 They actually stay flat for his tenure. 1595 02:15:22.844 --> 02:15:37.509 So Wall Street keeps bringing this up as a major red flag and comparing Home Depot to Lowe's, which is growing same-store comps as they're taking this new segment of the market, you know, the weekend sprucers here. 1596 02:15:37.577 --> 02:15:39.153 And it gets even worse. 1597 02:15:39.222 --> 02:15:44.978 During Nardelli's tenure, he authorizes $20 billion in share buybacks and dividends. 1598 02:15:45.047 --> 02:15:47.720 That doesn't even move the stock price. 1599 02:15:47.720 --> 02:16:04.720 Which you should read as all the institutional investors have all these discounted cash flow models. And they don't believe that the sum of all the future profits that this business will generate discounted to the present is growing. They think the value of this business is staying flat. 1600 02:16:04.720 --> 02:16:13.690 Yeah, well, they think it's shrinking because Home Depot is also in the market buying up stock, and that's not moving the price up. So— 1601 02:16:14.280 --> 02:16:26.790 Right. But the, the high-level point is, despite revenue and profits being up due to new store openings, we do not think the future of this company is brighter. 1602 02:16:26.790 --> 02:16:39.300 Yeah. Yep. Yep. And meanwhile, during this same period, again, this is as the US housing bubble is reaching, you know, its peak inflation. Lowe's stock price is up 200%. They're winning the housing bubble. 1603 02:16:40.190 --> 02:16:46.110 Hmm. The other thing we haven't talked about is he tried to bolt a lot onto this company. 1604 02:16:46.110 --> 02:16:46.874 Yep. 1605 02:16:46.874 --> 02:16:56.820 He was growing by acquisition and expanding into adjacencies and launching new business lines. To create these new adjacencies versus just kind of investing in the core business. 1606 02:16:57.306 --> 02:16:58.306 Yep, yep. 1607 02:16:58.306 --> 02:17:03.540 Which like when you come from a conglomerate like GE- 1608 02:17:03.540 --> 02:17:04.040 That's what you do. 1609 02:17:04.040 --> 02:17:04.540 -that's what you do. 1610 02:17:04.540 --> 02:17:05.816 And on top of all of this, some of what made Home Depot unique starts to fade. 1611 02:17:05.834 --> 02:17:07.664 They took gross margin up, which results, of course, in more profits, but prices that aren't blowaway. 1612 02:17:07.682 --> 02:17:08.345 They're closer to market competitive. 1613 02:17:08.363 --> 02:17:09.996 And actually, if you look at their gross margin profile, it's remained elevated ever since. 1614 02:17:10.014 --> 02:17:10.552 So it's not a huge difference. 1615 02:17:10.570 --> 02:17:15.558 The gross margins are still lower than typical retail and certainly lower than that 45% that we talked about way back when, but they went from this like 28, 29, 30 range to pretty squarely 33% gross margins, which is not as low as Walmart, let alone Costco's razor-thin margins. 1616 02:17:15.576 --> 02:17:16.240 So they kind of moved away from that— 1617 02:17:49.670 --> 02:17:52.030 Costco model, if you will. 1618 02:17:52.030 --> 02:17:57.809 The scale economies shared idea. They sort of realized, "Eh, we can actually keep a little bit more of the profits." 1619 02:17:58.150 --> 02:18:14.770 Yep. Which also, coming back to Wall Street's disappointment with Nardelli and the company, despite the growth of revenue and profits, makes sense, right? Like he's trying to pull out all the tools in the tool bag to get Wall Street back on his side here. 1620 02:18:14.770 --> 02:18:16.084 Oh my gosh, you're right. 1621 02:18:16.136 --> 02:18:17.871 It's just incentive misalignment. 1622 02:18:17.923 --> 02:18:22.812 If you're comped on the stock price, you don't care about the business's current performance. 1623 02:18:22.864 --> 02:18:28.331 You just want investors to believe the story that you are storing up long-term value inside the company. 1624 02:18:28.383 --> 02:18:33.377 So you keep prices really low, you keep volume really high, you keep customers really obsessed. 1625 02:18:33.429 --> 02:18:37.740 If your comp is tied to today's numbers, you don't store value inside the company. 1626 02:18:37.740 --> 02:18:38.154 Yes, yes— 1627 02:18:38.154 --> 02:18:39.020 You try to pump today's numbers. 1628 02:18:39.779 --> 02:18:44.459 Exactly. It's a paradoxical misalignment of incentives. 1629 02:18:44.462 --> 02:18:45.462 Fascinating. 1630 02:18:45.462 --> 02:18:46.131 Yep. 1631 02:18:46.131 --> 02:18:57.640 So you actually, coming all the way back around, you do want to incentivize management on stock price because that is the way that we are storing up value in this business for the far future. 1632 02:18:58.099 --> 02:18:58.599 Yep. 1633 02:18:58.599 --> 02:19:00.796 So all of this brewing negativity and certainly Wall Street dissatisfaction with Nardelli comes to a head at Home Depot's 2006 annual shareholder meeting. 1634 02:19:00.813 --> 02:19:01.984 Joe Nocera, great financial journalist, wrote for The New York Times. 1635 02:19:02.001 --> 02:19:02.680 I'm just going to read here, quote, "Mr. 1636 02:19:02.697 --> 02:19:03.477 Nardelli has become this year's version of Mr. 1637 02:19:03.494 --> 02:19:03.994 Overpaid CEO. 1638 02:19:03.994 --> 02:19:06.379 In the 5 years since he was recruited from General Electric, Home Depot stock has fallen 12%, while shares of its chief competitor, Lowe's, have risen 173%. 1639 02:19:06.396 --> 02:19:07.007 You've heard of pay for performance. 1640 02:19:07.024 --> 02:19:07.524 This is pay for pulse. 1641 02:19:07.524 --> 02:19:08.890 But these facts barely begin to get at the richer story that is the Home Depot scandal. 1642 02:19:08.907 --> 02:19:11.028 So I hopped on a train and headed to Wilmington, Delaware, where the Home Depot shareholder meeting was being held this year. 1643 02:19:11.045 --> 02:19:11.545 I arrive. 1644 02:19:11.545 --> 02:19:13.014 I can hear protesters chanting, 'Hey, Bob, why are you chicken while the stock price takes a licking?' Mr. 1645 02:19:13.030 --> 02:19:13.607 Nardelli finally takes the podium. 1646 02:19:13.624 --> 02:19:14.167 He's accompanied by no one else. 1647 02:19:14.184 --> 02:19:14.914 Suddenly we all understand what's going on. 1648 02:19:14.931 --> 02:19:15.694 The board isn't coming to the annual meeting. 1649 02:19:15.711 --> 02:19:16.899 In all my years as a business reporter, I have never seen that before. 1650 02:19:16.916 --> 02:19:19.835 As a corporate governance expert at the University of Delaware will tell me the next morning, quote, 'Your one obligation as a director is to show up at the annual meeting. 1651 02:19:19.852 --> 02:19:21.328 The fact that the directors didn't show up is disgusting.' Nardelli begins the meeting. 1652 02:19:21.345 --> 02:19:22.431 When the first person gets up to speak, the questioner gets mad. 1653 02:19:22.448 --> 02:19:23.534 'I think it is absolutely outrageous that the board is not here. 1654 02:19:23.551 --> 02:19:25.519 The board is too chicken to face the shareholders.' As he speaks, the timer hits zero and his microphone is cut off. 1655 02:19:25.536 --> 02:19:30.610 After the meeting, the words on people's mouths are, 'Appalling, disgraceful, and arrogant.' I would add one more: 'Contemptuous.' I'm sure there are plenty of boards and chief executives who have contempt for their shareholders, but most of them are at least smart enough to keep it to themselves." 1656 02:21:21.940 --> 02:21:32.300 So what happened? Did the board not want to show up and say they were aligned with Bob? Did Bob say, "Please don't come because I don't want you speaking against me"? 1657 02:21:32.300 --> 02:21:34.434 It has never come out. 1658 02:21:34.531 --> 02:21:46.953 I think that Nardelli was just fed up with the narrative around him and all the discussions of his pay and the flat stock price. 1659 02:21:47.050 --> 02:22:01.510 And he just wanted to say a giant "F you" to the shareholder community of Home Depot, many of which included current and former Home Depot employees. 1660 02:22:01.720 --> 02:22:02.720 Wow. 1661 02:22:02.720 --> 02:22:03.320 It's, it's bad. 1662 02:22:03.800 --> 02:22:06.160 I mean, bad on the board too, though. 1663 02:22:06.160 --> 02:22:18.770 Yeah, bad on the board, bad on everybody. So the fallout from this event is extreme. Home Depot basically becomes the new symbol of everything that is wrong with corporate America. 1664 02:22:18.770 --> 02:22:28.880 And in particular, Nardelli's pay package is being held up as the number one example of corporate greed, corporate executives making too much. 1665 02:22:28.880 --> 02:22:29.380 Yep. 1666 02:22:29.380 --> 02:22:46.532 In the weeks and months after this meeting, the company and Nardelli and the board issue a series of explanations and apologies in escalating obsequiousness doesn't do anything to change the narrative. 1667 02:22:46.617 --> 02:22:57.671 Finally, on January 2nd, 2007, Ken Langone calls a special board meeting in Dallas, and the board fires Nardelli at this meeting. 1668 02:22:57.757 --> 02:23:08.640 He gets an $18 million cash severance payable immediately and gets a quote-unquote "retirement package" valued at $210 million. 1669 02:23:09.660 --> 02:23:17.380 This is on top of the initial make-you-whole grant plus the pay along the way. 1670 02:23:17.380 --> 02:23:17.880 Yes. 1671 02:23:17.880 --> 02:23:18.512 Yes, it is. 1672 02:23:18.583 --> 02:23:26.301 Ultimately, in Ken Langone's book, he does say that Nardelli only ended up getting a fraction of that amount. 1673 02:23:26.372 --> 02:23:27.929 But it doesn't matter. 1674 02:23:28.000 --> 02:23:29.770 The headlines are brutal. 1675 02:23:29.841 --> 02:23:42.940 When the news gets announced, the associates on the store floors in Home Depot, there are reports and videos of them celebrating and high-fiving and basically, you know, having a party. 1676 02:23:43.270 --> 02:23:45.550 Was not exactly a man of the people. 1677 02:23:45.550 --> 02:24:02.020 No, no, not exactly a man of the people. After this, Nardelli quickly gets another job. He becomes the CEO of Chrysler to guide that great American car company through the financial crisis. 1678 02:24:02.020 --> 02:24:14.020 And continue its path as an independent American automaker, succeeding and coming through it much like Ford did as an independent company and GM did as an independent company. Oh, wait. 1679 02:24:14.870 --> 02:24:17.030 Ends up getting owned by the Italians. 1680 02:24:17.030 --> 02:24:17.970 Yes. 1681 02:24:17.970 --> 02:24:23.310 Yeah, you can go listen to our Ferrari episode to learn how that all turned out. 1682 02:24:23.310 --> 02:24:23.820 How Fiat Chrysler was born. 1683 02:24:24.310 --> 02:24:24.810 Yep. 1684 02:24:24.810 --> 02:24:30.709 So once again, Home Depot and the board are left without an obvious successor. 1685 02:24:30.787 --> 02:24:32.560 Who do they turn to go? 1686 02:24:32.637 --> 02:24:38.266 Well, I would say up from here, anywhere from here would be up from here. 1687 02:24:38.343 --> 02:24:58.700 They decide that they're going to pin their hopes on another GE guy, one of Nardelli's lieutenants that he'd brought over from GE to run M&A and corporate development for Home Depot, a new role, as you were saying, Ben, as they added all this stuff to the company. 1688 02:24:59.350 --> 02:25:06.590 Someone who Ken loved, but Bernie was nowhere near convinced was the right choice. 1689 02:25:06.590 --> 02:25:07.090 Yeah. 1690 02:25:07.090 --> 02:25:07.528 Yeah. 1691 02:25:07.528 --> 02:25:10.613 A former lawyer by the name of Frank Blake. 1692 02:25:10.686 --> 02:25:21.072 Bernie and also, I would assume, Arthur, although I don't think Arthur was on speaking terms with the board at this point in time, are pissed. 1693 02:25:21.146 --> 02:25:40.529 Bernie's actual quote to Ken when Ken calls him and tells him who the next CEO of Home Depot is going to be is, "I can't believe you brought in another goddamn GE guy to run my company." But it would turn out that not only was Frank Blake nothing like Bob Nardelli, 1694 02:25:40.602 --> 02:25:43.382 he was exactly what Home Depot needed. 1695 02:25:43.455 --> 02:25:45.650 But before we tell that story— 1696 02:25:45.650 --> 02:25:56.790 Yes. Now is a great time, listeners, to thank one of our favorite partners, Sentry. That's S-E-N-T-R-Y, like someone standing guard. 1697 02:25:56.790 --> 02:26:11.340 Which is what they do for developers. Sentry helps teams debug everything from errors to latency issues, basically any software problem, and fix them before users get mad. It's considered, quote-unquote, "not bad" by millions of software developers. 1698 02:26:11.340 --> 02:26:29.730 And David, I have yet another interesting parallel for you to this episode on Home Depot. Home Depot is not just in the business of selling, you know, lumber. They wouldn't be a $350 billion company if that's all there was to it. They were in the business of turning regular people into builders. 1699 02:26:30.190 --> 02:26:30.690 Aha. 1700 02:26:30.690 --> 02:26:32.002 I see what you're doing here. 1701 02:26:32.055 --> 02:26:32.555 Yes. 1702 02:26:32.555 --> 02:26:42.185 Bernie and Arthur staffed those first stores with actual plumbers and electricians and carpenters, people whose job was to stand in the aisle and teach you how to do the thing yourself. 1703 02:26:42.238 --> 02:26:46.610 They didn't just sell you the tools, they gave you the confidence to pick them up. 1704 02:26:46.610 --> 02:26:49.790 Which is exactly the moment that software is in right now. 1705 02:26:49.845 --> 02:26:54.287 The number of people who can build something real has been completely blown open. 1706 02:26:54.341 --> 02:27:04.980 I mean, engineers, sure, but also designers shipping their own products, founders who have never worked at a tech company before, people who describe what they want and watch it get built by AI. 1707 02:27:04.980 --> 02:27:09.412 Yep, everyone's a builder of software now, so the hard part isn't building anymore. 1708 02:27:09.466 --> 02:27:10.801 It's the part afterwards. 1709 02:27:10.854 --> 02:27:15.287 Something breaks in production and you have to figure out what actually went wrong. 1710 02:27:15.341 --> 02:27:23.940 That's what Sentry does for builders of every kind, from a solo founder's side project to the engineering teams at Anthropic, Vercel, Cursor, Linear, and GitHub. 1711 02:27:23.940 --> 02:27:31.701 And when something does go wrong, Sentry shows you exactly what broke, which release it started in, and where it is in the code. 1712 02:27:31.762 --> 02:27:42.373 Then it hands that whole picture to whatever you build with, Claude Code or Cursor or Sentry's own agent, Seer, which finds the root cause and opens a PR for humans to review. 1713 02:27:42.434 --> 02:27:47.406 Sentry is where software gets fixed with over 200,000 organizations running on it. 1714 02:27:47.466 --> 02:27:50.801 So you can check out sentry.io/acquired to get started. 1715 02:27:50.862 --> 02:27:53.470 All right, David, the saving of Home Depot. 1716 02:27:54.630 --> 02:27:58.030 Man, things got pretty low there, didn't they, for a little while? 1717 02:27:58.100 --> 02:27:59.100 Yes. 1718 02:27:59.100 --> 02:28:00.550 Fortunately, there's a comeback story here too. 1719 02:28:00.670 --> 02:28:11.030 So the thing that is the context of all of this, we're going to talk about all the personnel stuff and the cultural change. In 2006, the housing bubble burst. 1720 02:28:11.237 --> 02:28:12.237 Yep. 1721 02:28:12.237 --> 02:28:17.441 We know of the great financial crisis in 2008, which is after this leadership transition, which was January of 2007. 1722 02:28:17.486 --> 02:28:21.255 But if you go back to 2006, that is where you can see it in Home Depot's financials. 1723 02:28:21.300 --> 02:28:24.441 Spending on home improvement supplies fell off a cliff 2006 into 2007. 1724 02:28:24.486 --> 02:28:32.607 The actual ceasing of building new homes for all of these unqualified buyers took 18 to 24 months to wind its way all the way through the financial system and to blow everything up. 1725 02:28:32.652 --> 02:28:35.434 But for Home Depot, their revenue would fall starting in 2007. 1726 02:28:35.479 --> 02:28:39.068 It bottomed in 2010, and it actually did not get back to 2007 levels until 2014. 1727 02:28:39.113 --> 02:28:45.440 So that's a 7-year span, and it's the same story with net income, where they were below their previous high watermark on revenue and profits. 1728 02:29:07.740 --> 02:29:28.260 Yep. And I think this maybe explains a little bit of the board's behavior. Once again, we don't have a bench here that we know well and are confident in to come run the company. Shoot, I think we got to stick with this guy as long as we can. 1729 02:29:28.260 --> 02:29:29.092 Yeah. 1730 02:29:29.092 --> 02:29:42.540 Most, if not all, of the other executive ranks at Home Depot were all Nardelli guys at this point in time. So if they were to get rid of Bob, the bench is only staffed with more Bobs. 1731 02:29:42.540 --> 02:29:42.967 Or so they thought. 1732 02:29:42.967 --> 02:29:44.338 Or so they thought. 1733 02:29:44.338 --> 02:29:59.710 To give some credit to Bob, even though his tactics were not the right tactics on this company for their core competency, their culture, their mission, any of that stuff, the wind had for decades been at Home Depot's back. 1734 02:30:00.426 --> 02:30:01.426 Yep. 1735 02:30:01.426 --> 02:30:08.310 You know, this amazing boom in housing, and suddenly you no longer have that. It's just hard to manage and create growth in an environment like that. 1736 02:30:08.310 --> 02:30:23.140 Yep. So coming out of the board meeting on January 2nd, 2007, when Nardelli gets fired, Frank Blake, the dark horse candidate, becomes CEO. So, yeah, Ben, who is Frank? 1737 02:30:23.140 --> 02:30:43.000 So Frank was a lawyer by training who'd worked in DC in the federal government as a public servant, who'd been a Supreme Court clerk, had gone to GE and risen up to become the head of M&A, came over with Bob Nardelli and held a senior role at Home Depot, but he didn't own a P&L. 1738 02:30:43.046 --> 02:30:44.046 Yeah— 1739 02:30:44.046 --> 02:30:49.670 Like, his job didn't look anything like what a CEO's job would look like. 1740 02:30:49.670 --> 02:30:55.230 Right. He didn't have an operational role at the company. He wasn't in touch with the store associates. He wasn't on the store floors. 1741 02:30:55.230 --> 02:31:04.750 But the answer to why he's the right choice is he was in touch with the culture, with what made Home Depot special, with its original founding principles, all that. 1742 02:31:04.808 --> 02:31:13.400 One of the ways in which he was, he talked about this on Invest Like the Best in Patrick's podcast interview with him, his son worked at Home Depot. 1743 02:31:13.651 --> 02:31:14.731 Yep, that's right. 1744 02:31:14.731 --> 02:31:24.840 And so he got the unvarnished take, not the corporate ivory tower sort of filtering of information. He got the dinner table conversation of what's it like in the stores? 1745 02:31:25.516 --> 02:31:26.516 Yep. 1746 02:31:26.516 --> 02:31:35.840 And obviously it wasn't just that one thing, but that's the mentality that he brought to this job of how do we exist as a store support center, not as a headquarters? 1747 02:31:35.840 --> 02:31:36.340 Yep. 1748 02:31:36.340 --> 02:31:49.674 So when Frank takes over as CEO, at that same board meeting on January 2nd, like the first thing that he says to the board, the first ask that he makes is, I want to place a call to Bernie. 1749 02:31:49.746 --> 02:32:02.725 By this point in time, Bernie had retired fully from the board and certainly was just disgusted with the whole state of the company, as evidenced by his another goddamn GE guy quote. 1750 02:32:02.796 --> 02:32:13.992 So Frank gets him on the phone, even knowing that Bernie is hostile to him, and convinces Bernie that he wants to come meet him and spend some time with him. 1751 02:32:14.063 --> 02:32:23.334 That leads to Frank and Ken going to Florida to meet with Bernie, where he now lives, getting breakfast with him the next weekend. 1752 02:32:23.405 --> 02:32:31.107 And then Bernie and Frank go out and they do a store walk together, but it's not a store walk of Home Depot. 1753 02:32:31.178 --> 02:32:45.441 The first place they visit together is Costco, because to Bernie, Home Depot stores no longer embody the values and qualities of a great retailer that he wants to teach, you know, the young Jedi here. 1754 02:32:45.512 --> 02:32:50.790 So that's the first thing that Frank does is mend the Bernie relationship. 1755 02:32:51.590 --> 02:32:58.340 And really learn directly from him. What do you think the culture is? 1756 02:32:58.340 --> 02:32:59.080 Yep. 1757 02:32:59.080 --> 02:33:08.180 Because the whole time he's been here, he's been under Bob. Frank wasn't here under Bernie. And so it's like, hey, I'm going to try to reinvent, reinvigorate whatever was special about the culture. Help me understand what that is. 1758 02:33:08.570 --> 02:33:09.570 Yep. 1759 02:33:09.570 --> 02:33:18.810 And one of the things that he brings up is this sort of fabled inverted pyramid at Home Depot where, you know, you've got, imagine a pyramid except it's upside down. 1760 02:33:18.866 --> 02:33:23.122 And at the bottom is the CEO and that CEO is just this tiny little triangle. 1761 02:33:23.178 --> 02:33:25.923 And at the top, the big thick level is customers. 1762 02:33:25.979 --> 02:33:28.443 And then underneath customers is associates. 1763 02:33:28.499 --> 02:33:38.580 The belief is like, look, the people who can actually affect the experience of the customers on their projects is the associates, and everyone under them just exists to serve them. 1764 02:33:38.662 --> 02:33:39.662 Yep. 1765 02:33:39.662 --> 02:33:46.380 And Frank sort of grabs this and brings this to the company as kind of a management tool of, hey, we need to start paying attention to this again. 1766 02:33:46.380 --> 02:33:46.880 Yep. 1767 02:33:46.880 --> 02:34:02.024 So after calling Bernie, the second thing that Frank says to the board upon becoming CEO is, hey, we got to get this whole issue of the Home Depot CEO's compensation out of the newspapers. 1768 02:34:02.105 --> 02:34:05.185 We got to make it not a thing anymore. 1769 02:34:05.266 --> 02:34:17.344 So obviously, my compensation needs to be much lower than what Bob's was, and I want to align myself with you guys, the company and the shareholders. 1770 02:34:17.425 --> 02:34:27.071 So I want 90% of whatever number we collectively decide is my compensation, the right number for the CEO of Home Depot. 1771 02:34:27.152 --> 02:34:36.231 I want 90% of that to be in stock options so that I'm aligned with the company, the shareholders, the employees. 1772 02:34:36.312 --> 02:34:43.040 I'm going to bring it all back to the equity strategy that the company had forever. 1773 02:34:43.040 --> 02:34:43.960 Okay, that's a way to make a statement. 1774 02:34:44.422 --> 02:34:45.422 Yep. 1775 02:34:45.422 --> 02:34:48.250 And if the company does well, you do really well. 1776 02:34:48.250 --> 02:35:04.030 Yep. And the company would do well under Frank. So the next thing is he completely stops new store expansion for Home Depot. Says, all right, if we're going to return this company to growth, we got to do it with same-store sales. 1777 02:35:04.770 --> 02:35:18.220 So this is crazy. In 2008, they had grown to 2,300 stores. And today, 18 years later, they are at just 2,400 stores. 1778 02:35:18.220 --> 02:35:18.927 Yep. 1779 02:35:18.927 --> 02:35:20.746 Here's how it went from 2008. 1780 02:35:20.809 --> 02:35:23.382 Right away, they closed about 30 of them. 1781 02:35:23.445 --> 02:35:29.093 They took a billion-dollar write-off on all of the pipeline that they had been developing. 1782 02:35:29.156 --> 02:35:34.741 So all this new store development, they said, nope, we're not going to open any of those. 1783 02:35:34.804 --> 02:35:37.816 We're just going to focus on store productivity. 1784 02:35:37.879 --> 02:35:45.410 Then for the next 11 years, other than like four or five stores a year here and there, they did not open any new stores. 1785 02:35:45.410 --> 02:35:45.910 Right. 1786 02:35:45.910 --> 02:35:46.610 They were flat for over a decade. 1787 02:35:46.610 --> 02:35:49.200 As they are simultaneously returning to growth. 1788 02:35:49.200 --> 02:36:05.012 So remarkably, while they weren't opening new stores, they grew revenue from $70 billion to $130 billion and net income from $4 billion to $11 billion, all by focusing on the return they could get from their existing stores. 1789 02:36:05.083 --> 02:36:11.860 So sales per store go from around $30 million to about $65 million over that 11 years per store. 1790 02:36:11.860 --> 02:36:12.867 Yeah, yeah. Crazy. 1791 02:36:12.980 --> 02:36:16.100 I mean, they just cranked on store productivity. 1792 02:36:16.540 --> 02:36:20.620 Yep. And we're going to get to e-commerce in a minute, which was a big part of that. 1793 02:36:20.620 --> 02:36:25.300 Yes, that is, of course, that's funny. That was my next thing too. I was like, that is the missing piece of this puzzle. 1794 02:36:25.300 --> 02:36:26.162 Yep. 1795 02:36:26.162 --> 02:36:29.218 But I think there's an interesting cultural thing here. 1796 02:36:29.274 --> 02:36:32.497 They'd always grown ever since founding by growing stores. 1797 02:36:32.553 --> 02:36:41.168 It was this safety net that we will always show growth because we are always growing stores, which means, A, you don't really optimize the stores you have. 1798 02:36:41.223 --> 02:36:47.226 You don't try to wring the very most you can out of them because you have a different way to provide growth. 1799 02:36:47.281 --> 02:36:54.451 And B, if you believe opening stores is intrinsically virtuous, then you just open more stores whether it was a good idea or not. 1800 02:36:54.507 --> 02:37:04.400 So there's lots of stores they opened that like probably shouldn't have been open and they either needed to close or focus on getting their productivity up to where it should be. 1801 02:37:04.400 --> 02:37:07.350 Right, right. Like Starbucks has run into this several times in their life as a company. 1802 02:37:07.350 --> 02:37:12.400 Yes. Yes. Opening more stores is not inherently virtuous unto itself. 1803 02:37:12.400 --> 02:37:25.210 Yep. So the other big thing that Frank does right away is spin off and sell some of the other businesses that Nardelli had been acquiring. 1804 02:37:25.210 --> 02:37:33.664 Yeah, they built this business called Home Depot Supply, which is sort of an amalgamation of several things they bought 2000 to 2006. 1805 02:37:33.727 --> 02:37:46.567 This is mainly a distributor, this business they built, Home Depot Supply, that served homebuilders, infrastructure contractors, municipalities, maintenance professionals, like big commercial customers. 1806 02:37:46.631 --> 02:37:51.207 And the goal was this broader ambition than just their existing ProDesk. 1807 02:37:51.271 --> 02:38:03.539 They wanted to serve properties across their whole lifecycle and whatever needs pop up across the lifecycle, not just this like single job, single contractor, order stuff, we'll give it to you. 1808 02:38:03.602 --> 02:38:11.866 It's a super different business model than their traditionally very focused model where everything kind of runs through the store. 1809 02:38:11.929 --> 02:38:18.985 And they had to develop all these new competencies, which, you know, are good but also detract from your focus. 1810 02:38:19.048 --> 02:38:28.646 So wholesale distribution, offering commercial credit, specialized sales forces, large-scale delivery to job sites for these giant commercial projects. 1811 02:38:28.710 --> 02:38:35.384 It did grow to 13% of Home Depot's revenue by 2006, so it was starting to become a big business for them. 1812 02:38:35.448 --> 02:38:42.313 But when Frank came in, his assessment was, this is such a different thing, and we're such a mess right now. 1813 02:38:42.376 --> 02:38:45.110 And the macro is starting to look a little— 1814 02:38:45.988 --> 02:38:46.988 Rocky. 1815 02:38:46.988 --> 02:38:53.950 Shady. I don't think Frank would take credit that he knew that it would affect the whole financial system, but at least it was impacting home building and home supplies. 1816 02:38:54.402 --> 02:38:55.402 Yeah. 1817 02:38:55.402 --> 02:39:15.390 So in 2007, they sold HD Supply to a private equity consortium for about $8.3 billion and kind of focused attention back on its core retail business. But it wasn't just the attention that they focused back on the core retail business. Frank, under the extreme nudging from Ken— 1818 02:39:16.465 --> 02:39:17.465 Yep. 1819 02:39:17.465 --> 02:39:19.310 Realized the core of this business is awesome. 1820 02:39:20.136 --> 02:39:21.136 Yeah. 1821 02:39:21.136 --> 02:39:26.140 The adjacencies around this business might be great, but I don't know. The core is great, though. 1822 02:39:26.140 --> 02:39:29.740 We're starting to do some of the right things. We're starting to turn this around. 1823 02:39:29.740 --> 02:39:42.780 Wouldn't it be great if we owned more of the core business? So what they do with the $8.3 billion, and this is ballsy, they put it all into buybacks. 1824 02:39:43.195 --> 02:39:44.195 Yep. 1825 02:39:44.195 --> 02:39:46.274 They just bet on themselves. 1826 02:39:46.348 --> 02:39:53.254 They said, I think the best ROI thing we can do is buy Home Depot stock with this $8 billion. 1827 02:39:53.328 --> 02:39:59.714 So right away, they bought back 14% of the total outstanding shares in the first year. 1828 02:39:59.789 --> 02:40:06.769 And Frank would go on to buy back 30% of all outstanding shares over the course of his tenure. 1829 02:40:06.843 --> 02:40:09.220 He dramatically shrunk the size- 1830 02:40:09.220 --> 02:40:09.720 Yeah. 1831 02:40:09.720 --> 02:40:10.320 -of the shareholder base. Those buybacks- 1832 02:40:10.320 --> 02:40:10.665 Yeah. 1833 02:40:14.000 --> 02:40:17.040 -were done mostly at $30 to $50 a share. I mean, today, Home Depot is $340 a share. 1834 02:40:17.560 --> 02:40:31.880 Yeah. This is "ballsy" is putting it mildly. Buying back 30% of your company's share base starting in the summer of 2007. 1835 02:40:32.080 --> 02:40:34.360 Well, you're in the housing industry. 1836 02:40:34.360 --> 02:40:55.850 While you're in the housing industry, as the housing bubble is popping real time, continuing this buyback program through the financial crisis. This is all Ken Langone right here. To the extent that Ken sinned at Home Depot during the Nardelli era, he is atoning for his sins here. 1837 02:40:55.850 --> 02:40:58.039 And we'll put this chart in the email. 1838 02:40:58.096 --> 02:41:11.173 The graph of the total number of outstanding shares is almost this perfect uphill-downhill that's centered right around the year 2001, where when the company was in its growth phase, it was doing all these new equity offerings, 1839 02:41:11.230 --> 02:41:15.436 creating more and more and more shares all the way up through about 2001. 1840 02:41:15.493 --> 02:41:19.295 Then they slowly started buying them back during the Nardelli era. 1841 02:41:19.353 --> 02:41:24.941 Then Frank and, again, Ken just go nuts and say, no, no, no, this company at the core is awesome. 1842 02:41:24.998 --> 02:41:27.763 We want to own as much of it as we possibly can. 1843 02:41:27.821 --> 02:41:36.347 It's flattened out in recent years because they've done some more recent giant acquisitions and they had COVID and good reasons to flatten them out. 1844 02:41:36.404 --> 02:41:42.050 But the number of outstanding shares today is almost all the way back down to where it was at IPO. 1845 02:41:42.390 --> 02:41:45.001 I know, this is just incredible. 1846 02:41:45.082 --> 02:41:52.834 And in big part, thanks to this, through the financial crisis, Home Depot stock performs great. 1847 02:41:52.916 --> 02:41:55.609 This is like so counterintuitive. 1848 02:41:55.690 --> 02:42:02.300 You would think that the financial crisis would be terrible for Home Depot stock. 1849 02:42:02.381 --> 02:42:06.543 But from 2008 to 2012, Home Depot stock is up 132%. 1850 02:42:06.624 --> 02:42:09.317 And then it continues after that. 1851 02:42:09.399 --> 02:42:14.376 2013, it's up 33% including dividends, 27% 2014, 26% in 2015. 1852 02:42:14.458 --> 02:42:16.580 Compounding is back, baby. 1853 02:42:20.360 --> 02:42:30.690 Why is it just Wall Street suddenly believing a narrative that Frank walks on water, or what's intrinsically happening that is driving the value of this company? 1854 02:42:30.690 --> 02:42:46.054 Well, this gets into the next, and frankly, probably the biggest thing that Frank Blake did for Home Depot, which is how they grew the company despite not growing store count, and that's e-commerce. 1855 02:42:46.131 --> 02:43:00.099 And this is absolutely awesome because as we've alluded to throughout the episode, the internet actually represented a pretty big disruptive threat for Home Depot, not from Amazon. 1856 02:43:00.176 --> 02:43:04.755 We'll get to Amazon in a minute, but actually from YouTube. 1857 02:43:04.832 --> 02:43:18.412 Like, you're unbundling the core value prop of the knowledge in the stores has gone, you know, first to the internet and a little bit during the beginning of the Nardelli era. 1858 02:43:18.489 --> 02:43:25.085 But once YouTube comes along in 2006, 2007, this is a big-time threat to the company. 1859 02:43:25.163 --> 02:43:32.690 It doesn't matter where you get your goods anymore if you get your knowledge for free on YouTube. 1860 02:43:32.690 --> 02:43:33.620 That's interesting. 1861 02:43:33.669 --> 02:43:35.237 It sounds great in the abstract. 1862 02:43:35.286 --> 02:43:40.282 I wonder if you're actually a, you know, Home Depot store manager, how much this actually impacts you. 1863 02:43:40.331 --> 02:43:51.450 I'm sure people come in being like, "I learned this on YouTube," and then you gotta be like, "Like, okay, but you think you know everything right now, but let me save you some trouble." I suspect there's a lot of that going on. 1864 02:43:51.700 --> 02:44:00.020 But I think over time, YouTube gets pretty good at surfacing the best videos— 1865 02:44:00.020 --> 02:44:00.346 High quality. Yeah. 1866 02:44:00.888 --> 02:44:02.328 —for home projects, DIY. 1867 02:44:03.050 --> 02:44:05.250 Yep. I think that's probably right. 1868 02:44:05.250 --> 02:44:27.860 Yep. Yep. So a big part of the way that Home Depot reinvents itself here in this era to maintain its relevance for customers is e-commerce. So Frank invests a lot of capital into building distribution centers, which is interesting because they're not growing stores. 1869 02:44:28.660 --> 02:44:43.270 Right, right. In 2009, they opened 12 big distribution centers that they call rapid deployment centers. This is a huge shift from the original model where manufacturers would ship directly to the store. This is centralizing the supply chain. 1870 02:44:43.762 --> 02:44:44.762 Yes. 1871 02:44:44.762 --> 02:45:00.870 This is saying, look, we want everything shipped to these 12 DCs and we will quickly chop them up and get them to stores. But also, it now enables us to have these centralized places to ship from since it's kind of a mess if you're shipping your entire e-commerce storefront- 1872 02:45:00.870 --> 02:45:01.370 Out of the stores, right? 1873 02:45:01.370 --> 02:45:01.914 -out of the stores. 1874 02:45:01.914 --> 02:45:02.270 Yeah, you can't really do that. 1875 02:45:03.060 --> 02:45:09.540 Except, one caveat to this, they do also do that. So I had two e-commerce Home Depot experiences in the last week. 1876 02:45:10.253 --> 02:45:11.253 Mm. 1877 02:45:11.253 --> 02:45:26.900 One, I bought on homedepot.com and it arrived two days later the way you would expect, the same way you buy from Amazon. I'm sure that shipped from a distribution center. The other was something that I could get sooner within two hours because- 1878 02:45:26.900 --> 02:45:27.387 With in-store pickup. 1879 02:45:27.387 --> 02:45:33.090 -they had it at the store, and it wasn't pickup! They had someone drive it out to me. 1880 02:45:33.090 --> 02:45:33.491 Oh, that's awesome. 1881 02:45:33.491 --> 02:45:43.170 Later that night from the SODO store in Seattle. It was about 20 minutes away from my house, but within a couple hours, it was delivered at my house since it was fulfilled from store. So they have the flexibility to do both ship from store and ship from distribution center. 1882 02:45:43.650 --> 02:45:44.150 Yeah. 1883 02:45:44.150 --> 02:45:59.279 So, yeah, e-commerce is actually this incredible opportunity for Home Depot right at the same time that Amazon is crushing the rest of the retail landscape and disrupting everything. 1884 02:45:59.362 --> 02:46:20.395 When you think about it, though, if you think about Home Depot's core bestselling products, things like lumber or drywall or plumbing supplies, roofing, siding, insulation, just imagine that attempting to go through the Amazon logistics pipeline, right? 1885 02:46:20.478 --> 02:46:22.640 Like you probably haven't— 1886 02:46:22.640 --> 02:46:24.310 They need to build a whole specialized system for it. 1887 02:46:24.310 --> 02:46:34.000 Totally. Amazon is not equipped to do this. I mean, could you imagine putting 200 cubic feet of lumber that weighs 6,000 pounds on an Amazon delivery van? 1888 02:46:34.000 --> 02:46:35.710 One of those little Rivians. 1889 02:46:35.710 --> 02:46:39.800 No, that is the amount of lumber you would need for a deck job. 1890 02:46:40.234 --> 02:46:41.234 Yeah. 1891 02:46:41.234 --> 02:46:50.730 So Home Depot is actually pretty uniquely positioned to build this out and own e-commerce for home improvement and hardware. 1892 02:46:51.200 --> 02:47:02.200 At the very least, just because it's wholly different, that an Amazon or a Walmart actually doesn't bring that much to bear to compete in delivery-based e-commerce for goods like this. 1893 02:47:02.200 --> 02:47:03.946 And it gets even better. 1894 02:47:04.019 --> 02:47:14.278 It turns out that in e-commerce for hardware, there's actually a whole separate servicing the customer element that Home Depot can lean into. 1895 02:47:14.351 --> 02:47:23.155 Which is when you're working on a project, it's really, really important that you get all the stuff you need all at once. 1896 02:47:23.227 --> 02:47:28.903 And when you run out of something, you get a refill of it as soon as possible. 1897 02:47:28.976 --> 02:47:33.560 Because if you run out of nails, the whole job stops, you know? 1898 02:47:33.560 --> 02:47:34.172 Yeah. 1899 02:47:34.172 --> 02:48:00.210 And so if you're a pro, obviously this is an issue, but especially if you're a consumer, this is an issue because you only have a limited amount of time on the weekends to, you know, build your deck or retile your bathroom, etc. 1900 02:48:00.210 --> 02:48:00.852 Right. 1901 02:48:00.852 --> 02:48:04.648 And so if it's Sunday morning and all of a sudden you're out of grout for your tiling job, are you really going to want to wait until two days later to get grout delivered? 1902 02:48:04.670 --> 02:48:06.524 By which point in time it's the week you're at work, you can't finish your bathroom. 1903 02:48:06.547 --> 02:48:07.385 You gotta wait until the next weekend. 1904 02:48:07.407 --> 02:48:09.240 Hell no, you're going to do anything you can to get that grout as soon as possible. 1905 02:48:09.870 --> 02:48:15.772 So this gets to the thing that I really didn't think about until diving into this research. 1906 02:48:15.837 --> 02:48:20.571 Most of the time when you say e-commerce, people equate it with delivery. 1907 02:48:20.636 --> 02:48:23.166 These are a bundled thing in the world. 1908 02:48:23.231 --> 02:48:30.495 I wanna order from my phone or my computer, and I wanna have it delivered to my house in a short period of time. 1909 02:48:30.560 --> 02:48:35.230 At Home Depot, a giant chunk of the e-commerce is actually store pickup. 1910 02:48:35.787 --> 02:48:36.787 Yep. 1911 02:48:36.787 --> 02:48:37.213 Because if I'm- 1912 02:48:37.213 --> 02:48:40.170 Because of this dynamic, I need it right now. 1913 02:48:40.170 --> 02:48:41.720 -out of grout—I don't wanna wait. 1914 02:48:41.767 --> 02:48:43.176 I can get in my car right now. 1915 02:48:43.223 --> 02:48:48.813 I just wanna know that it's gonna be ready when I get there, and I wanna have the easiest possible checkout experience. 1916 02:48:48.860 --> 02:48:50.363 So, oh my God, I'm out of grout. 1917 02:48:50.410 --> 02:48:50.910 Crap. 1918 02:48:50.910 --> 02:48:55.201 I'm ordering on my phone, and then I'm pulling out of the driveway and going down to Home Depot. 1919 02:48:55.248 --> 02:49:04.267 Even if they were gonna do their fastest delivery to me, it's probably going to take at least half an hour, an hour, 2 hours longer than me just saying, you know what, this is the time I have. 1920 02:49:04.314 --> 02:49:06.240 I'm driving right to the store right now. 1921 02:49:06.240 --> 02:49:25.100 Yep, exactly. So in March of 2009, the company changed its slogan from its longtime slogan that many Americans probably remember: 'You can do it, we can help,' which we didn't talk about earlier, by the way, but is so perfect to- 1922 02:49:25.100 --> 02:49:25.600 Yes. 1923 02:49:25.600 --> 02:49:26.600 -encapsulate the value proposition of the original Home Depot model. 1924 02:49:26.600 --> 02:49:27.100 Yes. 1925 02:49:27.100 --> 02:49:28.400 'You can do it. We can help.' 1926 02:49:28.400 --> 02:49:29.810 Their marketing consultants got much better over time. 1927 02:49:29.810 --> 02:49:37.360 Yeah, much, much better. So they scrapped that and they changed it to 'More saving, more doing.' 1928 02:49:37.570 --> 02:49:39.930 Hmm. How many entendres is that? 1929 02:49:39.930 --> 02:49:43.218 And it reflects this change in strategy, right? 1930 02:49:43.288 --> 02:49:46.016 It's 'more saving.' So, hey, we get it. 1931 02:49:46.086 --> 02:49:52.592 You know, we're not differentiated anymore by the education that we bundle, that we can help. 1932 02:49:52.662 --> 02:50:05.325 We're going to rededicate ourselves to the 'saving' value proposition—you know, the Costco elements of our strategy—but then also the 'more doing.' This is what we're talking about. 1933 02:50:05.395 --> 02:50:07.214 Shoot, I ran out of grout. 1934 02:50:07.284 --> 02:50:08.823 It's Sunday afternoon. 1935 02:50:08.893 --> 02:50:13.160 I need to get this bathroom done before the end of the night. 1936 02:50:13.230 --> 02:50:14.140 'More doing.' 1937 02:50:14.140 --> 02:50:14.967 Yep. 1938 02:50:14.967 --> 02:50:17.180 Pop online, go on your phone. We're gonna get it to you. 1939 02:50:17.740 --> 02:50:18.740 Yep. 1940 02:50:18.740 --> 02:50:41.180 So the net of all that is building towards what Home Depot's strategy is today: 90% of all homes in America can get anything they need for any project—over a million SKUs delivered to their home or job site or a nearby store within 2 to 24 hours. 1941 02:50:41.180 --> 02:50:53.000 And what they need to pull that off is just an incredible amount of density. So, David, I texted you this. I said, 'I can't believe it. California alone has 250 Home Depot's.' 1942 02:50:54.325 --> 02:50:55.325 Yep. 1943 02:50:55.325 --> 02:50:56.170 Washington State has 48. 1944 02:50:56.350 --> 02:50:57.070 And what did you say? 1945 02:50:57.070 --> 02:50:58.016 48. 1946 02:50:58.016 --> 02:51:01.430 There are, by comparison, there are two IKEAs in Washington State. 1947 02:51:01.430 --> 02:51:02.704 There are two IKEAs. 1948 02:51:02.768 --> 02:51:13.731 But, you know, if you wanna have that value proposition: 90% of homes can get anything they need for a project, a million SKUs with 2 to 24 hours, that requires two things. 1949 02:51:13.795 --> 02:51:22.783 One, being really close to lots and lots of stores, which was their initial market strategy to go really dense before going to the next city. 1950 02:51:22.846 --> 02:51:26.990 And two, to have a just ridiculous distribution center footprint- 1951 02:51:27.176 --> 02:51:28.176 Yep. 1952 02:51:28.176 --> 02:51:30.588 -to facilitate the e-commerce component. 1953 02:51:30.648 --> 02:51:44.398 So I did as much research as I could to figure out what their distribution center network looks like today, because it's evolved a lot since 2009, and they've really figured out how to have all these different specialty centers. 1954 02:51:44.459 --> 02:51:51.997 They have seven import distribution centers to bring things in from outside the country, and this is all just within the U.S. 1955 02:51:52.058 --> 02:51:59.355 They have 18 rapid deployment centers, which take goods from manufacturers, cut them up, get the merchandise into stores. 1956 02:51:59.415 --> 02:52:08.220 Then there are special stocking and bulking distribution centers, which are meant to store inventory rather than cut it up and get it into stores. 1957 02:52:08.280 --> 02:52:17.990 There are 17 flatbed distribution centers, which are all about fulfilling those massive orders to pros if you need huge quantities of things onto flatbed trucks. 1958 02:52:18.050 --> 02:52:28.604 They also have 160 market delivery operations centers, which are cross-dock facilities for other large items like patio furniture that they don't want to route through stores. 1959 02:52:28.665 --> 02:52:35.359 David, to your point of really benefiting from a specialized supply chain, this is an insane footprint to have. 1960 02:52:35.419 --> 02:52:42.475 For e-commerce, they have 20 dedicated direct fulfillment centers that are just for that, which they started in 2014. 1961 02:52:42.535 --> 02:52:46.214 Those stock way more SKUs than you would ever see in a store. 1962 02:52:46.274 --> 02:52:49.411 That's where all their online-only stuff comes from. 1963 02:52:49.471 --> 02:53:06.960 That explains why one of my goods that I ordered last week took—it was a battery for a camping lantern that I bought—two and a half days to get to me, whereas the other thing that shipped right from the store got to me in just a few hours because the lantern battery was an online-only SKU. 1964 02:53:07.020 --> 02:53:14.559 And then not to mention, we'll talk about this later, but they do reacquire HD Supply, and they make some other acquisitions. 1965 02:53:14.619 --> 02:53:18.419 HD Supply on its own has 130 dedicated distribution facilities. 1966 02:53:18.479 --> 02:53:20.530 So it's just this crazy footprint- 1967 02:53:20.530 --> 02:53:21.030 Yep. 1968 02:53:21.030 --> 02:53:21.730 -to accomplish that mission you talked about. 1969 02:53:21.730 --> 02:53:28.053 Crazy footprint and specialized footprint that looks super different than Amazon's. 1970 02:53:28.130 --> 02:53:49.768 So this becomes the story of the stock and the company after the financial crisis of, 'Oh, hey, it's a retail apocalypse out there and Amazon's eating everybody's lunch' except Home Depot's, because this is a highly specialized—again, specialty retail—logistics and fulfillment chain. 1971 02:53:49.844 --> 02:53:52.130 And Home Depot's built it out. 1972 02:53:52.130 --> 02:54:09.220 With very, very high-dollar items that you buy through it. And actually, they make a decent margin. I mean, it's 33% gross margins. This is not Costco. So you multiply decent margins by large-dollar items, buy lots of them, buy every house in America. The number gets really large. 1973 02:54:09.930 --> 02:54:22.140 Yep. So Frank Blake retires in 2014, and unlike any of the previous chapters of the company, he's actually built a management bench. 1974 02:54:22.140 --> 02:54:31.150 And the people who would stay in the company and succeed him are matched in their impressiveness only by the people who were in that same group who are leading other companies now. 1975 02:54:31.150 --> 02:54:32.025 Right. 1976 02:54:32.025 --> 02:54:34.310 So the CEO of UPS. 1977 02:54:34.310 --> 02:54:37.460 Yep. Carol Tomé. She was the CFO of Home Depot for a long time. 1978 02:54:37.866 --> 02:54:40.386 And the CEO of Floor & Decor. 1979 02:54:40.386 --> 02:54:40.886 Yep. 1980 02:54:40.886 --> 02:54:41.082 Tom Taylor, legend. 1981 02:54:41.111 --> 02:54:42.939 So when Frank retires, he hands the reins over to Craig Menear. 1982 02:54:42.968 --> 02:54:46.189 He runs the company for another eight years and then he retires in 2022 and hands the reins over to Ted Decker. 1983 02:54:46.218 --> 02:54:48.685 Both of them come up through the company, you know, practically lifers at Home Depot. 1984 02:54:48.714 --> 02:54:52.110 And yeah, speaking of 2022, all of this strategy and all of these people look like absolute geniuses when COVID hits. 1985 02:55:09.970 --> 02:55:23.250 Isn't it insane? They just stopped building the physical stores a decade before. They invested billions and billions of dollars building out many dozens of fulfillment centers. It's where all of their effort went- 1986 02:55:23.958 --> 02:55:24.958 Yep. 1987 02:55:24.958 --> 02:55:26.770 -in the category of improving your home. 1988 02:55:27.100 --> 02:55:28.100 Yep. 1989 02:55:28.100 --> 02:55:38.700 And then suddenly we're all stuck at home wanting to order things to improve our home and embark on home projects without necessarily going into stores in 2020, and they've got all this capacity built out and invested in. 1990 02:55:38.700 --> 02:55:55.660 Yep. Or be able to go into stores to get what we need, but do it in a way that you minimize human interactions there. And guess what? Home Depot has already built out all that infrastructure to order online or on your phone and pick up in stores. 1991 02:55:55.660 --> 02:55:56.520 Yep. 1992 02:55:56.520 --> 02:56:03.720 It was the most incredible unintended preparation of all time. 1993 02:56:03.870 --> 02:56:04.549 Yeah. 1994 02:56:04.549 --> 02:56:14.110 So during COVID, Home Depot's revenue growth goes nuts. It goes from $110 billion in revenue to about $160 billion in revenue. 1995 02:56:14.110 --> 02:56:16.619 In just 3 years, they had a little, obviously, some hangover after that, so it would decline and then take a couple years to come back. 1996 02:56:16.638 --> 02:56:18.367 But still, America wanted to shop there, and boy did they have the capacity built out for it. 1997 02:56:18.385 --> 02:56:18.885 It. 1998 02:56:18.885 --> 02:56:19.910 And then in 2024, we all wanted to spend money on something besides our homes. 1999 02:56:30.551 --> 02:56:31.551 Yes. 2000 02:56:31.551 --> 02:56:31.835 So... 2001 02:56:31.835 --> 02:56:47.720 Exactly. Exactly. Yeah. Ben, you mentioned the HD Supply round trip in there. They spun off the company, sold it to private equity as the housing bubble is bursting right before the financial crisis. 2002 02:56:47.720 --> 02:56:54.120 And it was mostly the distribution company that they sold off, which is a fine business, but not a great business. 2003 02:56:54.120 --> 02:57:05.730 Yep. Used all that capital to buy back the stock and then 13 years later bought the company back for the same price that it sold it for, right? 2004 02:57:05.730 --> 02:57:14.640 They actually just bought part of it back, the most valuable piece of it, for $8 billion, but there's been lots of inflation since then. It's not really fair to call it the same price. 2005 02:57:14.640 --> 02:57:15.602 Right. 2006 02:57:15.602 --> 02:57:19.316 They definitely bought the best part of it for less than they sold it for. 2007 02:57:19.366 --> 02:57:27.699 But, yeah, the purpose of doing this, like, leave capital allocation aside for a second, they wanted to better serve that maintenance, repair, and operation customer. 2008 02:57:27.749 --> 02:57:40.550 And you kind of need to do it with specialized distribution outside of the retail stores for larger and more complex planned purchases rather than what the Home Depot retail store really is, which is filling in the gaps real time or one-off for a project. 2009 02:57:41.207 --> 02:57:42.207 Yep. 2010 02:57:42.207 --> 02:57:55.570 The next thing they do is they buy SRS in 2024. This is a giant deal, an $18.25 billion acquisition. Largest deal in the company's history. They actually pause stock buybacks here. 2011 02:57:55.710 --> 02:57:56.670 In order to do this. Yeah. 2012 02:57:56.670 --> 02:57:57.170 They're like, we really gotta use the capital to swallow that. 2013 02:57:57.170 --> 02:57:57.309 SRS is a specialty trade distributor that serves professional roofers, landscapers, pool contractors, and other trades. 2014 02:57:57.309 --> 02:57:57.575 You can kind of think of it as expanding into an adjacency, growing its total addressable market. 2015 02:57:57.575 --> 02:57:57.792 The thesis is similar to HD Supply, but it's less focused on maintenance and more focused on net new exterior building projects. 2016 02:57:57.792 --> 02:57:58.078 So these are bulk orders planned ahead of time, delivered to job sites with a dedicated delivery fleet of vehicles. 2017 02:57:58.078 --> 02:57:58.335 Again, a whole other set of distribution centers and vehicles that they now own that are specialized for their business, mostly facilitated outside the walls of their traditional stores. 2018 02:57:58.335 --> 02:57:58.750 This continues to grow, and they've already made another multibillion-dollar acquisition within SRS to do interiors, so drywall, ceilings, things like that, in addition to SRS's traditional focus on exteriors. 2019 02:57:58.750 --> 02:57:59.330 So it's like a parallel business that serves even bigger pros doing different types of jobs where they can fulfill the whole thing outside of stores, and then those same pros probably come into Home Depot retail to do the real-time stuff while they are doing a job in progress. 2020 02:59:12.488 --> 02:59:13.488 Yep. 2021 02:59:13.488 --> 02:59:23.920 So it's interesting, like, that Bob Nardelli growing via expansion into adjacencies wasn't wrong. It was just the wrong time to do it- 2022 02:59:23.920 --> 02:59:24.420 The wrong timing. 2023 02:59:24.420 --> 02:59:25.120 -and the wrong way to do it. 2024 02:59:25.120 --> 02:59:41.270 Yep, yep, yep. And now that the company has shifted its strategy to e-commerce, which is so much more distribution and logistics and fulfillment-heavy, it makes more sense to expand into these adjacencies as logistics become the core competency of the business. 2025 02:59:42.010 --> 02:59:46.890 Yeah. And now that the core business is healthy again, I mean- 2026 02:59:47.474 --> 02:59:48.474 Yep. 2027 02:59:48.474 --> 02:59:55.250 -now that you have stores that are actually working at their highest level of productivity possible with some work done on the culture. Yeah. 2028 02:59:55.250 --> 02:59:56.920 Yeah, so, all right, take us to today. 2029 02:59:56.920 --> 02:59:57.420 Yes. 2030 02:59:57.420 --> 03:00:00.118 So the business today, it's a $165 billion a year revenue business. 2031 03:00:00.162 --> 03:00:03.050 Not a super fast-growing company, grows at 2.5% to 4.5% per year. 2032 03:00:03.094 --> 03:00:07.358 A little over half the revenue is pro contractors and half is that consumer DIY retail customer. 2033 03:00:07.403 --> 03:00:10.112 Moving on to profits, the gross margin is a little above 33%. 2034 03:00:10.157 --> 03:00:11.312 Operating margin is 12.5%. 2035 03:00:11.356 --> 03:00:13.000 Net income last year was $14 billion. 2036 03:00:13.044 --> 03:00:19.041 Of the $165 billion they make, they get to keep about $14 billion of it, which, if you do the math, is about an 8.5% net income margin. 2037 03:00:19.085 --> 03:00:22.017 They have 2,400 stores today, opening about 15 new ones each year. 2038 03:00:22.061 --> 03:00:23.572 They own 90% of their real estate. 2039 03:00:23.616 --> 03:00:31.123 They only lease about 10% of the stores since once capital stopped being an issue for them and they started being free cash flow-generative, they realized that actually, 2040 03:00:31.168 --> 03:00:38.319 a competitive advantage for us is lock up the best real estate and hold it forever and don't get held hostage in a real estate negotiation when a lease comes up. 2041 03:00:38.364 --> 03:00:42.317 Early on, they obviously couldn't do that, and they intentionally did stuff like the J.C. 2042 03:00:42.362 --> 03:00:46.493 Penney deal to lease secondhand retail stores so that they could quickly stand up new stores. 2043 03:00:46.537 --> 03:00:49.202 But over time, it just became better to own the real estate. 2044 03:00:49.247 --> 03:00:52.934 This has actually been why international has been tough, or one of the reasons why. 2045 03:00:52.978 --> 03:01:00.530 A lot of the best real estate in Europe is taken, but a lot of the best real estate in Georgia, in the '80s was perfectly available, and they sort of grew up with the US. 2046 03:01:01.186 --> 03:01:02.186 Yep. 2047 03:01:02.186 --> 03:01:18.510 I mean, it's weird to say because the US was already 200 years old, but they grew up with the suburbs of the US becoming extremely populous. 2048 03:01:18.626 --> 03:01:30.866 They have moved to Canada, Mexico, they're branching out in North America, but completely failed in China. 2049 03:01:31.103 --> 03:01:34.103 They totally miscalibrated. 2050 03:01:34.368 --> 03:01:38.915 Home improvement is not really a thing. 2051 03:01:39.032 --> 03:01:42.880 A DIYer is not virtuous in China. 2052 03:01:58.405 --> 03:01:59.405 Hmm. 2053 03:01:59.405 --> 03:02:01.580 It's sort of like, why can't you have someone fix that for you? 2054 03:02:01.580 --> 03:02:02.420 Hmm. Interesting. 2055 03:02:02.420 --> 03:02:03.660 And the wealthy people live in cities. 2056 03:02:04.148 --> 03:02:05.228 Right, right, right. 2057 03:02:05.228 --> 03:02:09.270 So 86% of stores are here domestically in the United States. 2058 03:02:09.337 --> 03:02:17.826 If you go over to the classic retail metrics and look at inventory turnover, it is higher than Lowe's, but it's nothing crazy. 2059 03:02:17.894 --> 03:02:23.418 They turn their inventory about 4.5 times per year compared to Lowe's turning 3.3. 2060 03:02:23.486 --> 03:02:28.000 Just for reference, Costco turns their inventory 13 times per year. 2061 03:02:28.000 --> 03:02:28.553 Right off the charts. 2062 03:02:28.600 --> 03:02:36.680 Again, very different category here. Costco sells the items on its shelf faster than it needs to pay suppliers for them. 2063 03:02:37.152 --> 03:02:38.152 Yep. 2064 03:02:38.152 --> 03:02:46.440 Home Depot doesn't have that. They have what we mentioned earlier, where at any given time, about half of their inventory is financed by the suppliers who they haven't paid yet. 2065 03:02:47.315 --> 03:02:48.315 Yep. 2066 03:02:48.315 --> 03:03:03.630 One big thing we should say here: it is totally unbelievable that The Home Depot can turn their inventory 4.5 times per year, given that the goods that they carry are super high-dollar specialty, and they have 35,000 SKUs against Costco's 4,000. 2067 03:03:03.830 --> 03:03:06.470 Yep. In-store and then a million SKUs online. 2068 03:03:06.990 --> 03:03:10.990 Right. The inventory turn, given the nature of their business, is kind of unbelievable. 2069 03:03:11.320 --> 03:03:12.320 Yep. 2070 03:03:12.320 --> 03:03:28.770 At any given time, Home Depot has about $11 million of inventory tied up in a store, and Lowe's is about the same. The funny thing about whenever you look at any chart of Home Depot and Lowe's is used to be super different, now about the same. They've really converged toward each other over time. 2071 03:03:28.770 --> 03:03:29.626 Yep. 2072 03:03:29.626 --> 03:03:48.330 One thing we didn't talk about is private label: They started this slowly back in 1985, and it grew to become a really big part of their strategy to have house brands and brands that are exclusive to Home Depot. You may not realize this, but Behr paint- 2073 03:03:48.330 --> 03:03:48.830 Yep. 2074 03:03:48.830 --> 03:03:50.030 B-E-H-R, only available at Home Depot. Hampton Bay lighting and ceiling fans. 2075 03:03:50.570 --> 03:03:53.090 That was a Pat Farrah special, I think. 2076 03:03:53.090 --> 03:03:56.690 Yep. Glacier Bay fixtures. Ryobi. 2077 03:03:59.530 --> 03:04:00.030 Yep. Power tools. 2078 03:04:00.570 --> 03:04:03.149 Which is a very hot brand recently, especially lawn care. 2079 03:04:03.195 --> 03:04:04.824 Anything with lithium-ion batteries. 2080 03:04:04.869 --> 03:04:05.729 Ridgid power tools. 2081 03:04:05.774 --> 03:04:08.173 Anvil, HDX, Everbilt, EcoSmart lighting, Husky tools. 2082 03:04:08.218 --> 03:04:12.066 There's actually a lot of brands that I did not realize were exclusive to Home Depot. 2083 03:04:12.111 --> 03:04:16.230 They don't actually disclose now, but industry estimates are 15% to 25% of their sales are— 2084 03:04:24.273 --> 03:04:25.273 House brands. 2085 03:04:25.273 --> 03:04:26.120 House brands. 2086 03:04:26.120 --> 03:04:26.966 Yeah. 2087 03:04:26.966 --> 03:04:45.650 Again, nothing compared to the one-third of Costco sales that are Kirkland Signature. But still, that's a giant amount. I think house brands are getting more interesting, too, especially with electric tools. If you look at Ryobi, batteries create brand loyalty. 2088 03:04:47.042 --> 03:04:48.042 Right, right. 2089 03:04:48.050 --> 03:04:59.890 I'm actually in the other camp. I don't have Ryobi stuff. I have EGO. But I bought an EGO lawnmower, which gave me an EGO battery. So over the years, I now have an EGO— 2090 03:04:59.890 --> 03:05:00.760 Right. You develop switching costs. 2091 03:05:01.250 --> 03:05:16.440 Weed whacker, I have an EGO hedge trimmer, I have an EGO leaf blower. Which kind of, I think, puts me out of the Home Depot ecosystem for all that stuff. So imagine the thousands and thousands of dollars Home Depot could have gotten on me if I had first bought a Ryobi lawnmower. 2092 03:05:16.792 --> 03:05:17.792 Yep. 2093 03:05:17.792 --> 03:05:23.400 Talking about e-commerce, after all that discussion, it's still only about 15% of their sales are online. 2094 03:05:24.635 --> 03:05:25.635 Yep. 2095 03:05:25.635 --> 03:05:26.840 There's so much running room that they have there. 2096 03:05:27.295 --> 03:05:28.735 So much running room. 2097 03:05:28.735 --> 03:05:34.040 They have 472,000 employees and their market cap today is $350 billion. 2098 03:05:35.170 --> 03:05:50.660 And my favorite fact to sum up the state of the company and the business today is the CEO of Lowe's is a former Home Depot executive groomed under Frank Blake. 2099 03:05:51.493 --> 03:05:52.493 Really? 2100 03:05:52.493 --> 03:06:00.660 Yep. Today, the Home Depot executive CEO lineage tree runs across the street to Lowe's. 2101 03:06:00.870 --> 03:06:01.870 Wow. 2102 03:06:01.870 --> 03:06:08.900 Marvin Ellison was head of stores under Frank Blake and then went to take over J.C. Penney as the CEO of J.C. Penney. 2103 03:06:08.900 --> 03:06:09.746 Ah wow. 2104 03:06:09.746 --> 03:06:12.810 And then in 2018, became the CEO of Lowe's. 2105 03:06:12.810 --> 03:06:17.200 Such a deep bench that you created your competitor CEO. 2106 03:06:17.610 --> 03:06:19.850 Yep. I think Frank would be proud. 2107 03:06:21.110 --> 03:06:22.110 Yes. 2108 03:06:22.110 --> 03:06:29.400 So yeah, the Home Depot story, to put a bow on at least the original Avengers plus Frank. 2109 03:06:29.482 --> 03:06:40.704 So Bernie Marcus passed away in 2024 at age 95 after a long, incredible life, including becoming friends with Pitbull in his later years. 2110 03:06:40.786 --> 03:06:46.029 Pat Farrah is alive and retired in his 80s, keeps a low profile. 2111 03:06:46.111 --> 03:07:00.200 Arthur Blank, who we said we would come back to today, is 83 and as some of you know, is the owner of the Atlanta Falcons NFL franchise and several other sports franchises. 2112 03:07:00.282 --> 03:07:06.835 And Arthur has been one of the most influential NFL owners of the last 20 years. 2113 03:07:06.917 --> 03:07:11.996 He serves on basically all the critical NFL league committees. 2114 03:07:12.078 --> 03:07:27.970 He's been a big part of everything we talked about on the NFL episode and all the strategy decisions that have made the NFL the dominant force in American sports and really American media today. 2115 03:07:27.970 --> 03:07:35.350 For as much affiliation as he has with The Home Depot, I think he actually has more with the Falcons and the NFL now. 2116 03:07:35.350 --> 03:07:38.060 No question, he is much better known for the NFL. 2117 03:07:38.060 --> 03:07:42.350 Whenever you see an interview with him, it's Falcons owner, not Home Depot co-founder. 2118 03:07:42.420 --> 03:07:51.540 Yep. Yep. And we said he got the third golden horseshoe. So when he bought the Falcons in 2002— 2119 03:07:51.880 --> 03:07:55.440 Just one year after fully leaving Home Depot. 2120 03:07:55.440 --> 03:08:12.990 Yep. He paid the then crazy price of $545 million for the franchise. The Falcons today, by the latest, you know, public valuations that are bandied about out there, are worth $7 billion. 2121 03:08:13.810 --> 03:08:16.410 There's no way they're worth way more than that. 2122 03:08:16.410 --> 03:08:20.270 That vastly discounts the actual value of the Falcons. 2123 03:08:20.270 --> 03:08:21.330 The Seahawks just traded for 9.5— 2124 03:08:21.480 --> 03:08:24.760 Yep. Seahawks just agreed to a sale at $9.6 billion. 2125 03:08:25.410 --> 03:08:30.410 And since then, the Lakers at 12.5. 2126 03:08:30.410 --> 03:08:31.334 Yep, at 12.5. 2127 03:08:31.406 --> 03:08:40.014 Even just comparing the Falcons to the Seahawks, Atlanta is about a 30% bigger market than Seattle, the whole metro area. 2128 03:08:40.085 --> 03:08:49.406 And much more importantly, Atlanta has a much better stadium deal with Mercedes-Benz Stadium than the Seahawks do with Lumen Field. 2129 03:08:49.477 --> 03:09:06.481 So I think the Falcons are worth a minimum of $10 billion and arguably more than that, which I think combined with his other assets and his remaining Home Depot stake makes Arthur the wealthiest of all of the co-founders of The Home Depot. 2130 03:09:06.552 --> 03:09:11.745 Listeners, one update here from the Acquired editing bay after recording. 2131 03:09:11.817 --> 03:09:17.366 The Falcons just agreed to sell a minority stake at a $10.6 billion valuation. 2132 03:09:17.437 --> 03:09:20.070 So, uh, yes, we were on to something. 2133 03:09:20.070 --> 03:09:22.590 David, you nailed it. Now back to the show. 2134 03:09:22.590 --> 03:09:40.350 Continuing on, Frank Blake, who of course Bernie Marcus so violently reacted to as another "goddamn GE guy" when he got the news that he was taking over the company, today runs Bernie Marcus's foundation. 2135 03:09:40.350 --> 03:09:41.005 Amazing. 2136 03:09:41.005 --> 03:09:54.650 Which is about a $4 billion spend-down foundation. And Ken Langone, the GOAT, is about to turn 91 years old. Has never sold a share of Home Depot. His stake in the company is worth about $6 billion today. 2137 03:09:54.650 --> 03:10:11.850 I went and looked back at this, that little 5% he got at founding compounded 25% for nearly half a century. But you all know this, that the hard part is actually not about the stock picking. The hard part is in the holding. 2138 03:10:11.850 --> 03:10:12.693 Yes. 2139 03:10:12.693 --> 03:10:33.494 So in 1985, and this is a great Arvind stat, I mean, longtime listeners know Worldly Partners, their whole thing is figure out what it takes to build a business that can 100x as a public company and then figure out how to have the stomach to stay with those companies through the downturns, 2140 03:10:33.565 --> 03:10:38.802 because there are always massive drawdowns in these giant 100x companies. 2141 03:10:38.873 --> 03:10:49.417 I mean, you look at Nvidia, you just have to weather through them and know enough about the business to believe that it's going to make it through. 2142 03:10:49.489 --> 03:10:53.506 So in 1985, the stock was down 66%, and Ken didn't sell. 2143 03:10:53.578 --> 03:10:57.236 Then in 2002, down 70%, and he didn't sell a share. 2144 03:10:57.307 --> 03:11:04.552 Then 2008, the whole Nardelli situation, the housing bubble, and then again down 70%, he didn't sell. 2145 03:11:04.624 --> 03:11:17.320 In fact, if you bought the shares at their peak in '99, your investment would've been underwater for a full 12 years until the stock recovered in 2012, but Ken still never sold. 2146 03:11:18.560 --> 03:11:20.760 Yep. Hey, he's a loyal guy. 2147 03:11:20.760 --> 03:11:21.640 The value is in the holding. 2148 03:11:22.320 --> 03:11:22.820 Yep. 2149 03:11:22.893 --> 03:11:23.393 Yep. 2150 03:11:23.466 --> 03:11:49.605 And amazingly, Home Depot may not be Ken's largest position, because in 1977, before even getting involved with Home Depot, Ken sold a medical device company to Eli Lilly for stock and got at the time 2.5% of Eli Lilly's equity. 2151 03:11:49.719 --> 03:11:57.744 And of course, I believe Ken has also never sold a share of Eli Lilly. 2152 03:11:57.859 --> 03:12:02.560 But that is a story for 2027 on Acquired. 2153 03:12:02.560 --> 03:12:03.060 Yes, it is. 2154 03:12:03.111 --> 03:12:04.191 All right. Analysis? 2155 03:12:04.860 --> 03:12:14.460 Let's do it. So we did a lot of analysis along the way. I have one major topic that I want to discuss with you, and I think it's the perfect episode to— 2156 03:12:14.460 --> 03:12:19.600 Yeah, you foreshadowed this with me, but you didn't tell me what it is, so I'm itching here. 2157 03:12:19.600 --> 03:12:29.100 To do it on. Yeah. Okay. So we, we talk about this all the time. I can't actually remember if we've talked about it on Acquired, but I feel like we talk about it endlessly on our phone calls. The thing that made you special often holds you back. 2158 03:12:29.516 --> 03:12:30.516 Mm-hmm. 2159 03:12:30.516 --> 03:12:44.570 At scale. And I'm going to throw out a few examples that I actually highlighted when I was first reading the Built from Scratch book. We wanted to see the big stuff loaded in the front of the parking lot so everyone could see it. No, they definitely have loading docks- 2160 03:12:45.305 --> 03:12:46.305 Yeah. 2161 03:12:46.305 --> 03:12:48.007 -now in the back of the stores. 2162 03:12:48.062 --> 03:12:50.643 They talk about how merchandise is not fronted. 2163 03:12:50.697 --> 03:12:55.200 There's not someone walking around turning things, making sure they're facing out. 2164 03:12:55.255 --> 03:12:57.232 I walked around the store last week. 2165 03:12:57.287 --> 03:12:59.428 Most items I saw definitely facing out. 2166 03:12:59.483 --> 03:13:02.613 To be the most presentable and appealing to the customer. 2167 03:13:02.668 --> 03:13:05.359 There is no backdoor or discount for contractors. 2168 03:13:05.414 --> 03:13:08.654 We were priced right for everyone, not just a select group. 2169 03:13:08.709 --> 03:13:11.125 They definitely have a pro pricing desk now. 2170 03:13:11.180 --> 03:13:21.503 They even talk this big game about in the book how they, they did everyday low prices just like Walmart did to not appear duplicitous to customers and not have people time their purchases. 2171 03:13:21.558 --> 03:13:23.535 Well, I got an email three days ago. 2172 03:13:23.590 --> 03:13:26.720 It said daily deals with a big dollar sign through the S. 2173 03:13:26.774 --> 03:13:29.300 Free delivery online only while supplies last. 2174 03:13:29.355 --> 03:13:31.113 84 offers for you up to 30% off. 2175 03:13:31.167 --> 03:13:32.430 Select home essentials. 2176 03:13:32.485 --> 03:13:32.985 Shop now. 2177 03:13:33.590 --> 03:13:39.590 I was going to say, I'm pretty sure I've been to some Home Depot Memorial Day sales. 2178 03:13:39.590 --> 03:13:40.303 Definitely. 2179 03:13:40.368 --> 03:13:43.094 You won't see aisle numbers in our stores. 2180 03:13:43.159 --> 03:13:43.659 Why? 2181 03:13:43.659 --> 03:13:53.023 Because if we had aisle numbers, when a customer asked where they can find something, it would be very easy for our associates to say, aisle eight. 2182 03:13:53.088 --> 03:13:59.123 If there's no numbers, the employee has to say, let's take a walk and we'll find it together. 2183 03:13:59.188 --> 03:14:01.200 I was in Home Depot a week ago. 2184 03:14:01.265 --> 03:14:04.185 There were definitely aisle numbers for sure. 2185 03:14:04.250 --> 03:14:09.831 Same with decentralized decision-making or having manufacturers ship direct to stores. 2186 03:14:09.896 --> 03:14:11.064 These all changed. 2187 03:14:11.129 --> 03:14:12.881 So what is the lesson here? 2188 03:14:12.946 --> 03:14:18.203 I think there's two ways to look at it, and I'm curious how you think about this. 2189 03:14:18.268 --> 03:14:23.654 Way number one: Companies in general just get less special over time as they scale. 2190 03:14:23.719 --> 03:14:24.887 It's like entropy. 2191 03:14:24.952 --> 03:14:36.569 The world wants you to look more like every other company when you get big, and to stay special, like Costco, Rolex, Hermès, Vanguard, these are like companies that fight gravity. 2192 03:14:36.634 --> 03:14:43.642 It's like ridiculously hard to clutch to the thing that made you so special and not look like everyone else. 2193 03:14:43.707 --> 03:14:50.392 But the other way to look at it is, it's actually completely the correct thing to do in most instances. 2194 03:14:50.456 --> 03:15:00.321 All the special things that you did when you were little to get attention and be different, in most cases, that actually holds you back when you're big. 2195 03:15:00.386 --> 03:15:07.719 And it's easy to think we have to keep doing things that way because it's what let us succeed in the first place. 2196 03:15:07.784 --> 03:15:15.507 But you probably have completely different reasons of why you succeed now than you did compared to when you were small. 2197 03:15:15.507 --> 03:15:17.270 Yep. And also, usually the market changes, right? Like, case in point in this story, early Home Depot would never have fulfillment centers and distribution centers. Home Depot today would be toast without them. 2198 03:15:17.270 --> 03:15:17.872 Totally. 2199 03:15:17.947 --> 03:15:31.871 I think the second bullet point is actually the correct one, that it is the rare case where clutching your pearls and holding on to this founding insight is the way to succeed at scale. 2200 03:15:31.947 --> 03:15:43.764 I think a lot of the time your scale is the reason you can be successful at scale, and you have to make decisions that make sense for a giant scaled company. 2201 03:15:43.839 --> 03:16:00.850 And like Hermès hand stitching their Birkin bags, even at the scale that they are today, is like a one in a million example where it was— it's actually the right thing to hold on to some founding tactic that still works today. 2202 03:16:01.729 --> 03:16:02.729 Yep. 2203 03:16:02.729 --> 03:16:05.570 The founding values are important, but the founding tactics are probably not. 2204 03:16:05.970 --> 03:16:18.540 Yep. I totally agree. Well, speaking of embracing your scale and your scale economies, I think this is the perfect transition to powers for Home Depot. 2205 03:16:18.540 --> 03:16:19.040 Yes. 2206 03:16:19.040 --> 03:16:25.384 So listeners, this is the part where we do the Seven Powers framework from Hamilton Helmer's book of the same title, 2207 03:16:25.441 --> 03:16:35.906 where we try to figure out what does a company have that enables it to get persistent differential returns or to be more profitable than their nearest competitor on a sustainable basis? 2208 03:16:35.963 --> 03:16:43.883 And those seven are scale economies, network economies, counterpositioning, switching costs, branding, cornered resource, and process power. 2209 03:16:43.939 --> 03:16:49.936 Well, the first thing you'd have to believe is that Home Depot is sustainably more profitable than Lowe's. 2210 03:16:49.992 --> 03:16:52.990 They are, but it's not by as much as you would think. 2211 03:16:53.047 --> 03:16:53.547 I think— 2212 03:16:53.950 --> 03:16:57.390 Yep. Home Depot is marginally more profitable than Lowe's. 2213 03:16:57.740 --> 03:17:01.300 There's been a very dramatic convergence over time. 2214 03:17:01.300 --> 03:17:02.295 Yep. 2215 03:17:02.295 --> 03:17:08.055 The biggest one to me is scale economies. 2216 03:17:13.740 --> 03:17:14.240 Yeah, got to be. 2217 03:17:14.240 --> 03:17:18.240 I suspect it is because they can just negotiate for the very lowest prices with their suppliers, get the best manufacturers to do their house brands, that sort of thing, given their, what are they, 3x the scale of Lowe's? 2218 03:17:18.240 --> 03:17:18.968 Yep, about 3x. 2219 03:17:19.100 --> 03:17:24.680 That's the biggest thing now. Early on, I think it was definitely counterpositioning. 2220 03:17:25.172 --> 03:17:26.172 Definitely. 2221 03:17:26.172 --> 03:17:37.720 Lowe's doesn't get enough credit for the pivot in 1990 because think about all the things working against a traditional hardware store. You've got a smaller footprint, which means— 2222 03:17:37.720 --> 03:17:40.490 Yep. You have to change your entire real estate strategy. 2223 03:17:40.490 --> 03:17:40.680 Basically all your real estate is useless. 2224 03:17:41.400 --> 03:17:42.400 Yep. 2225 03:17:42.400 --> 03:17:43.560 You probably have to lower your gross margins. 2226 03:17:44.422 --> 03:17:45.422 Yep. 2227 03:17:45.422 --> 03:17:59.756 But you're not doing enough volume to justify the lower gross margins, so you really can't lower them unless you can like pull some of those magic beans that Home Depot had and go convince people that the ride is going to be so long and fruitful together that even though you're not large yet, 2228 03:17:59.805 --> 03:18:01.420 they should give you great deals. 2229 03:18:01.704 --> 03:18:02.704 Yep, yep. 2230 03:18:02.704 --> 03:18:07.060 It's unbelievable that any of those stores managed to adopt the Home Depot strategy. 2231 03:18:07.060 --> 03:18:07.889 Yep. 2232 03:18:07.889 --> 03:18:14.900 Oh, and they probably use distributors. So you have to blow up all of your existing supplier relationships to go direct to manufacturers. 2233 03:18:15.650 --> 03:18:16.730 Yep. Yep, yep. 2234 03:18:16.750 --> 03:18:25.910 Today, there's some switching costs with the house brands, but I'd say the switching costs are probably more for pros who have just integrated Home Depot into their workflow. 2235 03:18:25.910 --> 03:18:30.590 Yep. I think there's significant switching costs for pros for that reason. 2236 03:18:30.590 --> 03:18:32.550 Yeah. And probably branding for pros. 2237 03:18:32.550 --> 03:18:40.990 And I think the hardcore weekend warrior segment also prefers Home Depot, but that's for the same reason that the pros do. 2238 03:18:40.990 --> 03:18:42.560 Yep, I think so too. 2239 03:18:42.710 --> 03:18:53.610 I think there is still counterpositioning today. It's just very different. It's counterpositioning versus Amazon. With their logistics and fulfillment network. 2240 03:18:53.610 --> 03:18:54.146 Mm, good point. Yep. 2241 03:18:54.610 --> 03:19:09.290 Amazon is building out more specialty fulfillment and logistics, but it's going to be really hard for Amazon to build and match the scale of what Home Depot has in hardware. 2242 03:19:09.290 --> 03:19:10.132 Yep, I agree. 2243 03:19:10.450 --> 03:19:11.410 But yeah, I think that's it. 2244 03:19:11.410 --> 03:19:12.690 I think that's it too. 2245 03:19:12.850 --> 03:19:16.450 A lot of scale economies. 2246 03:19:17.090 --> 03:19:17.590 A lot of scale economies. 2247 03:19:17.590 --> 03:19:18.190 Which makes sense for a retailer. 2248 03:19:18.190 --> 03:19:18.690 Yes. 2249 03:19:18.690 --> 03:19:19.190 Yep. 2250 03:19:19.190 --> 03:19:19.690 Yes. 2251 03:19:19.690 --> 03:19:20.190 All right. 2252 03:19:20.256 --> 03:19:21.923 Quintessence on this one. 2253 03:19:21.990 --> 03:19:34.191 Listeners, David and I chatted before and we decided for this episode, the quintessence, the main takeaway, we want to try and answer the question, why did this work so uniquely well? 2254 03:19:34.258 --> 03:19:42.525 Home Depot is the only specialty retailer in the world that is in the same universe as Costco and Walmart and Amazon retail. 2255 03:19:42.592 --> 03:19:44.392 So how did it get that way? 2256 03:19:44.459 --> 03:19:50.860 David, it won't surprise you that I have a several-part answer/equation to answer this question. 2257 03:19:50.860 --> 03:19:53.430 Ooh, equation. All right. You've certainly piqued my interest. 2258 03:19:53.430 --> 03:19:57.180 Because it's basically several things multiplied together. 2259 03:19:57.180 --> 03:20:00.110 Mm. Does it include scale economies shared? 2260 03:20:00.110 --> 03:20:01.614 Well, see what you think. 2261 03:20:01.674 --> 03:20:06.246 So the magical thing at the core of all of this is, forget home improvement. 2262 03:20:06.306 --> 03:20:15.271 If you can get consumers excited about shopping in a warehouse with no frills, there is an insane number of downstream benefits that comes from that. 2263 03:20:15.331 --> 03:20:23.513 And we talked about them all episode, particularly as it relates to saving costs of not having to have a separate backroom and showroom. 2264 03:20:23.573 --> 03:20:28.025 Normally, that is a huge if, but home improvement is the perfect category. 2265 03:20:28.085 --> 03:20:32.297 I mean, you are delighted to go buy hammers and lumber in a warehouse. 2266 03:20:32.357 --> 03:20:33.380 So, not an issue. 2267 03:20:33.380 --> 03:20:34.209 Yep. 2268 03:20:34.209 --> 03:20:34.950 That's factor No. 2269 03:20:34.993 --> 03:20:35.493 1. 2270 03:20:35.493 --> 03:20:35.624 No. 2271 03:20:35.624 --> 03:20:35.997 2, giant market. 2272 03:20:36.040 --> 03:20:38.133 Today, the home improvement industry in the U.S. 2273 03:20:38.177 --> 03:20:38.875 is $300 billion. 2274 03:20:38.918 --> 03:20:40.663 For reference, a comparable market, U.S. 2275 03:20:40.706 --> 03:20:41.753 furniture, $180 billion. 2276 03:20:41.797 --> 03:20:45.286 So, even other large retail categories aren't playing in this large of a market. 2277 03:20:45.329 --> 03:20:47.204 3, they captured a huge part of the market. 2278 03:20:47.248 --> 03:20:50.344 Used to be super fragmented, but today Home Depot is 51% of the market. 2279 03:20:50.388 --> 03:20:51.609 Lowe's is 29% of the market. 2280 03:20:51.653 --> 03:20:54.269 The next highest is Menards with less than 5% of the market. 2281 03:20:54.313 --> 03:20:58.500 By 2026, Home Depot and Lowe's together represent 80% of the market for home improvement stores. 2282 03:21:14.071 --> 03:21:15.151 Yeah, that's wild. 2283 03:21:15.300 --> 03:21:23.020 The scale economies in this business, which were not apparent when it was a small fragmented thing, have actually led to winner-take-most. 2284 03:21:23.300 --> 03:21:37.250 Yep. And in fact, the narrative around Home Depot and the market that I think management itself would tell for many years is, "Hey, we're still a small part of the market." That's, yeah, not true anymore. 2285 03:21:37.250 --> 03:21:39.460 It depends how you define the market. But yeah, if you define it as home improvement stores— 2286 03:21:40.300 --> 03:21:41.300 Yep. 2287 03:21:41.300 --> 03:21:52.500 -they're 51%. And it makes sense that they should be able to command the cheapest prices from the manufacturers, and as long as they're good about passing that on to you, that should reflect in market share. 2288 03:21:52.500 --> 03:21:53.420 Yep. 2289 03:21:53.420 --> 03:22:18.070 Okay, so that's 3. 4, aging housing stock in the United States. I wanted to save this all the way for the end. Arvind did some amazing research on this one that the stat is perfect. The median age of the housing stock remained broadly stable at about 23 years old from 1940 all the way to 1980. 2290 03:22:18.584 --> 03:22:19.584 Mm-hmm. 2291 03:22:19.584 --> 03:22:22.470 Post-war construction, you kept adding new homes to the overall stock. 2292 03:22:23.254 --> 03:22:24.694 The American suburban build-out. 2293 03:22:24.790 --> 03:22:44.550 So the median age of a home stayed young since you were injecting so many new single-family homes. As of 1980, right when Home Depot was starting, that ended. The median age of a home by 1990 went up to a little bit higher, 25 years. Then by 2000, it was a 30-year-old home. 2294 03:22:44.897 --> 03:22:45.897 Mm-hmm. 2295 03:22:45.897 --> 03:23:01.830 Then by 2010, it was a 33-year-old home. Today, the age of the median home in the United States is 42 years old. This company was founded and IPO'd into a market of houses that were only getting older and needed ever more repairs. 2296 03:23:02.550 --> 03:23:13.510 And as the very proud owner of a 115-year-old house here in San Francisco, let me tell you, we have been very busy for the last few years maintaining our house. 2297 03:23:13.600 --> 03:23:27.720 This is one of the largest tailwinds we've ever studied in a business, and a very predictable one too. I mean, one thing I know for sure, if the age of the median home in the United States right now is old, in 5 years, it's also going to be old. 2298 03:23:27.720 --> 03:23:28.930 Yep, it's gonna be older. 2299 03:23:28.930 --> 03:23:34.973 So here's a market— this is a different way to slice the market, but another crazy stat. 2300 03:23:35.042 --> 03:23:35.935 In 1975, U.S. 2301 03:23:36.004 --> 03:23:40.674 consumers spent $28 billion on residential improvements and repairs. 2302 03:23:40.743 --> 03:23:44.795 That was right before the company was founded, $28 billion. 2303 03:23:44.863 --> 03:23:48.435 5 years later, that $28 billion grew to $47 billion. 2304 03:23:48.504 --> 03:23:51.525 Today, that number is $600 billion that U.S. 2305 03:23:51.594 --> 03:23:54.960 consumers spend on home improvements and repairs. 2306 03:23:54.960 --> 03:24:05.700 It's funny, we haven't really talked about this all episode, but like so many of the other great companies we cover on Acquired, Home Depot is also a story of impeccable market timing. 2307 03:24:06.650 --> 03:24:10.890 5, they massively grew/invented the do-it-yourself concept. 2308 03:24:10.962 --> 03:24:17.574 And 6, the pro market ended up having way more running room ahead of it than anyone thought. 2309 03:24:17.646 --> 03:24:30.295 And Home Depot smartly crafted these very flexible offerings and parallel ways that you could buy from them, have different business models, have different distribution models. 2310 03:24:30.367 --> 03:24:35.182 So if I had to answer the question, why did it get so freaking big? 2311 03:24:35.254 --> 03:24:53.510 It's the literal multiplied product of giant market, captured a huge part of that market with scale economies, aging housing stock, invented the DIY concept, at least at scale, and then sort of also consumed the pro market along with the consumer market. 2312 03:24:54.180 --> 03:24:54.680 Yep. 2313 03:24:54.680 --> 03:24:55.165 Yep. 2314 03:24:55.165 --> 03:24:56.122 I love it. 2315 03:24:56.219 --> 03:25:17.678 I think maybe the only thing I would add to that beautiful equation is it's also the product of the U.S.'s economic and property rights policy decisions over the last 100 or so years that have created this market for U.S. 2316 03:25:17.775 --> 03:25:25.350 housing where a huge portion of the households in America own their own homes. 2317 03:25:26.860 --> 03:25:29.260 Hmm. Single-family freestanding structure homes. 2318 03:25:29.260 --> 03:25:30.095 Yeah. 2319 03:25:30.095 --> 03:25:30.542 Yeah. 2320 03:25:30.542 --> 03:25:36.470 And that was a necessary precondition for the home improvement industry to get so large. If you either had— 2321 03:25:36.940 --> 03:25:39.100 And the U.S. finances it. 2322 03:25:39.100 --> 03:25:39.830 And the U.S. finances. Yeah, yeah. 2323 03:25:43.020 --> 03:25:48.970 I mean, the fact that we—These 30-year mortgages are the most insane financial instrument ever. So we let people own homes. Even though no one has anywhere near the capital to own these homes. 2324 03:25:48.970 --> 03:25:53.110 And the strong tax incentives to have mortgages to own homes, etc., etc. 2325 03:25:53.339 --> 03:25:54.339 Yes. 2326 03:25:54.339 --> 03:25:58.478 If you either had not as high ownership rates in the U.S. 2327 03:25:58.551 --> 03:26:10.389 or like China, if you had a just fundamentally different kind of housing stock that people own, because actually the Chinese housing market is larger than the U.S. 2328 03:26:10.462 --> 03:26:16.200 housing market, but it's a terrible market for home improvement and Home Depot. 2329 03:26:16.200 --> 03:26:17.252 Yeah. Yep. Good point. 2330 03:26:17.480 --> 03:26:18.520 Yep. That's what I got. 2331 03:26:18.540 --> 03:26:21.660 That's a good ad. All right. That's our quintessence, ladies and gentlemen. 2332 03:26:22.130 --> 03:26:24.450 This was a fun one. A lot of characters along the way. 2333 03:26:25.976 --> 03:26:27.416 A lot of characters. 2334 03:26:27.416 --> 03:26:28.698 Carve-outs, what you got? 2335 03:26:28.698 --> 03:26:44.390 Carve-outs. All right, listeners, this is where we recommend things that have nothing to do with the episode that we've just been enjoying recently. One, for me, is Silo season 3. I think I've probably made a carve-out of Silo season 1 and 2 in the past. 2336 03:26:44.390 --> 03:26:44.804 I think so. 2337 03:26:44.804 --> 03:26:45.693 3 is— 2338 03:26:45.693 --> 03:26:47.500 And I might have done the books. The books are great. 2339 03:26:47.500 --> 03:27:01.470 I think you did the books. I've never read the books, and the books have dramatic spoilers for the show, so please don't tell me anything about the books. It's really good. The acting has always been great. The directing has always been great. The story has always been great. 2340 03:27:01.470 --> 03:27:02.220 Apple TV makes good stuff. 2341 03:27:02.880 --> 03:27:11.440 Yeah, I just can never wait until Friday night, and not for all the normal reasons to wait for Friday night, it's because that's when the new Silo drops. 2342 03:27:11.440 --> 03:27:11.940 Love it. 2343 03:27:11.940 --> 03:27:12.840 So I can't recommend it enough. Great, great sci-fi. 2344 03:27:12.840 --> 03:27:13.340 Throwback to appointment viewing. 2345 03:27:14.800 --> 03:27:19.360 Yes, my second one is also a season 3 of a TV show: Tires. 2346 03:27:19.980 --> 03:27:23.060 Oh yeah, this is with Shane Gillis, right? 2347 03:27:23.060 --> 03:27:23.560 Yes. 2348 03:27:23.560 --> 03:27:24.780 Oh my God, it's so funny. 2349 03:27:24.838 --> 03:27:29.713 I try to watch it at night after we put my son to bed, and I'm just laughing so hard. 2350 03:27:29.770 --> 03:27:31.892 I'm always afraid I'm gonna wake him. 2351 03:27:31.950 --> 03:27:33.211 It's just so, so good. 2352 03:27:33.269 --> 03:27:43.593 I'm so glad they did a season 3 because Shane got very famous after they did season 1 and 2, and I was like, oh, this is—this low-budget thing that he did with his friends is done. 2353 03:27:43.650 --> 03:27:47.378 But it's back, the whole cast is back, and it's better than ever. 2354 03:27:47.436 --> 03:27:48.870 So I highly recommend it. 2355 03:27:49.808 --> 03:27:50.808 Nice, nice. 2356 03:27:50.808 --> 03:27:53.587 And my third one is the Ratio 8 coffee maker. 2357 03:27:53.648 --> 03:27:56.860 It is an all-glass, ceramic, and metal coffee maker. 2358 03:27:56.921 --> 03:28:07.235 And I just realized how dumb it was that for most of my life I've been pouring boiling hot water through some piece of plastic before drinking my coffee every morning. 2359 03:28:07.297 --> 03:28:16.128 And so the Ratio 8 is a—first of all, it's aesthetically a very beautiful machine, but it's basically a high-end precision automated pour-over. 2360 03:28:16.190 --> 03:28:18.351 We'll link to it in the show notes. 2361 03:28:18.413 --> 03:28:34.100 It makes delicious coffee, especially when paired with—there's another service I've been trying called Trade Coffee, where on a schedule, they deliver a different coffee for you to try every two weeks or one week or whatever you want the frequency to be. 2362 03:28:34.226 --> 03:28:35.226 Mm. 2363 03:28:35.226 --> 03:28:43.020 And I oscillate decaf and regular so that I can mix them and make half-caf coffee in the mornings. 2364 03:28:43.020 --> 03:28:43.743 Oh, nice, nice. 2365 03:28:43.940 --> 03:28:45.980 Yeah, that's all I got. 2366 03:28:45.980 --> 03:28:52.610 Nice. Well, I am going to surprise you. I think I have two carve-outs, one of which is a TV show and one of which is a movie. 2367 03:28:52.610 --> 03:28:53.778 A movie, David Rosenthal. 2368 03:28:53.778 --> 03:28:56.143 I know, watching movies and TV shows. 2369 03:28:56.207 --> 03:28:59.467 This is not my normal outside of Acquired behavior. 2370 03:28:59.531 --> 03:29:02.855 The first one is the TV show Quarterback on Netflix. 2371 03:29:02.919 --> 03:29:07.714 It's August here as we're recording this, and I am so starved for football. 2372 03:29:07.778 --> 03:29:11.038 Man, Netflix does such a good job with Quarterback. 2373 03:29:11.102 --> 03:29:19.988 It drops right at the right time, right at the start of training camp when you're desperately in need of some football content this season. 2374 03:29:20.052 --> 03:29:22.161 Cam Ward of the Tennessee Titans. 2375 03:29:22.225 --> 03:29:31.047 I didn't watch a lot of Titans games last season, and so I didn't know much about Cam Ward, former number one pick last year in the draft. 2376 03:29:31.111 --> 03:29:32.517 I'm excited about him. 2377 03:29:32.581 --> 03:29:35.970 I think he can be a star in the league going forward. 2378 03:29:35.970 --> 03:29:38.210 Sweet. All right, Quarterback on Netflix. 2379 03:29:38.210 --> 03:29:53.870 And then my second carve-out is the old Jerry Seinfeld movie Comedian, which I watched upon reading a tweet from a friend of the show, Jeremy Jaffan. This movie is so fun. It follows Jerry right after Seinfeld, the show ended. 2380 03:30:06.762 --> 03:30:07.762 Oh. 2381 03:30:07.762 --> 03:30:14.820 When he goes back to the clubs in New York, to the comedy clubs, and builds up a whole new stand-up routine completely from scratch. 2382 03:30:14.874 --> 03:30:25.301 And it's like he's Jerry Seinfeld right after the show ends—the most famous person, you know, maybe in all of New York—and he's just going to the clubs, trying out new material, and he's bombing. 2383 03:30:25.355 --> 03:30:25.943 It's great. 2384 03:30:25.997 --> 03:30:27.120 It's so fun to watch. 2385 03:30:27.120 --> 03:30:30.430 Oh, sweet. I gotta check it out. Do you know my favorite game when I go stay at a hotel? 2386 03:30:30.430 --> 03:30:31.284 Oh, no. 2387 03:30:31.284 --> 03:30:47.250 I turn on the TV and I try to see if there is an hour where a Seinfeld rerun is not on any channel. The syndication rights are so distributed that I feel like Seinfeld, the show, is on 24/7 somewhere. 2388 03:30:47.490 --> 03:30:50.490 It's gotta be. And on Netflix now. 2389 03:30:50.490 --> 03:30:50.990 Yeah. 2390 03:30:50.990 --> 03:30:51.346 Yep. 2391 03:30:51.346 --> 03:30:51.736 All right. 2392 03:30:51.796 --> 03:30:55.774 Well, we have some thank-yous for folks who helped us this episode. 2393 03:30:55.833 --> 03:31:01.177 First, I've been talking about him all episode, but Arvind Navaratnam at Worldly Partners. 2394 03:31:01.236 --> 03:31:03.848 He always does these great 100-page studies. 2395 03:31:03.908 --> 03:31:14.595 And this episode is particularly in his wheelhouse because in his quest to find the next 100x company to invest in and hold for decades—decades—he does this on-the-ground research. 2396 03:31:14.654 --> 03:31:31.279 He goes to stores and he employs someone full-time at Worldly Partners who is traveling the country, walking through Home Depot, Lowe's, Costco, other stores, doing price comparisons and actually generating real first-party data on how do these stores evolve and change over time, 2397 03:31:31.338 --> 03:31:35.079 how do their prices change, and how does the experience change. 2398 03:31:35.138 --> 03:31:38.047 His write-up on this one is particularly awesome. 2399 03:31:38.107 --> 03:31:40.719 You can check it out at worldlypartners.com. 2400 03:31:40.778 --> 03:31:42.856 All of his other studies are there. 2401 03:31:42.916 --> 03:31:47.072 This time, Arvind teaches a class for HBS and Boston College students. 2402 03:31:47.131 --> 03:31:48.616 Usually, they're private. 2403 03:31:48.675 --> 03:31:55.206 He interviewed Ken Langone, and he has agreed to make that video public alongside the release of this episode. 2404 03:31:55.265 --> 03:31:58.293 He's also going to put that on worldlypartners.com. 2405 03:31:58.353 --> 03:32:01.381 Thank you so much to Arvind for your research help. 2406 03:32:01.440 --> 03:32:02.450 Thank you to Ken. 2407 03:32:02.960 --> 03:32:05.080 Yeah, so fun to talk to him. 2408 03:32:05.080 --> 03:32:06.085 Great storyteller. 2409 03:32:06.141 --> 03:32:08.320 And to friend of the show, Frank Blake. 2410 03:32:08.376 --> 03:32:12.230 Frank is just the most ridiculously humble person you will ever meet. 2411 03:32:12.286 --> 03:32:18.543 Ken would insist that he saved the company and it would cease to exist if not for Frank coming in and saving it. 2412 03:32:18.599 --> 03:32:21.449 Frank, of course, says that is absolutely not true. 2413 03:32:21.504 --> 03:32:24.410 And it turns out it wasn't that dire of a situation. 2414 03:32:24.410 --> 03:32:29.530 I think I'm with Ken in his opinion on this one. Yes. Thanks, Frank. 2415 03:32:29.530 --> 03:32:30.300 Yep. 2416 03:32:30.300 --> 03:32:42.770 And thanks to Russ and Dylan Murphy, my contractors, for being my partner in building and restoring and maintaining my 115-year-old house here in San Francisco and helping us with this episode. 2417 03:32:42.770 --> 03:32:43.270 Yes. 2418 03:32:43.270 --> 03:32:46.060 A huge thank you to our partners this season. 2419 03:32:46.126 --> 03:32:48.166 Sierra, our presenting partner. 2420 03:32:48.232 --> 03:32:54.286 Sierra helps the great companies of the world build better, more human customer experiences. 2421 03:32:54.352 --> 03:32:56.063 That's sierra.ai/acquired. 2422 03:32:56.129 --> 03:32:56.787 To WorkOS. 2423 03:32:56.853 --> 03:33:01.328 Start selling to enterprise customers with just a few lines of code. 2424 03:33:01.393 --> 03:33:04.684 Build authentication in minutes instead of months. 2425 03:33:04.750 --> 03:33:05.473 workos.com. 2426 03:33:05.539 --> 03:33:06.395 To Anthropic. 2427 03:33:06.461 --> 03:33:14.423 Claude is a truly incredible AI product that thinks with you, just like it thought with me in preparing for this episode. 2428 03:33:14.489 --> 03:33:16.200 That's claude.ai/acquired. 2429 03:33:16.266 --> 03:33:16.924 To Sentry. 2430 03:33:16.990 --> 03:33:22.189 Application monitoring software considered "not bad" by millions of developers. 2431 03:33:22.255 --> 03:33:23.505 Sentry.io/acquired. 2432 03:33:23.571 --> 03:33:35.351 And if you're in the Bay Area on September 17th, just a few days after this episode comes out, you should join us for the official 2026 Acquired Meetup with our friends at Sentry. 2433 03:33:35.416 --> 03:33:37.127 That's acquired.fm/meetup. 2434 03:33:37.193 --> 03:33:45.485 If you like this episode, go check out our other episodes on great retailers, Costco, Walmart, Trader Joe's, IKEA, and Amazon. 2435 03:33:45.551 --> 03:33:49.500 We're really creating kind of this retail through line here. 2436 03:33:49.500 --> 03:33:50.000 I know. 2437 03:33:50.000 --> 03:33:50.500 The great American retailers. 2438 03:33:50.500 --> 03:33:56.760 We might have to make some t-shirts with some more saving, more doing slogans on it. 2439 03:33:56.760 --> 03:33:57.260 That's right. 2440 03:33:57.260 --> 03:33:58.060 And you can do it. We can help. 2441 03:33:58.060 --> 03:33:58.814 That's right. 2442 03:33:58.872 --> 03:34:05.080 And for all of you who have been asking for visuals with our episodes, you can check out our companion PDF. 2443 03:34:05.138 --> 03:34:09.722 It will come out the day that this episode drops and it will improve over time. 2444 03:34:09.780 --> 03:34:13.435 So if you checked out our Disney PDF from part one or Part Two. 2445 03:34:13.493 --> 03:34:17.671 Both of those have been dramatically improved since those first dropped. 2446 03:34:17.729 --> 03:34:23.009 That's library.acquired.fm for all those tables, charts, and illustrations of key concepts. 2447 03:34:23.067 --> 03:34:25.272 Join the email list acquired.fm/email. 2448 03:34:25.330 --> 03:34:32.466 It's where we send out behind-the-scenes photos from research, past episode corrections, and vote on future episode topics. 2449 03:34:32.524 --> 03:34:38.036 And come talk about this with David, me, and the whole community in Slack at acquired.fm/slack. 2450 03:34:38.094 --> 03:34:40.880 Listeners, with that, we will see you next time. 2451 03:34:41.050 --> 03:34:41.850 We'll see you next time. 2452 03:34:41.850 --> 03:34:48.560 [Music]