The Home Depot: How America's aging houses built the best stock of the last 45 years (Audio)

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. >> But before we tell that story, now is a. great time to thank our presenting. partner, a company that we are big fans. of, Sierra. Yes. So on Acquired, we. study the leaders of the greatest. companies in history. And today, all of. those folks are wrestling with basically. the same question. What is my. competitive advantage when everyone has. access to the same intelligence? And. what is the right way to turn AI into.

revenue for our company? >> Yep. And that's where Sierra comes in. First, your customer relationships are. your competitive advantage. When you. deploy Sierra's AI agents, those. relationships get deeper with every. customer interaction, generating. insights that compound over time. Second, you should pay for outcomes, not. tokens, like an insurance claim paid or. a sale closed or a customer retained. Sierra is already the leading platform. for customer service agents. Everything. from account signup to troubleshooting.

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>> Yep. And they just launched a super cool. new product, Personas. So instead of. every AI agent sounding the same, polite, but kind of robotic, you can. give your agent a distinct voice and. personality, tailoring its tone, humor, even the rhythm of how it speaks to your. brand. >> Great brands have a recognizable. character to them. Acquired, for. example, has a uh a very different. communication tone than say a hospital. And you know, a luxury brand would have. yet a completely different one. and the. agents at your company should too.

>> How an agent speaks impacts customer. trust. Sierra told us that a customer of. theirs, one of the largest. telecommunications companies in the. world, just introduced a new voice and. persona for their agent. And and this is. wild. The rate it solved customers. problems increased by almost 50%. Because it had a persona. Yes. Wild. So. to find out how you can build standout. customer experiences that grow your. business with AI, visit sierra.ai. 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. is a great time, listeners, to thank one. of our favorite partners, Sentry. That's. S N T R Y, like someone standing guard, which is what they do for developers. Sentry helps teams debug everything from.

errors to latency issues. basically any. software problem and fix them before. users get mad. It's considered quote. unquote not bad by millions of software. developers. >> 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. software is in right now. The number of. people who can build something real has. been completely blown open. I mean, engineers, sure, but also designers. shipping their own products. Founders. who have never worked at a tech company.

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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].