The Home Depot

Acquired3:35:04

English auto-captions · YouTube edition

Ben describes Home Depot’s expansion into China as a failure of its familiar warehouse-store model.

Home Depot’s announcement on 13 September 2012 spells out what closed and what stayed. Its remaining seven big-box stores were shutting, affecting about 850 employees. The company expected an after-tax closure charge of approximately $160 million, covering assets, leases, severance and other costs. It retained two recently opened shops in Tianjin: one for paint and flooring, the other selling Home Decorators Collection products. It also kept a team developing new retail formats and began exploring partnerships with Chinese e-commerce sites. Around 170 staff would remain across those operations and its Shanghai and Shenzhen sourcing offices. The announcement described a change of retail format, rather than a complete withdrawal from China.

Original announcement

Full transcript

I'm sorry I got tripped up. You used uh

power tools, David Rosenthal.

>> 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

size door opening in my studio. I

drilled the door handle. I put the door

knob on myself. It all worked great.

>> We uh 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? [music]

Is it you? Is it you? Is it you? Who got

the truth now?

Is it you? Is [music] it you? Is it you?

Sit me down. Straight. Another story on

the way. [music]

>> 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, but not really like

an important company to the world, but I

was wrong. And the stats are uh large,

David.

>> Large.

>> 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 just covered.

>> 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. And astonishingly,

if you put $1,000 into Home Depot and

Apple and their IPOs and you held them

all today, your investment in Home Depot

would beat your investment in Apple. 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 um who holds that

equity because it's actually a critical

part of the company's strategy or at

least it was.

>> Yeah. And listeners, if you're trying to

contextualize, well, 45 years is a long

time. You know, how does that 17 million

stack up? Ben 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.

>> Wow. 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? I mean, of

course, it's bigger than Lowe's, 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,

more 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.acquire.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 acquire.fm/e.

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.fm/e.

Join the Slack. Come discuss it with

David and I at acquired.fm/slack.

And before we dive in, we want to thank

our brand new presenting partner,

Sierra. Yes, Sierra helps the great

companies of the world build better

customer experiences and drive stronger

business outcomes with AI. And we are so

excited to be working with them. 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

forformational 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. They're 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 uh 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. Uh, the forward

of which was written by his good friend,

the rapper Pitbull. [laughter] Uh, like

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 at

[laughter] the forward.

>> So Bernie, despite his uh, you know,

rough upbringing and gang experience on

the streets of New York, he's super

smart and he ends up being the first

person in his family to go to college.

She goes to Ruckers down the road from

New York in there 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

concessionire in a New York area

discount store. Concession like a like a

store within a store. This uh begins

Bernie's retail education and from there

he would go on to join the uh New York

area discount chain Two Guys.

Ultimately, this leads him a couple

years later in his 30s to an executive

role at the Dalin 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. Uh there 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. [laughter] And

Dalen was this holding company that

operated almost like I don't know like a

portfolio or an index fund on all these

retail concepts. So they would go out

and acquire small chains of all of these

types of postgeneral store concepts

serving the American suburbs. So yeah,

they hadarmacies, 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 Dalen. He has no equity in

the company. He's just a employee, but

it's a stable job. He's doing well.

certainly moved up in the world from his

upbringings. And then he gets an

opportunity. In 1972, Dalon makes Bernie

the CEO

of its Handy Dan 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 on to found Home Depot, none of them

are like general contractors or grew up

in the hammer manufacturing business.

It's people who just who knew retail.

>> These are retail guys. Exactly.

[laughter]

>> Well, retail and uh finance guys as

we'll see. Yes. So once Bernie becomes

CEO of Handy Dam, he quickly recruits

another younger company man from within

the Dalin Empire, a financial whiz named

Arthur Blank to come over to LA and join

him as his CFO at Handydan. And Bernie,

you know, he he knows himself as as

we'll see. He is an incredible retailer,

an incredible CEO, an incredible leader,

but his weak spot is finance. Now, you

might be wondering, wait a minute, if

Handy Dan is a subsidiary of Dalin,

why does it have its own CEO, CFO,

management team? Because Handy Dan was

also a standalone publicly traded

company.

>> And Dalen didn't own all of it, right?

It just owned the majority of the

shares.

>> Yeah. So Dalon had bought all of it, but

then there was this [snorts] kind of

crazy fad going on 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 division's 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 it didn't work

at all. In practice, most of these

publicly traded little divisional stubs

traded at a further discount to the

parent company's already discounted

holding company valuation.

>> So why is Dalon doing all this financial

engineering? You know, I thought we just

said that times are great for retail,

the American suburbs are booming, etc.,

etc. Well, they were in the 60s,

but now here in the 70s, retail is uh

struggling. So, we've talked about this

period on a whole bunch of other

episodes on acquired, you know, Vanguard

most recently, but the 70s were brutal

in America. There's the oil crises that

hit. There's stagflation.

Uh, 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, etc.

This is really bad for suburban retail.

>> Shopping just dries up and Dalon starts

totally sucking wind except for Handy

Dan.

>> 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 they take over, as

you said, they're not coming from the

hardware business. These guys are

seasoned retailers from other parts of,

you know, the retail sector. Hardware,

home improvement as a concept wasn't

really a 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, then 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 and so like if you're a

consumer, if you're a suburban homeowner

and you've got a project that you want

to work on yourself over the weekends,

>> which actually wasn't very many people

that that sort of do-it-yourself for

wasn't really a thing yet.

>> Totally. I mean, it's Home Depot that

unlocks that category because before

Home Depot, you couldn't trust that you

could get all the stuff you needed to

accomplish your project to build a deck

or retile your bathroom or whatever you

wanted to do around your house. You

would walk into these little hardware

stores and good luck, you know.

[laughter]

>> 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 these small

store footprints that we're talking

about like a fifth or less of the size

of what you know as Lowe's today.

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, sort of a small

showroom, not you know concrete floors

and giant ceilings attached to a lumber

yard. You 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. They're 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 Dalon, the parent

company, because they're so weighed down

by their other divisions that they file

for bankruptcy in 1975.

and they bring in a noted turnaround

artist as the CEO to turn it around.

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 Langon.

>> This is your uh 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 Langon 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 Perau's

company, EDS. People today remember Ross

Perau 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.

>> Yeah. And I was trying to think about

the best way to frame EDS. Maybe like a

palunteer. They were very involved in

government contracts. I mean Ross

Perau's history. We got to do a whole

Ross Bro 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.

>> He was a top salesman at IBM before

starting the company. a deployment and

service arm for enterprise computing and

government computing and that sort of

led him down this whole crazy path of

building what was then an empire in EDS

would be small by today's standards but

he was a technology

enterprise business magnet at the time

>> totally and based in Plano Texas EDS has

this long history they ultimately get

acquired by Hila Packard and become uh

HP enterprise services so yeah Ben

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 to every

customer and every entrepreneur that he

works with. He never sells a share of

almost every company he's ever been

involved in. And we're going to talk

about the almost in just a minute. So,

all right, back here, we're in the mid1

1970s after the EDS IPO. Ken has just

taken public uh Philadelphia based

hardware chain, you know, 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 uh 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 we'll spoil it now. David, we

spent some time with Ken prepping for

this episode and his comment was God is

good as it pertains to hardware and home

improvement. It's the gift that keeps on

giving that 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 uh recurring

revenue if you're in this business to

keep working on a home as the weather

and 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 house's then market value into their

home every year just in maintenance

before you get into improvement.

>> Right? But in postwar America, they were

building more and more houses every

year. The old houses they built were

getting old. It was a great business to

be in. Or it should have been anyway.

>> Should have been. Should have been. So

Ken says to the CEO of this company, a

guy named Gary. He says, "All right,

Gary, who's the best operator here in

the business?" And Gary says, "Oh, 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 Dalon is going

bankrupt, but Handy Dan is doing great.

So Ken says, "Okay, wait, wait, hang on.

Let me go get my Moody's manual because

this is how you checked company

financials back in [laughter] the day."

He pulls out his Moody's manual, his

little book, and he's going through, he

looks, he 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 gonna earn

post tax net income of a buck 50 a share

this year. So this company is trading at

2 years of post tax earnings. So Ken's

like,

>> "Something has to be wrong. Is is there

like an accounting problem? Is there

some trick in the reporting or gimmick

here that I don't understand? I got to

dig into this."

>> So So he says, "Gary, let's get let's

get Handy 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?" [laughter]

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. I'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 Langon. [clears throat]

>> 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. This information

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 that I'm 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, uh, they have lunch and

quickly becomes apparent that Bernie is

a gifted retail operator. Company's

doing great. The financial statements

are all correct. So, Ken says to Bernie,

"Do you have any equity in this

company?" And Bernie says, "No, just an

employee. You know, this is a Dalen

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

publicly 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. [laughter]

Now Bernie, this is exposing his 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,

>> negotiating in some ways. He he

overrusts people to

>> he's weirdly riskaverse in this area. So

he says, "Oh, oh, I can't do that.

That's that's that's too risky. You

know, I've got a family." And 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. Price says, "Nope, nope. 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 just 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, uh, Ken says, "All right, all

right. I told you." Uh, 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. [laughter]

>> All right. So, I I looked this up,

David, in the book Built from Scratch,

which is the awesome book that uh 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 uh the

church's financial officer, who is also

a priest, "Hey, will you sell your

shares to me?" The priest pauses and he

says, "Langon,

is that an Italian name?" [laughter]

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." [laughter]

And uh Ken, you know, smiles and laughs

and says, "Uh, well, on on these terms,

you should keep it. Don't sell.

>> You should 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. His 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 in that series of events.

This is how Ken Langon becomes a

co-founder of The Home Depot is he gets

his buddies Bernie and Arthur fired

accidentally.

>> Accidentally.

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I/acquired and just tell him 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 Dan?

>> 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 dance doors. Ken

basically becomes part of the crew,

which is uh very different than the new

Dalan 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,

you know, 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 Dalen, a guy

named Sandy Sigalof." And uh, you know,

build a relationship with him. Now,

Sigalof, 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 uh

bankruptcy value recovery artist here,

shall we say?

>> Yeah. Didn't he give himself a nickname?

Was it uh Ming the Merciless?

>> Yes. After the villain in the Flash

Gordon comic series, and he called

himself that because of how merciless he

was to all the uh employees of these

companies that he would slash and burn

and get rid of. So Ken realizes right

away that this Sigaloff guy is bad news,

but he's got this close to 19%

equity position in handy Dan. He's like,

"This guy 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,

Sigalof 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. [laughter]

Okay, so Ken has no intention of selling

here. Let's just first say that. He he

is now in it with Bernie and Arthur. He

thinks it's a great business

>> and loyalty is his whole mo. He never

sells.

>> Yes. So Sigolof sends his lieutenant

Jeffrey Chainan to try to negotiate

something. So, this is from the book

Built from Scratch. Chainan says, "The

stock is selling for about $8 a share.

How about if we pay you 10?" "No way."

Langon says, "The price is 12." Chainan

was shocked. "Forget it." Langon left

and went to the men's room. Barely 2

minutes later, Chainan followed him in.

"Okay," he said. 12. [laughter] 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

offer is off the table. That is gone. We

had an offer and a denial. No deal.

Chainan goes, "What?" Ken goes, "I

suggested a price of $12 in my office,

right?" Chain nodded. And you declined.

"Well, that's it. I don't want to sell

now.

>> We're in the men's room now. Price is

different."

>> Jaden says, "You must have some price."

"Okay," Ken says. " $14."

Chad had left in such a blind rage that

he almost banged his head on the door.

About a week later, Sigalof called

Langon. Let's not mess around. He said,

"We will pay you 14." Ken goes, "Sandy,

you guys don't get it. I offered it to

you for $14." Shannon said, "No, that

offer is off the table." [laughter]

"I don't understand," Sigalof 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." Sigolof hung up the phone.

Matter than hell. It's like uh is it in

uh 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 uh Kenny as

he's taken to calling him.

>> Yes.

>> He says, "Kenny, just do me a favor. Ju

just sell just sell the sickle off. He's

breathing down my neck. This situation's

getting bad. It's making my life

difficult. Just just just sell. It's

fine. business is doing great. So, this

is actually like my biggest headache.

>> Yep. And Ken says, "Bernie, what are you

talking about? Don't you understand?

Like, I am the only thing that is

protecting you from Sigleoff. 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 Dalon. You know, that's not

him." Bernie, though, again, he's like

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. And it's uh 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 and 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 Sigalof. 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 does he sell for?

>> Well, even though he's going to sell,

Ken is no pushover here. He sells for

2550

a share that he started buying at three.

Do you know over what period of time?

>> I think it was only about two years this

whole saga

>> from $3 I his average entry price was

probably I don't know $56.

>> Yeah. 56 whatever

>> up to 2550 to sell. And the story is

great where the Sigalof 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 2550.

And he goes why the odd number? And Ken

goes well it doesn't look like we had

some real hard bargaining here.

[laughter]

>> So good. So good.

So January 1978, Sigalof buys Ken's

shares and now owns just about 100% of

the company except for the uh Catholic

Church in Brooklyn.

>> Yep. And then just as predicted

>> Yep. Just as predicted, three months

later, Sigalof fires Bernie and Arthur

and the audit manager at Handyan, a guy

named Ron Bril. The reason that Ron gets

fired too is the pretense that Sigalof

trumps up is an accusation that the

three of them had violated national

labor relations rules in negotiating

with unions. Signal off 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 Sigelof, I think, couldn't do this

while there was still a large outside

shareholder who would have disagreed

with that decision. But now that he owns

basically the whole company, he's like,

"Great, I I want to consolidate power. 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

Histori 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 equity. I

can't support my family. Sy's coming

after me with this labor relations case.

I don't know. I might go to jail. What

am I going to do?" And Ken says,

"Bernney, relax. You just got kicked in

the ass with a golden horseshoe."

[laughter]

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 to 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, you

know, 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 till someone does it and it's

going to destroy this store because it's

just a structurally better business

model, better idea, better thing for

customers. So, you know, this is fine.

But, and Ken's like, "Well, tell me."

And and Bernie is is 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 gonna I'm gonna hold on to it." And

Ken's like, "No, come on, dude. Tell

me." And so now Ken knows the idea too.

>> 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

Saul 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 uh

store concept that he's launching down

there in San Diego." And I'm telling

you, man, it's going to revolutionize

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. [laughter]

Customers

come in and shop the warehouse. So

there's no back room. 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 blowing

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, [laughter]

cut back a couple months later here to

breakfast at the Waldorf Histori 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 gonna go start that company. We

got the golden horseshoe 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 dandy concept here.

We're talking about a warehouse, but

also a lot of stuff that we got to put

in it. And yeah,

>> this isn't Price Club. We're not selling

toilet paper and water bottles. We're

selling expensive stuff like power tools

and lumber. We need a lot of capital to

put into this thing.

>> Yeah. Bernie and Arthur had gone away,

done a little work, sketched out what

the economics could be, and they

realized even the best handy Dan did

about 3 million in annual revenue. I

think these stores can do 7 8 9 million

in revenue. And we're not just going to

stock like 8,000 items. We're going to

stock 25,000 items. It's not a 10,000 ft

store like Lowe's or Handy Dan. This is

going to be like a 60,000 ft store. I

mean, 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 there's 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 whole situation, the

firing from Handy Dan, the labor

relations suit from Sigalof, etc., etc.

Saul listens to all of it. He says,

"Bernie, do you think you're talented?"

And Bernie says, "Yes, I think I'm

talented. I did a great job at

handdyan." 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 tells Sigoff to go f himself

and just do this thing." And so with

Saul's 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? I mean, it's it's an

eerily similar thing. they they would

diverge over time and we'll talk about

all the differences, but the pitch is

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 in hardware retail at that

time, 45%. It's going to be a little bit

different than Price Club in that they

actually think they're going to have the

best selection. We're have tons and tons

of SKs.

>> We're going to have tons of SKs versus

Price Club and Costco's famous low skew

count.

>> We're going to have the 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 tool store, etc., etc. Yeah.

Being a warehouse unlocks [snorts]

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 gonna have to have 25,000 SKs 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. And

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 of nuts

and eat a big jar of nuts. They don't

know how to build a deck.

>> Yep. 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.

>> Yep.

>> 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 SKs. Yeah, I

think Bernie both really did need the

pep talk from Saul and he also wanted to

make sure

>> Yeah,

>> Saul wasn't gonna 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 Perau almost owned the majority of

Home Depot.

>> Yeah. 70% of Home Depot because Ken

flies everybody to Dallas. They meet

with Ross and they hammer out a deal for

Perau to put up the money for what would

become Home Depot.

>> $2 million.

>> $2 million 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 and ultimately

the sticking point, you can't make this

up. It's all in built from 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 new, you know, fancy

Cadillac. This is an old fancy Cadillac.

>> And Perau says, "Hey, well, this is

important to me. My guys, my guys here

at EDS, they don't drive Cadillacs. They

only drive Chevrolets. We're scrupulous

here about our costs." And Bernie's

like, "Cost? What are you talking about?

This is old Cadillac."

>> Right. Practically, pragmatically, this

is actually exactly in line with your

ethos.

>> Yep. And uh Ross is 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 it?

>> Exactly. You're treating me like an

employee again.

>> This is our company. You're the

financeier.

Uh, 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 dilution along the

way, but then counteracted 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, would have had about 91% of

their original percentage of the

company. Yep.

>> So Ross Perau insisting on a Cadillac

cost him $223

billion,

[laughter]

>> assuming he held. Assuming he would have

held,

>> right, which uh Ken did, by the way.

Still holds all of his shares. Yeah, you

didn't miss hear Ben there. Uh 230

billion. That's with a B dollars.

Oh man.

>> So they're screwed, right? I mean,

there's not a lot of places to find the

capital. This thing requires a ton of

money to get off the ground.

>> Yeah. For ordinary people. But uh they

got Ken Langon here, the greatest

investment banker of all time. So he

says, "Nah, yeah, no, no big deal. You

know, I get it. You know, that that was

pretty heavy-handed of Ross. I'll just

go round up a bunch of other investors

instead and we'll put a syndicate

together. And um 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 deal by walking

away from Ross Perau?" 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 [laughter]

mark it up.

So great, [gasps]

>> which is a little facicious. I in my

mind, what happened here is when you're

negotiating with one counterparty that's

coming in for all the capital,

>> they have leverage.

>> 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 just going

around all these people and saying, "Do

you want to be in on these terms?" It's

kind of the if you're a venture investor

or you're a startup, it's the difference

between you writing your own terms for

the safe and writing in the number of

the valuation and then just having

people pile in on that number versus the

lead investor coming in with a priced

round. They get to dictate the number

and that number is usually

>> not as friendly to you. Yeah. As uh as

the number that you write on your own

safe.

>> Yeah. It's still a great line 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 investors own 50%. Ken gets

5% in exchange for, you know, putting

this deal together, finding the capital,

and I think he put in something like

100k of his own.

>> Yep. He put in 100k.

>> And then Arthur, Birdie, the rest of the

management team would get 45%. And at

this point, the the founders of the Home

Depot are set. It's Bernie, Arthur, and

Ken

>> for the moment.

>> Yes, they are missing uh one superpower

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

you know, as we talked about, warehouses

are expensive. LA isn't great because

real estate is super expensive. There

not a lot of empty warehouses lying

around. And also, Handy Dan is still

there. Handy is still the best operator

in the industry.

Maybe not great if we start 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, seen 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 ft.

>> Yep. It's got every hardware and home

improvement item that you can imagine

piled up high to the ceilings and priced

cheaper than consumers had ever seen it

before. In uh retail parliament, the

strategy here is known as stack them

high, watch them fly.

>> I mean, it's a bonanza. The consumers

walk in and they're like, "Holy,

this is crazy. This is fun." It's like

our Walmart episode where they were

doing crazy stunts in the parking lot.

Yes. the feeding frenzy.

>> 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 Homeco." So Ken flies

in, and I'm just going to read Bernie's

description of what happens next here.

Pat, the Homeco, 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

haircut was wearing a powder blue velvet

leisure 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 Michelangelo

was to art. [laughter] At least that's

what Ken said by the time the meeting

ended. Or the way I've heard Ken

describe this is uh 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've got

Bernie the retailer, Arthur finance and

operations, Ken finds the money and as

sort of the spiritual glue holding this

team together, but they don't yet have

the genius merchandiser who is going

around suppliers figuring out what the

best stuff you can get from them at the

best terms. Having a crazy nose for what

consumers want and making sure to find

those items from the suppliers. cleverly

figuring out how to display it. Yes. And

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. And uh Oh, man. There's so many

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 it was an accident, but we

definitely got to take out this wall

now."

>> Yep. So, despite the uh, you know,

reservations about Pat's character, they

sign an LOI, letter of intent to buy

Homeco from Pat with this new wellunded

company that Bernie and Arthur and

>> wellunded. They got $2 million. That's

not nearly enough to do anything that

they I mean, they're operating on a

shoestring budget here, but I'll come

back to that.

>> Yes. Yes. So, they start digging in on

due diligence on Homeco and they

discover that while Pat is a genius, all

the revenue, all the sales, all the

customer demand, it's all real, the

store itself is actually insolvent

because Pat has not been paying any of

his suppliers.

>> Pat needs an Arthur.

>> Yes. Yes, he does. He has just been

ignoring the invoices that the suppliers

were sending him, you know, 30, 60, 90

days later.

>> I mean, that sounds malicious. I get the

sense a lot of what he was doing was

incompetence. Yes. Not

>> No, he he Yeah. Yes. It wasn't that he

was trying to steal the money. It was

that he genuinely didn't know how to

operate a business. He's like, I just go

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, did are these financial statements

correct? And the auditors determine,

"No, the margins at this store are not

anywhere near what this owner thinks the

margins are." And Bernie and crew have

to break this news to Pat. And Pat's

like distraught. He's like, "What do you

What do you mean I this thing's going to

run out of cash in the next few months?

I'm doing great." And they're like,

"You're you're not doing great, man."

>> Yep. But God bless him. And this is

Bernie's trusting nature and optimism.

They say, "Okay, we're not going to buy

Homeco. You're gonna 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, [laughter] 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 it it kind

of has two things it forces. One, they

got to get the longest possible

financing terms from suppliers.

>> Yep.

>> So, you know, once the goods arrive at

the store, it's like a ticking clock to

make sure that they can move these

goods. 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 item so that Home

Depot could get money right away versus

businesses

>> because the expectation with a business

is I 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 proc contractor and

you're expecting to pay in 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 the 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

and a name. But before we tell those

stories, now is a great time to thank

one of our favorite companies, Work OS.

Yes. So listeners, there's this decision

that every company faces once you find

product market fit and you start

scaling. 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

work OS. They make it easy to add all

the things that enterprise customers

require. Single sign on, skim,

permissions, audit logs, all with 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.

Which actually is a very Home Depot

problem. About half of what Home Depot

sells goes to a procontractor who is

buying on behalf of a homeowner. It's

someone else's money for someone else's

kitchen that you're building. and the

scope of work that the pro and their end

customer agree to.

>> Yep. Agents are like the pros of

software. They log in and take actions

on behalf of the people 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

[laughter]

>> or my new bathroom or 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 works 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 in to redo the

kitchen doesn't decide to take out a

loadbearing wall in the dining room.

which you know 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 OpenAI cursor perplexity and

friends of the show at Sierra and

Anthropic along with hundreds of other

AI startups build on work OS. You can

learn more at workos.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 uh Homeco 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 Depot 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

them.

>> 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

pretty cheap and available there,

>> which leads us into the second reason

they choose Atlanta. Speaking of good

real estate locations, they end up

getting a sweetheart deal from JC

Penney, you know, like the big national

department store chain.

>> Yep. to subleasase a couple of their

locations in Atlanta. J Penney had

started a Kmart Copycat subsidiary.

>> Is that what Treasure Island was? I was

trying to Kmart Copycat. Yep.

>> Ah.

>> Yep. And it was in the southeast and it

was called Treasure Island. And they had

great locations. I mean J. C. Penney 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 four of the Treasure Island

locations in the Atlanta suburbs

>> as a subleasase, right?

>> Yep. As a subleasase. Yep. At least a

start. So Bernie, Arthur, and Pat, they

all pack up their families, they move to

Atlanta, but now they really need a

name. They've got the locations. They

could open these stores. So, they hire a

marketing consultant who comes up with a

with a great idea. Can't wait to present

it to the team.

Bad Bernie's buildall. It's a

literative. 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 shtick was? I

>> That was what the shtick was going to

be. 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. [laughter]

>> Which of course is exactly what the loan

officer wants to hear at the bank when

you're I mean, speaking of being

scrappy, they're just constantly going

to lenders and trying to get capital so

that they can buy inventory, but they're

just trying to get loans so they can run

the business.

>> Yep. [laughter]

So obviously bad Bernie's build all is

uh not going to cut it. So Ken goes to

the investor group that he put together

to solicit ideas and the wife 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

uh 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 Santi

Stigeloff? Handy Dan HD. [laughter]

Nice little uh

>> tweak, shall we say? A little nod. Yeah,

let's let's put it in the positive spin.

Little nod.

>> Yes.

Turns out though, the consultant who

came up with Bad Bernie's buildall

wasn't a total waste because he's the

one who suggests that they adopt the

color orange as their company color

because it would stand out. 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 apron stands out. It's

distinctive. It's great.

>> Yep.

>> So, that leads right into the opening of

the first two Home Depots in Atlanta on

June 22nd, 1979.

They opened 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, we'll we'll put some in the

email. It's very clearly a big hardware

store operating inside of a Kmart. I

mean, it it looks like that. They they

describe the concept in all the books

they've written and all these accounts

of of early Home Depot as this vast

warehouse with tall ceilings and

merchandise piled to the ceiling.

>> But the early pictures are I swear

Kmarts or or even kind of J C Penney.

Like it's pretty low ceilings. The racks

that things are on are are like standard

Kmart style racks. It's it's nothing

like the Home Depot that you know of

today. The floors are this sort of like

lenolium type floors. And so yeah,

they're uh they're selling table saws

and hammers and lumber out of uh

discount

>> Kmart knockoff. Yeah.

>> Kmart knockoff, right? Second use real

estate.

>> Yep. Yep. Yep. There's some uh 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 to, you know, 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 Trader Joe's episode

amortize the cost of their advertising.

If you blitz one local geography's

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 mixup and the

newspaper ad doesn't run. So, they got

>> Whoops. Nobody knows about these stores

opening. Instead, Bernie and the store

associates, like the the retail workers

on on the floor in the 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

[laughter] the store.

An auspicious beginning to uh 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

lenolum 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 4 in the morning,

the day of the opening. He sees the

polished floors and he goes nuts.

>> Oh yeah, that was like a a thing with

this entire company for decades is that

they all worked from like

>> the wee hours of the morning and it was

just like expected of the entire culture

is if you're not sleeping, you're here

working

>> and also it's fun. Like it's a it's a

party and we just work all the time and

all of us do it.

>> Yep. [gasps] So when Pat sees these

sparkling clean floors, he loses it. He

calls Bernie and Arthur. gets him out of

bed and the three of them come in and

they start careening forklifts around

the store floor to scuff up the

lenolium. 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 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 uh quote about this that

he would write is our stores are action

places.

>> Yeah. And also I we're going to get to

this later, but part of the Home Depot's

business model and part of the big giant

reason that it works is if you are mid

job, the Home Depot is the place that

you use for real time replenishment.

>> Yep.

>> So sometimes that means if you are

swinging by every morning on the way to

your job site, sometimes it means that

>> 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 storeroom

inventory that was reliable and you

could count on and you could get in a

just in time way whenever you were

working on a project.

>> Yep. Whether you're a pro or a

homeowner.

>> Yes. And it sure better feel like that.

>> Yep.

>> Another classic story is uh 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 the

Delmare 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 folding them and

putting 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

looked so in in their words, fabulously

legitimate that [laughter] they had this

>> big uh expansive inventory. And they did

the same thing with uh 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 too uh significantly, but

stacked them 10 ft high.

>> Whenever I go to Home Depot now, I'm

going to have to start like knocking on

cans [laughter] and boxes and make sure

that they're they're

>> capital constraint is no longer their

issue.

>> Yeah. So despite the uh rocky launch of

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 that

first year there in 1979. They open the

third store in Atlanta and they do $7

million in total sales for just that

like sixmonth 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, uh, friend of the show,

Arvin Navaratnam, who I'll bring up

several times on this episode for his

extensive research on the retail sector

and especially Home Depot. He found that

they were in the early days 10 to 25%

below the prices of their competitors.

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 pallet into the

store. So, uh, they can take relatively

low margins, not not Costco low, but 30%

gross margins on these products and they

can offer these screaming 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. They have everything. I

could I I'm like discovering new

projects to do and it's all cheap. It's

amazing.

>> Yep. I mean, just like Costco, nobrainer

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 cuz

what's high convenience to me is I can

walk literally two blocks from here to a

hardware store. Granted, it's 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 downtown, you

know, in the neighborhood of Sodto. 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, J C Penney 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?

Like 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 $2 million of startup capital was

blown in 1979. In 1980 this next year

they made a million dollars in profit.

Like this 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. Going like gang busters, but that's

not enough capital to take over all

these leases and this great real estate

down in Florida. So once again, Ken

Langan says, "No problem. I got this.

We'll just go public. [laughter]

Now [gasps]

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 in

Atlanta public

in

1981

here when interest rates are hitting

their all-time peak of 20 plus%.

Can you imagine this pitch to Wall

Street? You know what people don't like

to do when interest rates are really

high? Buy 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?

Look,

>> call me Call me Warren Buffett over

here, David, [laughter] but

So, you know, once again, Ken is like, I

got this. But by this point in time, he

is no longer an active investment banker

himself. He's just a principal investor

now. So, he can't lead the IPO himself.

He calls up his buddies at Bear Sterns

and he strongarms 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.

>> Yeah.

>> As it always was.

>> Ken knows how to get deals done.

>> Yes.

>> So, of the $6 million target, the plan

is that half of that is going to be for

expansion capital to go down into

Florida and take over these leases. And

half of that money is going to go to the

initial seed investors to cash them out

at close to a 2x in, you know, 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 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

cashing out at a slightly less than a

2x,

>> you have to stay invested. We need all

$3 million that we were able to raise to

go to the balance sheet so that we can

do this expansion."

>> Yep. which if you do the math,

that $2 million from the initial Home

Depot investor group bought 50% of the

company in 1978.

By not cashing out here at a 2x return,

those investors, if they held to today,

would have gotten well north of a

50,000x

return [laughter]

on their capital. check my calculator,

but I think it's better than a 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 since IPO

and you know, since many other

companies,

>> Nvidia, etc. It went public at a tiny

tiny market cap. 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 since

IPO that the public had access to.

>> Yep. But you needed to be um well I was

going to say crazy, but uh you needed to

have vision to do this. I mean it's

IPOing as a fourtore [laughter] hardware

chain in Atlanta,

>> right?

>> This is not uh anthropic here 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 called Bow

Water. Uh 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 Dan. 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-reional 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 Lowe's to become the largest home

improvement retailer in America. Also,

in 1989, Handy Dan 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, there's this interesting question

here. We've 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 kind of ridiculous. The

model, at least as we've explained it so

far,

clearly works at scale,

but there you should sort of have this

question in your head of, well, how did

they do all that when they had $2

million and just a scrappy team? 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 and they needed

to have suppliers give them great deals

even though they actually didn't have

any proof points that they could sell in

volume. So I I don't know how do you

think about

why they were able to sort of act like a

scale company even when they weren't at

scale yet? I think it was that they

combined Pat Farah's aggressiveness that

he put 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 could 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. But you know

>> specifically selling the dream to their

suppliers to the manufacturers

>> suppliers and uh to financeers 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 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, romancers, 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 to 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'd 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 Farah, you go join the next thing.

[laughter]

>> Yes. So I think this is actually the

perfect place to really talk about what

the model is and yes why here now we're

in the late 1980s

there is capital available it's the go-

go 1980s why are copycats not emerging

wellunded 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'd 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. Yeah.

Builder Square, Home Club, Homequarters

Warehouse, Mr. How 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, Ben, and

Home Depot is a specialty merchandise

retailer. On the surface, these things

look kind of similar. Like a Home Depot

store looks like a Costco store. But in

specialty retailing, it's not enough

[snorts] 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

wholly 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 instore

sampling and makeovers. or even like

Apple and Best Buy, they need to offer

the Genius Bar and the Geek Squad to

help with troubleshooting. Specifically,

expertise that serves the customer.

Nobody's serving the customer in a

Costco except at the checkout aisle.

It's like you go grab your toilet paper,

you check out.

>> The whole point is that we don't

actually need to have that many people

in the store serving you.

>> Right. Right.

>> That's how we can pay our associates so

much. That creates so much goodness in

the model.

>> Yep. Yep. Home Depot

basically

invented what serving the customer looks

like in home improvement. Before Home

Depot, there basically was no customer

servicing in hardware. It was like you

walked into a hardware store and good

luck. If you knew where things were,

good, you know, if not

>> and 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

uh 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 and interrupt

corporate work because they actually

need to take a call from someone who is

on the floor with a customer to address

a customer specific concern. I mean the

culture is this sort of service and

customer obsessed orientation.

>> Ben Ben, I noticed you said uh

headquarters there. I don't think Home

Depot has a headquarters.

>> That is correct. They have a store

support center because headquarters

merely exists to support the stores.

>> Yes. Yes. Atlanta for Home Depot, the

corporate address is the store support

center, not the headquarters of the

company.

>> But that's powerful to name it that and

sort of instill that in the culture.

>> Totally. Totally.

>> So I 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 chalk 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 a 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

serviceoriented

mentality.

>> Yep. And I would say that's the culture

still to this day with some bumps along

the road that we'll get to as we go. 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 retile a bathroom. Like maybe you

could go to a bookstore and buy a how-to

book. Maybe if you found one for 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, they just recruit employees from

the trades who are professional

tradesmen, contractors to come be their

retail staff in 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 highpaying 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 trades person,

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 in 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. Two, 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 have a retirement plan. You

probably don't have a fall back 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. It'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

trades person 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 going to 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, you 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. 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 on to customers. Lower

margins than elsewhere in 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 shortterm

against the business model. Those are

great.

>> That's the economics of the model. Yeah.

>> Long term, right? But it is horrible

operationally having lots of SKs. 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 to encourage a

buying frenzy. That is a a huge part of

making this work. When you have so many

SKUs, 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 at a Home Depot. So, it's the

the crazy stunts. It's the heat in the

store. It's the one-stop shopness. So,

you buy a bunch of things. It's starting

to work with procontractors as customers

because they're going to buy huge

amounts of things every week. They're

going to be repeat buyers. Again, you're

the whole goal here is we actually don't

generate that much margin percentage. We

have lots of SKs and we have lots of

inventory of each of those SKs. 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

Navaratnam at Worldly Partners has

studied this company at length, and I'm

going to just going to quote from his

100page study that we'll 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, strengthened

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 too

that turbocharges the whole thing, which

is the company's stock price. And the

fact that employees

all the way down to and including the

retail associates on the floors, the

good jobs for the former trades people

are getting equity in the company. So

you're probably listening like, wait,

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. So for these early associate

employees of the company, they build

this real link and culture among the

labor force of, hey, I serve my

customers well on the floor of the

store. 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 that

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 in 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 company sort of at

mass employment has retail employees who

are participating in this like giant

wealth generation machine. And because

it was compounding at 25% per year, I

mean it's the best thing they could have

put their money in. The way it worked

was if you were a salaried employee,

which started at assistant store

manager, you got stock options. If you

were an hourly employee, you couldn't be

granted stock options, but you got this

stock purchasing program, which in the

early days they set up as you can buy

stock at a 15% discount to the current

trading price and we'll give you a no-

risk guarantee. 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 retailer model

versus general merchandise.

>> Let's say you're 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. [laughter]

Hardware and home improvement is

different. So there are these legends

within the company. The one that gets

told often 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." 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 is so happy. He goes home.

He 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 $100,000 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 $200 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

and says, "I I think we should promote

you. Thank you. That's the exact right

customer service mentality.

>> We're going to give you another equity

grant right now."

>> Right. So listeners, uh, a fun aside,

one fellow listener and friend of the

show is Frank Blake, who famously was

the Home Depot CEO going into and

navigating the company through the Great

Recession 2007 through 2014. And uh, he

gave us this great quote when we were

talking to him for research. He said,

"The best sign of cultural health is

walking into the breakroom and seeing

the associates watching the stock

price." Like we we want that. We

encourage that here.

>> Yeah. It's like the opposite of uh

prevailing Silicon Valley wisdom where

like, "Oh, you don't want your employees

checking 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 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 Depot were twice

as large as Lowe's and they carried

three times as many products, which if

you know us and our Costco zealatry,

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

Lowe's stores. So there really was this

benefit where when you made those

investments in more square footage, more

inventory, more SKUs, the return on that

investment actually increased at scale

as you added more things. The word of

mouth, the one-stop shopping, the

feeling of the buying frenzy, it more

than paid for all that additional

allocation that you were making in

inventory and square footage. 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

and 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 to the $350

billion market cap company today,

except

>> except [laughter]

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 it for

the first time. They looked at 1.2 2

million clawed 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 assumed

it'd 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 is 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 in 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

of our process and automation. So, if

you want to be like us and build tools

using Claude Co to make your

organization work better, you can go to

claude.ai/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 are going

great as we talked about. Once the model

is in place, the whole company is

humming. By 1996,

Home Depot is doing $20 billion in sales

annually and expanding rapidly. They're

averaging a new store opening every 4

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

right up there with Visa and Coca-Cola

and 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 Proline tools like

DeWalt or 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 prolevel 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 I want what the

pros use.

>> Absolutely.

>> They also hire dedicated salespeople to

handle pros. They stand up a pro desk in

a lot of their stores. They offer, this

is a big change for them, pro

pricricing. Yep. So they start offering

bulk deals if you are coming to the

proes.

>> I think importantly though that 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 of that

or rent a truck. It'd 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 stat, so we're

flashing forward, but I think it's still

a a relevant data point,

the average Home Depot DIY customer

interacts with the company about five

times a year, spends about $330.

The average professional customer would

interact 66 times a year.

>> Yep.

>> With an annual spend of $65,000.

>> Yep. Sounds right. And of course, there

are pros that spend hundreds of

thousands of dollars a year. Yep. So, on

the back of all this train of success,

great stuff, Bernie says, "All right,

time to declare victory." He retires as

CEO, hands the title over to Arthur in

1997. 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

Built from Scratch in the memoir that

they wrote. But even just the fact that

the company ended up in this position

shows that um corporate management

wasn't exactly tip-top, shall we say, in

this era. And the lawsuit also kind of

reflects the stores. I mean, Home Depot

up to this point were like a a man's

place, you know? It was guys buying

hardware from other guys and

>> which Lowe's would go on to 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 cuz the stores get to use their

local knowledge of the market to make

sure that they're buying all the right

stuff, the right quantities, that

they're super in touch with the

customer. And that leads to, I think

Bernie estimated 15 to 20% 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 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 even an opportunity

to do national buying for hardware

before Home Depot cuz 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.

>> Yeah. 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. [laughter] Yes. So, obviously that

contained a lot of bad things for the

American economy and for home

improvement retailers to come. But

during the runup,

>> right, they're building houses at an

unmatched clip.

>> Yep. and it reopens the market for

Lowe's to come back as a real

competitor. So, while the housing market

is inflating here in the late 90s and

early 2000s, Lowe's completely changes

their strategy. 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 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

Lowe's 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 as the market is changing

you're getting younger buyers of homes

you're getting more women buyers of

homes. what they want and need from home

improvement

is actually starting to shift a little

bit from what Home Depot is offering.

>> Didn't Lowe's come in with a slogan uh

improving home improvement?

>> Exactly. Exactly. Tracking the slogans

in this industry will tell you

everything that is going on

strategically. Yeah. Improving home

improvement is aimed directly at Home

Depot and directly at appealing to

younger, more casual, often more women

buyers. M

>> these are buyers that aren't necessarily

doing home remodels. They're doing home

makeovers or 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 and stuff like that.

>> So, Lowe's starts to shift. They

actually used to appeal more to pros and

then in this era they really start

shifting more to the end consumer, the

DIY casual consumer and having a more

pleasant shopping experience than Home

Depot's sort of rugged appealing to pros

environment.

>> Yep. And what does it also coincide

with? The internet. So all of a sudden,

for the first time, there's a way to get

educated as a consumer, as a DIYer about

how to complete these projects without

needing to go to these tough, burly

former pros that are staffing the Home

Depot.

>> Now, it would be a while still before

YouTube was founded. This is, you know,

late 90s, not the the 201s, but you

start to get people sharing information

on forums and things like that.

>> Yep. All of this in in 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 in revenue. They have

over a thousand stores and over 200,000

employees. And so one day at a board

meeting, Ken asks Arthur about

succession, like, "Hey man, you seem

like you're kind of getting tired, too.

If you need to step down tomorrow, is

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, thinks about

it, 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 as CEO. It is worth

saying they very impressively figured

out a management track for store

managers. 75% 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. 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

the company. And the plan is that

they're going to go recruit a president

and COO. Basically, somebody to replace

Arthur's old job as number two now that

Arthur is CEO. And this new person will

be next in line to take the helm of the

company when Arthur's ready to retire.

And Arthur actually chairs the search

committee himself. And the first target

is Jamie Diamond.

>> It's amazing.

>> Who has just gotten fired by Sandy While

at Croup.

>> Yes. And Jamie loved the uh 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. Jaime will say to

this day that he loved everything 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.

>> Yep. 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 Ken, 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 the most storied CEO in America at

the time.

>> Yeah, history has kind of forgotten this

now cuz G frankly has fallen apart, but

>> like literally got broken into three

pieces. So that's not a controversial

statement.

>> Yes. Yes. actually

>> and before that incinerated more market

cap than any other company before it in

history

>> or at least until some of the Nvidia

draw downs.

>> Oh, but yeah, these days like these

these drops that happen at big tech

companies is uh you know dwarfs

everything in comparison. But at the

time that that was the story is

>> postjack Welch GE just completely

destroying shareholder value.

>> Yep. But here we are in 1998, 1999,

2000. I mean, Fortune magazine crowned

Jack Welch the manager of the century in

its Millennium issue at the end of 1999.

That's how vaunted GE was.

>> Yep. And it was all driven by a culture

of operational excellence as embodied in

G's famous six sigma approach to

defectfree

output.

>> Sounds great.

>> Yeah, sounds great, right? Well, we'll

see. So, back to Home Depot. So, here's

Ken and the Home Depot board thinking,

"Man, we sure could use some of that

operational excellence stuff around

here. I think that would really be good

for the company.

>> And if you're going to go cherrypick 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

and the three places they went. [gasps]

Yes. So, in November of 2000, Jack Welch

announces that Jeffrey EML will be his

successor to take over as GE's next CEO.

And Ben, as you were alluding to, the

other two candidates for the GE job were

James Mcernney, who quickly leaves 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 Ken Langon, again being on

the GE board here, knows well and loves.

He 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 hit in the ass

with a golden horseshoe.

>> Guess where you get to go work [snorts]

now.

>> Guess 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 COO

job and says, "You'll come in. You'll be

here for a little while. Arthur'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 $150

million equity package to come join Home

Depot."

Bob says, "Okay, great. I clearly can't

stay here at GE. I'm in." 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. M

>> this leads to a uh awkward, shall we

say, Home Depot board meeting where the

board presents this new development to

Arthur. He says, [sighs] "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 ready 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, A, this is

faster timing than I was thinking for me

to leave. But B, Arthur would later say

in an interview, I thought he was the

wrong choice by a lot, even though I'm

the one who initiated an external

search.

>> Yep.

>> To your point though, I think the uh

Yeah. Yeah, I'm okay with it. is a

little bit of like a test to the board

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 you should stay CEO."

>> Yep. Yep. 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's still on the board at

this point, and I think pretty severely

damages their relationship 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 6

months he fully steps away and is gone

from the company. We'll come back to

Arthur all the way at the end, but uh

>> he's got his own golden horseshoe

>> golden horseshoe. Yeah, [laughter]

>> 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 GE 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 going 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. Uh Ken Langon 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 Lowe's 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 is 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. If you take away all of

people's ability to take ideas and act

on them and have fun and all that stuff

like you that could kill the company.

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, the the the answer here

isn't decentralize or centralize. 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 can see like all

the idiosyncrasies of any given

situation.

>> Yep. Yeah. Here's the way I would

characterize it.

There was a bunch of lowhanging 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. I mean, he

was the GE guy through and through. And

operating the Home Depot was not the

same thing as manufacturing turbines at

GE,

>> 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 that GE

doesn't service their customers, but

it's a very different dynamic.

>> At GE line level employees are

completely replaceable,

>> right? By design.

>> This is the whole point of six sigma

black belt. We are going to drive out

costs and inefficiencies ruthlessly

within the organization. It's the

system. It's not the people.

That's the opposite of the 25 cent

kitchen sink washer sale leading to a

$100,000 kitchen remodel on the sales

floor at Home Depot. You just can't

measure that in a six sigma spreadsheet

management process kind of way.

>> It reminds me of why Jeff Bezos doesn't

like to have his meetings have a hard

end time cuz he 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.

>> Yep. So what does Nardelli do? He

replaces huge 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 going to

make that 25 cent washer sale and fix a

customer's kitchen sink and have that

lead to something bigger down the line.

All that's going to go we're going to

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 going to

be less of them, period. According to

Arvin's research, associates per store

dropped from 200 to 170 over the course

of 2000 to 2006.

>> Yep.

>> The 15% reduction in headcount just like

all right, we have fewer people to help

you solve your problems now.

>> Yep. So those are the associates on the

floor. Now the store managers before

Nardelli, all the store managers were

promoted up, Ben, as you said, from

store associates and they were focused

on their stores, their customers, doing

what was right, etc.

Nardelli changes the criteria for store

managers now preferring candidates with

college degrees.

>> So now there's no promotion path cuz 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 falls to the

lowest level of any major US retailer.

So, all the major US retailers, you

know, there's annual surveys of customer

satisfaction at everything from Best Buy

to Costco to Walmart to Home Depot to

Lowe's. Home Depot goes from near the

top to dead last. But David, they

doubled their revenue and their profits

and they grew from 1100 stores to 2,000

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

by the board over the six years of his

tenure running Home Depot. And the board

would always give him bigger bonuses and

pay him more than they were

contractually obligated to because

Nardelli would always make the argument

to them, "Hey, I'm crushing my numbers.

Revenue's up. profits are up. I'm

beating plan. Everything is great. He

would refuse, however, when the board

would ask to tie any of his compensation

to the company's stock price, which I

will say is 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

You're comped on what other people think

of the company.

>> Ben, 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

fundamentally 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 wig

former GE guy coming in as CEO and

saying, "Yeah, I'm gonna get rich

regardless of whether the stock price

goes up and the stock price stops going

up."

>> Yeah. Why did the stock price stay flat

during 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. Ben, 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 and comparing Home Depot

to Lowe's, which is growing same store

comps as they're taking this new segment

of the market, you know, the weekend

sprucers here.

>> And it gets even worse. During

Nardelli's tenure, he authorizes $20

billion 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 highle 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.

>> Yep. Yep. And meanwhile, during this

same period, again, this is as the US

housing bubble is reaching, you know,

its peak inflation, Lowe's stock price

is up 200%. They're winning the housing

bubble.

>> The other thing we haven't talked about

is he

tried to bolt a lot onto this company.

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.

>> Yep. Yep.

>> 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. They're closer to market

competitive. And actually, if you look

at their gross margin profile, it's

remained elevated ever since. So, it's

not a huge difference. The gross margins

are still lower than typical retail and

certainly lower than that 45% that we

talked about way back when. But they

went from this like 28 29 30 range to

like pretty squarely 33% gross margins

which is not as low as Walmart let alone

Costco's razor thin margins. So they

kind of moved away from that uh

>> Costco model if you will

>> the scale economy's shared idea. they

sort of realized, h, 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

business's 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

numbers.

>> Exactly. It's a paradoxical misalignment

of incentives.

>> Fascinating.

>> Yep. So you actually coming all the way

back around, you do want to incentivize

management on stock price because that

is the way that we are storing up value

in this business for the far future.

>> Yep. So all of this brewing negativity

and certainly Wall Street

dissatisfaction

with Nardelli comes to a head at Home

Depot's 2006

annual shareholder meeting. Jonas Sera,

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 5 years since he

was recruited from General Electric,

Home Depot stock has fallen 12% while

shares of its chief competitor Lowe's

have risen 173%.

You've heard of pay for performance.

This is pay for pulse. O. [laughter]

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 licking?" 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. [laughter]

The fact that the directors didn't show

up is disgusting." [gasps] Uh, Nardelli

begins the meeting. When the first

person gets up to speak, the questioner

gets 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

hits 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 cuz I don't want you

speaking against me."

>> It has never come out. I think that

Nardelli was just fed up with [snorts]

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 FU to the shareholder community

of Home Depot,

many of which included current and

former Home Depot employees.

>> Wow. It's It's bad.

>> I mean, bad on the board, too, 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 Langon calls a special board

meeting in Dallas, and the board fires

Nardelli at this meeting. He gets an $18

million cash severance payable

immediately and gets a quote unquote

retirement package valued at $210

million.

>> This is on top of the initial make you

whole grant plus the pay along the way.

>> Yes. Yes, it is. Ultimately, in Ken

Langon'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 financial crisis

and continue its path as an independent

American automaker, succeeding and

coming through it much like Ford did as

an independent company and GM did as an

independent company.

Oh, wait. [laughter]

>> Ends up getting owned 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 and

corporate development for Home Depot. A

new role, as you were saying, Ben, as

they added all this stuff to the

company,

>> someone who Ken loved, but Birdie was

nowhere near convinced was the right

choice.

>> Yeah. 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 pissed.

Bernie's actual quote to Ken when Ken

calls him and tells him who the next CEO

of Home Depot is going to be is, "I

can't believe you brought in another

goddamn GE guy to run my company."

But it would turn out that not only was

Frank Blake nothing like Bob Nardelli,

he was exactly what Home Depot needed.

But before we tell that story, yes, now

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>> And David, I have yet another

interesting parallel for you to this

episode on Home Depot. Home Depot is not

just in the business of selling, you

know, lumber. They wouldn't be a $350

billion company if that's all there was

to it. They were in the business of

turning regular people into builders.

Aha, 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 gave you the confidence to pick

them up.

>> Which is exactly the moment that

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to get started. All right, David. the

saving of Home Depot. [laughter]

>> Man, things got pretty low there, didn't

they? 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 cultural

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

of 2007. But if you go back to 2006,

that is where you can see it in Home

Depot's 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 7-year span. And it's the

same story with net income where they

were below their previous high water

mark 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 to

come run the company. Shoot. I think we

got to stick with this guy as long as we

can.

>> Yeah. Most if not all of the other

executive ranks at Home Depot were all

Nardelli guys at this point in time. So,

if they were to get rid of Bob, the

bench is only staffed with more Bobs.

>> Or so they thought.

>> 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 Depot's back.

Yep.

>> You know that 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 Nardelli gets

fired, Frank Blake, the Darkhorse

candidate, becomes CEO. So, yeah, Ben,

who is Frank? So Frank was a lawyer by

training who'd worked in DC in the

federal government as a public servant

who'd been a Supreme Court clerk, had

gone to GE and risen up to become the

head of M&A, came over with Bob Nardelli

and held a senior role at Home Depot,

but he didn't own a P&L. 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

choice is 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.

>> Yep.

>> And obviously it wasn't just that one

thing, but that's the mentality that he

brought to this job of how do we exist

as a store support center, not as a

headquarters.

>> Yep. So when Frank takes over as CEO at

that same board meeting on January 2nd,

like the 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 GE guy quote.

Mhm.

>> 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 is Costco. Because to Bernie,

Home Depot stores no longer embody the

values and qualities of a great retailer

that he wants to teach, you know, the

young Jedi here.

>> [laughter]

>> So that's the first thing that Frank

does is mend the Bernie relationship

>> and really learn directly from him. What

do you think the culture is? Cuz 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 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 uh

inverted pyramid at Home Depot where you

know you've got imagine a pyramid except

it's 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

associates 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 forever.

>> 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 write 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 simultaneously 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 4 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. And we're going to get to

e-commerce in a minute which was a big

part of this.

>> That is of course it's funny that was my

next thing too. I was like that is the

missing

>> 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 B, if you

believe opening stores is a

intrinsically virtuous, then 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 moral 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

proesk. They wanted to serve properties

across their whole life cycle and and

whatever needs pop up across the life

cycle, not just this like single job,

single contractor, order stuff, we'll

give it to you. It's a super different

business model than their 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,

largecale delivery to job sites for

these giant commercial projects. It did

grow to 13% of Home Depot's 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 macro is

starting to look a little shady. 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 they sold HD Supply

to a private equity consortium for about

$ 8.3 billion and kind of focused

attention back on its core retail

business. But it wasn't just the

attention that they focused back on the

core retail business. Frank under the

extreme nudging from Ken

>> Y

>> 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 ballsy,

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." 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% of 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 a share. I

mean, today Home Depot is $340 a share.

>> Yeah, this is

Ballsy is putting it mildly. Buying back

30% of your company's share base

starting in the summer of 2007.

[laughter]

>> While 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

Langon right here. To the extent that

Ken sinned at Home Depot during the

Nardelli era, he is atoning for his sins

here. [laughter]

>> 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 that's centered

right around the year 2001 where when

the company was in its growth phase it

was doing all these new equity offerings

creating more and more and more shares

all the way up through about 2001 then

they had slowly started buying them back

during the Nardelli era and then Frank

and again Ken just go nuts and say no 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 co 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 uh 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% in 2015.

Compounding is back, baby. Why is it

just Wall Street suddenly believing a

narrative that Frank walks on water or

what's uh what intrinsically is

happening that is driving the value of

this company?

>> Well, this gets into the next and 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 and a little

bit during the beginning of the Nardelli

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 could get

your knowledge for free on YouTube.

>> That'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. Yeah.

>> 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 building

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 DCs and

we will quickly chop them up and get

them to stores, but also it now enables

us to have these centralized places to

ship from since it's kind of a mess if

you're shipping your entire e-commerce

store out of the stores.

>> Yeah, you can't really do that.

>> Except one caveat to this, they do also

do that. So, I I had two e-commerce Home

Depot experiences in the last week. One

I bought on homed depot.com and it

arrived 2 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

2 hours because they had

>> store pickup

>> at the store and it wasn't pickup. They

had someone drive it out to me later

that night.

>> That's awesome.

>> From the Sodto 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

>> build a whole specialized system for it.

>> Totally. Amazon is not equipped to do

this. I mean, could you imagine putting

200 cubic feet of lumber that weighs

6,000 lb on an Amazon delivery van?

>> Those little Rivians. [laughter]

>> 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.

>> And so if you're a pro, obviously this

is an issue, but especially if you're a

consumer, this is an issue because you

only have a limited amount of time on

the weekends to, you know, build your

deck or retile your bathroom, etc. 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

At Home Depot, a giant chunk of the

e-commerce is actually store pickup.

>> Yep.

>> Because if I'm

>> because of this dynamic, I need it right

now.

>> I don't want to wait. Like, I can get in

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. Uh crap, I'm

ordering on my phone and then I'm

pulling out of the driveway and going

down to Home 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, 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

longtime slogan that many Americans

probably 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 over time.

>> Yeah, much much better. So [laughter]

they scrap that and they change it to

more saving, more doing.

>> M how many entandras is that?

>> And it reflects this change in strategy,

right? Like it's more saving. So like,

hey, we get it. You know, we're not

differentiated anymore by the education

that we bundle that we can help. We're

going to reedicate 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's strategy is

today, which is 90% of all homes in

America can get anything they need for

any project. So over a million SKUs

delivered to their home or job site or a

nearby store within 2 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.

>> Washington state has 48.

>> And what do you say? There are by

comparison, there are two IKEAs in

Washington.

>> 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 SKs with 2 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

US. 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 centers 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 onto flatbread

trucks, they also have 160 market

delivery operations centers which are

cross stockck 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 SKs 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 it

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's shipped right from the store got

to me in just a few hours because the

lantern battery was an online only skew.

Mhm.

>> And then not to mention, we'll we'll

talk about this later, but they do

reacquire 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 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 Depot because this is a

highly specialized again specialty

retail logistics and fulfillment chain

and Home Depot's 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. So,

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 Toé, she was the CFO of Home

Depot for a long time.

>> And the CEO of Floor and Decor.

>> Yep. Tom Taylor, legend. So when Frank

retires, he hands the reigns over to

Craig Maner. He runs the company for

another eight years. And then he retires

in 2022 and hands the reigns over to Ted

Decker. Both of them come up through the

company, you know, practically lifers at

Home Depot.

And yeah, speaking of 2022,

[laughter] all of this strategy and all

of these people look like absolute

geniuses when CO hits.

>> Isn't it 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. It's

where 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.

>> Yeah.

>> So during COVID, Home Depot's revenue

growth goes nuts. It goes from 110

billion in revenue to about 160 billion

of revenue

>> in just 3 years.

>> Yeah,

>> they had a little obviously some

hangover after that. So, it would

decline and then take a couple 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. So,

[laughter]

>> 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.

>> They actually just bought part of it

back, the most valuable piece of it for

$8 billion, but there's been lots of

inflation since then. It's not really

fair to call it the same price. They

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. They're like, "We really

got to use the capital to 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. The 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 interiors, so drywall,

ceilings, things like that, in addition

to SRS's traditional focus on exteriors.

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 Bob

Nardelli growing via expansion into

adjacencies wasn't wrong. It was just

the wrong time to do it and the wrong

way to do it.

>> Yep. Yep. Yep. And now that the company

has shifted its strategy to e-commerce,

which is so much more distribution and

logistics and fulfillmentheavy,

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 today.

>> Yes. So the business today, it's a $165

billion a year revenue business. Not a

super fast growing company. Grows at 2

and a half to four and a half% per year.

Uh a little over half the revenue is

procontractors and half is that sort of

consumer DIY retail customer. Moving on

to profits, the gross margin is a little

above 33%.

Operating margin is 12.5%. Net income

last year was 14 billion. So of the 65

billion they make. They get to keep

about 14 billion of it, which if you do

the math is about an 8.5% net income

margin. They have 2400 stores today,

opening about 15 new ones each year.

They own 90% of their real estate. They

only lease about 10% of the stores.

Since once capital stopped being an

issue for them and they started being

free cash flow generative, they realized

that actually a competitive advantage

for us is lock up the best real estate

and hold it forever and don't get held

hostage in a a real estate negotiation

when a lease comes up.

>> Early on, they obviously couldn't do

that and they intentionally did stuff

like the J C Penney deal to to lease

secondhand retail stores so that they

could quickly stand up new stores. But

over time it it just became better to 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 taken.

>> Mhm.

>> But like a lot of the best real estate

in Georgia in the 80s 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 a they grew up with the suburbs of

uh the US becoming extremely populous.

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 in China. Sort

of like why can't you have someone fix

that for you? And the wealthy people

live in cities.

>> Right. Right. You're 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

Lowe's, but it's nothing crazy. They

turn their inventory about four and a

half times per year compared to Lowe's

turning 3.3. Just for reference, Costco

turns their inventory 13 times per year.

>> Right?

>> So again, like very different category

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 where at

any given 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. It 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 SKs

against Costco's 4,000.

>> Yep. In store and then a million SKs

online,

>> right? The the inventory turn given the

nature of their business is kind of

unbelievable.

>> Yep. At any given time, Home Depot has

about $11 million of inventory tied up

in a store and Lowe's is about the same.

The funny thing about whenever you look

at any chart of Home Depot and Lowe's is

used to be super different, now about

the same. They've really converged

toward each other over time.

>> Yep.

>> One thing we didn't talk about is

private label. They started this slowly

back in 1985 and it grew to become a

really big part of their strategy to

have house brands and and um brands that

are exclusive to Home Depot. But you may

not realize this, but Bare Paint, BHR,

only available at Home Depot. Hampton

Bay Lighting and Ceiling Fans,

>> that was a Pap Farah special, I think.

>> Yep. Glacier Bay fixtures. Ryobi, which

is a very hot brand recently, especially

lawn care. anything with lithium-ion

batteries. Uh, Rigid Power Tools, Anvil,

HDX, Everbuilt, Eosmart Lighting, Husky

Tools. There's 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 onethird

of Costco sales that are Kirkland

Signature, but still, I mean, that's a

that's a giant amount. I will I think

house brands are getting more

interesting, too, 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. if I have e uh

ego, but I bought an ego lawn mower

which gave me an ego battery. So over

the years I now have developed switching

costs

>> weed whacker. I have an ego hedge

trimmer. I have an ego leaf blower which

kind of I 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 lawn

mower. Yep. Talking about e-commerce,

after all that discussion, it's still

only about 15% of their sales are

online.

>> Yep.

>> There's so much running room that they

have there.

>> So much running room.

>> They have 472,000 employees and their

market cap today is $350 billion.

>> And my favorite fact to sum up the state

of the company and the business today is

the CEO of Lowe's

is a former Home Depot executive groomed

under Frank Blake.

>> 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

J. C. Penney as the CEO of J. C. Penney

and uh then in 2018 became the CEO of

Lowe's. such a deep bench that you

created your competitor CEO.

>> Yep. [laughter] I think Frank would be

proud.

>> Yes.

>> So, yeah, the Home Depot story to uh 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.

[laughter]

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, is the

owner of the Atlanta Falcons NFL

franchise and several other sports

franchises. And uh 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

force in 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 Falcon's owner, not Home

Depot co-founder.

>> Yep. Yep. And uh we said he got the

third Golden Horseshoe. So when he

bought the Falcons in 2002,

>> just one year after fully leaving Home

Depot.

>> Yep. He paid the then crazy price of

$545 million for the franchise. The

Falcons today by the latest, you know,

public valuations that are bandied about

out there are worth seven billion

dollars.

>> There's no way they're worth way more

than that.

>> That vastly discounts the actual value

of the Falcons.

>> The Seahawks just traded for 9.5.

>> Yep. Seahawks just agreed to a sale at

$9.6 billion.

>> And since then the Lakers at 12 and a2.

Even just comparing the Falcons to the

Seahawks, 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-Benz Stadium than the Seahawks

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

stake makes Arthur the wealthiest of all

of [laughter] 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 stake at a $10.6 $6

billion valuation. So, uh, yes, we were

on to something.

>> David, you nailed it. Now, back to the

show.

>> Continuing on, Frank Blake, uh, who of

course Bernie Marcus so violently

reacted to as another goddamn GE guy

when he got the news that he was taking

over the company today, runs Bernie

Marcus' foundation.

>> Amazing.

>> Which is about a $4 billion spendown

foundation. And Ken Langon, the goat, is

about to turn 91 years old, has never

sold a share of Home Depot. His stake in

the company is worth about $6 billion

today. I went and looked back at this

that 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 not about the stock picking.

The hard part is in the holding.

>> Yes.

>> So in 1985, and this is a great Arvin

stat. I mean, longtime listeners know

Worldly Partners, their whole thing is

figure out what it takes to build a

business that can 100x as a public

company and then figure out how to have

the stomach to stay with those companies

through the downturns cuz there are

always massive drawdowns in these giant

100x companies. I mean, you look at

Nvidia, like you 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 in 2008, the whole Nardelli

situation, the housing bubble, and then

again down 70%. He didn't sell. In fact,

if you bought the shares at their peak

in 99, your investment would have been

underwater for a 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. [laughter]

Because in 1977,

before even getting involved with Home

Depot, Ken sold a medical device company

to Eli Liy for stock and got at the time

2 and a half% of Eli Liy's equity. And

of [snorts] course, I believe Ken has

also never sold a share of Eli Liy. But

that is a story for 2027 [laughter]

unacquired. 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 it's the perfect episode to

>> Yeah, you foreshadowed this 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 docks now in the

back [laughter] of 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 propricing

desk now. They even talk this big game

about in the book how they they did

everyday low prices just like Walmart

did to not appear duplicitous to

customers and not have people time their

purchases. Well, I got an email three

days ago. It said daily deals with a big

dollar sign through the S. Free delivery

online only while 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? Cuz 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

8." 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-m 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 the world

wants you to look more like every other

company when you get big and to stay

special like Costco, Rolex, Hermes,

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 than you did compared 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 on 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 Hermes handstitching

their Birkin bags even at the scale that

they are today is like a one ina 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

uh embracing your scale and your scale

economies, I think this is the perfect

transition to powers [laughter] for Home

Depot.

>> 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 or

to be more profitable than their nearest

competitor on a sustainable basis. And

those seven are scale economies, network

economies, counterpositioning, 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

Lowe's. They are, but it's not by as

much as you would think.

>> Yep. Home Depot is marginally more

profitable than Lowe's.

>> There's been a very dramatic convergence

over time.

>> Yep.

>> The biggest one to me is scale

economies. I I suspect it is because

they can just negotiate for the very

lowest prices with their suppliers, get

the best manufacturers to do their house

brands, that sort of thing. given their

what are they 3x the scale of Lowe's.

>> Yep. About 3x.

>> So that's the biggest thing. Now early

on I think it was definitely

counterpositioning.

>> Definitely

>> Lowe's doesn't get enough credit for the

pivot in 1990 because think about all

the things working against a traditional

hardware store. You've got a smaller

footprint which is means

>> you have 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 managed to adopt the Home Depot

strategy.

>> Yep. Oh, and they probably use um

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 also prefers Home Depot, but

that's for the same reason that the pros

do.

>> Yeah, I think so, too.

>> I think there is still

counterpositioning today. It's just very

different. It's counterpositioning

versus Amazon with their logistics and

fulfillment 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 lot of scale economies.

>> A lot of scale economies,

>> which makes sense for a retailer.

>> Yes.

>> Yeah.

>> 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 Costco and Walmart and Amazon retail.

So, how did it get that way? David, it

won't surprise you that I have a

severalpart

answer slash uh equation to answer this

question. equation. All right. You've

certainly piqued my interest

>> 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. and we talked

about them all episode particularly as

it relates to saving costs of not having

to have a separate back room and

showroom. Normally that is a huge if but

home improvement is the perfect

category. I mean you are uh 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. For reference,

like a comparable market, US furniture,

180 billion. So even other large retail

categories aren't playing in this large

of a market. Three, they captured a huge

part of the market. Used to be super

fragmented, but today Home Depot is 51%

of the market. Lowe's is 29% of the

market. The next highest is Menard's

with less than 5% of the market. M

>> by 2026, Home Depot and Lowe's 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 itself would tell for many

years is, hey, we're still a small part

of the market. That's Yeah. Not That's

how you define the market. But yeah, if

you define it as home improvement

stores,

>> they are 51%. And it makes sense that

they should be able to command the

cheapest prices from the manufacturers.

And as long as they're good about

passing that on to you, that should

reflect in market share.

>> Yep.

>> Okay. So, that's three. Four, aging

housing stock in the United States. I

wanted to save this all the way 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.

>> Postwar construction, you kept adding

new homes to the overall stock.

>> The American suburban buildout.

>> 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.

>> Then by 2010, it was a 33y old home.

>> Today, the age of the median home in the

United States is 42 years old. This

company was founded and IPOed into a

market of houses that were only getting

older and needed ever more repairs.

>> And as the very proud owner of a

115year-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 in a very predictable one, too. I

mean, one thing I know for sure, if the

age of the median home in the United

States right now is old, in 5 years,

it's also going to be old.

>> Yep. It's going to be older.

>> 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 on

residential improvements and repairs.

That was right before the company was

founded, 28 billion. 5 years later, that

28 billion grew to 47 billion. M

>> today that number is $600 billion

that 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 slashinvented

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, uh

have different 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 uh then sort of

also consumed the pro market along with

the 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 over the last 100 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

homes. Yeah.

>> And that was a necessary precondition

for the home improvement industry to get

so large. If you either had

>> and and the US finances it. I mean, the

fact

>> US [clears throat] finances 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 to own

these homes.

>> And the strong tax incentives to have

mortgages to own homes, etc., etc. I if

you either had not as high ownership

rates in the US or like China, if you

had a just fundamentally different kind

of housing stock that people own because

actually the Chinese housing market is

larger than the 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.

>> Lot of characters.

>> Carveouts. [snorts]

What you got?

>> Carveouts. All right, listeners. This is

where we recommend things that have

nothing to do with the episode that

we've just been enjoying recently. One

for me is Silo season 3. I think I've

probably made a carve out of Silo season

1 and two in the past.

>> I think so. I might have done the books.

The books are great.

>> 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 reasons

to wait for Friday night. It's cuz

that's when the new silo drops.

>> So, um I can't recommend it enough.

Great. Great sci-fi

>> throwback to appointment viewing.

>> Yes. My second one is also a season 3 of

a TV show, Tires.

>> Oh, yeah. This is with uh Shane Gillis,

right?

>> Yes. Oh my god, it's so funny. I try 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 going to wake him.

It's just so so good. I uh I I'm so glad

they did a season 3 because Shane got

very famous after they did season one

and two and I was like, "Oh, this is

this lowbudget 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 Ratio8 coffee

maker. It is a uh 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 every

morning. And so the Ratio 8 is a uh

first of all, it's aesthetically a very

beautiful machine, but it's basically a

high-end precision automated pourover.

We'll link to it 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 for you to try every two weeks or

one week or whatever you want the

frequency to be. And uh I oscillate

decaf and regular so that I can mix them

and uh make half caf in the mornings.

>> Oh, nice. Nice.

>> Yeah, it's all I got.

>> Nice. Well, I am going to surprise you.

I think I have two carveouts. One of

which is a TV show and one of which is a

movie.

>> A movie. David Rosenthal.

>> 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. Man,

Netflix does such a good job with

quarterback. It drops right at the right

time, right at the start of training

camp when you're desperately in need of

some football content. This season, uh,

Cam Ward of the Tennessee Titans. didn't

watch a lot of Titans games last season

and so I didn't know much about Cam

Ward, former number one pick last year

in the draft. I'm excited about him. I

think he can be a star in the league

going forward.

>> Sweet. All right, quarterback on

Netflix.

>> And then my second carveout is the old

Jerry Seinfeld movie comedian, which I

watched upon reading a tweet from friend

of the show Jeremy Javon. This movie is

so fun. It follows Jerry right after

Seinfeld the show ended

>> when he goes back to the clubs in New

York to the comedy clubs and builds up a

whole new standup routine completely

from scratch. And it's like he's Jerry

Seinfeld right after the show ends. So,

with the most famous person, you know,

maybe in all of New York, and he's just

going to the clubs, trying out new

material, and he's bombing, and it's

it's great. It's so fun to watch.

>> Oh, sweet. I got to check it out. Do you

know my favorite game when I go stay at

a hotel?

>> Ooh, no.

>> I turn on the TV and I try to see if

there is an hour where a Seinfeld rerun

is not on any channels.

>> [laughter]

>> The syndication rights are are so

distributed that I feel like Seinfeld

the show is on 24/7 somewhere. It's

>> got to 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

them all episode, but Arvvin Navaratnam

at Worldly Partners, he always does

these great 100page studies, and this

episode is particularly in his

wheelhouse because in his quest to find

the next 100X company to invest in and

hold for decades, he does this on the

ground research, he goes to stores and

he employs someone full-time at Worldly

Partners who is traveling the country,

walking through Home Depot, Lowe's,

Costco, other stores, doing price

comparisons, and actually generating

real first-party data on how do these

stores evolve and change over time, how

do their prices change, how does my the

experience change? And so his his write

up on this one is particularly awesome.

So you can check it out at

worldlypartners.com. All of his other

studies are there and this time Arvin

teaches a class for HBS and Boston

College students. Usually they're

private. He interviewed Ken Langon and

he has agreed to make that video public

alongside the release of this episode.

So, he's also going to put that on

worldly partners.com. So, thank you so

much to Arvin for your research help.

Uh, thank you to Ken.

>> Yeah, so fun to talk to him.

>> Great storyteller. And to friend of the

show, Frank Blake. Frank is just the

most ridiculously humble person you will

ever meet. 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 uh with Ken in his opinion

on this one. [laughter]

>> Yes. Thanks Frank. And uh thanks to Russ

and Dylan Murphy, my contractors for

being my partner in uh building and

restoring and maintaining my 115year-old

house here in San Francisco and helping

us with this episode.

>> Yes. A huge thank you to our partners

this season. Sierra, our presenting

partner. Sierra helps the great

companies of the world build better,

more human customer experiences. That's

sierra.ai/acquired

to work OS. Start selling to enterprise

customers with just a few lines of code.

Build authentication in minutes instead

of months. Workos.com to Anthropic.

Claude is a truly incredible AI product

that thinks with you just like it

thought with me in preparing for this

episode. That's claw.ai/acquired

I/acquired

to Sentry application monitoring

software considered not bad by millions

of developers. Centry.io/acquired.

And if you're in the Bay Area on

September 17th, just a few days after

this episode comes out, you should join

us for the official 2026 acquired meetup

with our friends at Sentry. That's

acquired.fm/meup.

If you like this episode, go check out

our other episodes on great retailers.

Costco, Walmart, Trader Joe's, IKEA, and

Amazon. We're really creating kind of

this retail uh I know

>> throughine here, the the great American

retailers.

>> We might have to uh make some t-shirts

with some more saving, more doing

slogans on it. And uh 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 PDF from part one or part

two, both of those have been

dramatically improved uh since those

first dropped, that's

library.acquired.fm

for all those tables, charts, and

illustrations of key concepts. Join the

email list acquire.fm/e,

where we send out behindthe-scenes

photos from research, past episode

corrections, and vote on future episode

topics. and come talk about this with

David, me, and the whole community in

Slack at acquire.fm/slack.

Listeners, with that, we will see you

next time.

>> We'll see you next time.

>> Who got the truth? [music]

Is it you? Is it you? Is it you? Who got

the truth now? Huh?

[music]