Home Depot

0:00I'm sorry, I got tripped up. You used power tools. David Rosenthal. Haha. I built this whole door. I got the the Blake door from Home Depot. I had to cut it down to size to fit a non-standard sized door opening in my studio. I drilled the door handle. I put the door knob on myself. It all worked great. We got to get you to the pro desk. Yeah. And it's been part of every acquired episode since. All right. Let's do this. Who got the truth? Is it you? Is it you? Is it you? Who got the truth now? Is it you? Is it you? Is it you? Sit me down. Say it straight. Another story on the way. Who got the truth? Welcome to the Fall 2026 season of acquired. The podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Rosenthal. 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,

1:05but not really like an important company to the world. But I was wrong. And the stats are large. Yes. Oh, right. It is the world's largest specialty retailer. The only retailers larger are general, not in a specific vertical like home improvement. So think Walmart or Amazon or Costco, those are bigger. But the other vertical ones are not. In fact, Home Depot is the 45th most valuable publicly traded company in the world period with a $350 billion market cap. So that's more valuable than Netflix or Alibaba or Goldman Sachs or LVMH or Disney that we discovered. Yes. Which is wild because unlike all of those other companies, Home Depot is only in North America. Yes. Home improvement is just a massive category, way, way bigger than I realized. So here's a fun stat. Home Depot went public in 1981, one year after Apple Computer.

2:09And astonishingly, if you put a $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. And if you reinvested the dividends that it paid out, it has compounded at nearly 25% per year for 45 years. I mean, imagine if your stock portfolio did that. Yeah. Home Depot is an all-timer. I kind of can't believe we haven't done this episode yet. 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 today. 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 strategy or at least it was. Yeah. And listeners, if you're trying to contextualize, well, 45 years is a long time. How does that $17 million stack up?

3:11Ben and David love their index funds. You know, we love Vanguard here. If you had bought the S&P 500 with that same $1,000 instead of $17 million today, you would have $170,000. Well, today we will tell the story of how it happened. 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, which seemed risky at best, unthinkable, maybe. And we'll try to answer the question, how and why did that idea become so large? Of course, it's bigger than lows, but also IKEA, trader Joe's. It's bigger than nearly all dedicated grocery store chains. And today, they employ an astonishing 470,000 people. That's more than any big tech company in the US, except for Amazon,

4:12more than any bank in the world, more than almost every car company, hotel chain, more employees than any restaurant chain, also, including Starbucks. So listeners, this is the story of Home Depot. Woo, let's go. So for all of you who have been asking for visuals to go with our episodes, you are in luck. We are making our companion PDF a regular thing now. So you can click the link in the show notes or go to library dot acquire dot FM to get access to all the charts and tables and illustrations from key concepts in this episode. You can join the email list at acquired dot FM slash email. 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 that is acquired dot FM slash email. Join the slack. Come discuss it with David and I at acquired dot FM slash slack. Before we dive in, we want to thank our brand new presenting partner, Sierra. Yes, Sierra helps the great companies of the world to build better customer experiences and drive

5:13stronger business outcomes with AI. And we are so excited to be working with them. 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. So the story of Home Depot is kind of like the acquired version of like a 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. They provide extreme value propositions to the American consumer. Yes, yes. So we start first with Home Depot's founding CEO, Bernie Marcus. Bernie comes from a poor family of Jewish immigrants in the rough neighborhoods of Newark, New Jersey in the 1930s during the Depression. Bernie was actually in a gang as a kid, which I discovered hilariously reading Bernie's book, Kick Up Some Dust, the forward of which was written by his good friend, the rapper Pitbull.

6:19Like, amazingly, the two of them like bonded and became good friends later in Bernie's life. Yeah, when you sent me that book cover, I had a serious double take. So Bernie, despite his 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. He goes to Rutgers down the road from Newark, and they're in New Jersey for college. And his dream is to go on to medical school and become a psychiatrist. That doesn't work out because his family doesn't have any money to send him to medical school. So instead, he becomes a pharmacist. That quickly leads him to becoming a concessionaire in a New York area discount store, concessionaire like a store within a store. This begins Bernie's retail education. And from there, he would go on to join the New York area discount chain two guys. Ultimately, this leads him a couple of years later in his 30s to an executive role at the

7:20Dailin Corporation, which was a retail conglomerate based in Los Angeles with a whole bunch of different stores. So we're now here in the 1960s. This is an exciting time for retail. All sorts of new concepts are popping up all over the country to replace the outdated general store model. They're shopping malls being built everywhere in the suburbs across America here in the post-war period. Sears is building big anchor tenant stores attached to these new shopping malls. Kmart is rising across the country as a discounter. Sam Walton and Walmart are starting to emerge down in the rural south and they're building a powerhouse. The landscape in retail is dynamic. The post-war 1960s baby boom American suburbs are alive and well with their shopping. And Dailin was this holding company that operated almost like, I don't know, like a portfolio, were an index fund on all these retail concepts. So they would go out and acquire small chains of all of these types of post-general store concepts

8:27serving the American suburbs. So yeah, they had pharmacies, hardware stores, clothing, home furnishing, discounters, you name it. 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. Yep. Yep. So Bernie is now a corporate executive at Dailin. He has no equity in the company. He's just a employee, but it's a stable job. He's doing well. He's certainly moved up in the world from his upbringings. And then he gets an opportunity. In 1972, Dailin makes Bernie the CEO of its handy-dannned subsidiary, which is a chain of hardware stores that's also based there in Los Angeles. So again, he has no equity. He's the CEO, but he's just an employee. And also he comes at it from the retail side, not the hardware expertise side. This is kind of my favorite part of this whole story is of the people who would go

9:28on to found Home Depot. None of them are like general contractors or grew up in the hammer manufacturing business. It's people who just knew new retail. These are retail guys, exactly. Well, retail and finance guys as we'll see. Yes. So once Bernie becomes CEO of handy-dannned, he quickly recruits another younger company man from within the Dailin Empire, a financial whiz named Arthur Blank to come over to LA and join him as his CFO at handy-dannned. And Bernie, you know, he knows himself as well. See, he is an incredible retailer, an incredible CEO, an incredible leader, but his weak spot is finance. Now you might be wondering, oh, wait a minute, if handy-dann is a subsidiary of Dailin. Why does it have its own CEO, CFO management team? Because handy-dann was also a standalone publicly traded company. And Dailin didn't own all of it, right? It just owned the majority of the

10:32shares. Yeah. So Dailin 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% so that the parent company could still consolidate the divisions, financials on their books. 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. Yep. Yep. 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. Actually, in reality, it didn't work at all. In practice, most of these publicly traded little divisional stubs traded at a further discount to the parent companies already discounted holding company valuation. So why is Dailin doing all this

11:38financial engineering? I thought we just said that times are great for retail. The American suburbs are booming, et cetera, et cetera. Well, they were in the 60s, but now here in the 70s, retail is struggling. So we've talked about this period on a whole bunch of other episodes on acquired Vanguard most recently, but the 70s were brutal in America. There's the oil crises that hit, their stagflation, federal interest rates go up into the teens. Like the teens, can you imagine? Yeah, they briefly even hit like 18, 19%. 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, et cetera. This is really bad for suburban retail. Shopping just dries up. And Dailin starts totally sucking wind, except for handy dand. Right, it's like this crown jewel within an otherwise withering empire, right? Right. And it's all thanks to Bernie and Arthur. Because when

12:43they take over, as you said, they're not coming from the hardware business. These guys are seasoned retailers from other parts of the retail sector. Hardware, home improvement as a concept wasn't really a term yet. The hardware store landscape at the time was this patchwork of clubby regional, not very sophisticated and not very good businesses. And they've got limited assortment. They don't stock that many things. The market's super fragmented. And importantly, you couldn't actually go to one place to get everything. You'd go to some store for lumber than a different store to get tools and then another store for plumbing supplies, electrical products, lawn and garden, was sort of its own entire thing. These are all little specialty stores. Yeah. And so like if you're consumer, if you're a suburban homeowner, and you've got a project that you want to work on yourself over the weekends, which actually wasn't very many people that sort of do it yourself for wasn't

13:43really a thing yet. Totally. 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 retell your bathroom or whatever you wanted to do around your house. You would walk into these little hardware stores and a good look, you know. So the biggest operator in the industry at the time was a company out of North Carolina called Lowe's. You might have heard of it. Yes. Lowe's back then, despite being the biggest player in the hardware sector, was not the Lowe's that you think of today. It had evolved out of the general store concept. It was all the small store footprints that we're talking about, like a fifth or less of the size of what you know is Lowe's today. They're mostly in strip malls. And the whole company Lowe's is only doing about 150 million in annual revenue total. And my understanding of the store concept then is it's basically a hardware store or sort of a small showroom, not, you know, concrete

14:45floors and giant ceilings attached to a lumber yard. To get a lumber yard, a nice little showroom, that's kind of it. The craziest thing about Lowe's is it was founded in 1921. Yeah, as a general store. Yeah. Right. By this point in history, it's already 50 years old before the Home Depot has even been founded. Yep. 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. These guys are much more competitive, much more sophisticated than the whole rest of the industry. These guys are sharp operators. They've done concessions. They've done discounting. They've done pharmacy. Yeah, there's students of retail. Yep. 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. But that still doesn't save Dailyen, the parent company, because they're so weighed down by their other divisions that they file for bankruptcy

15:47in 1975. And they bring in a noted turnaround artist as the CEO to turn it around. We'll come back to that in a minute. 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. This is your third superhero. You've got Bernie Marcus, the retailer. You've got Arthur Blank, the sort of finance and operations genius. And now you've got Ken Langone in New York City. Yep. And Ken, I think a lot of listeners will probably know who Ken Langone is. He is basically the goat investment banker. 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. People today remember Ross Perot as like, oh yeah, that guy who ran for president in the 90s. But he was kind of like Larry Ellison of his time. EDS was this giant company.

16:52Yeah. And I was trying to think about the best way to frame EDS. Maybe like a palantir. They were very involved in government contracts. I mean, Ross Perot's history. We got to do a whole Ross Perot episode at some point. But from his time at IBM, he kind of saw people are buying all of these mainframes. But they have no idea how to use them. I actually have to start using the top salesman at IBM before starting the company. A deployment and service arm for enterprise computing and government computing. And that sort of let 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 magnet at the time. Totally and based in Plano, Texas. EDS has this long history. They ultimately get acquired by Hula Packard and become HP enterprise services. So yeah, bent exactly what you're talking about data centers, mainframes, etc, etc. 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

17:59to every customer and every entrepreneur that he works with. He never sells a share of almost every company he's ever been involved in. We're going to talk about the almost in just a minute. So all right. Back here, we're in the mid 1970s after the EDS IPO, Ken has just taken public Philadelphia based hardware chain, one of these other regional players, a company called Panorama. And like everyone else, they've fallen on hard times. 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? Like what does best look like in this industry? Because it should be a good business. I mean, we spoil it now, David. We spend some time with Ken prepping for this episode. And his comment was, God is good as it pertains to hardware and home improvement. It's the gift that keeps on giving. We've built tons and tons of houses in America and they need just an endless supply of stuff. It's almost like a subscription of recurring revenue if you're in this business

19:04to keep working on a home as the weather and time acts on it. And market and you know, whatever changes, the rule of thumb is that homeowners need to reinvest about 1% of the houses then market value into their home every year, just in maintenance. Before you get into improvement. Right. But in post war America, they were building more and more houses every year. The old houses they built were getting old. It's a great business to be in or it should have been anyway. Should have been should have been. So Ken says to the CEO of this company and guy named Gary, he says, Gary, Gary, who's the best operator here in the business and Gary? So easy. Handy Dan out in California. Those guys are the best. And Ken's like, handy Dan, what are you talking about? I know Wall Street. That company's going bankrupt. Gary says, no, no, no, no, no. Their parent, Daelin, is going bankrupt. The handy Dan is doing great. So Ken says, okay, hang on. Let me go get my Moody's Manual because this is how you check the company financials back. He pulls out his Moody's Manual, his little bucket, he's going through,

20:07he finds handy Dan, he looks at the financials. Holy crap. You're right. This is a great business. But yeah, it's trading for $3 a share. And if Moody's is right, this company is going to earn post tax net income of a buck 50 a share this year. So this company is trading it two years of post tax earnings. So Ken's like, something has to be wrong. Is there like an accounting problem? Is there some trick in the reporting or gimmick here that I don't understand? I got to get into this. So he says, Gary, let's get handy Dan on the phone. Like right now, I got to talk to these guys. So Gary calls up Bernie, gets him on the phone and Ken's like, Mr. Marcus, are your financial statements true? Bernie says, yeah, yeah, sure business is doing great. It's the craziest thing that Wall Street doesn't appreciate us. Ken says, Mr. Marcus, would you mind if I come out and see you in person? Bernie says, yeah, sure, fine. Ken says, great.

21:10I'm booking my flight right now. I'll be there for lunch tomorrow. Bernie's in Los Angeles. Ken is currently in Philadelphia. This is classic Ken Lengone. 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. Right. If you're this 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 in going to fly across the country right away. It's like, okay, I really got to watch what I say to this guy. Yeah. Yeah. So they have lunch and quickly becomes apparent that Bernie is a gifted retail operator. Companies doing great. The financial statements are all correct. So Ken says to Bernie, do you have any equity in this company? Bernie says, no, just an employee, you know, this is a daily subsidiary even though we're publicly traded. Ken says, okay, I'm going to go back to New York tonight. And tomorrow, I'm going to start buying every single

22:13publicly traded share of your company that I can get my hands on. 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. Now Bernie, this is exposing his weakness here with finance. 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. And negotiating. Yeah. In some ways, he over trusts people to. He's weirdly risk averse in this area. So he says, oh, well, I can't do that. That's too risky. I've got a family. Ken's like, Bernie, Mr. Marcus, the stock market is based on supply and demand. I have enough money. I'm going to buy every single share that exists of your company. The price will go up. There's no risk. But he says, no, no, I can't do it. And interestingly, when I read this, I was thinking, is this insider trading? I don't think it would have been at the time since Ken is an outsider,

23:16just telling Bernie that he's going to buy the stock. So the information is actually market information, not inside information, originating from the company itself. And Bernie's lawyer is, of course, sitting there listening to make sure. Yep. So Ken says, all right. All right. Yeah. 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. All right. So I looked this up, David, in the book, Built From Scratch, which is the awesome book that is kind of the canonical home depot story written by Bernie and Arthur. And so here's how it goes. 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. So Ken calls the priests, like he called up every other shareholder. And when Ken asks the church's financial officer, who is also a priest,

24:19hey, will you sell your shares to me? The priest pauses and he says, Langone, is that an Italian name? And he goes, yes. And he goes, and are you Catholic? And Ken goes, yes, I am. And the priest says, then under the pain of hell, tell me what I should do. And Ken smiles and laughs and says, well, on these terms, you should keep it. Don't sell. You said, hang on to your shares. 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. And improbably, Ken, going out and buying these shares, leads to Bernie and Arthur getting fired and then founding the Home Depot. Which is in no way Ken's fault, but it is crazy that this is the first domino to tick over and

25:24that series of that. This is how Ken Langone becomes a co-founder of the Home Depot is he gets his buddies Bernie and Arthur fired accidentally. Accidentally. 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. Yes. So on acquired, we study the leaders of the greatest companies in history. And today, all of those folks are wrestling with basically the same question, what is my competitive advantage when everyone has access to the same intelligence? And what is the right way to turn AI into revenue for our company? Yep. And that's where Sierra comes in. First, your customer relationships are your competitive advantage. When you deploy Sierra's AI agents, those relationships get deeper with every customer interaction, generating insights that compound over time. Second, you should pay for outcomes, not tokens, like an insurance claim paid or a sale closed or a customer retained.

26:25Sierra is already the leading platform for customer service agents, everything from account sign-up to troubleshooting and subscription management. They work with 40% of the Fortune 50, one in three of the world's leading banks, five out of the 10 largest healthcare companies. And now, their agents can handle complex workflows that generate revenue as well. These are things that can take weeks or months and they span across voice, chat, email, WhatsApp. I mean, really complex things like appointment booking or prior authorizations in healthcare or refinancing alone in financial services. 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. Great brands have a recognizable character to them. Acquired, for example, has a very different communication tone than, say, a hospital. And, you know, a luxury brand would have yet a completely different one.

27:29And the agents that your company should do. How an agent speaks impacts customer trust. Sierra told us that a customer there is 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's solved customers problems increased by almost 50%. Because it had a persona. Yes, wild. So to find out how you can build stand out customer experiences that grow your business with AI, visit Sierra.ai slash acquired and just tell them that Ben and David sent you. 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? Yes. So Ken is essentially like de facto board member now of handy dan. And he just loves everything that the guys are doing. He's super encouraging. He starts flying out to the west coast and then around the country as Bernie and Arthur open new handy dan stores. Ken basically becomes part of

28:34the crew, which is very different than the new daylin CEO's approach to managing Bernie and handy dan and quite bothersome. This guy who's the minority shareholder is sort of like closer with your management team than you are. Right. That you consider one of your divisions in your company. Right. So on one of Ken's trips out to LA, Bernie says, hey, you should probably go see our actual CEO at daylin. That guy named sandy sigiloff and you know build a relationship with him. Now sigiloff, as we said, was brought in to turn around the company out of bankruptcy. And he's a bad dude. He's exactly who you would imagine is the bankruptcy value recovery artist here. Shall we say? Yeah. Didn't he give himself a nickname? Was it Ming the merciless? Yes, after the villain in the Flash Gordon comics series and he called himself that because of how

29:37merciless he was to all the employees of these companies that he would slash and burn and get rid of. So Ken realizes right away that this sigiloff guy is bad news, but he's got this close to 19% equity position in handy dan. It's like, I can't walk all over me. All this leads to Ben as you predicted quite a lot of conflict between the two of these characters. And finally sigiloff says, all right, Ken, I want you out of here. I want you gone. What do I have to do to just buy back this 19% stake that you have? And Ken loves a good game here. Okay, so Ken has no intention of selling here. Well, let's just first say that. He is now in it with Bernie and Arthur. He thinks it's a great business and loyalty is his whole MO. He never sells. Yes. So sigiloff sends his lieutenant Jeffrey Chenan to try to negotiate something. So this is from

30:37the book built from scratch. Chenan says, the stock is selling for about $8 a share. How about if we pay you 10? No way. Langone says the price is 12. Chenan was shocked. Forget it. Langone left and went to the men's room. Barely two minutes later, Chenan followed him in. Okay, he said 12. Jeff, you don't understand. You offered to buy it for 10? I said no. I offered to sell it to you for 12. You said no. Now you are back wanting to buy it for 12? That offers off the table. That is gone. We had an offer and a denial. No deal. Chenan goes, what? Ken goes, I suggested a price of $12 in my office, right? Chenan nodded and you declined. Well, that's it. I don't want to sell that. Where are the men's room now? Price is different. Chenan says you must have some price. Okay. Ken says $14. Chenan left. It's such a blind rage that he almost banged his head on the door. About a week later, sigiloff called Langone. Let's not mess around. He said we will pay you 14. Ken

31:40goes, Sandy, you guys don't get it. I offered it to you for $14. Chenan said no. That offers off the table. I don't understand. Sigiloff said Ken goes, it's this simple. You had a chance. You turned it down. I've reconsidered my position. I don't want to sell. Sigiloff hung up the phone matter than hell. It's like, what is it? Empire strikes back of the... I am altering the deal. Pray I don't alter it any further. Is the Darth Vader line? So this continues for a while and then one day Bernie calls Ken or Kenny as he's taken to calling him. Yes. He says Kenny, just do me a favor. Just sell. Just sell the sigil off. He's breathing down my neck. This situation's getting bad. It's making my life difficult. Just sell. The business is doing great. So this is actually like my biggest headache. Yep. Ken says Bernie. What are you talking about? Don't you understand? I am the only thing that is protecting you from Sigiloff. If I sell, he's going to turn around and fire your ass. He can't stand to see you being successful and getting credit for any success at

32:46Dalyne. That's not him. Bernie, though, again, he's surprisingly trusting about this stuff. He says, no, no, no, no. Sandy needs me. I'm the only thing propping up the company. I'm a big boy. I can handle him. Please just sell. Make my life easier. It's funny. 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. Then later on in Home Depot inspires such loyalty. He puts so much trust in other people, which steers him wrong sometimes, but it makes other people wholly trust him. Yep. 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 Sigiloff. And this I think is basically the one time that he sells out of a company that he's invested in. But David, how much do he sell for? Well, even though he's going to sell Ken is no push over here. He sells for 2550, a share that he started buying at three.

33:53Do you know over what period of time? I think it was only about two years, this whole saga. From $3. His average entry price is probably, I don't know, $56. $56. Whatever. Up to $25.50 to sell. And the story is great where the Sigiloff finally calls and says, all right, let's just do this on the phone. You name your price. I will buy it at that price. And Ken goes $25.50 and he goes, why the odd number? And Ken goes, well, let us look like we had some real hard bargaining here. So good. So January 1978, Sigiloff buys Ken shares and now owns just about 100% of the company, except for the Catholic Church in Brooklyn. Yep. And then just as predicted. Yep, just as predicted. Three months later, Sigiloff fires Bernie and Arthur and the audit manager at handydan, a guy named Ron Brill. The reason that Ron gets fired too is the pretense that Sigiloff trumps up is an

34:57accusation that the three of them had violated national labor relations rules in negotiating with unions. Sigiloff starts a labor relations investigation against his own company to trump up the excuse to fire them. That is how bad a dude this guy was. Yeah. And really what was happening here is Sigiloff, 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 is great. I want to consolidate power. You guys are I need to be the guy here. 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 Historia Hotel. This is April 1978. Yep. And Bernie is just losing it. He's freaking out. He's like, Kenny, this is terrible. I'm 48 years old. I don't have any savings. I didn't have any

36:01equity. I can't support my family. Sandy's coming after me with this labor relations case. I don't know. I might go to jail. What am I going to do? Ken says Bernie, relax. You just got kicked in the ass with a golden horseshoe. That's a verbatim quote, by the way, because now we're going to go start that company that you told me about. 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 all these store openings. When Bernie is opening a handy dan in, I think it was Houston, Texas. Yep. Houston, Texas. And Bernie should have been all excited about this. This is the best version of the story yet. And he's looking at Ken and Ken's like, why are you melancholy right now? And Bernie says, because someone's going to put us out of business. I have in my head the idea of the perfect home improvement store. And this isn't it. And it's just a matter of time until

37:05someone 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. So, you know, this is fine. But and Ken's like, well, tell me. And Bernie has started to learn a little bit. He's like, well, well, if I tell you, then you know. And right now, only I know. So I'm actually, I'm going to, I'm going to hold on to it. And Ken's like, no, come on, do tell me. And so now Ken knows the idea to the reason that Bernie's so been out of shape about this is he just been down to visit one of his buddies, another retail guy down in San Diego. Goes by the name of Saul Price. That's all price of price club. And then what would eventually become Costco? Yep. Yep. Yep. And Bernie spills the beans to Ken. And he says, well, I went to see Saul. And he's got this new store concept that he's launching down there in San Diego. And I'm telling you, man, it's going to

38:07revolutionize the whole retail industry. It's just a matter of time before somebody brings Saul's concept to hardware puts us out of business to all sorts of other categories. We're all going the way of the dinosaur. He's calling this thing price club. And the idea is warehouses, the warehouse is the store. Customers come in and shop the warehouse. So there's no backroom. All the square footage that we're paying money on on our lease is shoppable square footage. Yep. And even more than that, there's no distributors or wholesalers or anything. Price club is the wholesaler. They're buying the goods directly from the manufacturers at wholesale pricing. And then marketing it up just a little bit selling it to consumers. This is

39:07below in everybody else in San Diego out of the water. They're not even paying people to walk around and put the labels out. I mean, it's literally just people coming in to the warehouse and buying stuff right off the pallet. There's like no cost in this business. Yep. And there's no reason why it shouldn't work just as well in hardware. And someday soon somebody's going to see price club. They're going to do this for hardware and we're going to be out of business. So cut back a couple of months later here to breakfast at the Waldorf Astoria in New York. Ken's like Bernie. You getting fired is the opportunity of a lifetime for both of us. You, me, Arthur, let's bring Ron along too. We're even going to start that company. We got the Golden Horse you here. Yep. 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. And yeah,

40:09this 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. 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 three million an annual revenue. I think these stores can do seven, eight, nine million dollars in revenue. And we're not just going to stock like 8,000 items. We're going to stock 25,000 items. It's not a 10,000 foot store like lows or handy dan. This is going to be like a 60,000 foot store. Maybe we need capital to make this happen. 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, oh, okay, but I have someone I need to go talk to first. I need to go back down to San Diego and see Saul. Yep. Bernie goes back down to San Diego. He sits down. He has dinner with Saul. He explains the

41:10whole situation, the firing from handy dan, the labor relations suit from sigilov, et cetera, et cetera. Saul listens to all of it and he says, Bernie, do you think you're talented? Bernie says, yes, I think I'm talented. I did a great job at handy dan. Saul says, do you think you have the ability to build something, to create something, to do this on your own? Bernie says, yeah, yeah, I think this could be really successful. Saul says, then tell sigilov to go F himself and just do this thing. And so it solves blessing. Bernie's in. And this is kind of important to keep Saul price in the loop because Bernie is trying to ascertain, are you also going to meaningfully add home improvement to your concept here? Yes. I mean, it's, it's an eerily similar thing. They would diverge over time and we'll talk about all the differences. But the pitches, customers are going to love it because we're going to have the lowest prices. We're only going to make a 30% gross margin instead of what's industry standard and hardware retail at that time, 45%. It's going to be a little bit different

42:14than price club in that they actually think they're going to have the best selection. We have tons and tons of skews. We're going to have tons of skews versus price club at Costco's famous low skew count. 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 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 lumber yard and the plumbing store, etc. Yeah. Being a warehouse unlocks putting all this stuff together under one roof for the first time. But it is different than the price club model of only having 4,000 items. They're going to have to have 25,000 skews 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. There is one other big difference too. People know how to buy toilet paper and how to use toilet paper. They know how to buy a big jar

43:15and nuts and eat a big jar and nuts. They don't know how to build a deck. 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. 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 skews. Yeah, I think Bernie both really did need the pep talk from Saul and he also wanted to make sure. Yeah. Saul wasn't going to do this too. Yeah. 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% 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. Yeah, 70% of Home Depot

44:22because 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. Two million dollars. Two million dollars in return for 70% of the company except at the last minute, Bernie blows up the deal. He and Ross get into this big fight over management style and management philosophy and ultimately the sticking point, you can't make this up. It's all in film scratch is the car that Bernie drives. He drives an old Cadillac, 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 a expensive car. Not a new fancy Cadillac. 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 Cadillac. They only drive several days. We're scrupulous here about our costs. Bernie's like, the cost we've talked about. This is an old

45:27Cadillac. Right. Practically, pragmatically, this is actually exactly in line with your ethos. Yep. And Ross like, no, no, it's the principle of the thing. And it's a sticking point of two things. One, Bernie's like, no, we should be pragmatists. We shouldn't follow some dumb virtue signaling thing. But two, you're treating this like this is a division of your company, isn't this exactly your treat me like an employee again. This is our company. You're the financier. This doesn't feel right. Yep. So he blows up the deal. And this might be the most expensive disagreement in all of business history. Let's see, I'll do the math here live on air. So 70% of a market cap of $350 billion. Yep. They did a ton of delusion along the way, but then counteract it 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 what have had about 91% of their original percentage of the

46:32company. Yep. So Ross Perot, insisting on a Cadillac cost him $223 billion. Assuming he held, assuming you would have held. Right. Which Ken did, by the way, still holds all this shares. Yeah, you didn't miss here. And there are $230 billion. That's with a B dollars. Oh, man. So there's 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. Yeah, for ordinary people, but they got Ken Langone here. The greatest investment banker of all time. So he says, no, no big deal. I get it. That was pretty heavy handed, Ross. I'll just go round up a bunch of other investors instead. And we'll put a send-to-get together. All right. Let's rewrite the deal for this. Rather than the investors getting 70%. Let's give them 50% this time. And Arthur looks at him and he's like, wait, you mean we're going to get a better

47:38deal by walking away from Ross Perot to which Ken replies, Arthur, in the retail business, when you can't sell something, you mark it down. In my business, when we can't sell something, we mark it up. So great. 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, they have left it. They have leverage. But Ken goes out and he finds 40 individual people. Yep, to put in $50,000 chunks. Yeah. And so Ken basically writes the term sheet and then just going around all these people and saying, do you want to be in on these terms? It's kind of that if you're a venture investor, 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, they get to dictate the number and that numbers usually not as friendly to you as the number that you write on your own safe. Yep. It's still a great

48:40line though. It's a great line. Totally sums up Kenny. All right. So Ken gets the money. They all get back together in LA and they get to work. And the way the cap table breaks down now is the investor's own 50% Ken gets 5% in exchange for putting this deal together, finding the capital. And I think he put in something like 100k of his own. Yep, he put in 100k. 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. For the moment. Yes. They are missing one super power that you need in a Avengers of retail team. Yes. Yes. Well, let's get to that. So, Bernie and Arthur go back to LA and they get to work. And the first question is, all right, where are we going to put the first store, the first warehouse? And as we talked about, warehouses are expensive. LA isn't great because real estate is super expensive. They're not a lot

49:45of empty warehouses lying around. And also, handy dan is still there. handy dan is still the best operator in the industry. Maybe not great if we started in our previous backyard here. We should go somewhere else in the country. So they start scouting around looking for other cities to go to. Before they can decide on a location though, while they're still in LA, they get wind that someone else has beat them to the punch has been down to San Diego scene price club and has gone out and started price club for hardware for home improvement. And it's right there in LA. It's a store called homeco and it's run by this wild man named Pat Farah. So, Bernie and Arthur, they go to see the store. They walk in and it's the exact vision that Bernie had. Yep. It's 130,000 square foot warehouse, which is way bigger. It's not even home depot then. It's home depot today. Right. It's way bigger than those early home depots that would open that were like 60, 65,000 feet.

50:48Yep. 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 them high, watch them fly. I mean, it's a bananza. The consumers walk in and they're like, oh, what? This is crazy. This is fun. It's like our Walmart episode where they were doing crazy stunts in the parking lot. It's a party. Yes. The feeding friends. Yes. So Bernie and Arthur call up Ken. They say, hey, I know this isn't the plan, but we already found this thing fully baked right here in LA. Fly out. Let's the three of us go talk to this guy, Pat and see if we can just buy it from him. Buy the store. Buy home co. So Ken flies in and I'm just going to read Bernie's description of what happens next here. Pat, the home co, you know, owner operator here, was an hour late getting to his own store. When he finally showed up, the wild man with the huge afro

51:53air cut was wearing a powder blue velvet leezer suit that was one size too small for him. His ass stuck out the back of his pants. His shirt was unbuttoned halfway down his chest and he displayed a variety of gold chains and a big old gold watch. Kenny shot Arthur a look that said, is this your idea of a joke? But Pat Farah is one of the most creative people any of us had ever met. Pat is to retailing what Michael Angela was to art. At least that's what Ken said by the time the meeting ended. Or the way I've heard Ken describe this is Pat was crazier than a bed bug, but he was a genius. I mean, crazy. Yes, but this is the missing piece of the puzzle. You got Bernie the retailer Arthur finance and operations can find the money and as sort of the spiritual glue holding this team together. But they don't yet have the genius merchandiser who is proud of his suppliers

52:53figuring 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 cleverly figuring out how to display it and what the pricing and packaging looks like to whip consumers up into a buying frenzy. You got to create heat in the store. Yes, yes. This is all of the universe of Pat. All Pat. Oh man, there's somebody legends about Pat including driving forklifts through walls etc etc etc. Yeah, wasn't that like they they wanted to tear down a wall but they couldn't get a permit. And so Pat just drove a forklift into it. And when the inspector came out he said, I don't know. Someone just is an accident but we definitely got to take out this wall now. Yep. So despite the you know reservations about Pat's character, they sign an L.O.I. letter of intent to buy home co from Pat with this new well-funded company that Bernie and Arthur and

53:55well funded. They got $2 million. That's not nearly enough to do anything that they know. They're operating on a shoestring budget here but I'll come back to that. Yes. Yes. So they start digging in on due diligence on home co 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. Pat needs an Arthur. Yes. Yes he does. He has just been ignoring the invoices that the suppliers were sending in, you know, 30, 60, 90 days later. I mean that sounds malicious. I get the sense a lot of what he was doing was in competence. Yes. Not. No. He, he, 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 going to go get the stuff and then I sell it. 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,

54:59no, the margins that this store are not anywhere near what this owner thinks the margins are. And Bernie and crew have to break this news to Pat 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. They're like, you're not doing great man. Yep. But God bless them. And this is Bernie's trusting nature and optimism. They say, okay, we're not going to buy home co. You're going to go bankrupt. But we got to get you on the team. You are special. After you file for bankruptcy, we want you to come in and join us as our fourth full co-founder here. And you're going to handle merchandising. We're going to take care of finances and operations. You're not going to go anywhere near that. But you are going to come in. You're going to stack them high and we're all going to watch them fly. 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

56:03it kind of has two things it forces. One, they got to get the longest possible financing terms from suppliers. Yep. So once the goods arrive at the store, it's like a ticking clock to make sure that they can move these goods. So they don't want them arriving anywhere, you know, other than the day before opening day. 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. This is what Pat was not doing. 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. Yep. Just based on payment terms because they can sell about half the items before they have to owe those dollars to the manufacturers. Two, they realized they couldn't afford to extend payment terms to their customers. 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

57:05item so that the Home Depot could get money right away versus businesses 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. So it's like, sure, if you're like a little pro contractor and you're expecting to pay and cash, we can deal with you, but we can't really deal with big businesses. So they just have to be generally very scrappy in every area of their business to get kind of the most bang for their limited bucks, especially in their early days. Yep. Yep. And thus the founding team, the Avengers of retail is complete. They're all assembled. Bernie, Arthur, Ken, Pat. There's just a couple more things they need, you know, like a actual location, end of name. But before we tell those stories, now is a great time to thank one of our favorite companies, WorkOS. Yes. So listeners, there's this decision that every company faces once you find product market fit and you start

58:09scaling, what do you do next? One big answer is move up market and find your first enterprise customers. Actually, it's funny. The way this fits into Home Depot is going after the first pros, not just these consumer customers. Yep. And today, the way you do that is WorkOS. Then we could easy to add all the things that enterprise customers require, single sign-on, skim, permissions, audit logs, always simple drop-in APIs. And this matters even more in the AI era, where products need deep access to sensitive data to be impactful. But there's a new twist. It's not just your customers employees who need to get into your app anymore. It's their agents. Banana. 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. That's right. 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. Yep. Agents are like the pros of software. They log in and take actions on behalf of the

59:14people who deploy them. Except the way most teams wire them up today is a shared API key or a borrowed human session, even worse. This is like handing your contractor a credit card and your house keys and just hoping a house comes out the other side. Or my new bathroom. Yeah. Authentication used to just mean proving that you are you. Now it means proving that your agent is allowed to do this specific thing as you right now with limits. And that is what work OS has built the whole stack for. So their new system work OS airlock doesn't just check which tools an agent can call. It checks the user's original intent so that the agent that you sent into redo the kitchen doesn't decide to take out a load bearing wall in the dining room. Which permissions tell you what an agent can do work OS airlock checks. It was actually asked to do it turns out those are very different questions. Getting agent identity right is how you get in the door with enterprises now. It is why open AI cursor proplexity and friends of the show at Sierra and Anthropic along

1:00:18with hundreds of other AI startups build on work OS. You can learn more at work OS dot com and just tell them that Ben and David sent you. All right. So how is this company born in Atlanta so far we've been talking about California. So after the home co interlude and bringing Pat on the team. 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 depost stock equivalent to the value that they had lost in his first venture to make them whole and you know if they held that would be giant amounts of wealth for very very long. They held yes. So pretty quickly they all decide on Atlanta as you said Ben for two reasons. So one the demographics of the southeast are good promising. It's poised for lots of suburban expansion even despite the tough climate of the 70s. But unlike California and the Northeast which are already built up good real estate locations are still

1:01:25pretty cheap and available there. Which lead us into the second reason they choose Atlanta speaking of good real estate locations. They end up getting a sweetheart deal from JC Penny. You know like a big national department store chain. Yep. To sub lease a couple of their locations in Atlanta. JC Penny had started a Kmart copycat subsidiary. Is that what Treasure Island was? I think it was a Kmart copycat. Yep. And it was in the southeast and it was called Treasure Island and they had great locations. I mean JC Penny was like a big company big national retailer had a great real estate team. But the Treasure Island subsidiary wasn't working and it was failing. So they offer these crazy hardware startup guys for of the Treasure Island locations in the Atlanta suburbs as a sub lease right? Yep. As a sub lease. Yep. At least to start. So Bernie

1:02:28Arthur and Pat they all pack up their families. They move to Atlanta. But now they really need a name. They've got the locations that can open these stores. So they hire a marketing consultant who comes up with a great idea. Can't wait to present it to the team. Bad Bernie's build all. It's a litter at him. Get it? Like it's awesome. You're Bernie. You're bad Bernie. And we're going to have all this, you know, advertising that's going to be you behind bars in jail. Like they put me in jail for these prices. They're too good. Is that what the stick was? That was what the stick was going to be. I could not figure out why they would want to call it bad Bernie. Yeah. Oh, that is awful. It's like he must be a crook because these prices are too low. Which of course is exactly what the loan officer wants to hear at the bank when they're 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. Yep. So obviously bad Bernie's

1:03:35build all is not going to cut it. So Ken goes to the investor group that he put together to solicit ideas and the life of one of the investors suggests the Home Depot. And it sticks. Now none of the guys ever wrote about this. So I don't know if this was part of the process or not. I don't know if it was intentional or not. But what are the initials of Home Depot? And the stock ticker today. And the stock ticker. Yeah. HD. Where did they get fired from by Sandy Sniggle off? Handy Dan HD. Nice little oh my. A tweak. Shall you say a little nod? Yeah. Let's put it in the positive spin. 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.

1:04:39Because it would stand out. 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. And that's how orange became the Home Depot color. Perfect. Which is totally brilliant. I mean, it's distinctive. Orange A friend stands out. It's distinctive. It's great. Yep. So that leads right into the opening of the first two Home Depot's in Atlanta on June 22nd 1979. They open two stores. Same day. And this all happened like pretty fast. This is just over one year from when Bernie and Arthur and Ron get fired from Handy Dan. And it is obvious that it happened fast when you look at some of these pictures. Listeners will put some in the email. It's very clearly a big hardware store operating inside of a camart. I mean, it looks like that.

1:05:42They 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 into the ceiling. But the early pictures are I swear camarts or even kind of JC pennies like it's pretty low ceilings. The racks that things are on are like standard camart style racks. It's nothing like the Home Depot that you know of today. The floors are this sort of like what linoleum type floors. And so yeah, they're selling table saws and hammers and lumber out of discount camart knockoff. Yeah. Camart knockoff. Right. Second use real estate. Yep. Yep. There's 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 in the weekend paper that week

1:06:47to really drive how you want to drive homeowners to your store. Well, weekend newspaper delivery highly correlated with home ownership, 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 trainer Joe's episode amortize the cost of their advertising. Exactly. You blitz one local geographies radio, tv, newspapers, then you can kind of like 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. 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. Don't like sprinkle some stores here and there. No, go into a city with force. 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 whoops. Nobody knows

1:07:50about these stores opening 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. You know, a species beginning to home depot here. The other great legend around the first store openings is that the night beforehand, the two store managers of the two locations get together. They've got a great idea. 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 in the morning. That's all going to look great. And Pat Farah comes in at like four in the morning the day of the opening. He sees the polished floors and he goes nuts. Oh, yeah. That was like a thing with this entire company for decades is that they all worked from like the wee hours the morning. And it was just

1:08:53like 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. Yep. So when Pat sees these sparkling clean floors, he loses it. He calls Bernie and Arthur. He gets him out of bed. And the three of them come in and they start corining forklifts around the store floor to scuff up the linoleum. So it looks like it was busy. Pat's like, we can't have this be clean. It looks like nobody's been in here. And it sends the wrong message. I think they exactly sprinkled some sawdust too. 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. We need it scuffed up like a home depot. Yep. Bernie's a quote about this that he would write is our stores are action places. Yeah. And also, we're going to get to this later. But part of the home depot's business model and part of the

1:09:53big giant reason that it works is if you are mid job, the home depot is the place that you use for real time replenishment. Yep. So sometimes that means if you are swinging by every morning on the way to your job site, sometimes it means that if you're pro, yep. 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. But they wanted it to be a place where they could treat it like the outsourced back office store room 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. Yep. Whether you're a pro or a homeowner. Yes. And it sure better feel like that. Yep. Another classic story is their capital constraint. 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. And so a week before opening, they didn't have enough merch to fill the whole store. So Pat Farah calls

1:10:59the Delmar cabinet company and asks if they can borrow not even buy borrow 500 boxes of all different sizes. So the team stays up all night, fold them and put them on the racks around the stores. 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 expansive inventory. And they did the same thing with paint stacks. Pat found 2,000 empty paint cans for each store. And they put special little labels so they would know not to investigate to significantly, but stacked from 10 feet high. 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 actually. Capital constraint is no longer their issue. Yeah. So despite the rocky law to the first few stores, within a couple months, they do get all these kinks ironed out. And the first stores start humming. By the end of the year,

1:12:01that first year there in 1979, they open the third store in Atlanta and they do $7 million in total sales for just that like six month operating period of the first year. So like startup retailer, $7 million in sales across two and then at the very end of the year bringing online a third store. This is right on with their aggressive financial projections that Ben you were talking about that they needed to make this work. And part of the appeal is they're blowing stuff out. I mean, friend of the show, Arvind Navarotnam, 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. And they did this through all the ways that you would expect. And we've talked about on the Costco episode, they're getting deliveries directly from the manufacturers on a palette into the store. So they can take relatively low margins,

1:13:06not Costco low, but 30% gross margins on these products. And they can offer these scream and deals. I mean, 10 to 25% below that of competing retailers. This should create crazy word of mouth. You got to see the store. I just went there's they have everything I could I'd like discovering new projects to do and it's all cheap. It's amazing. Yep. I mean, just like Costco, no brainer proposition to the buying public. And it's a different take on the classic retail triangle of price selection and convenience. You usually have low prices, large selection, and high convenience. And they definitely have low prices and large selection. 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, granted its low skew count, but it's close. 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, you know, down south of

1:14:06downtown, you know, in the neighborhood of Soto. But you can get everything. You only need to go to one store. It's one trip like we've been talking about. Yes. So the model starts to work quickly. And the flywheel here is getting spun up in Atlanta. And then the next year in 1980, JC Penny calls him back again and says, Hey, we're finally going to pull the plug totally on this treasure island thing. We got a bunch of locations that are now going to be empty down in Florida. Do you want them? And yeah, of course they want them. Right. Right. The whole plan here is expand nationally. And this is great real estate. Like we should jump on this. Yep. There's just one problem, which is they are maxed out on capital. So in 1979, that first six month period that the company was operating, they lost about a million dollars. So one out of the two million dollars of startup capital was blown in 1979. In 1980, this next year, they made a million dollars in profit.

1:15:13This is incredible. This shows how well the model is working. 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. Yep. Go in Lake Gangbusters. But that's not enough capital to take over all these leases. And this great real estate down in Florida. So once again, Ken Langone says, no problem. I got this. We'll just go public. Now, this is a crazy idea in any market. The pitch here to be clear is we are going to take a four store chain. They've now opened the fourth store at Atlanta public. In 1981, here when interest rates are hitting their all-time peak of 20 plus percent, can you imagine this pitch to Wall Street? You know what people don't like to do when interest

1:16:15rates are really high by speculative new IPOs. Even though in theory, valuations should actually be depressed when interest rates are high. 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. Ben, are you suggesting that recessions are the best time to push your chips in? Call me Warren Buffett on my day of the butt. So once again, Ken is like, I got this. But by this point in time, he is no longer an active investment banker himself. He's just a principal investor now. So he can't lead the IPO himself. He calls up his buddies at Bear Stearns and he strong arms them into taking on this crazy IPO. Bear agrees and they set a target of raising $6 million. 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. As it always was. Ken knows how to get deals done.

1:17:18So 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. And half of that money is going to go to the initial seed investors to cash them out at close to a 2x and call it a year and a half, two years here. Great deal. Great deal. Great deal. Right? 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 get the full $6 million deal done. We're going to have to cut this thing in half. 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 caching out at a slightly less than a 2x.

1:18:18You 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. 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 caching out here at a 2x return, those investors, if they held to today, would have gotten well north of a 50,000 x return on their cap at all. Check my calculator. But I think it's better than the 2x. Yep. So the IPO gets done. They end up raising a little bit more than three. They raise $4 million in total in the IPO at a $32 million initial market capitalization post offering. Which this listeners is part of the reason why it's a better investment than Apple, Sense IPO and Sense many other companies. In video, etc. It went public at a tiny, tiny

1:19:24market cap. Yep. I mean, you could get in as a public shareholder at a $32 million valuation. I mean, even if you inflation adjust that, that's $122 million today. Just think about that. A company went public at a total market cap of $122 million. It had so much running room ahead of it. That is how you get that giant multiple sense IPO that the public had access to. Yep. But you needed to be, well, I was going to say crazy, but you needed to have vision to do this. I mean, it's IPO-ing as a four store hardware chain in Atlanta. This is not an thropic year where everybody knows them and they're giant. A household name, right? This is a four store chain in Atlanta. Yep. So after the IPO, they go to Florida, goes great. Next, they go to Texas by actually acquiring a copycat chain that had sprung up,

1:20:24called Bowwater. That was a bad idea and cost the company a lot of time remaking those stores, but they turn it around. They're successful in Texas. Then they go to the West Coast. They go back to California. They beat handy-dann. They go to the Northeast, then national rest of the country. The company is just like on a tear. 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. Yep. And then quickly after that, in 1986, they hit a billion dollars in sales with 60 stores. They don't stop there. In 1989, they pass lows to become the largest home improvement retailer in America. Also, in 1989, handy-dann goes out of business. Finally, get their clock cleaned by the new HD. Meanwhile, Home Depot is now up to 118 stores nationally. Yep. So this is an interesting question

1:21:28here. We've just talked about how they speed ran to a billion dollars in revenue and 100 plus stores. National market leader in less than 10 years. Right. Kind of ridiculous. The model, at least as we've explained it so far, clearly works at scale. But you should sort of have this question in your head of, well, how did they do all that when they had two million dollars and just a scrappy team? I mean, this was a shoot-the-moon strategy. It needed to grow fast in order to make it work. 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. 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. How do you think about why they were able to act like a scale company even when they weren't at scale yet? I think it was that they combined Pat Farah's aggressiveness that he

1:22:34put together at Homeco with Bernie and Arthur's operations and finance genius to just barely make it all work. And a lot of illusion along the way where they can sell the dream and selling the dream is fine if the dream comes true. It's only bad if you promise people all this volume and then you can't get any volume. Specifically selling the dream to their suppliers to the manufacturers. Suppliers and to finance ears to like max out the amount of debt that they would extend this company. All the debt capital they were raising. 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 and I think it addresses the uniqueness of the people. We had to be psychologists, lovers, romansers and con artists to get our suppliers aboard. 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

1:23:36to us in those early years. We didn't have the buying power of our established competitors. On paper we couldn't compete with handy city or handy dan but we were good at selling futures. You need to do this for us now we tell vendors because down the road we will have 50 stores. Eventually we will be the biggest in the industry 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 then we motivated them. We appealed to their greed. We appealed to their enthusiasm for new concepts. We appealed to their need to get their products exposed. It's like sheer force of will keeping all these plates spinning and convincing everyone in your ecosystem that you're legit. It's why you needed the Avengers to do this. Right. And it's fine to sell the future as long as you make the future come true. American enterprise system here the worst thing that happens if it doesn't work is you declare bankruptcy and like Pat Ferra you go join the next thing. Yes. So I think this is actually the perfect place to really talk about

1:24:39what the model is 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. Well there were copycats. I mean there were other large format hardware home improvement stores. I mean I I've been to a builder square I think when I was a kid. Yeah. Yeah yeah. So yes exactly this did happen. A lot of capital rushed into the space trying to do this yep builder square home club home quarters warehouse Mr. Howe warehouse these are all copycats spun up in the 1980s. None of them are around today. Okay. So why the answer is that as Home Depot scales it's not just Costco for hardware. Costco is a general merchandise retailer like you said in the intro been and Home Depot is a specialty merchandise retailer on the surface these things

1:25:46look kind of similar like a Home Depot store looks like a Costco store 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 you also need to serve the customer in ways that are holy unique and specific to each specialty market. So if you think about like tire and auto shops they need to offer fast quality installation of tires and auto parts right or beauty right like beauty needs to offer in store sampling and makeovers or even like Apple and Best Buy they need to offer the genius bar and the geeks squad to help with troubleshooting specifically expertise that serves the customer nobody serving the customer in a Costco except at the checkout aisle it's like you go grab your toilet paper you check out that's is that we don't actually need to have that many

1:26:48people in the store serving you right right that's how we can pair associate so much that creates so much goodness in the model yep yep Home Depot basically invented what's serving the customer looks like in home improvement before Home Depot there basically was no customer servicing in hardware was like you walked into a hardware store and good luck if you knew where things were good you know if not and we're generalizing here 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 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 and we drop everything in order to serve a customer and there's even stories about people at headquarters who will pick up the phone in the middle of a meeting an interrupt corporate work because they actually need to take a call from someone who is on the floor with a customer to

1:27:49address a customer specific concern I mean the culture is this sort of service and customer obsessed orientation I've been I've been I know she said headquarters there I don't think Home Depot has a headquarters that is correct they have a store support center yeah because headquarters merely exists to support the stores yes yes Atlanta for Home Depot the corporate address is the store support center not yes headquarters the company but that's powerful to name that and sort of instill that in the culture totally totally 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 and I asked the associate how his day was going and this was like the eighth associate that walked by and it was chock full of staff and this guy the words out of his mouth were it's going well I have like eight things on my to do list today I've gotten 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 yep I know we say that's the culture still to

1:28:51this day with some bumps the wrong the road that we'll get to as we go 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 like if you were just a DIY homeowner you had no way of obtaining knowledge about how to build a deck or how to retire a bathroom like maybe you could go to a bookstore and buy a how to book maybe if you've found one right no hiring a contractor who knows how right exactly but people want to work on their own homes this is the unique thing that Home Depot figures out as they scale they actually need to bundle education with the products that they're selling their customers 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

1:29:59in the stores and then they create a culture of hey anytime a customer comes in and asks you how to do something stop what you're doing you know how to do this stuff and explain it to them show them get some products out show them how to build what they want to build 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 good point you would think on the surface that this is crazy and this is what all the copycats miss they just hire regular retail employees like Walmart does or Costco does or target does or what have you actually though if you're a tradesperson there's a pretty good chance that a Home Depot job might be appealing to you so back here in I don't know call it 1985 1990 imagine you're a plumber you're an electrician maybe you're a carpenter sure you can make more money

1:31:00in your trade than you can working at Home Depot but being a contractor is not easy like even if you're successful one it's not steady cash flow is lumpy and unpredictable to it requires a lot of driving and then three it's manual labor like what are you going to do if you get old what are you going to do if you get hurt what are you going to do if you can't work do you have a retirement plan well if you're in a union job at like a big you know commercial constructor sure but if you're working residential you're probably not in a union you probably don't ever retireman plan you probably don't have a fallback of savings okay now Home Depot comes to town and they're recruiting it's a stable job with regular hours with other people like you you don't need to drive around you don't need to manage clients yep you need to stock the shelves but it's not hard labor

1:32:00it's pretty attractive and there's all sorts of benefits to the Home Depot long term of doing this 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 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 you suddenly feel empowered and you're like you know what I'm gonna try drywall next time 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 so today all this that we're talking about sounds like sure nice 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 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 yep and so unless you copied Home Depot's labor employment model

1:33:02you weren't actually going to be able to make the model work like they did and it's not just the employment model there's a lot of other elements that kind of have an escape velocity component yep so we talked about who's in the stores then there's what's in the store at its core it's the warehouse concept you're eliminating middlemen you're not paying distributors you're shipping directly to the stores you're passing savings onto customers lower margins than else around the industry this leads to you having the lowest prices this is a well understood warehouse model at this point but they have something working against them which is super high skew count and lots of associates doing all this service so they sort of have to figure out how to succeed despite sort of two big strikes short term against the business model those are great economics of the model yeah long term right but it is horrible operationally having lots of skews it's hard to turn them over quickly you have a bigger payroll at each store than you would in a price club like model so what are all the elements that make up for it and make it worth those investments you have

1:34:08to encourage a buying frenzy that is a huge part of making this work when you have so many skews you have to have reasons for people to buy all of them 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 because it's not the gross margins percentages that put food on the table it's the gross margin dollars that put food on the table 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 in a home depot so it's the crazy stunts it's the heat in the store it's the one stop shop list so you buy a bunch of things it's starting to work with pro contractors as customers because they're going to buy huge amounts of things every week they're going to be repeat buyers again your the whole goal here is we actually don't generate that much

1:35:08margin percentage we have lots of skews and we have lots of inventory of each of those skews so how do we get as much volume as possible 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 and that means you can ask for ever lower prices on your bulk orders 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 so to summarize all this friend of the show Arvin Navarot-Namat worldly partners has studied this company at length and I'm going to just going to quote from his 100 page study that will link to in the show notes 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 home depot built a high-volume model and shared the benefits of scale with customers generated greater traffic

1:36:10strengthen supplier relationships supported a broader assortment and reinvested the resulting productivity into stores associates logistics technology and price creating a self reinforcing flywheel that became increasingly difficult to replicate as the company scaled and there's one more element to the 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 trades people are getting equity in the company so you're probably listening like wait what what how does the company's stock price make this model work better 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 and it's all possible because the company went public so early right there was so much upside remaining yes

1:37:15so 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 I help them complete their projects they come back they buy more my store sales grow the company's revenue goes up and the company was small enough back in the early days they this made an impact on the company's revenue the stock then goes up and then I get rich like really rich there are thousands and thousands of early home depot associates who became multi millionaires because of this yeah when we were talking to Ken and research for this he he put it this way to us when you tap into people's basic instincts good things happen yeah I mean if you come from a Silicon Valley tech startup this is second nature to you but this really wasn't done in retail this is really the first time that a scaled companies sort of at mass employment has retail employees who are

1:38:21participating in this like giant wealth generation machine and because it was compounding at 25% per year means the best thing they could have put their money in the way it worked was if you were a salary employee which started at assistant store manager you got stock options if you are 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 so if the price ever goes down below what you bought it for we will fill the gap for you and then they did all this education to the associates and say hey you really need to do this and the whole thing works because they were able to position it to Wall Street as a growth stock 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 yes and it all comes back to the specialty

1:39:25retailer model versus general merchandise hmm let's say your Costco or Walmart you set up the same thing 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 hardware and home improvement is different so they're these legends within the company the one that gets told off and is the faucet washer that leads to a kitchen remodel so legend is customer comes into the store with a faucet that he's brought in from his kitchen sink he says hey my faucet is leaking I think I need a new faucet I know it's probably going to be a couple hundred dollars and the store associate who has plumbing experience looks at the faucet and says oh no no you don't need a new faucet like we can fix this let's go get a new washer that's all you need we'll get a new washer it's 25 cents install it and you know you're going to be good to go they do the customer's so happy he goes home

1:40:29he tells his wife and family next thing you know a couple weeks later he's back and he says you know we've been thinking about a kitchen remodel we're going to do it with you guys here at Home Depot and it's a hundred thousand dollar sale because of hardware and home improvement in this category this stuff happens and customer service directly drives it yep yep that's a great point the continuation of that story is that someone makes a comment like boy your your boss is going to probably fire you you could have sold a two hundred dollar faucet and you only made 25 cents on the washer you're probably going to get fired for losing that sale Bernie Marcus hears about this and he's like calls the guy it's a side I think we should promote you yeah that's exact right customer service mentality we're going to give you another equity grant right now right so listeners a funnicide 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 yep and he gave us this great

1:41:31quote 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 yeah we we want that we encourage that here yeah it's like the opposite of prevailing silicon valley wisdom we're like oh you know what you're in please check in the stock price 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 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 in 1980 home depots work twice as large as lows and they carried three times as many products which if you know us in our Costco's elitry that sounds like a lot of danger these are all downsides right but what ended up happening is they had four times as many transactions as those smaller lows stores so there really

1:42:33was this benefit where when you made those investments in more square footage more inventory more skews the return on that investment actually increased at scale 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 are making in inventory and square footage and you know that was a that was a Bernie hunch before they actually opened the first store but he was right that that that is the kind of key insight behind the whole thing is that actually there are returns to your investment that increase once you get out beyond a certain skew count out beyond a certain square footage 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 $100,000 kitchens home remodels etc etc yep so this is basically the core model that takes Home Depot

1:43:38to the $350 billion market cap company today except it's not exactly a straight line yes there is a fall from grace coming listeners before we get to the home Depot of today but first now is a great time to thank our friends at Anthropic the makers of Claude so David Anthropic published a number over the summer that I have not been able to stop thinking about since I saw for the first time they looked at 1.2 million Claude co-work sessions over the course of three weeks across a ton of companies like 600,000 organizations software development which I thought would be a huge part of it was less than 9% of those sessions I assume to be way higher I know the biggest category by a mile was business process and operations which was about a third of all co-work usage then content and writing was the next highest so you know if your mental model is still AI writes code like this

1:44:43is very different in the data yeah and it's a perfect lens for the company that we're covering today with home Depot home Depot has thousands of employees and very few of them are ever going to open a command line interface their job might be merchandising or supply chain or figuring out what their stores should be putting on the shelves and so there's a lot of use cases there for AI even though almost none of them are writing code yep these are all types of cases that require analysis and documents and spreadsheets all day long and that is exactly what Claude co-work is built for on your desktop working in your actual folders not just a chat window and that's the important part for you listeners as is so often the case you are waiting on engineering resources to free up in your company to build some tool no longer with co-work Claude can build you the tools that you need to do your job better and in fact that is even the case for us here at acquired HQ absolutely we have a bunch of proprietary tools that live in web dashboards that Claude has just built for us that handle tons

1:45:47of our process and automation so if you want to be like us and build tools using Claude co-work to make your organization work better you can go to claw.ai slash acquired and just tell them that Ben and David sent you so back to home depot not exactly being a uh straight line from here so at first things to go in great as we talked about what's the models in place the whole company is humming by 1996 home depot is doing 20 billion dollars in sales annually and expanding rapidly they're averaging a new store opening every four days they have over 600 approaching 700 stores they have 32 international yep 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 so they become a major Olympic sponsor like

1:46:50right up there with Visa and Coca-Cola Nike now JP Morgan yep that's right and uh Ben as you alluded to this era is when they really start serving the pro contractor market as well as the DIY weekend warrior they offer business credit accounts they're finally on solid enough financial footing that they can do that they start carrying more pro line tools like de Walter Milwaukee tools 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 people with high willingness to pay for the best or if they want to have a tool for 20 years sure I want the what the pros use absolutely they also hire dedicated sales people to handle pros they stand up a pro desk yep in a lot of their stores they offer this is a big change for them pro pricing yep so they start offering bulk deals if you are coming to the pro desk I think importantly though

1:47:56that bulk pricing is available to DIY customers too you just have to buy in a certain amount right 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 you know you don't want to have to go to the store and load up a car with all that or rent a truck and be nice to just have it delivered to the job site yep and pros would go on to be this just giant driver of the business whereas and this is a 2015 stats or a 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 three hundred and thirty dollars the average professional customer would interact sixty six times a year yep with an annual spend of six and a half thousand dollars yep sounds right and of course there are pros that spend hundreds of thousands

1:48:58of dollars a year yep so on the back oh 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 so almost 20 years yep almost 20 years in and he goes out on top 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 massed 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 Bernie and Arthur dispute the claims in bill from scratch in the memoir that they wrote 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

1:50:04in this era and the lawsuit also kind of reflects the stores I mean home depots up to this point were like a man's place you know it was guys buying hardware from other guys and which lows would go and do exploit cultivating women as customers 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 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 yeah it was there for sure yep 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 and it's awesome because the stores get to use their local knowledge of the market to make sure that

1:51:06they're buying all the right stuff the right quantities that they're super in touch with the customer and that leads to I think Bernie estimated 15 to 20 percent higher sales per store because the regions were making their own decisions 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 in terms of absolute scale economies with purchasing power if you were to centralize your merchandising organization right so there's 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 you can't get the best prices from your suppliers from your suppliers if you've got 57 different regional or even store-level buyers negotiating with them which wasn't an issue at any other store because Home Depot invented the concept of the national hardware store chain right there wasn't

1:52:08even an opportunity to do national buying for hardware before Home Depot because nobody was buying nationally like sure absolutely there were still regional differences in what like Arizona needed versus what Alaska needed but like a table saw is a table saw you don't need different table saws for different parts of the country yep 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 yeah you're putting down no cash and managing to get a house because they're willing to lend against invisible earnings 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 right there building houses at an unmatched clip yep and it reopens the market for lows to come back as a real competitor so while the housing

1:53:12market is inflating here in the late 90s and early 2000s lows completely changes their strategy yeah in 1990 they got wise to what was happening to all of their regional competitors and the smaller format stores and they basically studied at Home Depot and said that is the correct way to do this so I think it was 1990 they opened their first warehouse store and they did a complete about face obviously when you go to a lows today it's a very very similar concept but this is like a real innovators 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 yep and here is the market is changing you're getting younger buyers of homes you're getting more women buyers of homes what they want need from home improvement is actually starting to shift a little bit from what home depot was operating didn't lose come in with a slogan improving home improvement exactly exactly

1:54:13tracking the slogans in this industry will tell you everything that is going on strategically yet improving home improvement is aimed directly at home depot and directly at appealing to younger more casual often more women buyers these are buyers that aren't necessarily doing home remodels they're doing home makeovers are home refinishings they're like weekend sprucers versus weekend warriors so you know they're buying more kitchen and bath products furnishings they're not buying lumber and plumbing pipes stuff like that so lows starts to shift they actually used to appeal more to pros and then in this area they really start shifting more to the and consumer the DIY casual consumer and having a more pleasant shopping experience than home depot sort of rugged appealing to pros environment yep and what is also coincide with the internet so all of a sudden

1:55:13for 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 now would be a while still before YouTube was founded this is you know late 90s not the the 20 teens yep but you start to get people sharing information on forums and things like that yeah all of this in an aggregate though opens up the market for a real competitor for the first time yeah so once Arthur takes over home depot he runs the company for a couple years but these issues start piling up and he's also getting tired just like Bernie when Bernie retired and the company's just getting bigger and bigger by 2000 it's over 40 billion dollars in revenue they have over a thousand stores and over 200,000 employees until one day at a board meeting Ken asks Arthur about succession like hey man you seem like you're kind of getting tired too if you need to step down tomorrow

1:56:19is there anybody here at the company that could take your place right when Bernie stepped down we had you but who's after you and so Arthur goes away thanks about he comes back and he's like oh man Ken you're right actually the answer is no Pat certainly can't take my place and you can you know we love you but you're not an operator you can't be CEO of this company and yeah I guess we haven't really cultivated an executive bench here in the company of someone who could take over a CEO it is worth saying they very impressively figured out a management track for store managers 75 percent of store managers at home depot don't have a college degree because they have figured out how to promote from within and so you can you know come to home depot as an 18 year old retail employee and become a store manager yep and that works super well but what they didn't cultivate at least in this era was who's going to succeed these founders so the board and Arthur together decide hey we got to bring in a external search firm and bring some more management talent into

1:57:24the company and the plan is that they're going to go recruit a president and CEO basically somebody to replace Arthur's old job as number two now that Arthur is CEO and this new personal be next in line to take the helm of the company when Arthur's ready to retire and Arthur actually shares the search committee himself and the first target is Jamie diamond it's amazing who has just gotten fired by Sandy while at city group yes and Jamie loved the home depot founders as he told us on stage at our radio city show last year 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 and I 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 and it just didn't he was like what am I doing here I'm like pretending to be a home improvement 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

1:58:29everything about home depot the culture the philosophy as a company he talks about the store support center thing all the time when we were preparing for radio city I watched 50 Jamie diamond interviews and he references how awesome it is that their HQ is called store support center and that's a cultural indicator yeah so the company burns about six months on the Jamie process at the end of it they've still got nobody and the board is starting to get a little frustrated here now it just so happened that can in addition to now being the lead director of the home depot board was also on the board of general electric and at the time GE was going through its own very public succession drama of who was going to succeed jack welch the most storied CEO in America at the time yeah history has kind of forgotten this now because GE frankly has fallen apart but like literally

1:59:32got broken into three pieces so that's not a controversial stage yes yes it actually and before that incinerated more market cap than any other company before it in history or at least until some of the Nvidia drawdowns yeah these days like these these drops that happen at big tech companies is you know dwarfs everything in comparison yeah at the time that that was the story is post jack welch GE just completely destroying shareholder value yep but here we are in 1998 1999 2000 I mean fortune magazine crown jack welch the manager of the century in its millennium issue at the end of 1999 that's how vaunted GE was yep and it was all driven by a culture of operational excellence as embodied in GE's famous six sigma approach to defect free output sounds great

2:00:34yes sounds great right well we'll see so back to home depot so here's can in the home depot board thinking man we sure could use some of that operational excellent stuff around here I think that would really be good for the company and if you're going to 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 diamond we don't have it here let's start at the top GE is the consensus best place to look in America for management which is crazy looking at the three choices to succeed jack welch and how disastrous it was for all three of them three places they went yes so in November of 2000 jack welch announces that Jeffrey ml will be his successor to take over as GE's next CEO and Ben as you are alluding to the other two candidates for the GE job were James McNerney who quickly

2:01:36leaves to become the CEO of 3M you may know his name because he would then leave 3M to go and become the CEO of Boeing yeah we all know how that turned out and then the other candidate Bob Nardelli who can Langone again being on the GE board here knows well and loves loves Bob so immediately after the succession news comes out of GE Ken calls up Nardelli and pulls out the same line that he used on Bernie 20 years earlier you've just been hitting the ass with a golden horseshoe guess where you get to go work now yes what we are going to do together now that you didn't get the GE CEO job I'm going to bring you into home depot so the board immediately pivots and offers Nardelli the president and CEO of job and says you'll come in you'll be here for a little while

2:02:40Arthur's going to retire you will be his appointed successor and so to incentivize Nardelli to take this job they say we'll make you whole on your GE stock options we're going to give you a 150 million dollar equity package to come join home depot Bob says okay great I clearly can't stay here at GE umman 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 he's only going to come on board if he becomes CEO right away he's not going to wait this leads to a awkward shall we say home depot board meeting where the board presents this new development to Arthur he says okay I'm okay with it Bob can have the CEO job but deep down he's not really okay with it and part of it I think was Arthur not being

2:03:50ready to let go the other part of it I think was a genuine spidey sense that hey what is this last minute bait and switch from Nardelli is this a red flag here well Arthur would later say hey this is faster timing than I was thinking yep for me to leave but be Arthur would later say at an interview I thought he was the wrong choice by a lot even though I'm the one who initiated an external search yep 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 yeah of 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 he's crazy yeah yeah well that's not what the board says they take him at his word they take him at his word 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 because Bernie still on the board at this point and I think pretty severely damages their

2:04:53relationships going forward regardless the board does bring Bob in as CEO Arthur resigns as CEO but stays on the board for just a couple months and within six months he fully steps away and is gone from the company we'll come back to Arthur all the way at the end but he's got his own golden horses you yeah spoiler alert he would I think become the highest net worth of any of these folks so Nardelli comes in as the new Home Depot CEO and to the outside world this looks like a huge win I mean they got essentially the most eligible corporate bachelor in America one of the two runners up to the G job 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 I wanted that job but I got this one so I'm

2:05:55going to try to make this job like the one that I wanted yeah yeah now to be fair the first couple years of Nardelli's tenure are great maybe even the first three or four yeah yeah yeah Ken Langone still says to this day that for the first four years everything Nardelli touched turned to gold 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 and there was a lot of low hanging fruit around yeah when he came in 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 run down and yeah this is where lows was coming back and beating Home Depot the extreme decentralization made things very chaotic Nardelli referred to the company in an interview as having been in startup mode for 20 years clearly what Nardelli missed

2:06:57is how important being entrepreneurial was to the company's success he was about to embark on a mission of operational excellence but you can operationally excellence yourself out of being entrepreneurial yeah 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 yep yep the other things he did was just this if you look across every system purchasing replenishment merchandising all operating functions he would centralize he took nine separate buying offices and folded them into one so they were suddenly getting better prices from their suppliers he invested in a bunch of new technology systems I mean that the the answer here isn't decentralized or centralized 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 data set in a system of record but you definitely don't want to centralize it when you can push decision making closest to the customer where people

2:08:01can see like all the idiosyncrasies of any given situation yep yeah here's the way I would characterize it there was a bunch of hello hanging fruit operationally Nardelli was excellent at implementing all the changes that needed to be made on that front at home depot but he was all about six sigma all about operational excellence when he was the G guy through and through and operating the home depot was not the same thing as manufacturing turbines a G right so if you go back to the whole thesis of home depot here and this idea of being a specialty retailer with great service meaning you need to service your customers it's not to say the GE doesn't service their customers but it's a very different dynamic at GE line level employees are completely replaceable by design this

2:09:01is the whole point of six sigma black bell we're 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 leading to a hundred thousand dollar kitchen remodel on the sales floor at home depots you just can't measure that in a six sigma spreadsheet management process kind of way 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 wander and if you're going to invent you need to wander 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 yeah so what does Nardelli do he replaces

2:10:03huge swaths of the associate on the floor retail workforce in home depot with part time general retail labor so doing away with the whole philosophy that made home depot of we have knowledgeable people who are gonna make that 25 cent washer sale and fix the customers kitchen sink and have that lead to something bigger down the line all that's gonna go we're gonna bring in 16 year olds on part-time jobs to just ring them up at the cash register and not only that there's just gonna be less of an period according to Arvins research associates per store dropped from 200 to 170 over the course of 2000 to 2006 yeah the 15 percent reduction in headcount just like all right we've fewer people to help you solve your problems now yeah so those are the associates on the floor now the store managers before nardelli all the store managers were promoted up been as you said from store associates

2:11:08and they were focused on their stores the customers doing what was right et cetera nardelli changes the criteria for store managers now preferring candidates with college degrees 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 and think back to the old workforce all these trades people 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 yeah I mean it weakened the culture 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 this entrepreneurial we can figure it out thing this is heavily destructive to that in a way that you may never be able to fully rescue and get back so a couple years into nardelli's tenure customer satisfaction among home depot shoppers

2:12:16falls to the lowest level of any major US retailer so all the major US retailers you know the annual surveys of customer satisfaction and everything from best buy to Costco to Walmart to home depot to lows home depot goes from near the top to dead last but David they doubled their revenue in their profits and they grew from 1100 stores to 2000 stores in five years what do you mean there are problems all the charts are up into the right yeah yeah so that then leads into the issue of nardelli's compensation 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 dollars by the board over the six years of his tenure running home depot and the board would always give him bigger

2:13:16bonuses 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 revenues up profits are up on beating plan everything is great he would refuse however when the board would ask to tie any of his compensation to the company stock price which I will say is in some ways fair 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 it always has struck me a little bit weird that I your comped on what other people think of the company then it's like you're reading from nardelli script right here so business week would report on this because this was uncommon for major CEOs at the time and through to today and nardelli would always say hey this is the one measure of company performance that I can't control so I'm not going to agree to my comp to be tied to it the problem in home depot is that this is

2:14:22fundamentally going against a key part that we talked about a minute ago of the company's model no stock go up no machine work exactly 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 now here's this big week former GE guy coming in a CEO and saying yeah I'm going to get rich regardless of whether the stock price goes up and the stock price stops going up yeah why did the stock price stay flattering this time well here's what's going on even though he doubles revenue and profits he actually mostly does it by doubling store count then as you had said same store sales comps had already trended flat before nardelli joins they actually stay flat for his tenure so Wall Street keeps bringing this up as a major red flag

2:15:26in comparing home depot to lows which is growing same store comps as they're taking this new segment of the market these are the weekend sprucers here and it gets even worse during our deli's tenure he authorizes twenty billion dollars in share buybacks and dividends that doesn't even move the stock price 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 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 right but the the high level point is despite revenue and profits and being up due to new store openings we do not think the future of this company is brighter yeah yeah and meanwhile during this same period again this is as the

2:16:30us housing bubble is reaching you know it's peak inflation low stock price is up two hundred percent they're winning the housing bubble the other thing we haven't talked about is he tried to bolt a lot onto this company yeah 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 yeah yeah which like when you come from a conglomerate like GE that's what you do that's what you do and on top of all of this some of what made home depot unique starts to fade they took gross margin up which results of course in more profits but prices that aren't blow away they're closer to market competitive and actually if you look at their gross margin profile it's remained elevated ever since hmm so it's not a huge difference the gross margins are still lower than typical retail and certainly lower than that 45 percent that we

2:17:32talked about way back when but they went from this like 28 29 30 range to like pretty squarely 33 percent gross margins which is not as low as Walmart let alone Costco's razor thin margins so they kind of moved away from that Costco model if you the scale economies shared idea they sort of realized that you know we can actually keep a little bit more of the profits 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 you're right it's just incentive misalignment if you're comped on the stock price you don't care about the businesses current performance you just want investors to believe the story that you are storing up long term value inside the company so you keep prices really low you keep volume really high you keep customers really obsessed if your comp is tied to today's numbers you you don't store value inside the company you try to pump today's

2:18:38numbers exactly it's a paradoxical misalignment of incentives fascinating yep so you actually and 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 yep so all of this brewing negativity and certainly Wall Street dissatisfaction with Nardelli comes to ahead at Home Depot's 2006 annual shareholder meeting Jonas Sarah great financial journalist wrote for the New York Times I'm just going to read here quote Mr. Nardelli has become this year's version of Mr. Overpaid CEO in the five years since he was recruited from general electric Home Depot stock has fallen 12% while shares of its chief competitor lows have risen 173% you've heard of pay

2:19:44for performance this is pay for pulse but these facts barely begin to get at the richer story that is the Home Depot scandal so I hopped on a train and headed to Wilmington Delaware where the Home Depot shareholder meeting was being held this year I arrive I can hear protesters chanting hey Bob why are you chicken while the stock price takes a lick in Mr. Nardelli finally takes the podium he's accompanied by no one else suddenly we all understand what's going on the board isn't coming to the annual meeting in all my years as a business reporter I have never seen that before 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 the fact that the directors didn't show up is disgusting uh Nardelli begins the meeting when the first person gets up to speak the questioner

2:20:50gets mad I think it is absolutely outrageous that the board is not here the board is too chicken to face the shareholders as he speaks the timer hit zero and his microphone is cut off 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 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 it has never come out 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 and uh he just wanted to say a giant f you to the shareholder community of Home Depot many of which included

2:21:58current and former Home Depot employees wow it's it's bad I mean bad on the board to though 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 and in particular Nardelli's pay package is being held up as the number one example of corporate greed corporate executives making too much yep 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 finally on January 2nd 2007 Ken Lengo and calls a special board meeting in Dallas and the board fires Nardelli at this meeting he gets an 18 million dollar

2:22:59cash severance payable immediately and gets a quote unquote retirement package valued at 210 million dollars this is on top of the initial make you whole grant plus the pay along the way yes yes it is ultimately in Ken Lengo's book he does say that Nardelli only ended up getting a fraction of that amount but it doesn't matter the headlines are brutal when the news gets announced the associates on the store floors in Home Depot there's reports and videos of them celebrating and high-fiving and basically you know having a party was not exactly a man of the people 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

2:24:00financial crisis and continuates 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 ends up getting known by the Italians yes yeah you can go listen to our Ferrari episode to learn how that all turned out how Fiat Chrysler was born yep so once again Home Depot and the board are left without an obvious successor who do they turn to to go well I would say up from here anywhere from here would be up from here 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 Incorporate Development for Home Depot a new role as you were saying then as they added all this stuff to the company someone who can loved but Bernie was nowhere near convinced was the right choice

2:25:05yeah yeah a former lawyer by the name of Frank Blake 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 hissed 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 he 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 he was exactly what Home Depot but before we tell that story yes now is a great time listeners to thank one of our favorite partners century that's S E N T R Y like someone standing guard which is what they do for developers century 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

2:26:11and 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 dollar company if that's all there was to it they were in the business of turning regular people into builders I see what you're doing here yes 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 they didn't just sell you the tools they give you the confidence to pick them up which is exactly the moment that software is in right now the number of people who can build something real has been completely blown open 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 yep everyone's a builder of software now so the hard part isn't building anymore it's the part afterwards something breaks in production

2:27:12and you have to figure out what actually went wrong that's what century does for builders of every kind from a solo founder side project to the engineering teams at Anthropic for sale cursor linear and GitHub and when something does go wrong century shows you exactly what broke which release it started in and where it is in the code then it hands that whole picture to whatever you build with Claude code or cursor or centuries own agent seer which finds the root cause and opens a PR for humans to review century is where software gets fixed with over 200,000 organizations running on it so you can check out century.io slash acquired to get started all right David the saving of Home Depot man things got pretty low there didn't pay for a little while yes fortunately there's a comeback story here too so the thing that is the context of all of this we're going to talk about all the personnel stuff and the culture change in 2006 the housing bubble burst yep I mean we know of the great financial crisis in 2008 which is after this leadership transition which was January

2:28:18of 2007 but if you go back to 2006 that is where you can see it in home depots financials spending on home improvement supplies fell off a cliff 2006 into 2007 and the actual ceasing of building new homes for all of these unqualified buyers took like 18 24 months to wind its way all the way through the financial system and to blow everything up but for home depot their revenue would fall starting in 2007 it bottomed in 2010 and it actually did not get back to 2007 levels until 2014 so that's a seven year span and it's the same story with net income where they were below their previous high watermark on revenue and profits 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

2:29:21to come run the company shoot I think we got a stick with this guy as long as we can yeah most if not all of the other executive ranks at home depot were all our daily guys at this point in time so if they were to get rid of Bob the bench is only staffed with more bobs or so they thought 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 depots back yep you know this 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 yep so coming out of the board meeting on January 2nd 2007 when our deli gets fired frank Blake the dark horse candidate becomes CEO so you have been who is frank so frank was a lawyer by training who'd worked in DC

2:30:27in the federal government as 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 PNL like he his job didn't look anything like what a CEO's job would look like 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 but the answer to why he's the right choices he was in touch with the culture with what made home depot special with its original founding principles all that 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 yep that's right 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 yeah and obviously it wasn't just that one thing but that's the

2:31:28mentality that he brought to this job of how do we exist as a store support center not as a headquarters yep so when frank takes over his 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 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 G guy quote 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 that leads to Frank and Ken going to Florida to meet with Bernie where he now lives getting breakfast with him the next weekend and then Bernie and Frank go out and they do a store walk together but it's not a store walk of home depot the first place they visit together

2:32:34is 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 so that's the first thing that Frank does is men the Bernie relationship and really learned directly from him what do you think the culture is 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 yep 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 its upside down and at the bottom is the CEO and that the CEO is just this tiny little triangle and at the top the big thick level is customers and then underneath customers is associates and the belief is like look the people who can actually affect the experience of the customers on their projects is the

2:33:35associates and everyone under them just exists to serve them 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 yep 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 we got to make it not a thing anymore 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 so I want 90% of whatever number we collectively decide is my compensation the right number for the CEO of Home Depot I want 90% of that to be in stock options so that I'm aligned with the company the shareholders the employees I'm going to bring it all back to the equity strategy that the company had

2:34:41forever okay that's a way to make a statement yep and if the company does well you do really well 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 so this is crazy in 2008 they had grown to 2300 stores and today 18 years later they are at just 2400 stores yep here's how it went from 2008 right away they closed about 30 of them they took a billion dollar right off on all of the pipeline that they had been developing so all this new store development they said nope we're not going to open any of those we're just going to focus on store productivity 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 they were flat for over a decade as they are

2:35:45simultaneously returning to growth so remarkably while they weren't opening new stores they grew revenue from 70 billion to 130 billion and net income from four billion to 11 billion all by focusing on the return they could get from their existing stores so sales per store go from around 30 million to about 65 million over that 11 years yeah per store yeah crazy I mean they just cranked on store productivity yep I'm going to get to e-commerce in a minute which was a big part that is of course it's funny that was my next thing to us like that is the missing yep piece of this puzzle but I think there's a interesting like cultural thing here they'd always grown ever since founding by growing stores it was this like safety net that we can we will always show growth because we are always growing stores which means a you don't really optimize the stores you have you don't try to ring the very most you can out of them because you have a different way to provide growth and be if you believe opening stores is it intrinsically virtuous

2:36:52then you just open more stores whether it was a good idea or not so there's lots of stores they open 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 right like Starbucks has run into this several times in their life as a company yes opening more stores is not inherently virtuous unto itself 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 yeah they built this business called home depot supply which is sort of an amalgamation of several things they bought 2000 to 2006 this is mainly a distributor this business they built home depot supply that served home builders infrastructure contractors municipalities maintenance professionals like big commercial customers and the goal was this broader ambition than just their existing pro desk they wanted to serve properties across their

2:37:55whole life cycle and and whatever needs pop up across the life cycle not just this like single job single contractor order stuff will give it to you it's a super different business model then they're traditionally very focused model where everything kind of runs through the store and they had to develop all these new competencies which you know are are good but also detract from your focus so wholesale distribution offering commercial credit specialized sales forces large scaled delivery to job sites for these giant commercial projects it did grow to 13% of home depots revenue by 2006 so it was starting to become a big big business for them but when Frank came in his assessment was this is such a different thing and we're such a mess right now and the macros starting to look a little shady yeah 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 so in 2007

2:38:55they sold HD supply to a private equity consortium for about 8.3 billion dollars and kind of focused attention back on its core retail business but it wasn't just the attention that they focus back on the core retail business Frank under the extreme nudging from Ken yeah realized the core of this business is awesome yeah the adjacencies around this business might be great but I don't know the core is great we're starting to do some of the right things we're starting to turn this around 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 balsy they put it all into buybacks yep they just bet on themselves they said I think the best ROI thing we can do is buy home depot stock with this 8 billion dollars so right away they bought back 14% of the total outstanding shares in the first year and Frank would go on to buy back 30%

2:40:01of all outstanding shares over the course of his tenure he dramatically shrunk the size of the shareholder base those buybacks were done mostly at 30 to 50 dollars a share I mean today home depot is $340 a share yeah this is balsy is putting it mildly buying back 30% of your company's share base starting in the summer of 2007 well you're in the housing industry 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 can sin at home depot during the nardelli era he is atoning for his sins here and we'll we'll put this chart in the email the graph of the total number of outstanding shares is almost this like perfect uphill downhill

2:41:06that's centered right around the year 2001 where when the company was in its growth phase it was doing all these new equity offerings creating more and more and more shares all the way up through about 2001 then they'd slowly started buying them back during the nardelli era and then frank and yeah again Ken just go nuts and say no no this company at the core is awesome we want to own as much of it as we possibly can it's flattened out in recent years because they've done some some more recent giant acquisitions and they had covid and good reasons to flatten them out but the number of outstanding shares today is almost all the way back down to where it was at IPO I know this is just incredible and in big part thanks to this through the financial crisis home depot stock performs great this is like so counterintuitive you would think that the financial crisis would be terrible for home depot stock but from 2008 to 2012 home depot stock is up 132% and then it continues after that 2013 it's up 33% including dividends 27% 2014 26%

2:42:15in 2015 compounding is back baby why is it just Wall Street suddenly believing a narrative that Frank walks on water or what's what intrinsically is happening that is driving the value of this well this gets into the next and 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 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 we'll get to Amazon in a minute but actually from YouTube like you're unbundling the core value prop of the knowledge in the stores has gone you know first to the internet in a little bit during the beginning

2:43:16of the nardeli era but once YouTube comes along in 2006 2007 this is a big time threat to the company doesn't matter where you get your goods anymore if you get your knowledge for free on YouTube it's interesting it sounds great in the abstract i wonder if you're actually a you know home depot store manager how much this actually impacts you i'm sure people come in being like i learned this on YouTube and then you got to be 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 but i think over time youtube gets pretty good at surfacing the best videos for home project DIY i think that's probably right 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

2:44:22building distribution centers which is interesting because they're not growing stores 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 yes this is saying look we want everything shipped to these 12 dc's 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 stores out of the stores yeah you can't really do that except one caveat to this they do also do that so i had two e-commerce home depot experiences in the last week hmm one i bought on home depot com and 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 they had pick up at the store and it wasn't pick up they had someone drive it out to

2:45:29later that's awesome from the sodo store in Seattle is about 20 minutes away from my house but within a couple hours it was delivered to my house since it was fulfilled from store so they have the flexibility to do both ship from store and ship from distribution center yep 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 when you think about it though if you think about home depot's core best selling products things like lumber or drywall or plumbing supplies roofing siding insulation just imagine that attempting to go through the amazon logistics pipeline right like you probably have a build a whole specialized system for totally amazon is not equipped to do this i mean can you imagine putting 200 cubic feet of lumber that weighs 6,000 pounds

2:46:32on an amazon delivery van those little rathans no that is the amount of lumber you would need for a deck job yeah so home depot is actually pretty uniquely positioned to build this out and own e-commerce for home improvement and hardware 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 and it gets even better 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 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 and when you run out of something you get a refill of it as soon as possible because if you run out of nails the whole job stops yeah you know and so if you're a pro obviously

2:47:34this 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 retry your bathroom etc 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 by which point in time it's the week you're at work you can't finish your bathroom you got to wait till the next weekend like hell no you're going to do anything you can to get that grout as soon as possible so this gets to the thing that I really didn't think about until diving into this research most of the time when you say e-commerce people equate it with delivery these are a bundled thing in the world I want to order from my phone or my computer and I want to have it delivered to my house in a short period of time at home depot a giant chunk of the e-commerce is actually store pickup yep because if I'm because of this I need it right now I don't want to wait like I can

2:48:40get my car right now I just want to know that it's going to be ready when I get there and I want to have the easiest possible checkout experience so oh my god I'm out of grout crap I'm ordering on my phone and then I'm pulling out of the driveway and going down to hub depot even if they were going to do their fastest delivery to me it's probably going to take at least half hour an hour or two hours longer than me just saying you know what this is the time I have I'm driving right to the store right now yep exactly so in March of 2009 the company changes its slogan from its long time slogan that many Americans probably a remember of you can do it we can help which we didn't talk about earlier by the way but it's so perfect to encapsulate the value proposition of the original home depot model you can do it we can help their marketing consultants got much better yeah much much better so they scrapped that and they change it to more saving more doing how many entendres is that and it reflects this change in strategy right like it's more saving so like hey we get it you know

2:49:47we're not differentiated anymore by the education that we bundled that we can help we're going to re dedicate 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 shoot I ran out of grout it's Sunday afternoon I need to get this bathroom done before the end of the night more doing yep pop online go on your phone we're going to get it to you yep so the net of all that is building towards what home depot strategy is today which is 90% of all homes in America can get anything they need for any project so over a million skews delivered to their home or job site or a nearby store within two to 24 hours 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 depots

2:50:53Washington state has 48 and when you say there are by comparison there are two ikeas and washers two ikeas but you know if you want to have that value proposition 90% of homes can get anything they need for a project a million skews with two to 24 hours that requires two things one being really close to lots and lots of stores which was their initial market strategy to kind of go really dense before going to the next city and two to have an just ridiculous distribution center footprint to facilitate the e-commerce component so I did as much research as I could to figure out what does their distribution center network look like today because it's evolved a lot since that 2009 and they've really figured out how to have all these different specialty ones they have seven import distribution centers to bring things in from outside the country and this is all just within the u.s. they have 18 rapid deployment centers which take goods from manufacturers cut them up get the merchandise into stores then there's special stocking and bulking distribution

2:51:58centers which are meant to store inventory rather than cut it up and get it into stores there's 17 flatbed distribution centers which are all about fulfilling those massive orders to pros so if you need huge quantities of things on to flatbed trucks they also have 160 market delivery operations centers which are cross-doc facilities for other large items like patio furniture that they don't want to route through stores David to your point of really benefiting from a specialized supply chain this is an insane footprint to have for e-commerce they have 20 dedicated direct fulfillment centers that are just for that that they started in 2014 those stock way more skews than you would ever see in a store that's where all their online only stuff comes from and that explains why one of my goods that I ordered last week took was a battery for a camping lantern that I bought took like two and a half days to get to me whereas the other thing that shipped right from the store got to me

2:52:58in just a few hours because the lantern battery was an online on the skew and then not to mention we'll talk about this later but they do re-acquire HD supply and they make some other acquisitions HD supply on its own has 130 dedicated distribution facilities so it's just this crazy footprint yeah to accomplish that mission you talked about crazy footprint and specialized footprint that looks super different than Amazon's so this kind of becomes the story of the stock and the company after the financial crisis of oh hey it's retail apocalypse out there and Amazon's eating everybody's lunch except home depots because this is a highly specialized again specialty retail logistics and fulfillment chain and home depots built it out 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

2:54:00so you multiply decent margins by large dollar items by lots of them by every house in America the number gets really large yep so Frank Blake retires in 2014 and unlike any of the previous chapters of the company he's actually built a management bench 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 right so the CEO of UPS yep Carol to me she was the CFO of home depot for a long time and the CEO of florida core yep Tom Taylor legend so when Frank retires he hands the reins over to crag minir he runs the company for another eight years and then he retires in 2022 and hands the reins over to Ted Decker both of them come up through the company you know practically lifers at home depot and yeah speaking of 2022 all of this strategy and all

2:55:03of these people look like absolute geniuses when covid hits isn't insane they just they stopped building the physical stores a decade before they invested billions and billions of dollars building out many dozens of fulfillment centers so we're all of their effort went yep in the category of improving your home yep 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 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 yep it was like the most incredible unintended preparation of all time yeah so during covid

2:56:05home depot's revenue growth goes nuts it goes from 110 billion in revenue to about 160 billion of revenue in just three years yeah they had a little obviously some hangover after that so it would decline and then take a couple of years to come back but still America wanted to shop there and boy did they have the capacity built out for it and then in 2024 we all wanted to spend money on something besides our homes yeah 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 and it was mostly the distribution company that they sold off which is a fine business but not a great business 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 actually just bought part of it back the most valuable piece of it for eight billion dollars

2:57:11but there's been lots of inflation since then it's not really fair to call it the same price they definitely bought the best part of it for less than they sold it for but yeah the the purpose of doing this like leave capital allocation aside for a second they wanted to better serve that maintenance repair and operation customer 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 yep the next thing they do is they buy SRS in 2024 this is a giant deal an 18 and a quarter billion dollar acquisition the largest deal in the company's history they actually pause stock buybacks here in order to really gotta use the capital to swallow that SRS is a specialty trade distributor that serves professional roofers, landscapers, pool contractors and other trades you can kind of think of it as expanding into an adjacency growing its total addressable market

2:58:13the thesis is similar to HD supply but it's less focused on maintenance and more focused on net new exterior building projects so these are bulk orders planned ahead of time delivered to job sites with a dedicated delivery fleet of vehicles again a whole another 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 this continues to grow and they've already made another multi billion dollar acquisition within srs to do interior so drywall ceilings things like that in addition to srs's traditional focus on exterior 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 yep so it's interesting like that Bobner deli growing via

2:59:16expansion into adjacencies wasn't wrong it was just the wrong time to do it the wrong way to do it 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 yeah and now that the core business is healthy again I mean now that you have stores that are actually working at their highest level of productivity possible with some work done on the culture yeah yeah so all right take us to yes so the business today it's a hundred and sixty five billion dollar a year revenue business not a super fast growing company grows at two and a half to four and a half percent per year a little over half the revenue is pro contractors and half is that sort of consumer DIY retail customer moving on to profits the gross margin is a little above thirty three percent operating margin

3:00:18is 12 and a half percent net income last year was fourteen billion so of the hundred and sixty five billion dollars they make they get to keep about fourteen billion of it which if you do the math is about an eight and a half percent net income margin they have twenty four hundred stores today opening about fifteen new ones each year they own ninety percent of their real estate they only lease about ten percent of the stores since once capital stopped being an issue for them and they started being free cash flow generative they realize that actually 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 early on they obviously couldn't do that and they intentionally did stuff like the JC penny deal to to lease second hand retail stores so that they could quickly stand up new stores but over time it just became better to own the real estate this has actually been why international has been tough or one of the reasons why a lot of the best real estate in Europe is

3:01:23taken but like a lot of the best real estate in Georgia in the eighties was perfectly available and they they sort of grew up with the US I mean it's weird to say because the US is already 200 years old but I'll they grew up with the suburbs of the US becoming extremely populace they have moved to Canada Mexico you know they're they're branching out in North America but completely failed in China they totally miscalibrated home improvement is not really a thing a DIYer is not virtuous in China sort of like why can't you have someone fix that for you and the wealthy people live in cities right right right so 86% of stores are here domestically in the United States if you go over to the classic retail metrics and look at inventory turnover it is higher than lows but it's nothing crazy they turn their inventory about four and a half times per year compared to lows turning 3.3 just for reference Costco turns their inventory 13 times per year right so again like very different

3:02:29category here Costco sells the items on its shelf faster than it needs to pay suppliers for them yep Home Depot doesn't have that they they have what we mentioned earlier we're at any even time about half of their inventory is financed by the suppliers who they haven't paid yet yep one big thing we should say here is totally unbelievable that the Home Depot can turn their inventory four and a half times per year given that the goods that they carry are super high dollar specialty and they have 35,000 skews against Costco's 4,000 yep in store and then a million skews online right the inventory turn given the nature of their businesses kind of unbelievable yep at any given time Home Depot has about 11 million dollars of inventory tied up in a store and lows is about the same the funny thing about whenever you look at any chart of Home Depot and lows is used to be super different now about the same and they've really converged toward each other over time yep one thing we didn't talk about is private label they started this slowly back in 1985 and it grew to

3:03:34become 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 bear paint B.H.R only available at Home Depot Hampton Bay lighting and ceiling fans that was a Pafferra special I think yep glacier bay fixtures Ryobi which is a very high brand recently especially lawn care anything with lithium ion batteries rigid power tools and bill HDX ever built Eco smart lighting husky tools this is actually a lot of brands that I did not realize were exclusive to Home Depot they don't actually disclose now but industry estimates are 15 to 25% of their sales are house brands house brands yeah again nothing compared to the one third of Costco sales that are a Kirkland signature but still I mean that's a that's a giant amount I will I think house brands are getting more

3:04:37interesting to especially with electric tools if you look at Ryobi batteries create brand loyalty right right so I'm I'm actually in the other camp I don't have Ryobi stuff I have Eco but I bought an ego lawnmower which gave me an ego battery so over the years I now have you develop switching costs 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 yep talking about e-commerce after all that discussion it's still only about 15% of their sales are online yep they're so much running room that they have there so much running room they have 472,000 employees in their market cap today is 350 billion dollars 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

3:05:47Home Depot executive groomed under Frank Blake really yep today the Home Depot executive CEO lineage tree runs across the street to Lowe's Marvin Ellison was head of stores under Frank Blake and then went to take over JC Penny as the CEO of JC Penny and then in 2018 became the CEO of Lowe's such a deep bench that you created your competitors CEO yep I think Frank would be proud yes so yeah the Home Depot story to put a bow on at least the original Avengers plus Frank so Bernie Marcus passed away in 2024 at age 95 after a long incredible life including becoming friends with Pitbull in his later years Pat Farah is alive and retired in his 80s keeps a low profile Arthur blank who we said we would come back to today is 83 and as some of you know

3:06:56is the owner of the Atlanta Falcons NFL franchise and several other sports franchises and Arthur has been one of the most influential NFL owners of the last 20 years he serves on basically all the critical NFL league committees 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 forcing American sports and really American media today for as much affiliation as he has with the Home Depot I think he actually has more with the Falcons and the NFL now no question he is much better known for the NFL whenever you see an interview with him it's Falcons owner not Home Depot co-founder yep yep and we said he got the third Golden Horse shoe so when he bought the Falcons in 2002 just one year after fully leaving Home Depot yep he paid the then crazy price

3:07:59of $545 million for the franchise the Falcons today by the latest you know public valuations that are bandied about out there are worth seven billion dollars there's no way they're with way more than that vastly discounts the actual value of the Falcons the sea hawks just traded for nine and a half yep sea hawks just agreed to a sale at nine point six billion dollars and since then the Lakers at 12 and a half even just comparing the Falcons to the sea hawks Atlanta is about a 30% bigger market than Seattle the whole metro area and much more importantly Atlanta has a much better stadium deal with Mercedes Ben Stadium than the sea hawks do with Lumenfield 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 steak makes Arthur the wealthiest

3:09:02of all of the co-founders of the Home Depot listeners one update here from the acquired editing bay after recording the Falcons just agreed to sell a minority steak at a 10.6 billion dollar valuation so yes we were on to something David you nailed it now back to the show continuing on Frank Blake who of course Bernie Marcus so violently reacted to as another goddamn G guy when he got the news that he was taking over the company today runs Bernie Marcus's foundation amazing which is about a four billion dollar spend down foundation and Ken Langone the go is about to turn 91 years old has never sold a share of Home Depot his steak in the company is worth about six billion dollars today 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 the hard part is actually

3:10:07not about the stock picking the hard part is in the holding yes so in 1985 and this is a great arv and stat I mean long time 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 because there are always massive drawdowns in these giant 100x companies I mean you look at Nvidia like you just have to weather through them and know enough about the business to believe that it's going to make it through so in 1985 the stock was down 66% and Ken didn't sell then in 2002 down 70% and he didn't sell a share then 2008 the whole Nardelli situation the housing bubble and then again down 70% it didn't sell in fact if you bought the shares at their peak in 99 your investment would have been underwater for

3:11:10a full 12 years until the stock recovered in 2012 but Ken still never sold yep hey he's a loyal guy the value is in the holding yep yep 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 and of course I believe Ken has also never sold a share of Eli Lilly but that is a story for 2027 on acquired yes it is all right analysis 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 guess the perfect episode yeah you foreshadowed

3:12:15this with me but you didn't tell me what it is so to do it on I'm itching here 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 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 docs now yeah the stores they talk about how merchandise is not fronted there's not someone walking around turning things making sure they're facing out I walked around the store last week most items I saw definitely facing out to be the most presentable and appealing to the customer there is no backdoor or discount for contractors we were priced right for everyone not just a select group they definitely have a pro pricing desk now they even talk this big game about in the book how they they did every day low prices just like Walmart did to not appear duplicitous to customers and not have people time their

3:13:17purchases well I got an email three days ago it said daily deals with a big dollar sign through the S free delivery online only well supplies last 84 offers for you up to 30% off select home essentials shop now I was going to say I'm pretty sure I've been to some home depot memorial day sales definitely you won't see aisle numbers in our stores why 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 I'll eat if there's no numbers the employee has to say let's take a walk and we'll find it together I was in home depot a week ago there were definitely aisle numbers for sure same with decentralized decision making or having manufacturers ship direct to stores these all changed so what is the lesson here I think there's two ways to look at it and I'm curious how you think about this way number one companies in general just get less special over time as they scale it's like entropy the world wants

3:14:21you to look more like every other company when you get big and to stay special like Costco Rolex or mes Vanguard these are like companies that fight gravity it's like ridiculously hard to clutch to the thing that made you so special and not look like everyone else but the other way to look at it is it's actually completely the correct thing to do in most instances 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 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 but you probably have completely different reasons of why you succeed now then you did compare to when you were small yeah 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 totally I think the second bullet point is actually the correct one that it is the rare case where clutching your pearls and holding

3:15:26on to this founding insight is the way to succeed at scale 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 and like air as hand stitching their Birken 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 yep the founding values are important but the founding tactics are probably not yep I totally agree well speaking of embracing your scale in your scale economies I think this is the perfect transition to cars from deep oh yes so listeners this is the part where we do the seven powers framework from Hamilton Helmer's book of the same title where we try to figure out what does a company have that enables it to get persistent differential returns

3:16:31or to be more profitable than their nearest competitor on a sustainable basis and those seven are scale economies network economies counter positioning switching costs branding cornered resource and process power well the first thing you'd have to believe is that home depot is sustainably more profitable than lows they are but it's not by as much as you would think yep home depot is marginally more profitable than lows there's been a very dramatic convergence over time yep the biggest one to me is scale economies 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 there what are they three x the scale of lows yep about three x so that's the biggest thing now early on I think it was definitely counter positioning definitely lows doesn't get enough credit for the pivot in 1990 because think about all the things working against a traditional hardware store

3:17:35you've got a smaller footprint which is means to change your entire real estate basically all your real estate is useless yep you probably have to lower your gross margins yep 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 they should give you great deals yep yep it's it's unbelievable that any of those stores manage to adopt the home depot strategy yep oh and they probably use distributors so you have to blow up all of your existing supplier relationships to go direct to manufacturers yep yep yep 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 yep I think there's significant switching costs for pros yeah for that reason and probably branding for pros and I think the hardcore weekend warrior segment

3:18:35also prefers home depot but that's for the same reason that the pros do yep I think so too I think there is still counter positioning today it's just very different it's counter positioning versus Amazon with their logistics and fulfillment good point network yep 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 yep I agree but yeah I think that's it I think that's it too a scale economies a lot of scale economies which makes sense for a retailer yes yep yes all right quintessence on this one 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 home depot is the only specialty retailer in the world that is in the same universe as the Costco and Walmart and Amazon retail

3:19:39so how did it get that way David it won't surprise you that I have a several part answer slash equation to answer this question all right you've certainly peaked my answer because it's it's basically several things multiplied together like does it include scale economies shared well see what you think so the magical thing at the core of all of this is forget home improvement if you can get consumers excited about shopping in a warehouse with no frills there is an insane number of downstream benefits that that comes from that we talked about them all episode particularly as it relates to saving costs of not having to have a separate backroom and showroom normally that is a huge if but home improvement is the perfect category I mean you are delighted to go buy hammers and lumber in a warehouse so not not issue that's factor number one two giant market today the home improvement industry in the us is 300 billion dollars

3:20:41for reference like a comparable market us furniture 180 billion so even other large retail categories aren't playing in this large market three they captured a huge part of the market used to be super fragmented but today home depot is 51% of the market lows is 29% of the market the next highest is minards with less than 5% of the market by 2026 home depot and lows together represent 80% of the market for home improvement stores yeah that's wild the scale economies in this business which were not apparent when it was a small fragmented thing have actually led to winner take most yeah and in fact the narrative around home depot and the market that I think management self would tell for many years is hey we're still a small part of the market that's yeah depends how you define the market but yeah if you define it as home improvement stores yeah they're 51%

3:21:42and 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 yep okay so that's three four aging housing stock in the united states i wanted to save this all away for the end arvin 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 post-war construction you kept adding new homes to the overall stock the american suburban build out 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

3:22:44then 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 an IPOed into a market of houses that were only getting older and needed ever more repairs 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 this is one of the largest tailwinds we've ever studied in a business and and a very predictable one two i mean one thing i know for sure if the age of the median home in the united states right now is old in five years it's also going to be old yep it's going to be old there so here's a market so this is a different way to slice the market but another crazy stat in 1975 us consumers spent 28 billion dollars on residential improvements and repairs that was right before the company was founded 28 billion five years later that 28 billion grew to 47 billion today that number is 600 billion dollars

3:23:50that us consumers spend on home improvements and repairs 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 five they massively grew slash invented the do it yourself concept and six the pro market ended up having way more running room ahead of it than anyone thought 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 so if i had to answer the question why did it get so freaking big 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

3:24:52the consumer market yep yep i love it i think maybe the only thing i would add to that beautiful equation is it's also the product of the us's economic and property rights policy decisions um over the last hundred or so years that have created this market for us housing where a huge portion of the households in America own their own homes single family freestanding structure yeah homes yeah and that was a necessary precondition for the home improvement industry to get so large if you either had and in the u.s finances it i mean the fact is that yeah yeah 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 toe in these homes and the strong tax incentives to have mortgages to own homes etc etc if you either had not as high ownership rates in the us or like China if you

3:26:01had a just fundamentally different kind of housing stock that people own because actually the Chinese housing market is larger than the us housing market but it's a terrible market for home improvement and home depot yep good point yep that's what i got it's a good ad all right that's our quintessence ladies and gentlemen this was a fun one a lot of characters along the way a lot of characters carvots what do you have carvots 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 three i think i've probably made a carve out of silo season one and two in the past i think so i might have done the books the books 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 apple tv makes good stuff yeah i just can never wait till friday night and not for all the normal

3:27:06reasons to wait for friday night it's because that's when the new silo drops so i can't recommend it enough great great sci fi throwback to appointment viewing yes my second one is also a season three of a tv show tires oh yeah this is with shane gillis right yes oh my god it's so funny i tried to watch it at night after we put my son to bed and i'm just like laughing so hard i'm always afraid i'm gonna wake him it's just so so good i i'm so glad they did a season three because shane got very famous after they did season one and two and i was like oh this is this low-budget thing that he did with his friends is is done but it's back the whole cast is back and it's better than ever so i highly recommend it nice nice and my third one is the ratio eight coffee maker it is a all glass ceramic and metal coffee maker 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 it in my coffee

3:28:10every morning and so the ratio eight is a first of all it's aesthetically a very beautiful machine but it's basically a high-end precision automated pour over willing to in the show notes 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 to you to try every two weeks or one week or whatever you want the frequency to be and i oscillate decaf and regular so that i can mix them and make half-caf coffee in the mornings oh nice nice yeah so i got nice well i am gonna surprise you i think i have two carbats one of which is a tv show and one of which is a movie a movie david Rosenfall i know watching movies and tv shows this is not my uh normal outside of acquired behavior the first one is the tv show quarterback on netflix it's august here as we're recording this and i am so starved for football and Netflix does such a good job with quarterback it drops right

3:29:14at the right time right at the start of training camp when you're desperately in need of some football content this season uh cam word of the Tennessee Titans i didn't watch a lot of Titans games last season and so i didn't know much about cam word former number one pick last year in the draft i'm excited about him i think he can be a star and the league going forward sweet all right quarterback on Netflix and then my second carve out is the old jerry sign felled movie comedian which i watched upon reading a tweet from friend of the show jerry and jiffon this movie is so fun it follows jerry right after sign felled the show ended oh 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 at it's like he's jerry sign felled right after the show ends so with the most famous person you know maybe in all of new york

3:30:19and he's just go into the clubs trying out new material and he's bombing and it's it's great it's so fun to watch uh sweet i gotta check it out do you know my favorite game when i go stay at a hotel oh no i turn on the tv and i try to see if there is an hour where a sign felled rerun is not on any channels the syndication rights are are so distributed that i feel like sign felled the show is on 24 seven somewhere gotta be and on Netflix now yep all right well we have some thank yous for folks who helped us this episode first i've been talking about a wall episode but arvin nava rutnam at worldley partners he always does these great hundred page studies and this episode is particularly in his wheelhouse because in his quest to find the next hundred x company to invest in and hold for decades he does this on the ground research he goes to stores and he employs someone full time at worldley partners who is traveling the country walking through home depot lows Costco

3:31:21other stores doing price comparisons and actually generating real first party data on how do these stores evolve and change over time how do their prices change how to the experience change and so his his right up on this one is particularly awesome so you can check it out at worldley partners calm all of his other studies are there and this time arvin teaches a class for hbs and Boston college students usually their private he interviewed ken langone and he has agreed to make that video public alongside the release of this episode so he's also going to put that on worldley partners calm so thank you so much to arvin for your research help thank you to ken yeah so fun to talk to him great storyteller and to front of the show frank blake frank is just the most ridiculously humble person you will ever beat ken would insist that he saved the company and it would cease to exist if not for frank coming in and saving it frank of course says that is absolutely not true and turns out it wasn't that dire of a situation i think i'm with ken in his

3:32:25opinion on this one yes thanks frank and thanks to russ and dill and murphy my contractors for being my partner in building and restoring and maintaining my 115 year old house here in cfns go and helping us with this episode yes a huge thank you to our partners this season cierra our presenting partner cierra helps the great companies of the world build better more human customer experiences that cierra dot ai slash acquired to work o s start selling to enterprise customers with just a few lines of code build authentication in minutes instead of months work o s dot com to anthropic clawed is a truly incredible ai product that thinks with you just like it thought with me in preparing for this episode that's clawed dot ai slash acquired to century application monitoring software considered not bad by millions of developers century dot ios slash acquired and if you're in the bay area on september 17th just a few days after this episode comes out you should

3:33:26join us for the official twenty twenty six acquired meet up with our friend said century that's acquired dot fm slash meetup if you like this episode go check out our other episodes on great retailers casco wall mart trader joe's ikea and amazon were really creating kind of this retail i know through line here that the great american retailers we might have to uh make some t-shirts with some more saving more doing slogans on it and that's right you can do it we can help that's right and for all of you who have been asking for visuals with our episodes you can check out our companion pdf it will come out the day that this episode drops and it will improve over time so if you checked out our disney pf from part one or part two both of those have been dramatically improved uh since those first dropped that's library dot acquired dot fm for all those tables charts and illustrations of key concepts join the email list acquire dot fm slash email where we send out behind the scenes photos from research past episode corrections and vote on future

3:34:29episode topics and come talk about this with david me and the whole community and slack at acquire dot fm slash slack listeners with that we will see you next time we'll see you next time who got the truth is it you is it you is it you who got the truth now