I'm sorry I got tripped up. You used uh power tools, David Rosenthal.
I built this whole door. I got 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.
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 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.
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.
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.
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 for informational and entertainment purposes only. David, take us in.
So the story of Home Depot is kind of like the acquired version of like an 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 foreword 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 foreword.
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. He goes to Rutgers 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 concessionaire 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 Daylin 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 Daylin was this holding company that operated almost like I don't know like a portfolio or an index fund on all these retail concepts. So they would go out and acquire small chains of all of these types of post-general store concepts serving the American suburbs. So yeah, they had pharmacies, hardware stores, clothing, home furnishing, discounters, you name it.
And for the most part, all retail in America at this point, except for Sears, Kmart, some department stores, you really didn't have these big national retail giants the way that we do today. It was kind of these regional chains.
Yep. Yep. So Bernie is now a corporate executive at Daylin. He has no equity in the company. He's just an 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, Daylin makes Bernie the CEO of its Handy Dan subsidiary, which is a chain of hardware stores that's also based there in Los Angeles. 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 Dan, he quickly recruits another younger company man from within the Daylin Empire, a financial whiz named Arthur Blank to come over to LA and join him as his CFO at Handy Dan. 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 Daylin, why does it have its own CEO, CFO, management team? Because Handy Dan was also a standalone publicly traded company.
And Daylin didn't own all of it, right? It just owned the majority of the shares.
Yeah. So Daylin 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 Daylin 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 Daylin 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.
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 Daylin, the parent company, because they're so weighed down by their other divisions that they file for bankruptcy in 1975. And they bring in a noted turnaround artist as the CEO to turn it around. We'll come back to that in a minute. For the moment though, let's flash back over to the East Coast, to a completely different character, the New York investment banker Ken Langone.
This is your 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 Langone is. He is basically the goat investment banker. He came up from nothing as an Italian kid on Long Island. Talks his way onto Wall Street and basically while he's still a kid, he ends up winning the sole IPO manager position for Ross Perot's company, EDS. People today remember Ross Perot as like, 'Oh yeah, that guy who ran for president in the '90s.' But he was kind of like Larry Ellison of his time. EDS was this giant company.
Yeah. And I was trying to think about the best way to frame EDS. Maybe like a Palantir. They were very involved in government contracts. I mean Ross Perot's history. We got to do a whole Ross Perot episode at some point. But from his time at IBM, he kind of saw people are buying all of these mainframes, but they have no idea how to use them. I actually have to start.
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 magnate at the time.
Totally. And based in Plano, Texas, EDS has this long history. They ultimately get acquired by Hewlett 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 mid-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 Daylin 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 Langone. [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 Daylin 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 overtrusts people to
he's weirdly risk-averse 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, 'Langone, 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 Langone becomes a co-founder of The Home Depot is he gets his buddies Bernie and Arthur fired 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 and subscription management. They work with 40% of the Fortune 50, one in three of the world's leading banks, five out of the 10 largest healthcare companies, and now their agents can handle complex workflows that generate revenue as well. These are things that can take weeks or months and they span across voice, chat, email, WhatsApp. I mean, really complex things like appointment booking or prior authorizations in healthcare or refinancing a loan in financial services.
Yep. And they just launched a super cool new product, Personas. So instead of every AI agent sounding the same, polite, but kind of robotic, you can give your agent a distinct voice and personality, tailoring its tone, humor, even the rhythm of how it speaks to your brand.
Great brands have a recognizable character to them. Acquired, for example, has a 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/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 Dan stores. Ken basically becomes part of the crew, which is uh very different than the new Daylin CEO's approach to managing Bernie and Handy Dan.
And quite bothersome. This guy who's the minority shareholder is sort of like closer with your management team than you are,
right? That you consider one of your, 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 Daylin, a guy named Sandy Sigaloff.' And uh, you know, build a relationship with him. Now, Sigaloff, 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, Sigaloff 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 Sigaloff 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.' Langone says, 'The price is 12.' Chainan was shocked. 'Forget it.' Langone 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.' Chainan says, 'You must have some price.' 'Okay,' Ken says. '$14.' Chainan had left in such a blind rage that he almost banged his head on the door. About a week later, Sigaloff called Langone. '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.' Chainan said, 'No, that offer is off the table.' [laughter] 'I don't understand,' Sigaloff 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.' Sigaloff 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.
He says, 'Kenny, just do me a favor. Just sell just sell to Sigaloff. 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 Sigaloff. 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 Daylin. 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 Sigaloff. 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 25.50 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, his average entry price was probably I don't know $5, $6.
Yeah. 5, 6 whatever up to 25.50 to sell. And the story is great where the Sigaloff finally calls and says all right let's just do this on the phone. You name your price I will buy it at that price. And Ken goes 25.50. And he goes why the odd number? And Ken goes well it doesn't look like we had some real hard bargaining here. [laughter]
So January 1978, Sigaloff 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, Sigaloff fires Bernie and Arthur and the audit manager at Handy Dan, a guy named Ron Brill. The reason that Ron gets fired too is the pretense that Sigaloff trumps up is an accusation that the three of them had violated national labor relations rules in negotiating with unions. Sigaloff 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 Sigaloff, 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 Astoria Hotel.
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. Sandy's coming after me with this labor relations case. I don't know. I might go to jail. What am I going to do?' And Ken says, 'Bernie, 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 bent 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 Astoria in New York. Ken's like, 'Bernie, you getting fired is the opportunity of a lifetime for both of us. You, me, Arthur, let's bring Ron along, too. We're gonna go start that company. We got the golden horseshoe here.'
So Bernie's excited, but he says, 'Well, there's one problem. What about the money?' Arthur and I don't have any. And this isn't a Handy Dan concept here. We're talking about a warehouse, but also a lot of stuff that we got to put in it. And yeah,
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 Sigaloff, 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 Handy Dan.' Saul says, 'Do you think you have the ability to build something, to create something, to do this on your own?' Bernie says, 'Yeah, yeah. I think this could be really successful.' Saul says, 'Then tell Sigaloff 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 SKUs.
We're going to have tons of SKUs versus Price Club and Costco's famous low SKU 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 SKUs in
These warehouses and work with tons and tons of suppliers to make good on the promise that if you're doing something, it is the all-in-one place to shop for the job that you're getting done. 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 SKUs.
Yeah, I think Bernie both really did need the pep talk from Saul and he also wanted to make sure Saul wasn't going to do this, too.
All right, so back to the money. So, who does Kenny know who has a lot of money and a lot of liquidity and is also just crazy enough to back a new retail concept here in the 70s with all this inflation and interest rates at 20%? And listeners, this is the part of the episode where we tell the story of how Ross Perot almost owned the majority of Home Depot.
Yeah. 70% of Home Depot because Ken flies everybody to Dallas. They meet with Ross and they hammer out a deal for Perot to put up the money for what would become Home Depot.
$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 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 an expensive new, you know, fancy Cadillac. This is an old fancy Cadillac.
And Perot says, "Hey, well, this is important to me. My guys, my guys here at EDS, they don't drive Cadillacs. They only drive Chevrolets. We're scrupulous here about our costs." And Bernie's like, "Cost? What are you talking about? This is an old Cadillac."
Right. Practically, pragmatically, this is actually exactly in line with your ethos.
Yep. And 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 financier. This doesn't feel right.
Yep. So, he blows up the deal. And this might be the most expensive disagreement in all of business history.
Let's see. I'll do the math here live on air. So 70% of a market cap of 350 billion.
Yep. They did a ton of 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.
So Ross Perot insisting on a Cadillac cost him $223 billion,
assuming he held. Assuming he would have held, right, which Ken did, by the way. Still holds all of his shares. Yeah, you didn't mishear Ben there. 230 billion. That's with a B dollars.
Oh man. 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 they got Ken Langone 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 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 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 Perot?" To which Ken replies, "Arthur, in the retail business, when you can't sell something, you mark it down. In my business, when we can't sell something, we mark it up."
Which is a little facetious. In my mind, what happened here is when you're negotiating with one counterparty that's coming in for all the capital, they have leverage. But Ken goes out and he finds 40 individual people.
Yep. To put in $50,000 chunks.
Yeah. And so Ken basically writes the term sheet and then just going around all these people and saying, "Do you want to be in on these terms?" It's kind of 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 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.
And then Arthur, Bernie, the rest of the management team would get 45%. And at this point, the founders of the Home Depot are set. It's Bernie, Arthur, and Ken for the moment.
Yes, they are missing one superpower that you need in an 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 are 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 a 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 retail parlance, 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.
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 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. At least that's what Ken said by the time the meeting ended. Or the way I've heard Ken describe this is Pat was crazier than a bed bug, but he was a genius.
I mean, crazy, yes, but this is the missing piece of the puzzle. You'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, 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 oh man, there's so many legends about Pat, including driving forklifts through walls, etc., etc., etc.
Yeah. Wasn't that like 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 reservations about Pat's character, they sign an LOI, letter of intent to buy Homeco from Pat with this new well-funded company that Bernie and Arthur and...
Well-funded. They got $2 million. That's not nearly enough to do anything that they... I mean, they're operating on a shoestring budget here, but I'll come back to that.
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.
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... 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 get the stuff and then I sell it.
And they bring in as a part of the due diligence on this auditors to look at, hey, are these financial statements correct? And the auditors determine, "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 mean this thing's going to run out of cash in the next few months? I'm doing great." And they're like, "You're not doing great, man."
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 going to go bankrupt, but we got to get you on the team. You are special. After you file for bankruptcy, we want you to come in and join us as our fourth full co-founder here, and you're going to handle merchandising. We're going to take care of finances and operations. You're not going to go anywhere near that, but you are going to come in, you're going to stack them high, and we're all going to watch them fly."
Yep. So, I mentioned 2 million is not that much capital. They have to start getting really creative as they're thinking about the first store to make the business work on that. So it kind of has two things it forces. One, they got to get the longest possible financing terms from suppliers.
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 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 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 an 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, SSO, 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 pro contractor 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.
Or my new bathroom. Yeah. Authentication used to just mean proving that you are you. Now it means proving that your agent is allowed to do this specific thing as you right now with limits. And that is what Work OS has built the whole stack for. So their new system, WorkOS 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 load-bearing wall in the dining room.
Which you know permissions tell you what an agent can do. WorkOS Airlock checks it was actually asked to do it. Turns out those are very different questions. 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 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 JCPenney, you know, like the big national department store chain.
Yep. To sublease a couple of their locations in Atlanta. JCPenney had started a Kmart copycat subsidiary.
Is that what Treasure Island was? I was trying to... Kmart copycat. Yep.
Yep. And it was in the southeast and it was called Treasure Island. And they had great locations. I mean, JCPenney 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 sublease, right?
Yep. As a sublease. 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 great idea. Can't wait to present it to the team. Bad Bernie's Buildall. It's alliterative. 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. I could not figure out why they would want to call it Bad Bernie.
It's like he must be a crook because these prices are too low.
Which of course is exactly what the loan officer wants to hear at the bank when 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. So obviously Bad Bernie's Buildall is 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 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. Nice little tweak, shall we say? A little nod. Yeah, 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 put some in the email. It's very clearly a big hardware store operating inside of a Kmart. I mean, it looks like that. They describe the concept in all the books they've written and all these accounts of early Home Depot as this vast warehouse with tall ceilings and merchandise piled to the ceiling. But the early pictures are I swear Kmarts or even kind of JCPenney. Like it's pretty low ceilings. The racks that things are on are like standard Kmart style racks. It's nothing like the Home Depot that you know of today. The floors are this sort of like linoleum type floors. And so yeah, they're selling table saws and hammers and lumber out of a discount Kmart knockoff, right? Second use real estate.
Yep. Yep. Yep. There's some pretty fun legends around all this around the first store openings. The first of which is that they decide they're going to go big, blow a lot of the budget on a huge newspaper ad in the weekend paper that week 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 retail workers on the floor in the stores, they go out into the parking lots of the two stores with a bunch of signs advertising that they're giving away free $1 bills to lure people into the store.
An auspicious beginning to Home Depot here. The other great legend around the first store openings is that the night beforehand, the two store managers of the two locations get together. They've got a great idea. They're going to impress the founders. They have a cleaning crew come in and polish up the linoleum floors as a surprise for everybody coming in in the morning. That's all going to look great. And Pat Farah comes in at like 4 in the morning, the day of the opening. He sees the polished floors and he goes nuts.
Oh yeah, that was like a thing with this entire company for decades is that they all worked from like the wee hours 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 party and we just work all the time and all of us do it.
Yep. So when Pat sees these sparkling clean floors, he loses it. He calls Bernie and Arthur, gets them out of bed and the three of them come in and they start careening forklifts around the store floor to scuff up the linoleum. So, it looks like it was busy. 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 quote about this that he would write is our stores are action places.
Yeah. And also we're going to get to this later, but part of the Home Depot's business model and part of the 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.
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 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 their words, fabulously legitimate that they had this big expansive inventory. And they did the same thing with paint stacks. Pat found 2,000 empty paint cans for each store. And they put special little labels so they would know not to investigate too 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 and boxes and make sure that they're... Capital constraint is no longer their issue.
Yeah. So despite the 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 six-month operating period of the first year. So like startup retailer, $7 million in sales across two and then at the very end of the year bringing online a third store. This is right on with their aggressive financial projections that Ben you were talking about that they needed to make this work. And part of the appeal is they're blowing stuff out. I mean, friend of the show, 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, they can take relatively low margins, 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'm like discovering new projects to do and it's all cheap. It's amazing.
Yep. I mean, just like Costco, no-brainer proposition to the buying public. And it's a different take on the classic retail triangle of price, selection, and convenience. You usually have low prices, large selection, and high convenience. And they definitely have low prices and large selection. It's in some ways not high convenience because what's high convenience to me is I can walk literally two blocks from here to a hardware store. Granted, it's low SKU 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 Sodo. 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, JCPenney 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 gangbusters, but that's not enough capital to take over all these leases and this great real estate down in Florida. So once again, Ken Langone says, "No problem. I got this. We'll just go public." Now this is a crazy idea in any market. The pitch here to be clear is we are going to take a four-store chain. They've now opened the fourth store in Atlanta public in 1981 here when interest rates are hitting their all-time peak of 20 plus percent. Can you imagine this pitch to Wall Street? You know what people don't like to do when interest 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 Warren Buffett over here, David, 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 Stearns and he strong-arms them into taking on this crazy IPO. Bear agrees and they set a target of raising $6 million. And I think Bear was not interested, but then Ken called some other investment banks who said, "Oh, we're interested." And then Bear got interested.
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 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 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... well I was going to say crazy, but you needed to have vision to do this. I mean it's IPOing as a four-store hardware chain in Atlanta, right? This is not 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 Bowater. 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-regional chain here.
Yep. And then quickly after that, in 1986, they hit a billion dollars in sales with 60 stores.
They don't stop there. In 1989, they pass 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 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 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 to financiers to like max out the amount of debt that they would extend this company, all the debt capital they were raising.
So there's a great quote in Built from Scratch that I think kind of addresses this point because this was a disconnect I had the whole time of in theory you shouldn't be able to start like this and I think it addresses the uniqueness of the people. We had to be psychologists, lovers, 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.
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 well-funded with a lot of capital to just come eat their lunch and do this too?
Well there were copycats. I mean there were other large format hardware home improvement stores. I mean I'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 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 in-store 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.
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 we're generalizing here. I'm sure there were amazing associates at amazing hardware stores all over the place, but there wasn't this idea that... I went to a Home Depot last week as I was prepping for this, and this was after I had, you know, read some books and I had seen all the stuff about Home Depot's unique culture and their obsession with serving the customer above all else. And we drop everything in order to serve a customer. And there's even stories about people at headquarters who will pick up the phone in the middle of a meeting 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 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.
So I promise you I wasn't like secret shopping and trying to prod for these questions, but I was making a copy of a key while I was there and I asked the associate how his day was going. And this was like the eighth associate that walked by and it was chock full of staff. And this guy, the words out of his mouth were, 'It's going well. I have like eight things on my to-do list today. I've gotten to none of them because customer always comes first and I've had so many interesting customer problems come up today.' I mean, it is this like very real customer service-oriented mentality.
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 high-paying job as a contractor, switching gears and taking a retail job is typically not on people's bingo card.
Good point. You would think on the surface that this is crazy and this is what all the copycats miss. They just hire regular retail employees like Walmart does or Costco does or Target does or what have you. Actually though, if you're a tradesperson, there's a pretty good chance that a Home Depot job might be appealing to you. So, back here in, I don't know, call it 1985, 1990. Imagine you're a plumber, you're an electrician, maybe you're a carpenter. Sure, you can make more money 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 fallback of savings. Okay. Now, Home Depot comes to town and they're recruiting. It's a stable job with regular hours with other people like you. You don't need to drive around. You don't need to manage clients.
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 tradesperson works in your store and they meet with a customer trying to do a pretty simple project. Hey, I need to paint the walls of my living room. You do that and you have a pro help you pick out all the right stuff you need and get the right amount of paint. You suddenly feel empowered and you're like, you know what? I'm 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.
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 SKU count and lots of associates doing all this service. So they sort of have to figure out how to succeed despite sort of two big strikes short-term against the business model. Those are great.
That's the economics of the model. Yeah.
Long term, right? But it is horrible operationally having lots of SKUs. 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 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 margin 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 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 pro contractors as customers because they're going to buy huge amounts of things every week. They're going to be repeat buyers. Again, the whole goal here is we actually don't generate that much margin percentage. We have lots of SKUs and we have lots of inventory of each of those SKUs. So, how do we get as much volume as possible? 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 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 100-page 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 tradespeople 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.
When we were talking to Ken in research for this, he put it this way to us. When you tap into people's basic instincts, good things happen.
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 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 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, 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 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 want that. We encourage that here.
Yeah. It's like the opposite of 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 very much want our employees checking the stock price and thinking about how their day is going to impact that.
So, the last thing that I think is fascinating about this model is the original hunch of why the business would work despite all the trade-offs was correct. In 1980, Home Depot were twice as large as Lowe's and they carried three times as many products, which if you know us and our Costco zealotry, 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 Bernie hunch before they actually opened the first store. But he was right. 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 SKU 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 1.22 million Claude co-work sessions over the course of three weeks across a ton of companies like 600,000 organizations. Software development, which I thought would be a huge part of it, was less than 9% of those sessions. I 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.
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 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.
Yep. That's right. And Ben, as you alluded to, this era is when they really start serving the pro-contractor market as well as the DIY weekend warrior. They offer business credit accounts. They're finally on solid enough financial footing that they can do that. They start carrying more pro-line tools like 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 pro-level tools and hardware and supplies.
People with high willingness to pay for the best or if they want to have a tool for 20 years. Sure. I want what the pros use.
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 pricing. Yep. So they start offering bulk deals if you are coming to the pros.
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.
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 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.
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 masked. 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 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 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. 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.
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 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 run-up...
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 innovator's dilemma impressive thing that they did to shed their old operations and formats and close those and open only Home Depot style stores starting in the early 90s.
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 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.
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 2010s, but you start to get people sharing information on forums and things like that.
