TIP769: How Home Depot’s Founders Built a $300 Billion Company from the Ground Up w/ Kyle Grieve

23:06And look, if I were running a growing company and needed to get my financials and operations onto one platform, NetSuite is exactly what I'd use. For the first time ever, you can try NetSuite Next for free. If your revenues are at least in the seven figures, go to netsuite.ai slash tip. Built for every industry, ready for every boardroom. That's netsuite.ai slash tip. What's the one thing in business that's spreading as fast as AI? AI risk. Every new tool your team signs up for, every vendor that turns on AI features, every new integration, each one has a chance for something to go wrong. And most security programs just weren't built for AI's pace of growth.

23:48Enter Vanta. Vanta is the number one agentic trust platform used by over 16 ,000 fast-moving companies like Ramp Cursor and Harvey to stay audit ready. And now Vanta is helping companies like yours watch for the risks that show up between audits across your vendors, your AI tools, and your whole environment. How? The Vanta agent works like a 24-7 GRC engineer in the background, finding issues, drafting fixes for you, and cutting vendor assessment time by up to 50%. Whether you're a fast-growing startup or a global enterprise, Vanta is here to help you automate your security and compliance and earn and prove trust.

24:30Get started today at Vanta.com slash T-I-P. That's V-A-N-T-A dot com slash T-I-P. All right, back to the show. Now, even with Ken Langone in the corner, Bernie and Arthur were having a heck of a time coming up with the money that they needed to get Home Depot off the ground in the first place. They ended up going back to one of their bankers and just demanding that they help out. And it actually ended up working. So their banker, a man named Rip Fleming, got the money after being refused multiple times by his own bank. Later, Bernie learned that Rip put his entire career on the line just to secure this loan for Home Depot, which was completely critical for its launch.

25:10So after he'd been rejected on the loan for the third time, Rip went into his boss's office and gave his letter of resignation. His boss, realizing that Rip had about$400 million of other business, was not someone that he wanted to let go. And the kicker was that this loan was only for three and a half million dollars. Bernie expresses extreme gratitude for Rip in the book, writing that Home Depot would never have existed without his belief in Bernie and Arthur. Now, let's get into some of the very significant characteristics that were in Home Depot's DNA, because many of them were pretty surprising to me, but also made a lot of sense.

25:44So the first one I have here is when the store opened, one of the store's manager hired cleaning crews and made the store look completely spotless. Bernie and Pat instantly told the people to run forklifts and get the store looking, you know, used. They didn't want Home Depot to look like a hospital. They wanted it to look like a warehouse. The second one here was that lumber buyers buy their lumber at the same entrance as everyone else. So you have lumber shavings all over the place. This showed that the Home Depot was a place of action, as Bernie put it. Third was that they wanted do-it-yourselfers or DIYers to know that they got the same price on the product as construction professionals.

26:21The Home Depot was priced for everyone, not for specific individuals. And the fourth one here is that they front the products, they don't face them. So this means that they put products out and don't have to bother making them face towards the customer, as this is just more costly as you require labor and people to do that for you. So the Home Depot right from the get-go understood how to be a low-cost provider. Instead of using distributors primarily to source their products, 50 % of the products were sourced directly from the manufacturer. Now this gave them the low price advantage that obviously many customers absolutely love.

26:54The biggest problem for them initially was just getting their name in front of customers. But luckily for them, that problem slowly faded away and to protect the Home Depot's brand, they kept sales a secret to discourage competitors from entering the arena. Now, I mentioned that Treasure Island was subleasing to the Home Depot. Well, Treasure Island unfortunately wasn't doing very, very well. And since the Treasure Island locations were located adjacent to the Home Depot, once Treasure Island began its liquidation, Home Depot received a significant boost in its foot traffic, which it obviously very much liked.

27:25Additionally, once Treasure Island folded, Home Depot was able to take on extra square footage, increasing on average from 60 ,000 to 80 ,000. So I mentioned earlier that attracting foot traffic to Home Depot was very, very challenging. But Pat Farah thought of a simple way to get people in. So he bought a ton of these flush mount fireplace screens, then charged just$2 over cost. He was nearly giving them away for free. They ended up selling 3 ,000 of them. The entire order was sold in only four days and brought droves of customers, some driving multiple hours to see the store. Now, as with all smaller businesses such as Nike, which I covered on TIP 655, cash flow is nearly a universal problem.

28:04Growing revenues while increasing cash flow just is not easy. Generally, growth comes from growing your top line. But this top line growth requires capital. And in Home Depot's case, you need more inventory, more stores, and more labor. So it's no surprise that Home Depot had trouble finding financing. The way they worked around this was to obtain multiple$25 ,000 lines of credit. Then as they reached their limit, they simply requested an increase. And this worked until they actually went public all the way until 1981. Now, the first four stores were performing very, very well, far exceeding Arthur Blank's initial projection of$9 million per store.

28:40Instead, they were doing in excess of$12 million per store. They wanted to expand, but expansion obviously costs money. So they actually ended up choosing the path of going public. So the Home Depot just started as a tiny micro cap stock, IPO-ing at a market cap of about$7 million. Now, part of the reason they took Home Depot public was because they had expansion plans and they needed capital to fund it. South Florida was going to be the next area of focus. They had four stores in mind, which would double their store count from four to eight. Now I mentioned earlier that Treasure Island was just kind of this melting ice cube, but the Home Depot was actually promised that these stores wouldn't close down because they knew that the foot traffic from Treasure Island was a really nice tailwind for getting new business.

29:21But there was a day, unfortunately, that came when JCPenney just couldn't keep these stores open anymore. To make amends, they gave the Home Depot favorable terms on other real estate locations across the entire country. The ones that Bernie liked the most were the South Florida locations. So even with the four Florida locations, their contact at JCPenney, this man named Bill Harris, had a large stock of available stores nationwide. However, the Home Depot was just stretched as is, so it had to put the brakes on this very, very large opportunity set they had in front of them. Now, this is one of those situations where I think if you had the informational advantage, you'd probably be all over buying their shares in the open market.

30:03You're looking at a small business, only eight stores, and they're quickly growing their revenue with very, very high demand for each product. On top of that, they had access at this time to endless supply of other great locations where you'd be able to locate next to a JCPenney or one of their other brands like commercials. And even if you didn't have access to this kind of information, there was a deadly simple boots on the ground way that any investor could see that this whole Home Depot concept was probably a winner. If you did some Peter Lynch style research and simply just showed up at one of Home Depot's new Florida locations, you would have witnessed a line that was going around the building.

30:39A busy store isn't always a key to success, but obviously you'd much rather see a store with a massive line than a store begging for customers to come in. Now, in 1987, Ed Telling, the CEO of Sears, walked into his company's department stores and felt like a complete stranger. The air smelled faintly of rubber and new carpet. The aisles were lined with tools, towels, televisions, and tires. For decades, Sears had been the beating heart of American retail, the place where families brought everything from lawnmowers to lingerie. But to Telling, it kind of felt dated, stale, or beneath him. He didn't even like being in the stores while he was the CEO.

31:16Instead, he began dreaming of something larger, something grander than a mere department store. Sears, he believed, could be more than just a retail company. It could be an empire of services. A place where the American consumer could buy a washing machine, open a credit card, invest in stocks, insure their car, and buy a new home, all under the same roof. So he went shopping. First, Telling bought Dean Witter Reynolds, a stock brokerage firm, then Coldwell Banker, a real estate giant. They already owned Allstate Insurance and soon launched the Discover card. The plan was bold, a one-stop shop for every financial and consumer need.

31:52But there was one glaring problem. No one wanted that. Customers didn't want to talk to a stock broker while buying a toaster. They didn't trust a clothing store with their mortgage. You see, Sears Strength was tangible. They had this trust that was earned on the sales floor, not in a boardroom. But Telling was kind of detached from that world, and he believed that he could transform Sears into something by will and acquisition. But along the way, he just, you know, forgot the store. By the 1990s, the Sears empire began to crumble. The financial services floundered, the retail arm was neglected, and directionless kind of fell behind these leaner, humbler competitors such as the Home Depot.

32:29Now, because Home Depot did something different, they made sure that their leaders never forgot the store. Every executive, no matter how senior, was expected to spend time in the aisles wearing the orange apron, talking to customers, stocking shelves, and seeing firsthand what worked and what didn't inside of the business. Home Depot understood something that telling never did. A company's wisdom lives on the floor, not in the clouds. Strategy built in isolation without that kind of texture of some sort of reality isn't strategy at all. It's purely fantasy. So Sears, you know, they tried to reinvent themselves from the top down, but Home Depot just kept reinventing itself from the ground up.

33:07Now, the Home Depot was laser focused on getting customers what they wanted and what they needed, not investing in needs and wants for them. Bernie tells the story of how one customer was exiting one of his stores empty handed. So he caught up with them and asked why they hadn't purchased anything at the Home Depot. The customer told him that they just didn't have what they were looking for. And in a true case of hustle, Bernie Marcus would make a white lie that they were just out of that product. He would go to the distributor, pick it up, tear off the price tag, and then charge them a lower price than what he paid.

33:40Oh, and he also personally delivered it to their home. Now, it was clear that what management was building at the Home Depot was a highly customer-centric business that would be very, very hard to compete with. In a heartwarming story that showcased the employee's willingness to go above and beyond, there was a story of this woman who owned about 200 rental units. And she went into Home Depot and purchased a$75 chandelier for one of her units. She had it installed by an electrician, but unfortunately just didn't produce enough light for the room. So she returned to the Home Depot, went to the same salesman who sold her the chandelier and told him that she needed a more powerful one.

34:16What did you do with the old one? He inquired. She told him that it was just going to stay there because she didn't want to electrocute herself trying to remove it. The employee told her to give him her address and he would go to her place after his shift and remove the old one for her. After this experience, guess who the woman went to when she wanted to remodel all 200 units? The Home Depot. And this was why Bernie would go out of his way to over deliver for Home Depot's customers. By the 1990s, Home Depot had grown substantially. Instead of being a regional player, it was now a national player.

34:47They had the funds and the market to advertise to nearly everyone in America. As a result of this growth, they could really ratchet up some of their brand recognition through TV and magazines. Here's what Bernie said about Home Depot's evolution in branding. Our understanding of branding has evolved as a Home Depot matured. In the beginning, all we were trying to do was get our names out there, including giving out$1 bills in 1979, just to get people in the front door. Back then, the first components of branding, not that we have even used the term, were big stores, lots of stuff, low prices. That was a brand's catch points.

35:21Back then, it was novel. Over the years, we became more sophisticated about customer service, and that was an attention getter. We may not have been consciously doing it, but we were building a brand nonetheless. Now, Sam Walton was one of the earliest competitors to regularly visit Home Depot stores, as they had multiple competing departments, and he was always eager to see what competitors were doing so he could clone certain traits and pass them to Walmart. Additionally, Treasure Island was a direct competitor of Walmart. So whenever Sam was doing his market research in Atlanta, he'd be right next to a Home Depot location where he would do additional research.

35:57Sometime in the 1990s, Bernie Marcus visited Sam Walton and Walmart's HQ in Bentonville, Arkansas to tour the operations and discuss an idea that would be key to the Home Depot's branding. And that was everyday low prices. Now, everyday low prices were critical and helpful to Walmart's operations. Walton told Bernie how it works with manufacturers, how it helps stores, and the positive effect it had on systems and customers. Bernie was sold, and Arthur was also on it as well. Arthur obviously was a numbers man, and he knew that everyday low prices would probably eat into their margins, but he was also sold on the idea that it would help the sales process make sales more consistent and help make inventory management easier.

36:39Now, inventory management was a very, very big deal for the Home Depot. Items that were on sale were just a pain to manage. Often the products would sell out and the customer would show up upset because there just were no more products available. The Home Depot would still honor its sale by taking down customers' information and issuing a rain check, calling them when the stock came back in. But this was obviously a costly and tedious process. Everyday low pricing helped solve this problem. So to offset the margin hit, they needed to cut costs elsewhere. At this time, Home Depot was spending about 3 % of its revenue on advertising.

37:12Now, before everyday low pricing, they would get customers to come to the store only to leave with just the discounted item. Once they introduced everyday low pricing, they noticed that their customers' basket size was starting to increase as they bought additional products. Since customers would spend more money per visit, they could then cut their advertising spend. Arthur pointed out that he was able to have the advertising spend to align with Walmart's number and get to around 1.5 % of revenue. And to this day, Home Depot maintains everyday low pricing, which goes to show how much of a competitive advantage it can be if your business is set up to take advantage of it.

37:46So let's talk a little bit here about the competitive landscape that Home Depot had to deal with in its early days. So Lowe's had been one of Home Depot's competitors for multiple decades. In the book, Bernie Marcus said that he felt Home Depot was just eating their lunch. He lists the following metrics from around 1998. So store account,$761 for Home Depot versus about 484 for Lowe's. Total sales was 30 billion versus 12 billion in favor of Home Depot. And he also points out that at that time, 20 to 25 % of Lowe's locations faced Home Depot as a competitor, but that only 15 to 20 % of Home Depot's face Lowe's as a competitor.

38:24And then lastly, Home Depot on average got about 40 % more volume out of its stores at 40 % greater profitability. Now, when I read this, I thought, well, I think it'd be really interesting to compare how these two giants at home improvement compare today. So today we have a store count of 2 ,363 versus 1 ,753 in favor of Home Depot. Total sales, 165 billion versus 83 billion, also in favor of Home Depot. And then per store sales are about 14 million per store for Home Depot and actually 21 million per store for Lowe's. They have nearly identical gross margins at around 33%. And in terms of profitability, Home Depot has about an 8.9 % net margin versus 8.2 for Lowe's.

39:05So I would say, you know, Home Depot leads the race, but there seems to be space for two giants in this industry to suck up revenue and profits. And while Home Depot is doing very, very good, they never managed to fully eliminate a business like Lowe's from competing with them. And since Home Depot is so good, it's just a testament to how competitive these industries are, that there can be more than one winner. Now, what Bernie felt in his earlier days was that he was using this kind of new type of business model and that incumbents like Sears just weren't prepared for it. He writes, the industry knew we were edging closer and closer to them, but they never prepared for us.

39:41They all knew that eventually we would present a direct threat, but they couldn't think in terms other than the way that they had for decades. Now, next to this note in the book, I wrote two simple words, counter positioning. Now, counter positioning is a power from Hamilton Helmer's Seven Powers. Its basic premise is that one business can succeed over another by utilizing a new or differentiated business model. If the incumbent adopts the new business model, it can actually harm the business rather than help it compete. Bernie notes that incumbents were just too focused on selling less at higher prices, whereas Home Depot was more focused on selling more at lower prices.

40:18Home Depot was opening competitors' eyes to this business model. And part of the reason a company like Lowe's is still around today is it just began cloning many of Home Depot's practices, which clearly worked incredibly well. But how about competitors that just scared Bernie and Arthur? One such name was Hetchinger. So Hetchinger had been around for a while and had a really loyal customer base that Home Depot was finding it hard to disrupt. Hetchinger, in Bernie's words, had an enthusiastic consumer following, high quality locations, a classy look and feel, and a very heavy advertising. If they were steak, we were hamburger.

40:51Bernie and Arthur considered a merger with Hetchinger, but the reason it never worked out was that the business was family owned and they wanted a president who was also a family member. And on that point, Home Depot could just not agree. So no merger ever happened, even though both sides seemed very interested in getting a deal done. Now let's go over Home Depot's largest competitor, which we briefly discussed earlier, and that was Sears. So Arthur mentions that he thought being part of Sears could have been a significant win for both Sears and Home Depot. And the reason for that was that Sears had two outstanding brands that were in direct competition with the Home Depot in Craftsman Tools and Weatherbeater Paint.

41:28But these two brands just weren't that big of a priority for Sears at the time because they were focusing on this big conglomerate. Now, Home Depot believed that it could take over its home improvement section and rapidly improve it. They ended up speaking with Al Goldstein, the Sears executive in charge of acquisitions, but unfortunately a deal never came about. But the fact that it failed was actually a blessing in disguise. As Arthur mentioned in the book, he didn't think that they could handle a deal that was that big at the time, and it showed that growth had to be more thoughtful and maybe slower than they initially thought.

41:59The last part of this chapter I want to mention reminds me here a little bit of Michael Jordan and the docuseries The Last Dance. So in that show, someone mentions that Michael Jordan would actually invent conversations in his head to motivate himself to go the extra mile and really destroy his opponents. But in the show, it turns out that his opponents never actually said many of the things that Jordan claimed that they did. The thinking is that Jordan did this as part of his DNA, so he could go out and outplay everyone. Now, Home Depot didn't actually need to invent competition as it was always there.

42:26Still, they thought competition was good because it kept employees loyal and hungry to beat everybody else. And it ensured that customer service was better than everybody else. If you have no competition, the biggest problem is that you start slacking off in your business. We've seen this with cable companies like TCI. They establish a monopoly in a certain jurisdiction, then they'd allow their service to get worse and worse because they knew a check was going to come from their customers no matter what. Now, this obviously has two big downsides. So the first one, your product sucks. And this is never good because it opens the door to other hungry entrepreneurs who want to steal your customers and can easily tell them that there's a better offering.

43:03And then second is that you bring in regulation. If the government thinks the business is taking advantage of its customers and capitalism won't fix that problem, then the government will step in and do it on behalf of its constituents. Now in nature, the story of life is really just a language of competition. Every creature from the smallest ant to the largest oak just fights for sunlight, space and survival. And out of that struggle for survival emerges balance. Wolves keep the deer population in check. Deer trim the grass that feed the soil, and the soil nurtures the roots that hold the forest together.

43:35It's really a dance of tension and cooperation. Each species is pushing the other to adapt, to sharpen its instincts, to grow stronger. But without that push, without something to challenge it, the system just collapses under its own weight. And that exact sequence of events is valid both in business and in the human ambition. As I already pointed out with Michael Jordan, he had these imagined rivals that were like nature's predators. Forces in his mind, real or not, to help keep them sharp. Home Depot didn't even have to invent competition, but it embraced it in the way that a forest welcomes a changing season.

44:07The constant pressure to outperform rivals kept employees focused, customers loyal, and the organization alive and with purpose. Just like bees competing for nectar while pollinating the very flowers that they depend on, Home Depot's rivalry-fueled culture created a cycle of growth that benefited nearly everyone connected to it. But when competition disappears, the ecosystem just begins to rot. Just like a river that's dammed or a forest that's stripped of its predators, monopolies lose the natural feedback that just drives improvement. Their nutrients stop circulating, service declines, innovation dries up, and regulation rushes in to fill that void.

44:44Nature has a way of reclaiming balance and so does the market. In both worlds, survival belongs not to the strongest but to the most adaptable. The ones that really understand that competition isn't a threat to fear, but a necessity that keeps the whole system alive. Now let's do some storytelling here. So the date is October 30th, 1984, and you're Ralph Dillon, the CEO of London-based Bow Waters American Division. And you've successfully just sold a chunk of your hardware store to the Home Depot. As the leader of Bow Water Home Centers, you're intimately familiar with the Home Depot brand. Bernie, Arthur, and Ken all approach you to take a 15 % equity stake in the early years of Home Depot.

45:21Let's take a quick break and hear from today's sponsors. Spending my days digging through the financials of the world's best businesses, and one thing becomes obvious fast. The companies that win are the ones that can actually see what's happening inside their own operation. And these days, they say that every day your business is late to AI, you fall two days behind. The competition is only moving faster, but fortunately, there's NetSuite Next. You probably already know NetSuite, the AI-powered business management suite that securely connects all your data. It's a unified suite that brings your financials, inventory, commerce, HR, and CRM into a single source of truth, trusted by over 43 ,000 customers.

46:01NetSuite Next is the next huge leap in how business gets done. Because now AI is built into everything you do. It's customized for a wide range of industries, so it supports the way your business actually works. Whether your company earns millions or even hundreds of millions, it's time for NetSuite Next, where your business meets AI. And look, if I were running a growing company and needed to get my financials and operations onto one platform, NetSuite is exactly what I'd use. For the first time ever, you can try NetSuite Next for free. If your revenues are at least in the seven figures, go to netsuite.ai.tip.

46:39Built for every industry, ready for every boardroom. That's netsuite.ai.tip. Curious about online trading, but haven't taken the first step yet? You're not alone. And Plus 500 Futures is a great place to start. The futures markets are moving fast. And with Plus 500, you can explore popular assets like oil, gold, S &P 500, Bitcoin, and more. From crypto to commodities, there's always something happening. The platform is super easy to use so you can trade on the go right from your phone. You can get started with just$100 and jump into the action. See something interesting? Once your account is open, you can trade it in just a couple of clicks.

47:18And if you're not quite ready yet, you can practice with a free demo account. No risk, no pressure. With 20 years of experience, Plus 500 makes trading more accessible than ever. Check it out at plus500.com. Trading and futures involves risks of loss and is not suitable for everyone. Not all applicants will qualify. Plus 500. It's trading with a plus. Before I joined the Investors Podcast, every what if you can imagine was running through my head. What if I'm not the right fit for this audience? What if I freeze up on camera? What if I can't keep up with the level of analysis people here expect?

47:51Well, betting on myself anyways turned out to be one of the best decisions I've ever made. And I'll tell you, those early days would have been a lot less stressful with a partner in my corner the way Shopify is for the businesses that work with them. Shopify is the e-commerce platform behind millions of businesses around the world and 10 % of all e-commerce in the US, from household names like Allbirds and Gymshark to brands just getting off the ground. You get started with their design studio, hundreds of ready-to-use templates that help you build a beautiful online store that actually matches your brand with no design background required.

48:29It's also packed with AI tools that handle the work you didn't realize you'd have to do, writing product descriptions, headlines, even enhancing your product photography. And what if you get stuck? Well, Shopify is around 24-7 with award-winning customer support to walk you through it. It's time to turn those what-ifs into with Shopify today. Sign up for your$1 per month trial at shopify.com slash T-I-P. Go to shopify.com slash T-I-P. That's shopify.com slash T-I-P. All right, back to the show. Now, as part of your due diligence process for the Home Depot deal, you got all sorts of access. You got access to Bernie and Arthur's minds and the thinking processes.

49:12You got access to Home Depot's books. You got access to Home Depot's stores to see how they were planning on doing things and maybe what would differentiate them from competition. And you got access to the culture that Bernie and Arthur were trying to foster among their employees. So when Ralph was tasked with building out Bowwater Home Center, he had the blueprint to do so. He also knew that he didn't want to compete directly with Home Depot. So he intelligently chose locations that wouldn't compete directly with Home Depot. So he actually ended up scaling this business to nine locations and they were located in Louisiana and Texas.

49:45But the time came to give up these nine locations and Home Depot seemed like a good partner. Bow Water Home Center ultimately sold to Home Depot for about$38.4 million. Now for Bernie and Arthur, this was a growth leader that quickly enabled them to add nine stores in geographies that they had not yet penetrated. But growth for the sake of growth doesn't always work out as planned. And the Bowwater integration turned out to be a bit of a nightmare. The stores were in disarray, unkept, and they weren't selling half the volume of a regular Home Depot store. But Bernie and Arthur believed that they could lift these locations up to Home Depot standards.

50:22The problem was that they just underestimated the work that would be involved with doing that. They had to remove talent from their stores and transplant them to these Bowwater locations just to improve the look and feel of these places. And because they needed to use the most talented employees to fix Bowwater, it resulted in flat sales at the existing Home Depot locations that they were forced to vacate. The culture of Home Depot and Bowwater were like mixing water and oil. Home Depot's culture was to have managers that were out on the floor, helping customers and employees solve problems. But Bowwater's managers were allergic to being on the floor, preferring instead to stay in the back office and in the words of Arthur Blank, be content as pencil pushers.

51:02In the end, Home Depot had to lay off 95 % of Bowwater's workforce. But as with all great companies, they learned from that Bowwater acquisition. They realized that they shouldn't attempt to grow as fast as they had intended to with that acquisition. So Bernie, Arthur, and Ken asked the board to pass a resolution asking management not to grow the business by more than 25%. This was using the board to protect shareholders by changing management's behavior. And I highly, highly respect this action. So Arthur Blank listed four big reasons for the success of Home Depot. First was merchandise. As the lowest cost seller, they had enormous buying power.

51:37Since they could pay for merchandise quickly and buy in bulk, they received favorable terms from their suppliers. Second was distribution. Home Depot skipped distributors because it would have lowered their margins. Instead, they went straight to the manufacturer. And third is finances. Home Depot needed a strong balance sheet to think long-term. And obviously it wasn't that way in the beginning, but they eventually got there, which helped them grow intelligently over the long run. And fourth is infrastructure. They think of employees as long-term expenses that can help generate value for the business years down the road.

52:10This is why they put a significant focus on getting the right people inside of the Home Depot, as they knew they could do great things given enough time. As you can observe from the Bow Water acquisition, Home Depot was focusing on geographical expansion to continue scaling up. But from that Bow Water experience, they were focused on scaling organically through building their own stores in their own vision with their own people. Now, the Northeast would be their next growth lever. The strategy in the Northeast wasn't too dissimilar from Georgia or Florida. have a better product assortment, lower prices, and better services than the competition.

52:43That's all it really came down to. But Home Depot executed on these three things so well that they quickly ate up market share and forced many of their competitors into chapter 11. Because Home Depot could rapidly move volume, they had to find a way to keep increasing the volume of what it sold. It wasn't possible to just move more volume through one location. So they might have had a store that was modeled to sell$30 million each, but once they opened, they would sell 60 to 80 million each. Now, the solution here was actually just to cannibalize itself. This would allow other locations to steal some market share away from existing locations.

53:16But in the grand scheme of things, it just didn't matter that much as long as customers were buying from Home Depot and not a competitor. And an interesting thing happened as they expanded in the Northeast. Their share price absolutely took off. Now, was this because the market liked Home Depot's growth metrics? Or was it because analysts and fund managers who lived in the Northeast could now see for themselves just how much demand there was for Home Depot and maybe do some shopping there themselves. The answer was probably a mix of both. Now for a business to truly take advantage of scale, it must have a very good relationship with its supplier.

53:49In Built to Last, the chapter that discusses this is named Strategic Partners. And that's an interesting choice of words because if you think of your suppliers as partners and can work together, a company can really help itself, its suppliers, its customers, and ultimately its shareholders as well. Now I spoke about this on TIP 753 when I discussed Ray Kroc and McDonald's. Ray was able to get really good terms from his suppliers. And since McDonald's suppliers could essentially serve just to McDonald's, they grew as McDonald's grew. And many suppliers were very, very well rewarded. And Home Depot was doing something kind of similar here.

54:22So in the early days of Home Depot, Bernie had to ask for favorable terms from their suppliers. Even though Home Depot started at only four stores, they had big growth ambitions. And they would share this growth narrative with their suppliers to try to get them on board for their journey. For example, if Home Depot had an item that maybe cost$20 to buy from their suppliers, they would then ask for a discount once they met a certain sales volume. For instance, they would go to their suppliers and say, hey, look, if we sell$100 ,000 of that item, can we get a 2 % discount? And if we keep scaling sales, can we get a larger discount down the road?

54:56Let's say they could sell$400 ,000 on item. Maybe they would ask for a 5 % discount. Now, in the early Home Depot stages, their suppliers weren't convinced that they could move that kind of volume. Most of their customers just weren't selling nearly as much volume and therefore weren't getting as big discounts. This is where Home Depot got its advantage and how it worked with everyday low prices, a strategy that they eventually cloned from Sam Walton as I went over already. And the best part about Home Depot success was that it inevitably benefited its customers. If Home Depot could get a 5 % discount on an item, they could pass those savings to the customer.

55:30If the supplier sold smaller volumes of an item to a Home Depot competitor, they would not get that discount. So even if they wanted to compete with Home Depot by keeping their growth margins low, they still wouldn't be able to price a product as low as Home Depot could. Another important factor when thinking about how a business like Home Depot fits into an ecosystem is when it becomes powerful enough that vendors are actually hamstringing themselves by not selling to them. So 3M was a very good example cited in the book. 3M treated Home Depot like they were going to go bankrupt within a week and therefore they actually didn't want to do business with them when they were in their infancy.

56:06But once Home Depot's business model was validated through its growth, 3M wanted to make Home Depot a customer. Now this was eight years and several hundred stores after Bernie Marcus felt that he'd been treated poorly by 3M. And they eventually made a deal, but Bernie said they had to pay a very steep price for the opportunity to become a Home Depot supplier. While reading the book, I came upon one part that really got my attention, and that was at Home Depot, a retailer was exhibiting some form of network effects. What would happen was if a manufacturer wasn't selling at Home Depot, they would simply lose customers.

56:39The reason was simple. People wanted to buy their equipment from Home Depot because they knew the value proposition was just so good and better than pretty much anything else out there. So if they were using Klein's tools, for instance, their whole life, and then started shopping at Home Depot and needed a new socket wrench, they would just buy whatever socket wrench Home Depot was selling and not stay loyal to that client brand. So here's what Bernie Marcus said. We were not going to buy from any wholesaler or distributor. We had customers coming into our stores who were consumers of many of these products.

57:10When they couldn't buy these products in our stores, they would just buy something else. So we had to convince the manufacturers that they had to be in our stores because that's where their customers were. That was our selling point. Just go outside one of our stores and interview our customers, we tell manufacturers. Find out how many of them were your customers and are no longer your customers. Now, I just searched on Home Depot's site for RIDGID tools and I got about 554 results. The story of how RIDGID became an exclusive brand for Home Depot is a good one. So there was a company called Emerson Tool Company and it started making craftsman tools for Sears.

57:45And they did this successfully for nearly four decades. Bernie Marcus liked their tools so much that he tried to get them to make tools specifically for Home Depot and just name them something else. But the company's CEO, Chuck Knight, wouldn't do it because he felt that it was simply not the right thing to do given the relationship that they had with Sears and that Sears was a direct competitor. But one day, Bernie got some excellent news. He heard through the grapevine that Sears had decided to stop selling American-made tools like Craftsman. They'd go overseas to get cheaper manufacturing. They informed Emerson that they would no longer need their services.

58:17Now, keep in mind that some businesses, and obviously this one too, are very, very essential to small towns. And Emerson was one of these. So it employed about 6 % of the town's population. So shutting its doors would have been a terrible event for the people working there and their families. So Emerson got to work creating the best possible product lines that they presented to Home Depot's executives and merchants. And the product lines were absolutely exceptional. And that's why they still sell to Home Depot to this day. Now let's shift from Home Depot's advantage with suppliers to the advantages that it had through management, which it learned over decades of experience.

58:53So they discussed 14 here in detail. One, the invisible fence. This is a point about the benefits that Home Depot derives from its decentralized business model. The decentralization policy was implemented after Home Depot expanded to the West Coast. As they grew, they realized they needed different regional presidents who could manage their specific geographies. What the fence is, is just making sure that these presidents stay in their lane and don't venture too far outside of it. They have an ample latitude to do things without consulting above, but there is a limit to that freedom. And that is where the invisible fence analogy comes in.

59:27If they go outside the limit, they will be zapped by the fence. Regional presidents are given a lot of responsibility. And if things go well, then the whole region gets credit. If things go bad, it's the president's fault. Two is called the three bundles. This was a framework that Home Depot cloned from General Electric Chairman Jack Welch. It's three bands of decision-making authority inside of the company. The three bundles are non-negotiable, entrepreneurial, and empowerment. So the non-negotiable bundle is uniform across all of Home Depot's locations and just doesn't change. This ensures that the Home Depot brand is preserved no matter where you go and keeps operations consistent.

1:00:03This includes things like store layout, signage, pricing, safety standards and customer service expectations. The entrepreneurial bundle helps to encourage management and associates to think like entrepreneurs, to adapt, to innovate, and find new and better ways to serve customers. This might be innovative advertising like promoting the rigid tool line by creating a mini golf course using blowers, or cutting a junk car in half using a power saw and making an in-store display from it. This point is important because many of these grassroots ideas can spread into company-wide initiatives. The third bundle is the Empowerment Bundle.

1:00:38This is allowing associates to have complete autonomy over how to run their departments or stores on a day-to-day basis. The purpose of this bundle is to empower employees to act as owners and not just as staff, ensuring each store feels unique, is full of local energy and pricing, but remains aligned with Home Depot's mission. Number three is hire overqualified people with a view towards future growth. The most crucial part here is future growth. The person who takes you from$100 million to$1 billion might not be the same person who takes you from$1 billion to $5 billion. You need people who have the energy and inclination to continue taking your business to new heights.

1:01:13Number four is have a financial conscience. Once your business scales, buying an item that will be a necessity across all locations comes with a pretty high price tag. In the book, Arthur Blank mentions that Home Depot had about 1 ,000 locations. If you wanted to buy something for the store that was$1 ,000, that would actually be a$1 million decision. So focus on where you are spending money and don't spend unnecessarily. Five, one man shows don't cut it. If you have a superstar management, make sure that if changes need to be made, the manager shares their reasoning as to why changes need to be made.

1:01:44There's no point in hoarding information that could improve the business just for yourself. The company only gets better when failures are rectified across the board. Six is open lines of communication. Bernie and Arthur credit having breakfast in front of their entire Home Depot staff as helping them to identify problems throughout the company. So let me explain this. So they would hold a few breakfasts each year between the two of them where they would chat, then stream it to their store locations. During these breakfasts, they'd answer key questions from associates that helped improve things such as customer service.

1:02:16Seven is something called Bernie's test. So Bernie had a test where he'd visit Home Depot stores around the country and observe how long it took for people to recognize them. Arthur said that this wasn't about ego. It was about the associates making eye contact with their customers and just serving them properly. If they couldn't make eye contact, Bernie felt like they just weren't being well managed. He'd go into stores asking very simple questions to make sure that associates knew what they were willing to sell and were properly prepared. Eight is honest feedback. Home Depot managers got input from those above and below them.

1:02:48They It helped them improve as managers, which lifted the entire company. They called them the 360 feedback, and it helped give insights into where people would be the best fits as they moved up the corporate ladder. 9. Establish ties that bind and strengthen. Arthur felt that building great relationships with managers that he entrusted was just vital to the health of Home Depot. So he created these kind of outward mound trips, such as a visit to a dude ranch in Utah or sailing trips. This helped him develop closer bonds with people that he trusted to help run Home Depot and get to know them in a more personal way outside of business.

1:03:2010. Shut up and show them what you want. Now, I discussed earlier how Home Depot tries to empower its associates and managers so they act more as owners and less as paid labor. One way to do this is to allow associates or middle management to take the initiative and demonstrate how to make rapid improvements. One example of this was when a district manager went into a store, promoted seven employees to assistant managers, then went on a 20-hour binge of re-merchandising and cleaning. They rapidly improved the store's look and sold old inventory. Once the manager returned to the store, he saw all the improvements that had been made, which lit a fire under him to keep overperforming.

1:03:5611. Kill bureaucracy Part of Home Depot's success came from its decentralization. Arthur knew that bureaucracy would be a death sentence for a business like Home Depot. This is why they gave regional managers such a long leash. It transformed responsibility onto them so Bernadette and Arthur could focus more time and energy on things like scaling the business rather than micromanaging. 12. Hire the best. Arthur writes, there is an aversion in most organizations and among most managers to hiring people who are smarter than they are. From the time we started in retail, we have always believed in hiring the best people.

1:04:31Don't just hire good people and let their potential go to waste. Give up responsibility and authority to them. Challenge them to surpass you. And every time they show a spark of genius, your own career will take off because you are responsible for them. 13. Inverted pyramid. In Arthur and Bernie's view, they are the least important people at Home Depot. They aren't the guys to ask about, you know, wiring a house, their associates are. Knowing this, they prioritize serving the stores above all else. And they also emphasize that everyone working at Home Depot has a role in making sure the stores are thriving and have the support needed to continue serving customers as best as possible.

1:05:09And the last one here, number 14, is just respect for the individual. Bernie and Arthur highly respect each other, even though they don't always agree. But because they were both open to improvement, they have worked to continue improving themselves and not really let their egos lead them to becoming complacent. Arthur said they rated themselves as just a 67 out of 100 on how well they were doing. And even though they thought that that was 110 % compared to competitors, they felt like there was a lot of room for improvement. Now, those 14 points carry a lot of value. The word that comes to mind when going through all of them is just humility.

1:05:43you have to have humility to run a decentralized business and actively hire people who are smarter than you. But as Home Depot, Berkshire Hathaway, and scores of other decentralized companies have compounded value for decades have shown, if you have the humility to pass off responsibility and trust to exceptional people, there's a chance you're going to do exceptionally well. Now, when Built from Scratch was published in 1999, Arthur noted that Home Depot made millionaires from over 1 ,000 of his associates. This is a very impressive number, and considering the stock is nearly 10x'd from the end of 1999, I'd assume there's many more millionaires in Home Depot's ranks.

1:06:17Although it would have been easier to strike it rich in Home Depot in its fast growing days where now it's more of a blue chip stock. Now, one framework that I've learned from Warren Buffett that I think is incredibly powerful is to look back at what management has said a few years ago and see how they executed on their initiatives. The best management teams are the ones that say what they're going to do and then do exactly what they're going to say. It's rarer than you would think. So with that thought process in mind, I thought it would be interesting to take a much longer view on Arthur Blank's vision of Home Depot's future a quarter of a century ago.

1:06:47He named five growth categories. Now, keep in mind, a quarter of a century is a really long time. I generally look for three to five years, and it's kind of harder to get that data because it's hard to know where Home Depot was five years after he made these growth initiatives, but let's go over them anyways. So the first one is continued expansion of its core business. Second was increased sales to professional customers. Third is international expansion. Fourth was specialty store expansion. And five was convenience stores. So where they've shown brightest across all these growth categories was just simply by sticking at what they knew best, the good old US of A.

1:07:21From 1999 to today, they've grown their US store account from 930 to about 2038 for a low but steady kegger of 3%. We can roughly calculate US revenue growth assuming that in 1999, 100 % of revenue was from the US. This is most likely a wrong assumption, but ex-US was probably about less than 1%. Then we can look at US revenue today. So during that same time period, they grew US revenues at about a 5.5 % kegger. Now, as for the second point on selling to professional customers, it's very difficult to get any data on this. But as professionals would have probably had larger basket sizes, I can see how they would have been very high priority for Home Depot.

1:08:00It's impossible for my standpoint to grade them on this because I just can't see the mix of their customer base in 1999. Two sources I found said that professionals make about 10 % of Home Depot's customers, but about 40 to 50 % of total sales. Now, the book mentions that Canada was their first foray outside of their home country. And the success there opened up management's eyes to the potential of opening stores outside of the US. Now, while it appears that they attempted to open in places like Chile and China, from my research today, the only locations outside of the US that I can find are in Canada and Mexico.

1:08:31So while international expansion didn't go as planned, they still did a good job of expanding into both of these markets. Now, according to DIY International, Home Depot had about 2 ,317 locations in 2022, of which 323 were outside of the US. Over the last decade, international sales have gone up at a keg of about 5 % versus a US keg of about 7%. So the reason for this underperformance is things such as foreign exchange considerations, smaller housing markets in Canada and Mexico versus the US, smaller international professional home builder penetration, and the fact that Home Depot utilizes a lot of American-based products and services that offer better benefits in the US versus outside the US.

1:09:11Now, the specialty store expansion was a test that they started in 1991, and these were called Expo Design Centers, and they specialized in kitchen and bath renovations. The test ended up closing in 2009. Another test that they tried was a concept called the Home Depot Crossroads, which sold to more rural markets, but they very quickly regretted that and that initiative closed down swiftly. As for the convenience store aspect, they created a much smaller concept store called Villagers Hardware in 1999. The concept was made because they figured that some customers may not need to spend hundreds of dollars going to a large location.

1:09:46So they might prefer going to a smaller location where they could just get some very high priority options. But this initiative also flopped and they ended up shutting that one down in 2002. So in terms of these initiatives, the one that really worked out was just sticking to the US. At the time the book was written, e-commerce was still in its infancy. But it appears that they were ready to accept that some people would want to shop for Home Depot's products without physically entering the stores. So they acquired two direct-to-consumer businesses that specialized in blinds and wallpaper. It's hard to say how e-commerce has worked for Home Depot as they don't disclose online sales, but I can only assume that they're selling a fair amount of merchandise online.

1:10:25While Home Depot is a great company, I have to say I have zero interest in owning them. The business has a market cap of$383 billion and 20-year keggers of 4 % for revenue and 5 % for net income. Now, the lack of growth here is just entirely uninteresting to me, especially given that the shares trade for a PE of 26. They have over that same period paid some dividends and those dividends have grown at a 13 % compound annual growth rate, and they've retired some shares at about a keg of 4%. So they're creating some shareholder value through a mix of earnings growth, dividends, and share repurchases, but just not enough to really interest me.

1:11:02For investors who might favor steady businesses that pay a dividend and are likely to be around in 20 years, I can see how this stock might be of interest to you. If we went all the way back to when Home Depot went public, and when they had much fewer than 100 locations, they had whatever, four or eight of them, I would definitely be all years. They had a fantastic concept, a massive market that was barely penetrated. And from its IPO until 1999, adjusting for share splits, the company was a 1 ,333 bagger. So the potential would have been interesting when it was a micro cap or small cap, but I can't see returns today that are much higher than the market average.

1:11:38Now at its core, Home Depot's DNA is built on humility, hustle, and a deep respect for people. That's including customers, employees, and suppliers alike. From the very beginning, Bernie Marcus and Arthur Blank refused to let bureaucracy or ego stand in their way of progress. They led directly from the floor, not from the ivory tower or the boardroom. They built a culture where empowerment, ownership, and service defined success. Their obsession with low prices wasn't just a business model, it was the cornerstone of Home Depot's philosophy. And their willingness to outwork, out-serve, and out-learn competitors became the foundation for one of America's greatest retail stories.

1:12:15Home Depot's story reminds us that sustainable greatness doesn't come just from grand strategy. It comes from simple, consistent execution rooted in very, very strong values. The orange apron symbolizes more than just a brand. It's a badge of humility and purpose. From four scrappy warehouses in Atlanta to thousands of stores across North America and Mexico, Home Depot's culture of trust, empowerment, and relentless customer focus remains the beating heart of its success today. That's all I have for you. Want to keep the conversation going? Follow me on Twitter at IrrationalMRKTS or connect with me on LinkedIn.

1:12:50Just search for Kyle Grief. I'm always open to feedback, so feel free to share how I can make this podcast even better for you. Thanks for listening and see you next time.

1:12:58Kyle Grieve:Thank you for listening to TIP. Make sure to follow We Study Billionaires on your favorite podcast app and never miss out on episodes. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor's Podcast Network. Written permission must be granted before syndication or rebroadcasting.