The Home Depot

0:00Ben I'm sorry, I got tripped up. You used power tools, David Rosenthal?

0:05David I built this whole door. I got the blank door from Home Depot. I had to cut it down to size to fit a nonstandard size door opening in my studio.

0:15Ben Wow.

0:16David I drilled the door handle. I put the doorknob on myself. It all worked great.

0:18Ben We, we've got to get you to the pro desk.

0:20David Yeah. And it's been part of every Acquired episode since.

0:25Ben All right, let's do this.

0:26 [Music]

0:43Ben Welcome to the Fall 2026 Season of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert.

0:54David I'm David Rosenthal.

0:54Ben 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 large, David.

1:14David Yes, large.

1:15Ben 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.

1:41Ben So that's more valuable than Netflix or Alibaba or Goldman Sachs or LVMH.

1:47David Or Disney that we just covered.

1:51 [Music]

1:56Ben Yes.

1:57David Which is wild because unlike all of those other companies, Home Depot is only in North America.

1:59Ben 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.

2:23Ben 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—

2:34David Yeah, Home Depot is an all-timer. I kind of can't believe we haven't done this episode yet.

2:37Ben 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 dollars today.

2:54David Not bad. Not bad. Well, we're going to get into as we go who holds that equity, because it's actually a critical part of the company's strategy, or at least it was.

3:04Ben 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.

3:24David Wow.

3:25Ben 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.

3:51Ben 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.

4:19Ben More employees than any restaurant chain also, including Starbucks. So listeners, this is the story of Home Depot.

4:26David Woo, let's go.

4:27Ben 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.acquired.fm to get access to all the charts and tables and illustrations from key concepts in this episode.

4:46Ben You can join the email list at acquired.fm/email. That's where we'll send out all the behind-the-scenes photos of research and past episode corrections and vote on future episode topics. That is acquired.fm/email. 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.

5:08David 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.

5:18Ben 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.

5:32David So the story of Home Depot is kind of like the Acquired version of an Avengers movie. There are these four business and retail superheroes that come together and, you know, save— Well, they don't save the world, but they save customers a lot of money.

5:45Ben They provide extreme value propositions to the American consumer.

5:50David Yes. Yes. So we start first with Home Depot's founding CEO, Bernie Marcus. Bernie comes from a poor family of Jewish immigrants in the rough neighborhoods of Newark, New Jersey, in the 1930s during the Depression. Bernie was actually in a gang as a kid, which I discovered hilariously reading Bernie's book, Kick Up Some Dust, the foreword of which was written by his good friend, the rapper Pitbull.

6:18David Like, amazingly, the two of them bonded and became good friends later in Bernie's life.

6:24Ben Yeah, when you sent me that book cover, I had a serious double take at the foreword.

6:28David Yeah. So Bernie, despite his, you know, rough upbringing and gang experience on the streets of Newark, he's super smart and he ends up being the first person in his family to go to college. He goes to Rutgers down the road from Newark, there in New Jersey, for college. And his dream is to go on to medical school and become a psychiatrist.

6:50David That doesn't work out because his family doesn't have any money to send him to medical school. So instead, he becomes a pharmacist. That quickly leads him to becoming a concessionaire in a New York area discount store. Concessionaire, like a store within a store. This begins Bernie's retail education.

7:10David And from there, he would go on to join the New York area discount chain Two Guys. Ultimately, this leads him a couple of years later in his 30s to an executive role at the 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.

7:30David 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. There are shopping malls being built everywhere in the suburbs across America here in the postwar period. Sears is building big anchor tenant stores attached to these new shopping malls.

7:52David 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 postwar 1960s baby boom American suburbs are alive and well with their shopping. 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.

8:19David 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.

8:34Ben 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.

8:48David Yep. Yep. So Bernie's 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. He's 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.

9:15David So again, he has no equity. He's the CEO, but he's just an employee.

9:20Ben 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 knew retail.

9:39David These are retail guys.

9:39Ben Yep.

9:40David Exactly. Well, retail and finance guys, as we'll see.

9:43Ben Yes.

9:44David 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 L.A. and join him as his CFO at Handy Dan. And Bernie, you know, he knows himself as we'll see. He is an incredible retailer, an incredible CEO, an incredible leader.

10:11David 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.

10:30Ben And Daylin didn't own all of it, right? It just owned the majority of the shares?

10:33David Yeah. So Daylin had bought all of it, but then there was this kind of crazy fad going on Wall Street in the '70s here, which we're into now, where conglomerates would spin off these little 19% equity stubs of their various divisions and then float them publicly on the stock market, 19% being below 20%, so that the parent company could still consolidate the division's financials on their books.

11:04Ben 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.

11:10David Yep. Yep. And the idea was that this would unlock value since these conglomerates traded at a discount to the value that they'd otherwise have if all the businesses were independent. Actually, in reality, it didn't work at all. In practice, most of these publicly traded little divisional stubs traded at a further discount to the parent company's already discounted holding company valuation.

11:36David 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. Well, they were in the '60s. But now here in the '70s, retail is struggling. So we've talked about this period on a whole bunch of other episodes on Acquired, Vanguard most recently.

11:58David But the '70s were brutal in America. There's the oil crises that hit, there's stagflation, federal interest rates go up into the teens, like the teens. Can you imagine?

12:09Ben Yeah, they briefly even hit like 18, 19%.

12:13David 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.

12:34Ben Right. It's like this crown jewel within an otherwise withering empire, right?

12:38David 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 term yet. The hardware store landscape at the time was this patchwork of clubby, regional, not very sophisticated, and not very good businesses.

13:08Ben 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.

13:25Ben Lawn and garden was sort of its own entire thing. These are all little specialty stores.

13:29David Yeah. 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-

13:38Ben Which actually wasn't very many people. That sort of do-it-yourselfer wasn't really a thing yet.

13:45David 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.

14:04David 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.

14:12Ben Yes.

14:13David 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.

14:38Ben 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 lumberyard.

14:51David Yep.

14:51Ben So you get a lumberyard, a nice little showroom. That's kind of it. The craziest thing about Lowe's is it was founded in 1921.

14:57David Yeah, as a general store. Yeah.

14:58Ben Right. By this point in history, it's already 50 years old before The Home Depot has even been founded.

15:03David 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.

15:26Ben Yeah, they're students of retail.

15:28David 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.

15:55David 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.

16:08Ben This is your, your third superhero. You've got Bernie Marcus, the retailer.

16:12David Yep.

16:12Ben You've got Arthur Blank, the sort of finance and operations genius. And now you've got Ken Langone in New York City.

16:19David 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.

16:40David People today remember Ross Perot as like, oh yeah, that guy who ran for president in the '90s. But he was kind of like Larry Ellison of his time. EDS was this giant company.

16:52Ben Yeah. 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 have to do a whole Ross Perot episode at some point. But from his time at IBM, he saw people are buying all of these mainframes, but they have no idea how to use them.

17:10Ben I actually have to start like—

17:11David Yeah, he was a top salesman at IBM before starting the company.

17:15Ben 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.

17:33David Yep, totally. And based in Plano, Texas. EDS has this long history. They ultimately get acquired by Hewlett-Packard and become HP Enterprise Services. So yeah, Ben, exactly what you're talking about—data centers, mainframes, 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.

18:03David 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 a Philadelphia-based hardware chain, you know, one of these other regional players, a company called Panelrama.

18:25David And like everyone else, they've fallen on hard times. So Ken goes down to Philadelphia to see the CEO, and Ken's like, all right, well, who can we look at in the industry that's actually good? Like, what does best look like in this industry?

18:40Ben Because it should be a good business. I mean, we will 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. We've built tons and tons of houses in America, and they need just an endless supply of stuff.

19:01Ben It's almost like a subscription of recurring revenue if you're in this business to keep working on a home as the weather and time acts on it.

19:10David 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.

19:23Ben 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.

19:33David 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 said, 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.

19:52David That company's going bankrupt. And 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 the day. He pulls out his Moody's manual, his little book, and he's going through.

20:14David 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 going to earn post-tax net income of $1.50 a share this year. So this company is trading at two years of post-tax earnings.

20:33David So Ken's like—

20:34Ben Something has to be wrong.

20:35David Something has to be wrong.

20:35Ben Is there like an accounting problem? Is there some trick in the reporting or gimmick here that I don't understand? And I gotta dig into this.

20:42David Yeah. So, so he says, Gary, let's get, let's get Handy Dan on the phone like right now. I got to talk to these guys. So Gary calls up Bernie, gets him on the phone, and Ken's like, Mr. Marcus, are your financial statements true? Bernie says, yeah, yeah, sure. Business is doing great. It's the craziest thing that Wall Street doesn't appreciate us.

21:02David 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.

21:16Ben This is classic Ken Langone—

21:18David 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. That's not public information.

21:29Ben Right? If you're the 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, I'm going to fly across the country right away, it's like, okay, I really gotta watch what I say to this guy.

21:42David Yeah, yeah. So they have lunch and it 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? Bernie says, no, just an employee. You know, this is a Daylin subsidiary, even though we're publicly traded.

22:07David 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.

22:29David Now, Bernie, this is exposing his weakness here with finance. While he's brilliant and street smart, he's also kind of like innocent about Wall Street and finance and investing and all this stuff.

22:43Ben And negotiating, I think in some ways he overtrusts people to—

22:47David He's weirdly risk averse in this area. So he says, oh, well, 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.

23:04David The price will go up. There's no risk. Bernie says, nope, nope, I can't do it.

23:09Ben 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.

23:25Ben And Bernie's lawyer is, of course, sitting there listening to make sure.

23:28David Yep. So Ken says, all right, all right. I told you. He flies back to New York. He does exactly what he said he was going to do. He buys every single publicly traded share of Handy Dan. Except for one block.

23:47Ben All right. So I, I looked this up, David, in the book Built from Scratch-

23:57David Yep.

23:58Ben which is the awesome book that It's 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.

24:20Ben And when Ken asks 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? And he goes, yes. And he goes, and are you Catholic? And Ken goes, yes, I am. And the priest says, then under the pain of hell, tell me what I should do.

24:41Ben And Ken, you know, smiles and laughs and says, well, on these terms, you should keep it. Don't sell.

24:48David You should hang on to your shares.

24:49Ben So Ken started buying at $3 a share, and by the time he was done, he bought almost 20% of the company. The last few shares that he bought were at around $9 with no float and no trading left. So it's essentially locked at that price. There's two plus a church shareholders of this business.

25:06David And improbably, Ken going out and buying these shares leads to Bernie and Arthur getting fired and then founding The Home Depot.

25:19Ben 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.

25:26David Right. This is how Ken Langone becomes a co-founder of The Home Depot is he gets his buddies Bernie and Arthur fired accidentally.

25:32Ben Accidentally.

25:33David 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.

25:41Ben 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?

26:02David Yep. And that's where Sierra comes in. First, your customer relationships are your competitive advantage. When you deploy Sierra's AI agents, those relationships get deeper with every customer interaction, generating insights that compound over time. Second, you should pay for outcomes, not tokens, like an insurance claim paid or a sale closed or a customer retained.

26:25Ben 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, 1 in 3 of the world's leading banks, 5 out of the 10 largest healthcare companies, and now their agents can handle complex workflows that generate revenue as well.

26:45Ben 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.

27:00David 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.

27:16Ben Great brands have a recognizable character to them. Acquired, for example, has a very different communication tone than, say, a hospital.

27:25David Yep.

27:25Ben And, you know, a luxury brand would have yet a completely different one. And the agents at your company should too.

27:31David 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 this is wild. The rate it solved customers' problems increased by almost 50%.

27:51Ben Because it had a persona.

27:51David Yes.

27:52Ben 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 them that Ben and David sent you. Okay, David, so how does Ken hoovering up all the shares, even though he's sort of become buddies with Bernie and Arthur, how does that lead to their ousting from Handy Dan?

28:14David 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.

28:38David Which is very different than the new Daylin CEO's approach to managing Bernie and Handy Dan.

28:46Ben And quite bothersome. This guy who's the minority shareholder is sort of like, closer with your management team than you are.

28:53David Right. That you consider one of your divisions in your company.

28:55Ben Yes, right.

28:56David So on one of Ken's trips out to L.A., Bernie says, hey, you should probably go see our actual CEO at Daylin, a guy named Sandy Sigoloff, and, you know, build a relationship with him. Now, Sigoloff, as we said, was brought in to turn around the company out of bankruptcy. And he's a bad dude. He's exactly who you would imagine is the bankruptcy value recovery artist here, shall we say.

29:25Ben Yeah, didn't he give himself a nickname? Was it Ming the Merciless?

29:30David Yes, after the villain in the Flash Gordon comic series. And he called himself that because of how merciless he was to all the employees of these companies that he would slash and burn and get rid of. So Ken realizes right away that this Sigoloff guy is bad news, but he's got this close to 19% equity position in Handy Dan.

29:54David It'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, Sigoloff 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.

30:19Ben 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.

30:28David And loyalty is his whole MO. He never sells.

30:31Ben Yes. So Sigoloff sends his lieutenant, Jeffrey Chanin, to try to negotiate something. So this is from the book Built from Scratch. Chanin 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. Chanin was shocked. Forget it. Langone left and went to the men's room.

30:53Ben Barely 2 minutes later, Chanin followed him in. Okay, he said. $12. Jeff, you don't understand. You offered to buy it for $10. I said no. I offered to sell it to you for $12. You said no. Now you are back wanting to buy it for $12? That offer's off the table. That is gone. We had an offer and a denial.

31:14Ben No deal. Chanin goes, what? Ken goes, I suggested a price of $12 in my office, right? Chanin nodded. And you declined. Well, that's it. I don't want to sell now.

31:25David We're in the men's room now. Price is different.

31:27Ben Chanin says, you must have some price. Okay, Ken says. $14. Chanin left in such a blind rage that he almost banged his head on the door. About a week later, Sigoloff 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.

31:44Ben Chanin said no. That offer's off the table. I don't understand, Sigoloff 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. Sigoloff hung up the phone madder than hell.

31:59David It's like, uh, what is it in, uh, Empire Strikes Back of the—

32:03Ben I am altering the deal. Pray I don't alter it any further is the Darth Vader line.

32:08David So this continues for a while. And then one day Bernie calls Ken, or Kenny, as he's taken to calling him.

32:15Ben Yes.

32:15David He says, Kenny, just do me a favor. Just sell. Just sell to Sigoloff. He's breathing down my neck. This situation's getting bad. It's making my life difficult. Just sell. It's fine.

32:28Ben The business is doing great, so this is actually like my biggest headache.

32:31David 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 Sigoloff. 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.

32:50David 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, 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.

33:14David 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.

33:24Ben Yep.

33:25David 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 Sigoloff. And this, I think, is basically the one time that he sells out of a company that he's invested in.

33:42Ben Yeah, but David, how much does he sell for?

33:44David Well, even though he's going to sell, Ken is no pushover here. He sells for $25.50.

33:55Ben Yeah.

33:55David A share that he started buying at $3.

33:56Ben Do you know over what period of time?

33:57David I think it was only about 2 years, this whole saga.

33:58Ben From $3, his average entry price was probably, I don't know, $5, $6—

34:02David Yeah, $5, $6, whatever, to—

34:03Ben Up to $25.50 to sell. And the story is great where Sigoloff 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, just to look like we had some real hard bargaining here.

34:21David So good. So good. So January 1978, Sigoloff buys Ken's shares and now owns just about 100% of the company except for the Catholic Church in Brooklyn.

34:34Ben Yep. And then, just as predicted—

34:37David Yep. Just as predicted. 3 months later, Sigoloff 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 Sigoloff trumps up is an accusation that the 3 of them had violated national labor relations rules in negotiating with unions.

35:04David Sigoloff 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.

35:16Ben Yeah. And really what was happening here is Sigoloff, 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 want to consolidate power.

35:30David You guys are out of here.

35:31Ben I need to be the guy here.

35:32David 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.

35:49Ben This is April 1978.

35:51David 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.

36:14David You just got kicked in the ass with a golden horseshoe. That's a verbatim quote, by the way, because now we're going to go start that company that you told me about.

36:25Ben 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.

36:41David Houston. Yep. Houston, Texas.

36:42Ben And Bernie should have been all excited about this. This is the best version of the store 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.

37:02Ben 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 Bernie has started to learn a little bit. He's like, well, well, if I tell you, then you know.

37:24Ben And right now only I know. So I'm actually, I'm going to, I'm going to hold on to it. And Ken's like, no, come on, dude, tell me. And so now Ken knows the idea too.

37:34David The reason that Bernie's so bent out of shape about this is he'd just been down to visit one of his buddies, another retail guy down in San Diego. Goes by the name of Sol Price. That Sol Price.

37:51Ben Of Price Club, and then what would eventually become Costco.

37:54David Yep, yep, yep. And Bernie spills the beans to Ken and he says, well, I went to see Sol and he's got this new store concept that he's launching down there in San Diego. And I'm telling you, man, it's going to revolutionize the whole retail industry. It's just a matter of time before somebody brings Sol's concept to hardware, puts us out of business, to all sorts of other categories.

38:27David We're all going the way of the dinosaur. He's calling this thing Price Club, and the idea is warehouses. The warehouse is the store. Customers come in and shop the warehouse, so there's no back room.

38:43Ben All the square footage that we're paying money on, on our lease is shoppable square footage.

38:49David 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 marking it up just a little bit, selling it to consumers. This is blowing everybody else in San Diego out of the water.

39:11Ben They're not even paying people to walk around and put the labels out. I mean, it's literally just people coming into the warehouse and buying stuff right off the pallet. There's like no cost in this business.

39:24David Yep. And there's no reason why it shouldn't work just as well in hardware. And someday soon, somebody is going to see Price Club. They're going to do this for hardware, and we're going to be out of business. So cut back a couple of months later here to breakfast at the Waldorf Astoria in New York. Ken's like, Bernie, you getting fired is the opportunity of a lifetime for both of us.

39:47David You, me, Arthur. Let's bring Ron along too. We're going to go start that company. We got the golden horseshoe here.

39:53Ben Yep.

39:54David 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.

40:10Ben Yeah.

40:11David And 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.

40:21Ben 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.

40:40Ben It's not a 10,000-foot store like Lowe's or Handy Dan. This is going to be like a 60,000-foot store. I mean, we need capital to make this happen.

40:49David 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, okay, but there's someone I need to go talk to first. I need to go back down to San Diego and see Sol.

41:05Ben Yep.

41:06David Bernie goes back down to San Diego. He sits down, he has dinner with Sol. He explains the whole situation, the firing from Handy Dan, the labor relations suit from Sigoloff, etc., etc. Sol listens to all of it and he says, Bernie, do you think you're talented? Bernie says, yes, I think I'm talented. I did a great job at Handy Dan.

41:27David Sol 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. Sol says, then tell Sigoloff to go f- himself and just do this thing. And so with Sol's blessing, Bernie's in.

41:45Ben And this is kind of important to keep Sol Price in the loop because Bernie is trying to ascertain, are you also going to meaningfully add home improvement to your concept here?

41:56David Yes.

41:57Ben I mean, it's an eerily similar thing. They would diverge over time, and we'll talk about all the differences. 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%.

42:12Ben 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 going to have tons and tons of SKUs.

42:20David We're going to have tons of SKUs versus Price Club and Costco's famous low SKU count.

42:24Ben We're going to have the best selection. I mean, Bernie thinks that is essential to making this model work because it has to be a one-stop shop-

42:40David Yes.

42:40Ben 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 lumberyard and to the tool store, right?

42:44David And the plumbing store, etc., etc. Yeah, being a warehouse unlocks putting all this stuff together under one roof for the first time.

42:47Ben But it is different than the Price Club model of only having 4,000 items. They're going to 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.

43:06Ben 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.

43:20David Yep.

43:21Ben 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.

43:30David Yep.

43:31Ben 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.

43:46David Yeah, I think Bernie both really did need the pep talk from Sol, and he also wanted to make sure-

43:53Ben Yeah.

43:54David Sol wasn't going to do this too.

43:55Ben Yeah.

43:56David 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%?

44:14Ben 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.

44:19David 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-

44:33Ben $2 million.

44:34David $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.

44:39David He drives an old Cadillac.

44:59Ben 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 car.

45:10David Yes. Not a new, you know, fancy Cadillac.

45:13Ben Yes.

45:13David 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. Bernie's like, cost? What are you talking about? This is an old Cadillac.

45:28Ben Right. Practically, pragmatically, this is actually exactly in line with your ethos.

45:32David Yep. And Ross is like, no, no, it's the principle of the thing.

45:35Ben And it's a sticking point of two things. One, Bernie's like, no, we should be pragmatists. We shouldn't follow some dumb-

45:42David Yes.

45:42Ben Virtue signaling thing, but two, you're treating this like this is a division of your company, isn't it?

45:48David Exactly. You're treating me like an employee again.

45:50Ben This is, this is our company. You're the financier. This doesn't feel right.

45:55David Yep. So he blows up the deal. And this might be the most expensive disagreement in all of business history.

46:08Ben Let's see, I'll do the math here live on air. So 70% of a market cap of $350 billion.

46:16David Yep.

46:17Ben They did a ton of dilution along the way, but then counteracted 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.

46:33David Yep.

46:34Ben So Ross Perot insisting on a Cadillac cost him $223 billion—

46:42David Yeah—

46:43Ben Assuming he held, assuming he would have held.

46:45David Right, 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.

46:58Ben 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.

47:06David Yeah, for ordinary people. But they got Ken Langone here, the greatest investment banker of all time. So he says, nah, no big deal. All right, 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.

47:26David 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.

47:49David In my business, when we can't sell something, we mark it up. So great.

47:54Ben 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—

48:02David They have leverage. Yeah.

48:03Ben They have leverage. But Ken goes out and he finds 40 individual people.

48:09David Yep. To put in $50,000 chunks.

48:11Ben Yeah, and so Ken basically writes the term sheet and then is just going around to 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-

48:39David Lower.

48:40Ben not as friendly to you, yeah, as the number that you write on your own SAFE.

48:41David Yep. It's still a great line, though.

48:42Ben It's a great line.

48:43David Totally sums up Kenny. All right. So Ken gets the money. They all get back together in L.A., and they get to work.

48:48Ben 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.

49:01David Yep, he put in $100K.

49:04Ben 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.

49:14David For the moment.

49:15Ben Yes, they are missing one superpower that you need in an Avengers of Retail team.

49:23David Yes. Yes. Well, let's get to that. So Bernie and Arthur go back to L.A. and they get to work. And the first question is, all right, where are we going to put the first store, the first warehouse? And as we talked about, warehouses are expensive. L.A. isn't great because real estate is super expensive.

49:43David There are not a lot of empty warehouses lying around. And also Handy Dan is still there. Handy Dan is still the best operator in the industry. Maybe not great if we 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.

50:07David While they're still in L.A., 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 L.A. It's a store called HomeCo, and it's run by this wild man named Pat Farrah.

50:28David So Bernie and Arthur, they go to see the store, they walk in and—

50:33Ben It's the exact vision that Bernie had.

50:37David Yep. It's a 130,000-square-foot warehouse.

50:40Ben Which is way bigger—

50:41David It's not even Home Depot then. It's Home Depot today.

50:44Ben Right?

50:44David Yeah.

50:45Ben It's way bigger than those early Home Depot's that would open that were like 60,000, 65,000 feet.

50:49David 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 'em high, watch 'em fly.

51:07Ben I mean, it's a bonanza. The consumers walk in and they're like, oh, what? This is crazy.

51:12David Yep.

51:13Ben This is fun. It's like our Walmart episode where they were doing crazy stunts in the parking lot to attract people.

51:17David It's a party. Yeah, it's a feeding frenzy.

51:19Ben Yes.

51:20David 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 L.A. 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 gonna read Bernie's description of what happens next here.

51:44David 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.

52:09David Kenny shot Arthur a look that said, Is this your idea of a joke? But Pat Farrah 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 bedbug, but he was a genius.

52:34Ben I mean, crazy, yes, but this is the missing piece of the puzzle.

52:38David Yes.

52:38Ben You've got Bernie the retailer, Arthur finance and operations, Ken finds the money and is sort of the spiritual glue holding this team together. But they don't yet have the genius merchandiser-

53:14David Yep, Pat is the merchandiser.

53:14Ben who is going around to 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.

53:21David You gotta create heat in the store.

53:21Ben Yes, yes, this is all of the universe of Pat.

53:22David All Pat. And, oh man, there's so many legends about Pat, including driving forklifts through walls, etc., etc., etc.

53:27Ben Yeah, wasn't that like they wanted to tear down a wall, but they couldn't get a permit?

53:33David Yeah.

53:34Ben And so Pat just drove a forklift into it. And when the inspector came out, he said, I don't know, someone just—

53:37David Something happened.

53:38Ben It was an accident, but we definitely gotta take out this wall now.

53:40David Yeah. 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 Ken have started.

53:56Ben 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.

54:03David 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.

54:25Ben Ugh, Pat needs an Arthur.

54:26David Yes. Yes, he does. He has just been ignoring the invoices that the suppliers were sending him, you know, 30, 60, 90 days later.

54:35Ben I mean, that sounds malicious. I get the sense a lot of what he was doing was incompetence, not—

54:41David Yes. 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 and get the stuff and then I sell it.

54:51Ben 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.

55:09David Yes.

55:10Ben And Pat's like distraught. He's like, what do you— what do you mean? I— this thing's going to run out of cash in the next few months. I'm doing great. And they're like, you're not doing great, man.

55:18David Yep. But God bless them. 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 4th full co-founder here.

55:37David 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.

55:52Ben 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.

56:10David Yep.

56:11Ben 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.

56:32Ben 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—

56:43David Yep.

56:44Ben 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 The Home Depot could get money right away versus businesses.

57:11David That are gonna want credit—

57:12Ben 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.

57:17David Right? Right.

57:18Ben So it's like, sure, if you're like a little pro contractor and you're expecting to pay in cash, we can deal with you. But we can't really deal with big businesses. They just have to be generally very scrappy in every area of their business to get the most bang for their limited bucks, especially in the early days.

57:35David 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, WorkOS.

58:03Ben 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? Well, one big answer is move upmarket 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.

58:23David Yep. And today, the way you do that is WorkOS. They make it easy to add all the things that enterprise customers require: single sign-on, SCIM, 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.

58:42David 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.

58:50Ben Buh-nuh-nuh.

58:51David Duh, duh.

58:51Ben 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.

59:01David That's right.

59:01Ben 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.

59:09David 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.

59:30Ben Or my new bathroom, or yeah.

59:33David Yeah.

59:33Ben 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 WorkOS has built the whole stack for. So their new system, WorkOS Airlock, doesn't just check which tools an agent can call.

59:51Ben 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.

1:00:00David 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.

1:00:10Ben 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 WorkOS. You can learn more at workos.com and just tell them that Ben and David sent you.

1:00:27Ben All right, so how is this company born in Atlanta? So far we've been talking about California.

1:00:33David So after the HomeCo interlude and bringing Pat on the team—

1:00:38Ben 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 in the long run.

1:00:58David They got very, very wealthy if they held. Yes.

1:00:58Ben Yeah.

1:00:59David 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—

1:01:28Ben Hmm.

1:01:29David Which leads us into the second reason they choose Atlanta. Speaking of good real estate locations, they end up getting a sweetheart deal from J.C. Penney, you know, like the big national department store chain—

1:01:43Ben Oh yeah. Yep.

1:01:44David To sublease a couple of their locations in Atlanta. J.C. Penney had started a Kmart copycat subsidiary.

1:01:56Ben Is that what Treasure Island was?

1:01:57David Yeah, I think it was a Kmart copycat.

1:01:59Ben I was trying to figure it out.

1:01:59David Yep.

1:02:00Ben Ah.

1:02:01David Yep. And it was in the Southeast and it was called Treasure Island, and they had great locations. I mean, J.C. Penney was like a big company, big national retailer, had a great real estate team. But the Treasure Island subsidiary wasn't working, and it was failing. So they offer these crazy hardware startup guys four of the Treasure Island locations in the Atlanta suburbs.

1:02:24Ben As a sublease, right?

1:02:26David Yep. As a sublease. Yep. At least to 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're going to 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.

1:02:45David Bad Bernie's Build-All. It's alliterative. Get it? It's awesome. You're Bernie. You're Bad Bernie. And we're going to have all this advertising that's going to be you behind bars in jail. They put me in jail for these prices. They're too good.

1:03:00Ben Is that what the shtick was? I—

1:03:02David That was what the shtick was going to be.

1:03:03Ben I could not figure out why they would want to call it Bad Bernie.

1:03:08David Yeah.

1:03:08Ben Oh, that is awful.

1:03:09David It's like he must be a crook because these prices are too low.

1:03:14Ben Which, of course, is exactly what the loan officer wants to hear at the bank when you're—

1:03:17David Yeah, exactly.

1:03:18Ben 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.

1:03:32David Yep. Yep. So obviously Bad Bernie's Build-All 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.

1:04:00David I don't know if it was intentional or not. But what are the initials of Home Depot?

1:04:08Ben And the stock ticker today.

1:04:10David And the stock ticker. Yeah. HD. Where did they get fired from by Sandy Sigoloff? Handy Dan HD. Nice little—

1:04:19Ben Homage.

1:04:20David Tweak, shall you say. A little nod.

1:04:22Ben Yes.

1:04:23David Yeah. Let's put it in a positive spin. A little nod.

1:04:25Ben Yes.

1:04:26David Turns out, though, the consultant who came up with Bad Bernie's Build-All wasn't a total waste because he's the one who suggests that they adopt the color orange as their company color 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.

1:04:39David And that's how orange became The Home Depot color.

1:04:56Ben Perfect.

1:04:57David Which is totally brilliant.

1:04:58Ben It's distinctive.

1:04:59David I mean, the orange apron stands out. It's distinctive. It's great.

1:05:02Ben Yep.

1:05:03David So that leads right into the opening of the first 2 Home Depot's in Atlanta on June 22nd, 1979. They opened 2 stores same day. And this all happened like pretty fast. This is just over 1 year from when Bernie and Arthur and Ron get fired from Handy Dan.

1:05:27Ben 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.

1:05:42David Yeah.

1:05:43Ben 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 J.C. Penney's.

1:05:59David Yep.

1:06:00Ben 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—

1:06:23David Kmart knockoff.

1:06:24Ben Kmart knockoff, right.

1:06:25David Yep—

1:06:26Ben Second-use real estate.

1:06:27David Yep, yep, yep. There are 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 really drive homeowners to your store. Well, weekend newspaper delivery highly correlated with homeownership.

1:06:56Ben 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.

1:07:08David Exactly.

1:07:09Ben If you blitz one local geography's radio, TV, newspapers, then you can kind of 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.

1:07:35Ben Don't sprinkle some stores here and there. No, go into a city with force.

1:07:40David Yep, yep, yep. So all this sounds good on paper, except there's a mix-up and the newspaper ad doesn't run. So they got—

1:07:49Ben Oops.

1:07:50David 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. Inauspicious beginning to Home Depot here.

1:08:13David 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 the morning.

1:08:35David It's all going to look great. And Pat Farrah comes in at like 4 in the morning the day of the opening. He sees the polished floors and he goes nuts.

1:08:46Ben 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.

1:08:52David Yes.

1:08:53Ben 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.

1:09:03David Yep. So when Pat sees these sparkling clean floors, he loses it. He calls Bernie and Arthur, he 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.

1:09:22David It looks like nobody's been in here.

1:09:24Ben And it sends the wrong message.

1:09:27David Exactly.

1:09:28Ben 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.

1:09:44David Yep. Bernie's quote about this that he would write is, "Our stores are action places."

1:09:48Ben 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.

1:10:03David Yep.

1:10:03Ben So sometimes that means if you are swinging by every morning on the way to your job site. Sometimes it means that—

1:10:09David If you're a pro. Yep.

1:10:10Ben 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.

1:10:32David Yep. Whether you're a pro or a homeowner.

1:10:34Ben Yes, and it sure better feel like that.

1:10:37David Yep.

1:10:38Ben Another classic story is they're capital constrained. 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.

1:10:52David That's right.

1:10:53Ben And so a week before opening, they didn't have enough merch to fill the whole store. So Pat Farrah calls the Del Mar Cabinet Company and asked 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.

1:11:18Ben And apparently, I haven't seen this video, but they filmed themselves walking around the store because it looks so, in their words, fabulously legitimate that they had this big expanse of inventory. And they did the same thing with paint stacks. Pat found-

1:11:38David Yeah, empty paint cans.

1:11:39Ben 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 feet high.

1:11:41David 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, they're actually full.

1:11:45Ben Well, capital constraint is no longer their issue.

1:11:47David Yeah. So despite the rocky launch of the first few stores, within a couple of 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 6-month operating period of the first year.

1:12:14David 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.

1:12:33Ben And part of the appeal is they're blowing stuff out. I mean, friend of the show Arvind 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.

1:12:52Ben 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.

1:13:13Ben I mean, 10% to 25% below that of competing retailers. This should create crazy word of mouth. You got to see the store. I just went there. They have everything. I could— I'm like discovering new projects to do and it's all cheap. It's amazing.

1:13:27David Yep. I mean, just like Costco, no-brainer proposition to the buying public.

1:13:33Ben 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.

1:13:56Ben 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, down south of downtown in the neighborhood of SoDo, you can get everything. You only need to go to one store.

1:14:13David Yeah, it's one trip like we've been talking about.

1:14:15Ben Yes.

1:14:16David So the model starts to work quickly and the flywheel here is getting spun up in Atlanta. And then the next year in 1980, J.C. Penney calls him back again and says, "Hey, we're finally going to pull the plug totally on this Treasure Island thing. We got a bunch of locations that are now going to be empty down in Florida.

1:14:40David Do you want them?" And yeah, of course they want them.

1:14:44Ben Right, right.

1:14:44David Like, the whole plan here is expand nationally and this is great real estate. Like, we should jump on this.

1:14:50Ben Yep.

1:14:51David There's just one problem, which is they are maxed out on capital. So in 1979, that first 6-month period that the company was operating, they lost about $1 million. So $1 out of the $2 million of startup capital was blown in 1979. In 1980, this next year, they made $1 million in profit. Like, this is incredible.

1:15:14David This shows how well the model is working.

1:15:17Ben 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.

1:15:28David 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.

1:15:57David 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?

1:16:13Ben 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.

1:16:34David Ben, are you suggesting that recessions are the best time to push your chips in?

1:16:39Ben Look, call me Warren Buffett over here, David.

1:16:40David Yeah. 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.

1:17:05David Bear agrees, and they set a target of raising $6 million.

1:17:09Ben 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.

1:17:15David Yeah—

1:17:16Ben As it always works.

1:17:17David Ken knows how to get deals done.

1:17:18Ben Yes.

1:17:19David 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.

1:17:41Ben Great deal.

1:17:42David Great deal. Great deal, right? Fortunately for those investors, the week before the IPO, Bear calls up Ken and they say, "Hey, we took this thing on as a favor to you, but in this environment, we can't— we can't get the full $6 million deal done. We're going to have to cut this thing in half. We can only sell $3 million." So Ken goes back to the existing investors and says, "We're just going to let our investment ride rather than cashing out at slightly less than a 2x."

1:18:19Ben 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.

1:18:26David 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.

1:18:55Ben Which— check my calculator, but I think it's better than a 2x.

1:18:57David Yep. So the IPO gets done. They end up raising a little bit more than $3 million. They raise $4 million in total in the IPO at a $32 million initial market capitalization post-offering.

1:19:12Ben 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.

1:19:20David Nvidia, etc.

1:19:21Ben It went public at a tiny, tiny market cap.

1:19:29David Yep.

1:19:30Ben 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.

1:19:52David Yep. But you needed to be— well, I was going to say crazy, but you needed to have vision to do this.

1:20:00Ben Yes.

1:20:01David I mean, it's IPOing as a four-store hardware chain in Atlanta.

1:20:06Ben Right, right.

1:20:07David This is not Anthropic here where everybody knows them and they're giant.

1:20:11Ben A household name, right? This is a four-store chain in Atlanta.

1:20:15David 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.

1:20:36David 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.

1:20:46Ben 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—

1:20:59David Yep. And then quickly after that, in 1986, they hit $1 billion in sales.

1:21:06Ben With 60 stores.

1:21:07David 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. They finally get their clock cleaned by the new HD.

1:21:22Ben Meanwhile, Home Depot is now up to 118 stores nationally.

1:21:26David Yep.

1:21:27Ben So there's this interesting question here. We've talked about how they speed ran to $1 billion in revenue and 100+ stores.

1:21:33David National market leader in less than 10 years.

1:21:36Ben Right. Kind of, kind of ridiculous. The model, at least as we've explained it so far, clearly works at scale. But there, you should sort of have this question in your head of, well, how did they do all that when they had $2 million and just a scrappy team? I mean, this was a shoot-the-moon strategy. It needed to grow fast in order to make it work.

1:22:00Ben They needed to have a flood of customers on day one at the store in order to justify all the different inventory that they had. And they needed to have suppliers give them great deals, even though they actually didn't have any proof points that they could sell in volume. So I, I don't know, how do you think about why they were able to sort of act like a scale company even when they weren't at scale yet?

1:22:28David I think it was that they combined Pat Farrah's aggressiveness that he put together at HomeCo with Bernie and Arthur's operations and finance genius to just barely make it all work.

1:22:44Ben And a lot of illusion along the way-

1:22:48David Yep.

1:22:49Ben where they could sell the dream. And selling the dream is fine if the dream comes true.

1:22:52David Yep.

1:22:53Ben It's only bad if you promise people all this volume and then you can't get any volume. But, you know, as long as—

1:22:57David Yep. Specifically selling the dream to their suppliers, to the manufacturers.

1:23:01Ben Suppliers, suppliers and to financiers to like max out the amount of debt that they would extend this company.

1:23:08David Right. All the debt capital they were raising.

1:23:09Ben 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.

1:23:27Ben 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.

1:23:47Ben "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.

1:24:04Ben 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.

1:24:19David It's why you needed the Avengers to do this.

1:24:22Ben Right. And it's fine to sell the future as long as you make the future come true.

1:24:26David American enterprise system here. The worst thing that happens if it doesn't work is you declare bankruptcy and like Pat Farrah, you go join the next thing.

1:24:35Ben Yes.

1:24:36David So I think this is actually the perfect place to really talk about what the model is-

1:24:47Ben Yes.

1:24:47David and why here now we're in the late 1980s. There is capital available. It's the Go-Go 1980s. Why are copycats not emerging well-funded with a lot of capital to just come eat their lunch and do this too?

1:24:59Ben Well, there were copycats. I mean, there were other large-format hardware home improvement stores. I mean, I, I've been to a Builders Square, I think, when I was a kid.

1:25:09David Yeah, yeah, yeah. So, yes, exactly. This did happen. A lot of capital rushed into the space trying to do this. Yeah. Builders Square, Home Club, Home Quarters Warehouse, Mr. HOW Warehouse. These are all copycats spun up in the 1980s. None of them are around today?

1:25:28Ben Okay, so why?

1:25:29David 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.

1:25:51David 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?

1:26:20David 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.

1:26:42David It's like you go grab your toilet paper, you check out.

1:26:46Ben Right. The whole point is that we don't actually need to have that many people in the store serving you.

1:26:50David Right, right.

1:26:51Ben That's how we can pay our associates so much. That creates so much goodness in the model.

1:26:54David 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—

1:27:15Ben 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.

1:27:35Ben 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.

1:27:52Ben I mean, the culture is this sort of service and customer-obsessed orientation.

1:27:56David Ben, I noticed you said headquarters there. I don't think Home Depot has a headquarters.

1:28:00Ben That is correct. They have a store support center because headquarters merely exists to support the stores.

1:28:06David Yes, yes. Atlanta for Home Depot. The corporate address is the store support center, not-

1:28:14Ben Yes.

1:28:15David the headquarters of the company.

1:28:15Ben But that's powerful-

1:28:16David Yep.

1:28:16Ben to name it that and sort of instill that in the culture.

1:28:18David Totally, totally.

1:28:18Ben 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.

1:28:36Ben 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.

1:28:49David 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.

1:29:12David 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-

1:29:28Ben Right.

1:29:28David for what you were looking for.

1:29:29Ben No, you're hiring a contractor who knows how.

1:29:29David Right, exactly. But people want to work on their own homes. This is the unique thing that Home Depot figures out as they scale. They actually need to bundle education with the products that they're selling their customers. And rather than going out and hiring separate teachers that are going to run clinics in Home Depot's, they just recruit employees from the trades who are professional tradesmen, contractors to come be their retail staff in the stores.

1:29:58David And then they create a culture of, hey, any time 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.

1:30:15Ben 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.

1:30:25David 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.

1:30:48David 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.

1:31:11David 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.

1:31:33David 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.

1:31:55David You don't need to manage clients.

1:31:57Ben Yep.

1:31:58David You need to stock the shelves, but it's not hard labor. It's pretty attractive.

1:32:02Ben 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.

1:32:20Ben 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.

1:32:32David 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.

1:32:57Ben Yep.

1:32:58David 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.

1:33:06Ben And it's not just the employment model. There's a lot of other elements that kind of have an escape velocity component.

1:33:11David Yep.

1:33:12Ben So we've 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.

1:33:30Ben 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 two big strikes-

1:33:48David Yep.

1:33:49Ben short-term against the business model. Those are great—

1:33:49David Yep. Against the economics of the model. Yep.

1:33:51Ben 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.

1:34:10Ben 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.

1:34:34Ben 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.

1:34:58Ben 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.

1:35:22Ben And that means you can ask for ever lower prices on your bulk orders. So you either can harvest that extra margin for yourself or what The Home Depot did, at least for a very long time, is pass that along to the customer, make the whole thing spin faster of, oh my God, they have even lower prices. So to summarize all this, a friend of the show, Arvind Navaratnam at Worldly Partners, has studied this company at length, and I'm just going to quote from his 100-page study that we'll link to in the show notes.

1:35:52Ben 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.

1:36:25David 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?

1:36:49David 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.

1:37:13Ben Right, there was so much upside remaining.

1:37:15David 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.

1:37:37David 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 multimillionaires because of this.

1:37:57Ben Yeah.

1:37:58David 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.

1:38:05Ben Yeah. I mean, if you come from a Silicon Valley tech startup, this is second nature to you.

1:38:13David Yep.

1:38:14Ben 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.

1:38:31David 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.

1:38:55David 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.

1:39:06Ben 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.

1:39:21David Yes. And it all comes back to the specialty retailer model versus general merchandise.

1:39:29Ben Hmm.

1:39:30David 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. 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.

1:39:54David So legend is customer comes into the store with a faucet that he's brought in from his kitchen sink. He says, hey, my faucet is leaking. I think I need a new faucet. I know it's probably going to be a couple hundred dollars. And the store associate who has plumbing experience looks at the faucet and says, oh, no, no, you don't need a new faucet.

1:40:15David 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 $0.25. 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 of weeks later, he's back and he says, you know, we've been thinking about a kitchen remodel.

1:40:38David 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.

1:40:50Ben Yep, yep, that's a great point. The continuation of that story is that someone makes a comment like, boy, your, your boss is going to probably fire you. You could have sold a $200 faucet and you only made $0.25 on the washer, you're probably going to get fired for losing that sale. Bernie Marcus hears about this and he calls the guy and says, I think we should promote you.

1:41:12David Yeah.

1:41:12Ben I think that's the exact right customer service mentality.

1:41:13David We're going to give you another equity grant right now.

1:41:15Ben 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.

1:41:29David Yep.

1:41:30Ben 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 break room and seeing the associates watching the stock price.

1:41:44David Yep.

1:41:45Ben Like, we want that. We encourage that here.

1:41:59David 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, we very much want our employees checking the stock price and thinking about how their day is going to impact that.

1:42:05Ben 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's 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.

1:42:26Ben 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.

1:42:46Ben 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. That was a Bernie hunch before they actually opened the first store, but he was right.

1:43:05David Yep.

1:43:06Ben That is the 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.

1:43:17David 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 hundreds thousand-dollar kitchens, home remodels, etc., etc.

1:43:33Ben Yep. So this is basically the core model that takes Home Depot to the $350 billion market cap company today. Except—

1:43:44David Except it's not exactly a straight line.

1:43:48Ben 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.

1:44:10Ben They looked at 1.2 million Claude Cowork 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.

1:44:27David I know the biggest category by a mile was business process and operations, which was about a third of all Cowork 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.

1:44:45Ben 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.

1:45:01Ben And so there's a lot of use cases there for AI, even though almost none of them are writing code.

1:45:06David Yep, these are all types of cases that require analysis in documents and spreadsheets, all day long. And that is exactly what Claude Cowork is built for. On your desktop, working in your actual folders, not just a chat window.

1:45:21Ben 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 Cowork, 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.

1:45:39David Absolutely.

1:45:40Ben 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 Cowork to make your organization work better, you can go to claude.ai/acquired and just tell 'em that Ben and David sent you.

1:46:01David 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's 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 four days.

1:46:28Ben They have over 600, approaching 700 stores. They have 32 international.

1:46:33David 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.

1:46:53David And—

1:46:54Ben Now, J.P. Morgan.

1:46:55David 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.

1:47:18David 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.

1:47:31Ben 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.

1:47:38David Absolutely.

1:47:39Ben They also hire dedicated salespeople to handle pros. They stand up a pro desk-

1:47:46David Yep.

1:47:46Ben in a lot of their stores. They offer— this is a big change for them— pro pricing.

1:47:50David Yep.

1:47:51Ben So, they start offering bulk deals if you are coming to the pro desk.

1:47:54David I think importantly, though, that bulk pricing is available to DIY customers too. You just have to buy in a certain amount.

1:48:04Ben 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.

1:48:19Ben It'd be nice to just have it delivered to the job site.

1:48:23David Yep.

1:48:24Ben And pros would go on to be this 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-

1:48:55David Yep.

1:48:56Ben with an annual spend of $6,500.

1:48:57David Yep. Sounds right. And of course, there are pros that spend hundreds of thousands of dollars a year.

1:49:00Ben Yep.

1:49:00David 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.

1:49:20Ben So, almost 20 years.

1:49:21David 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.

1:49:48David 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's up to this point were like a, a man's place.

1:50:15David You know, it was guys buying hardware from other guys and—

1:50:19Ben Which Lowe's would go on to exploit cultivating women as customers.

1:50:23David 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.

1:50:31Ben 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—

1:50:41David Yeah, it was there for sure.

1:51:01Ben Yep.

1:51:02David 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.

1:51:06Ben And it's awesome because 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.

1:51:20David Yep, yep. But as Home Depot scales, the benefits of doing that really start to get outweighed by what you're leaving on the table-

1:51:38Ben Absolute chaos.

1:51:39David in terms of scale economies with purchasing power if you were to centralize your merchandising organization.

1:51:40Ben 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.

1:51:55David Yeah, from your suppliers. If you've got 57 different regional or even store-level buyers negotiating with them.

1:52:01Ben Which wasn't an issue at any other store because Home Depot invented the concept of the national hardware store chain.

1:52:08David Right, there wasn't even an opportunity to do national buying for hardware before Home Depot because nobody was buying nationally. Like, sure, absolutely. There were still regional differences in what, like, Arizona needed versus what Alaska needed. But like a table saw is a table saw. You don't need different table saws for different parts of the country.

1:52:27Ben Yep.

1:52:28David 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.

1:52:46Ben Yeah, you're putting down no cash and managing to get a house because they're willing to lend against invisible earnings.

1:52:53David Yes. Yes. So obviously that contained a lot of bad things for the American economy and for home improvement retailers to come. But during the run-up—

1:53:03Ben Right, they're building houses at an unmatched clip.

1:53:05David 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.

1:53:19Ben Yeah, in 1990, they got wise to what was happening to all of their regional competitors and the smaller format stores. 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.

1:53:29Ben 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.

1:53:53David 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.

1:54:08Ben Didn't Lowe's come in with a slogan, uh, improving home improvement?

1:54:12David 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.

1:54:33David They're doing home makeovers or home refinishing. 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.

1:54:50Ben Right. 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.

1:55:07David 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.

1:55:29Ben Now, it'd be a while still before YouTube was founded. This is, you know, the late '90s, not the 2010s.

1:55:40David Yep.

1:55:41Ben But you start to get people sharing information on forums and things like that.

1:55:42David Yep. All of this in aggregate, though, opens up the market for a real competitor for the first time.

1:55:45Ben Yep.

1:55:46David So once Arthur takes over Home Depot, he runs the company for a couple of years, but these issues start piling up, and he's also getting tired, just like Bernie when Bernie retired. And the company is just getting bigger and bigger. By 2000, it's over $40 billion in revenue. They have over 1,000 stores and over 200,000 employees.

1:56:07David And so one day at a board meeting, Ken asks Arthur about succession, like, hey, man, you seem like you're kind of getting tired too. If you need to step down tomorrow, is there anybody here at the company that could take your place?

1:56:22Ben Right, when Bernie stepped down, we had you, but who's after you?

1:56:26David And so Arthur goes away, thinks about it, comes back and he's like, Oh man, Ken, you're right. Actually, the answer is no. Pat certainly can't take my place. And you can, you know, we love you, but you're not an operator. You can't be CEO of this company. And Yeah, I guess we haven't really cultivated an executive bench here in the company of someone who could take over as CEO.

1:56:48Ben It is worth saying they very impressively figured out a management track for store managers. 75% of store managers at Home Depot don't have a college degree because they have figured out how to promote from within. And so you can, you know, come to Home Depot as an 18-year-old retail employee and become a store manager.

1:57:11David Yep.

1:57:12Ben And that works super well. But what they didn't cultivate, at least in this era, was who's going to succeed these founders.

1:57:15David So the board and Arthur together decide, Hey, we gotta bring in an external search firm and bring some more management talent into the company. And the plan is that they're going to go recruit a president and COO, basically somebody to replace Arthur's old job as number 2. Now that Arthur is CEO and this new person will be next in line to take the helm of the company when Arthur is ready to retire.

1:57:42David And Arthur actually chairs the search committee himself. And the first target is Jamie Dimon.

1:57:48Ben It's amazing.

1:57:49David Who has just gotten fired by Sandy Weill at Citigroup.

1:57:53Ben Yes. And Jamie loved the Home Depot founders, as he told us on stage at our Radio City show last year. But the other thing that he said right after that was, you know, I've never actually been to a Home Depot before considering this opportunity. And I think he went in once because a friend told him like, Oh, you need to go upstate and go to that Home Depot.

1:58:12Ben And it just didn't. He was like, what am I doing here?

1:58:15David Yeah, he was like-

1:58:15Ben I'm like pretending to be a home improvement.

1:58:18David Yeah. But this does burn a bunch of time. The whole process of meeting Jamie, wooing him, recruiting him. And they really do vibe. Jamie will say to this day that he loved everything about Home Depot, the culture, the philosophy as a company.

1:58:34Ben He talks about the store support center thing all the time. When we were preparing for Radio City, I watched 50 Jamie Dimon interviews, and he references how awesome it is that their HQ is called Store Support Center, and that's a cultural indicator.

1:58:46David Yep. So the company burns about 6 months on the Jamie process. At the end of it, they've still got nobody and the board is starting to get a little frustrated here. Now, it just so happened that Ken in addition to now being the lead director of The Home Depot board, was also on the board of General Electric.

1:59:12David And at the time, GE was going through its own very public succession drama of who was going to succeed Jack Welch.

1:59:22Ben The most storied CEO in America at the time.

1:59:25David Yeah, history has kinda forgotten this now because GE frankly has fallen apart. But—

1:59:32Ben Like literally got broken into 3 pieces. So that's not a controversial statement.

1:59:35David Yes, yes, it actually—

1:59:37Ben And before that incinerated more market cap than any other company before it in history.

1:59:43David Or at least until some of the Nvidia drawdowns, right?

1:59:46Ben Oh, but yeah, these days, like these, these drops that happen at big tech companies is, you know, dwarfs everything in comparison.

1:59:53David Yeah. Makes GE look quaint.

1:59:53Ben But at the time that, that was the story is post-Jack Welch GE just completely destroying shareholder value.

2:00:02David Yep. But here we are in 1998, 1999, 2000. I mean, Fortune magazine crowned Jack Welch the manager of the century in its millennium issue at the end of 1999. That's how vaunted GE was.

2:00:20Ben Yep.

2:00:20David And it was all driven by a culture of operational excellence, as embodied in GE's famous Six Sigma approach to defect-free output.

2:00:33Ben Sounds great.

2:00:34David Yes, sounds great, right? Well, we'll see. So back to Home Depot. So here's Ken and The Home Depot board thinking, Man, we sure could use some of that operational excellence stuff around here. I think that would really be good for the company.

2:00:51Ben And if you're gonna go cherry-pick the best corporate leadership that you could possibly get, the GE bench is probably the place to go hunting. You couldn't get Jamie Dimon. We don't have it here. Let's start at the top.

2:01:02David GE is the consensus best place to look in America for management.

2:01:07Ben Which is crazy looking at the 3 choices to succeed Jack Welch and how disastrous it was for all 3 of them.

2:01:16David Yes.

2:01:17Ben In the 3 places they went.

2:01:17David Yes. So in November of 2000, Jack Welch announces that Jeffrey Immelt will be his successor to take over as GE's next CEO. And Ben, as you were alluding to, the other 2 candidates for the GE job were James McNerney, who quickly leaves to become the CEO of 3M—

2:01:39Ben You may know his name because he would then leave 3M to go and become the CEO of Boeing.

2:01:45David Yeah, we all know how that turned out. And then the other candidate, Bob Nardelli, who Ken Langone, again being on the GE board here, knows well and loves— loves Bob. So immediately after the succession news comes out at GE, Ken calls up Nardelli and pulls out the same line that he used on Bernie 20 years earlier.

2:02:12David You've just been hit in the ass with a golden horseshoe.

2:02:17Ben Guess where you get to go work now?

2:02:19David Guess what we are gonna do together now that you didn't get the GE CEO job? I'm gonna bring you into Home Depot. So the board immediately pivots. And offers Nardelli the president and COO job and says, you'll come in, you'll be here for a little while. Arthur's gonna retire. You will be his appointed successor.

2:02:44David And so to incentivize Nardelli to take this job, they say, we'll make you whole on your GE stock options. We're gonna give you $150 million equity package to come join Home Depot. Bob says, okay, great. I clearly can't stay here at GE. I'm in. And then at the last minute, after they've already agreed on a deal for Nardelli to come in and be president and COO under Arthur, Nardelli calls the recruiter and has the recruiter tell The Home Depot board that he's changed his mind.

2:03:21David He's only going to come on board if he becomes CEO right away. He's not going to wait. This leads to an awkward, shall we say, Home Depot board meeting where the board presents this new development to Arthur. He says, okay, I'm okay with it. Bob can have the CEO job. But deep down, he's not really okay with it.

2:03:45David And part of it, I think, was Arthur not being ready to let go. The other part of it, I think, was a genuine spidey sense that, Hey, what is this last-minute bait and switch from Nardelli? Is this a red flag here?

2:04:02Ben Well, Arthur would later say, A, this is faster timing than I was thinking-

2:04:08David Yep.

2:04:09Ben for me to leave. But B, Arthur would later say in an interview, I thought he was the wrong choice by a lot, even though I'm the one who initiated an external search.

2:04:16David Yep.

2:04:17Ben To your point, though, I think the, Yeah, yeah, I'm okay with it is a little bit of like a test to the board of-

2:04:26David Yep.

2:04:27Ben what I would like is you to come back to me and say, actually, we love you so much. Who is this guy? No, get him out of here. We think you should stay CEO.

2:04:30David Who does he think he is? Yep. Yep. Well, that's not what the board says.

2:04:36Ben They take him at his word.

2:05:15David They take him at his word. This leads to a big fight, like a big fight between Arthur and Bernie and Ken, as chronicled in Ken's book, I Love Capitalism. Because Bernie's still on the board at this point, and I think pretty severely damages their relationships going forward. Regardless, the board does bring Bob in as CEO.

2:05:22David Arthur resigns as CEO but stays on the board for just a couple of months, and within 6 months he fully steps away and is gone from the company. We'll come back to Arthur all the way at the end, but—

2:05:25Ben He's got his own golden horseshoe.

2:05:26David Golden horseshoe. Yeah.

2:05:26Ben Spoiler alert, he would, I think, become the highest net worth of any of these folks.

2:05:28David So Nardelli comes in as the new Home Depot CEO, and to the outside world, this looks like a huge win. I mean, they got essentially the most eligible corporate bachelor in America, one of the 2 runners-up to the GE job. And as you're imagining, that's probably not a great dynamic you want to enter into for a new relationship, be it romantic or in a boardroom.

2:05:53Ben I wanted that job, but I got this one. So I'm going to try to make this job like the one that I wanted.

2:05:58David Yeah. Yeah. Now, to be fair, the first couple of years of Nardelli's tenure are great.

2:06:05Ben Maybe even the first three or four.

2:06:09David Yeah, yeah, yeah. Ken Langone still says to this day that for the first four years, everything Nardelli touched turned to gold. It turns out that a lot of the issues that had been popping up in the company that we talked about a minute ago could be fixed with great operational excellence. And there was a lot of low-hanging fruit around.

2:06:30Ben Yeah, when he came in 2000, there had been four consecutive quarters of slowing comparable store sales growth. There's clearly some serious underlying issue there. The older stores, they were getting really rundown.

2:06:43David And yeah, this is where Lowe's was coming back and beating Home Depot.

2:06:47Ben The extreme decentralization made things very chaotic. Nardelli referred to the company in an interview as having been in startup mode for 20 years. Clearly, what Nardelli missed is how important being entrepreneurial was to the company's success. He was about to embark on a mission of operational excellence, but you can operationally excellence yourself out of being entrepreneurial.

2:07:17David Yeah.

2:07:17Ben I mean, if you take away all of people's ability to take ideas and act on them and have fun and all that stuff, like, you—that could kill the company.

2:07:20David Yeah, yeah.

2:07:21Ben The other things he did was just this. If you look across every system, purchasing, replenishment, merchandising, all operating functions, he would centralize. He took nine separate buying offices and folded them into one, so they were suddenly getting better prices from their suppliers. He invested in a bunch of new technology systems.

2:07:40Ben I mean, the answer here isn't decentralize or centralize. You have to have the balance where you centralize where there's actually a benefit of getting all the data in one place or doing a bulk negotiation or doing analysis on one dataset in a system of record, but you definitely don't want to centralize it when you can push decision-making closest to the customer where people can see like all the idiosyncrasies of any given situation.

2:08:06David Yep. Yeah. Here's the way I would characterize it. There was a bunch of low-hanging fruit operationally. Nardelli was excellent at implementing all the changes that needed to be made on that front at Home Depot. But he was all about Six Sigma, all about operational excellence. I mean, he was the GE guy through and through.

2:08:31David And operating The Home Depot was not the same thing as manufacturing turbines at GE.

2:08:38Ben Right.

2:08:39David So if you go back to the whole thesis of Home Depot here and this idea of being a specialty retailer—

2:08:46Ben With great service.

2:08:48David Meaning you need to service your customers. It's not to say that GE doesn't service their customers, but it's a very different dynamic. At GE, line-level employees are completely replaceable.

2:09:01Ben Right by design.

2:09:01David This is the whole point of Six Sigma Black Belt. We are going to drive out costs and inefficiencies ruthlessly within the organization. It's the system; it's not the people. That's the opposite of the 25-cent kitchen sink washer sale-

2:09:25Ben Yeah.

2:09:26David leading to a $100,000 kitchen remodel on the sales floor at Home Depot. You just can't measure that in a Six Sigma spreadsheet management process kind of way.

2:09:32Ben It reminds me of why Jeff Bezos doesn't like to have his meetings have a hard end time because he likes to be able to wander, to invent and. Wander, and if you're going to invent, you need to wander. It's like the— if the job of The Home Depot store is to have an associate wander with a customer who's trying to figure out how to solve some problem or dream up some project, that is really hard to optimize because it's kind of an unbounded problem.

2:09:58David Yep. So what does Nardelli do? He replaces huge swaths of the associate on the floor retail workforce in Home Depot with part-time general retail labor. So doing away with the whole philosophy that made Home Depot of we have knowledgeable people who are going to make that $0.25 washer sale and fix a customer's kitchen sink and have that lead to something bigger down the line.

2:10:30David All that's going to go. We're going to bring in 16-year-olds on part-time jobs to just ring them up at the cash register.

2:10:40Ben And not only that, there's just going to be less of them, period. According to Arvind's research, associates per store dropped from 200 to 170 over the course of 2000 to 2006.

2:10:51David Yep.

2:10:52Ben A 15% reduction in headcount, just like, all right, we have fewer people to help you solve your problems now.

2:10:57David Yep. So those are the associates on the floor. Now the store managers. Before Nardelli, all the store managers were promoted up, Ben, as you said, from store associates, and they were focused on their stores, the customers, doing what was right, etc. Nardelli changes the criteria for store managers, now preferring candidates with college degrees.

2:11:20Ben So now there's no promotion path because no one's starting on the floor with a college degree. Every single person that you're hiring into those associate jobs doesn't have one. So what you're just telling them is like you're locked in this forever job with no path now.

2:11:33David And think back to the old workforce, all these tradespeople who are highly educated, highly knowledgeable. They have trades degrees if they have degrees at all. They don't have college degrees. That has nothing to do with either knowing about hardware and home improvement or being a great retailer.

2:11:49Ben Yeah, I mean, it weakened the culture. Zooming out, there's a great case to be made that the only sustainable competitive advantage this company had were their scale economies and their culture. This entrepreneurial, we can figure it out thing. This is heavily destructive to that in a way that you may never be able to fully rescue and get back.

2:12:09David So a couple of years into Nardelli's tenure, customer satisfaction among Home Depot shoppers falls to the lowest level of any major US retailer. So all the major US retailers, you know, there's annual surveys of customer satisfaction at everything from Best Buy to Costco to Walmart to Home Depot to Lowe's.

2:12:32David Home Depot goes from near the top to dead last.

2:12:37Ben But David, they doubled their revenue and their profits, and they grew from 1,100 stores to 2,000 stores in five years. What do you mean there are problems? All the charts are up and to the right.

2:12:51David Yeah, yeah. So that then leads into the issue of Nardelli's compensation. So on top of the huge equity grant that he got when he joined Home Depot from GE, Nardelli also gets paid roughly $200 million by the board over the six years of his tenure running Home Depot. And the board would always give him bigger bonuses and pay him more than they were contractually obligated to because Nardelli would always make the argument to them, hey, I'm crushing my numbers.

2:13:24David Revenue's up, profits are up, I'm beating plan. Everything is great. He would refuse, however, when the board would ask to tie any of his compensation to the company's stock price.

2:13:38Ben Which I will say is, is in some ways fair. I know it's misaligned with shareholders, but it is in some ways fair because it is incentivizing you on the things you can control, because a stock price is just what the outside world thinks of you, not actually what you are doing. It always has struck me a little bit weird that I— you're comped on what other people think of the company.

2:14:00David Ben, it's like you're reading from Nardelli's script right here. So Businessweek would report on this because this was uncommon for major CEOs at the time and through to today. And Nardelli would always say, hey, this is the one measure of company performance that I can't control. So I'm not going to agree to my comp to be tied to it.

2:14:21David The problem in Home Depot is that this is fundamentally going against a key part that we talked about a minute ago of the company's model.

2:14:29Ben No stock go up, no machine work.

2:14:31David Exactly. And so for all the associates on the store floor now, those of them who are left with equity, their promise has always been, I do good work, I see the results, the stock price goes up, I get rich. Now here's this bigwig former GE guy coming in as CEO and saying, yeah, I'm going to get rich regardless of whether the stock price goes up.

2:14:58David And the stock price stops going up.

2:15:00Ben Yeah, why did the stock price stay flat during this time?

2:15:03David Well, here's what's going on. Even though he doubles revenue and profits, he actually mostly does it by doubling store count.

2:15:13Ben Hmm.

2:15:13David Ben, as you had said, same-store sales comps had already trended flat before Nardelli joins. They actually stay flat for his tenure. So Wall Street keeps bringing this up as a major red flag and comparing Home Depot to Lowe's, which is growing same-store comps as they're taking this new segment of the market, you know, the weekend sprucers here.

2:15:37David And it gets even worse. During Nardelli's tenure, he authorizes $20 billion in share buybacks and dividends. That doesn't even move the stock price.

2:15:47Ben Which you should read as all the institutional investors have all these discounted cash flow models. And they don't believe that the sum of all the future profits that this business will generate discounted to the present is growing. They think the value of this business is staying flat.

2:16:04David Yeah, well, they think it's shrinking because Home Depot is also in the market buying up stock, and that's not moving the price up. So—

2:16:14Ben Right. But the, the high-level point is, despite revenue and profits being up due to new store openings, we do not think the future of this company is brighter.

2:16:26David Yeah. Yep. Yep. And meanwhile, during this same period, again, this is as the US housing bubble is reaching, you know, its peak inflation. Lowe's stock price is up 200%. They're winning the housing bubble.

2:16:40Ben Hmm. The other thing we haven't talked about is he tried to bolt a lot onto this company.

2:16:46David Yep.

2:16:46Ben He was growing by acquisition and expanding into adjacencies and launching new business lines. To create these new adjacencies versus just kind of investing in the core business.

2:16:57David Yep, yep.

2:16:58Ben Which like when you come from a conglomerate like GE-

2:17:03David That's what you do.

2:17:04Ben that's what you do. And on top of all of this, some of what made Home Depot unique starts to fade. They took gross margin up, which results, of course, in more profits, but prices that aren't blowaway. They're closer to market competitive. And actually, if you look at their gross margin profile, it's remained elevated ever since.

2:17:10Ben So it's not a huge difference. The gross margins are still lower than typical retail and certainly lower than that 45% that we talked about way back when, but they went from this like 28, 29, 30 range to pretty squarely 33% gross margins, which is not as low as Walmart, let alone Costco's razor-thin margins.

2:17:15Ben So they kind of moved away from that—

2:17:49David Costco model, if you will.

2:17:52Ben The scale economies shared idea. They sort of realized, "Eh, we can actually keep a little bit more of the profits."

2:17:58David Yep. Which also, coming back to Wall Street's disappointment with Nardelli and the company, despite the growth of revenue and profits, makes sense, right? Like he's trying to pull out all the tools in the tool bag to get Wall Street back on his side here.

2:18:14Ben Oh my gosh, you're right. It's just incentive misalignment. If you're comped on the stock price, you don't care about the business's current performance. You just want investors to believe the story that you are storing up long-term value inside the company. So you keep prices really low, you keep volume really high, you keep customers really obsessed.

2:18:33Ben If your comp is tied to today's numbers, you don't store value inside the company.

2:18:37David Yes, yes—

2:18:38Ben You try to pump today's numbers.

2:18:39David Exactly. It's a paradoxical misalignment of incentives.

2:18:44Ben Fascinating.

2:18:45David Yep.

2:18:46Ben So you actually, coming all the way back around, you do want to incentivize management on stock price because that is the way that we are storing up value in this business for the far future.

2:18:58David Yep. So all of this brewing negativity and certainly Wall Street dissatisfaction with Nardelli comes to a head at Home Depot's 2006 annual shareholder meeting. Joe Nocera, great financial journalist, wrote for The New York Times. I'm just going to read here, quote, "Mr. Nardelli has become this year's version of Mr.

2:19:03David Overpaid CEO. In the 5 years since he was recruited from General Electric, Home Depot stock has fallen 12%, while shares of its chief competitor, Lowe's, have risen 173%. You've heard of pay for performance. This is pay for pulse. But these facts barely begin to get at the richer story that is the Home Depot scandal.

2:19:08David So I hopped on a train and headed to Wilmington, Delaware, where the Home Depot shareholder meeting was being held this year. I arrive. I can hear protesters chanting, 'Hey, Bob, why are you chicken while the stock price takes a licking?' Mr. Nardelli finally takes the podium. He's accompanied by no one else.

2:19:14David Suddenly we all understand what's going on. The board isn't coming to the annual meeting. In all my years as a business reporter, I have never seen that before. As a corporate governance expert at the University of Delaware will tell me the next morning, quote, 'Your one obligation as a director is to show up at the annual meeting.

2:19:19David The fact that the directors didn't show up is disgusting.' Nardelli begins the meeting. When the first person gets up to speak, the questioner gets mad. 'I think it is absolutely outrageous that the board is not here. The board is too chicken to face the shareholders.' As he speaks, the timer hits zero and his microphone is cut off.

2:19:25David After the meeting, the words on people's mouths are, 'Appalling, disgraceful, and arrogant.' I would add one more: 'Contemptuous.' I'm sure there are plenty of boards and chief executives who have contempt for their shareholders, but most of them are at least smart enough to keep it to themselves."

2:21:21Ben So what happened? Did the board not want to show up and say they were aligned with Bob? Did Bob say, "Please don't come because I don't want you speaking against me"?

2:21:32David It has never come out. I think that Nardelli was just fed up with the narrative around him and all the discussions of his pay and the flat stock price. And he just wanted to say a giant "F you" to the shareholder community of Home Depot, many of which included current and former Home Depot employees.

2:22:01Ben Wow.

2:22:02David It's, it's bad.

2:22:03Ben I mean, bad on the board too, though.

2:22:06David Yeah, bad on the board, bad on everybody. So the fallout from this event is extreme. Home Depot basically becomes the new symbol of everything that is wrong with corporate America.

2:22:18Ben And in particular, Nardelli's pay package is being held up as the number one example of corporate greed, corporate executives making too much.

2:22:28David Yep. In the weeks and months after this meeting, the company and Nardelli and the board issue a series of explanations and apologies in escalating obsequiousness doesn't do anything to change the narrative. Finally, on January 2nd, 2007, Ken Langone calls a special board meeting in Dallas, and the board fires Nardelli at this meeting.

2:22:57David He gets an $18 million cash severance payable immediately and gets a quote-unquote "retirement package" valued at $210 million.

2:23:09Ben This is on top of the initial make-you-whole grant plus the pay along the way.

2:23:17David Yes. Yes, it is. Ultimately, in Ken Langone's book, he does say that Nardelli only ended up getting a fraction of that amount. But it doesn't matter. The headlines are brutal. When the news gets announced, the associates on the store floors in Home Depot, there are reports and videos of them celebrating and high-fiving and basically, you know, having a party.

2:23:43Ben Was not exactly a man of the people.

2:23:45David No, no, not exactly a man of the people. After this, Nardelli quickly gets another job. He becomes the CEO of Chrysler to guide that great American car company through the financial crisis.

2:24:02Ben And continue its path as an independent American automaker, succeeding and coming through it much like Ford did as an independent company and GM did as an independent company. Oh, wait.

2:24:14David Ends up getting owned by the Italians.

2:24:17Ben Yes.

2:24:17David Yeah, you can go listen to our Ferrari episode to learn how that all turned out.

2:24:23Ben How Fiat Chrysler was born.

2:24:24David Yep. So once again, Home Depot and the board are left without an obvious successor. Who do they turn to go? Well, I would say up from here, anywhere from here would be up from here. They decide that they're going to pin their hopes on another GE guy, one of Nardelli's lieutenants that he'd brought over from GE to run M&A and corporate development for Home Depot, a new role, as you were saying, Ben, as they added all this stuff to the company.

2:24:59Ben Someone who Ken loved, but Bernie was nowhere near convinced was the right choice.

2:25:06David Yeah. Yeah. A former lawyer by the name of Frank Blake. Bernie and also, I would assume, Arthur, although I don't think Arthur was on speaking terms with the board at this point in time, are pissed. Bernie's actual quote to Ken when Ken calls him and tells him who the next CEO of Home Depot is going to be is, "I can't believe you brought in another goddamn GE guy to run my company." But it would turn out that not only was Frank Blake nothing like Bob Nardelli, he was exactly what Home Depot needed.

2:25:43David But before we tell that story—

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2:26:11Ben And David, I have yet another interesting parallel for you to this episode on Home Depot. Home Depot is not just in the business of selling, you know, lumber. They wouldn't be a $350 billion company if that's all there was to it. They were in the business of turning regular people into builders.

2:26:30David Aha. I see what you're doing here. Yes. Bernie and Arthur staffed those first stores with actual plumbers and electricians and carpenters, people whose job was to stand in the aisle and teach you how to do the thing yourself. They didn't just sell you the tools, they gave you the confidence to pick them up.

2:26:46Ben Which is exactly the moment that software is in right now. The number of people who can build something real has been completely blown open. I mean, engineers, sure, but also designers shipping their own products, founders who have never worked at a tech company before, people who describe what they want and watch it get built by AI.

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2:27:42Ben Sentry is where software gets fixed with over 200,000 organizations running on it. So you can check out sentry.io/acquired to get started. All right, David, the saving of Home Depot.

2:27:54David Man, things got pretty low there, didn't they, for a little while?

2:27:58Ben Yes.

2:27:59David Fortunately, there's a comeback story here too.

2:28:00Ben So the thing that is the context of all of this, we're going to talk about all the personnel stuff and the cultural change. In 2006, the housing bubble burst.

2:28:11David Yep.

2:28:12Ben We know of the great financial crisis in 2008, which is after this leadership transition, which was January of 2007. But if you go back to 2006, that is where you can see it in Home Depot's financials. Spending on home improvement supplies fell off a cliff 2006 into 2007. The actual ceasing of building new homes for all of these unqualified buyers took 18 to 24 months to wind its way all the way through the financial system and to blow everything up.

2:28:32Ben But for Home Depot, their revenue would fall starting in 2007. It bottomed in 2010, and it actually did not get back to 2007 levels until 2014. So that's a 7-year span, and it's the same story with net income, where they were below their previous high watermark on revenue and profits.

2:29:07David Yep. And I think this maybe explains a little bit of the board's behavior. Once again, we don't have a bench here that we know well and are confident in to come run the company. Shoot, I think we got to stick with this guy as long as we can.

2:29:28Ben Yeah.

2:29:29David Most, if not all, of the other executive ranks at Home Depot were all Nardelli guys at this point in time. So if they were to get rid of Bob, the bench is only staffed with more Bobs.

2:29:42Ben Or so they thought.

2:29:42David Or so they thought.

2:29:44Ben To give some credit to Bob, even though his tactics were not the right tactics on this company for their core competency, their culture, their mission, any of that stuff, the wind had for decades been at Home Depot's back.

2:30:00David Yep.

2:30:01Ben You know, this amazing boom in housing, and suddenly you no longer have that. It's just hard to manage and create growth in an environment like that.

2:30:08David Yep. So coming out of the board meeting on January 2nd, 2007, when Nardelli gets fired, Frank Blake, the dark horse candidate, becomes CEO. So, yeah, Ben, who is Frank?

2:30:23Ben So Frank was a lawyer by training who'd worked in DC in the federal government as a public servant, who'd been a Supreme Court clerk, had gone to GE and risen up to become the head of M&A, came over with Bob Nardelli and held a senior role at Home Depot, but he didn't own a P&L.

2:30:43David Yeah—

2:30:44Ben Like, his job didn't look anything like what a CEO's job would look like.

2:30:49David Right. He didn't have an operational role at the company. He wasn't in touch with the store associates. He wasn't on the store floors.

2:30:55Ben But the answer to why he's the right choice is he was in touch with the culture, with what made Home Depot special, with its original founding principles, all that. One of the ways in which he was, he talked about this on Invest Like the Best in Patrick's podcast interview with him, his son worked at Home Depot.

2:31:13David Yep, that's right.

2:31:14Ben And so he got the unvarnished take, not the corporate ivory tower sort of filtering of information. He got the dinner table conversation of what's it like in the stores?

2:31:25David Yep.

2:31:26Ben And obviously it wasn't just that one thing, but that's the mentality that he brought to this job of how do we exist as a store support center, not as a headquarters?

2:31:35David Yep. So when Frank takes over as CEO, at that same board meeting on January 2nd, like the first thing that he says to the board, the first ask that he makes is, I want to place a call to Bernie. By this point in time, Bernie had retired fully from the board and certainly was just disgusted with the whole state of the company, as evidenced by his another goddamn GE guy quote.

2:32:02David So Frank gets him on the phone, even knowing that Bernie is hostile to him, and convinces Bernie that he wants to come meet him and spend some time with him. That leads to Frank and Ken going to Florida to meet with Bernie, where he now lives, getting breakfast with him the next weekend. And then Bernie and Frank go out and they do a store walk together, but it's not a store walk of Home Depot.

2:32:31David The first place they visit together is Costco, because to Bernie, Home Depot stores no longer embody the values and qualities of a great retailer that he wants to teach, you know, the young Jedi here. So that's the first thing that Frank does is mend the Bernie relationship.

2:32:51Ben And really learn directly from him. What do you think the culture is?

2:32:58David Yep.

2:32:59Ben Because the whole time he's been here, he's been under Bob. Frank wasn't here under Bernie. And so it's like, hey, I'm going to try to reinvent, reinvigorate whatever was special about the culture. Help me understand what that is.

2:33:08David Yep.

2:33:09Ben And one of the things that he brings up is this sort of fabled inverted pyramid at Home Depot where, you know, you've got, imagine a pyramid except it's upside down. And at the bottom is the CEO and that CEO is just this tiny little triangle. And at the top, the big thick level is customers. And then underneath customers is associates.

2:33:28Ben The belief is like, look, the people who can actually affect the experience of the customers on their projects is the associates, and everyone under them just exists to serve them.

2:33:38David Yep.

2:33:39Ben And Frank sort of grabs this and brings this to the company as kind of a management tool of, hey, we need to start paying attention to this again.

2:33:46David Yep. So after calling Bernie, the second thing that Frank says to the board upon becoming CEO is, hey, we got to get this whole issue of the Home Depot CEO's compensation out of the newspapers. We got to make it not a thing anymore. So obviously, my compensation needs to be much lower than what Bob's was, and I want to align myself with you guys, the company and the shareholders.

2:34:17David So I want 90% of whatever number we collectively decide is my compensation, the right number for the CEO of Home Depot. I want 90% of that to be in stock options so that I'm aligned with the company, the shareholders, the employees. I'm going to bring it all back to the equity strategy that the company had forever.

2:34:43Ben Okay, that's a way to make a statement.

2:34:44David Yep.

2:34:45Ben And if the company does well, you do really well.

2:34:48David Yep. And the company would do well under Frank. So the next thing is he completely stops new store expansion for Home Depot. Says, all right, if we're going to return this company to growth, we got to do it with same-store sales.

2:35:04Ben So this is crazy. In 2008, they had grown to 2,300 stores. And today, 18 years later, they are at just 2,400 stores.

2:35:18David Yep.

2:35:18Ben Here's how it went from 2008. Right away, they closed about 30 of them. They took a billion-dollar write-off on all of the pipeline that they had been developing. So all this new store development, they said, nope, we're not going to open any of those. We're just going to focus on store productivity.

2:35:37Ben Then for the next 11 years, other than like four or five stores a year here and there, they did not open any new stores.

2:35:45David Right.

2:35:45Ben They were flat for over a decade.

2:35:46David As they are simultaneously returning to growth.

2:35:49Ben So remarkably, while they weren't opening new stores, they grew revenue from $70 billion to $130 billion and net income from $4 billion to $11 billion, all by focusing on the return they could get from their existing stores. So sales per store go from around $30 million to about $65 million over that 11 years per store.

2:36:11David Yeah, yeah. Crazy.

2:36:12Ben I mean, they just cranked on store productivity.

2:36:16David Yep. And we're going to get to e-commerce in a minute, which was a big part of that.

2:36:20Ben Yes, that is, of course, that's funny. That was my next thing too. I was like, that is the missing piece of this puzzle.

2:36:25David Yep.

2:36:26Ben But I think there's an interesting cultural thing here. They'd always grown ever since founding by growing stores. It was this safety net that we will always show growth because we are always growing stores, which means, A, you don't really optimize the stores you have. You don't try to wring the very most you can out of them because you have a different way to provide growth.

2:36:47Ben And B, if you believe opening stores is intrinsically virtuous, then you just open more stores whether it was a good idea or not. So there's lots of stores they opened that like probably shouldn't have been open and they either needed to close or focus on getting their productivity up to where it should be.

2:37:04David Right, right. Like Starbucks has run into this several times in their life as a company.

2:37:07Ben Yes. Yes. Opening more stores is not inherently virtuous unto itself.

2:37:12David Yep. So the other big thing that Frank does right away is spin off and sell some of the other businesses that Nardelli had been acquiring.

2:37:25Ben Yeah, they built this business called Home Depot Supply, which is sort of an amalgamation of several things they bought 2000 to 2006. This is mainly a distributor, this business they built, Home Depot Supply, that served homebuilders, infrastructure contractors, municipalities, maintenance professionals, like big commercial customers.

2:37:46Ben And the goal was this broader ambition than just their existing ProDesk. They wanted to serve properties across their whole lifecycle and whatever needs pop up across the lifecycle, not just this like single job, single contractor, order stuff, we'll give it to you. It's a super different business model than their traditionally very focused model where everything kind of runs through the store.

2:38:11Ben And they had to develop all these new competencies, which, you know, are good but also detract from your focus. So wholesale distribution, offering commercial credit, specialized sales forces, large-scale delivery to job sites for these giant commercial projects. It did grow to 13% of Home Depot's revenue by 2006, so it was starting to become a big business for them.

2:38:35Ben But when Frank came in, his assessment was, this is such a different thing, and we're such a mess right now. And the macro is starting to look a little—

2:38:45David Rocky.

2:38:46Ben Shady. I don't think Frank would take credit that he knew that it would affect the whole financial system, but at least it was impacting home building and home supplies.

2:38:54David Yeah.

2:38:55Ben So in 2007, they sold HD Supply to a private equity consortium for about $8.3 billion and kind of focused attention back on its core retail business. But it wasn't just the attention that they focused back on the core retail business. Frank, under the extreme nudging from Ken—

2:39:16David Yep.

2:39:17Ben Realized the core of this business is awesome.

2:39:20David Yeah.

2:39:21Ben The adjacencies around this business might be great, but I don't know. The core is great, though.

2:39:26David We're starting to do some of the right things. We're starting to turn this around.

2:39:29Ben Wouldn't it be great if we owned more of the core business? So what they do with the $8.3 billion, and this is ballsy, they put it all into buybacks.

2:39:43David Yep.

2:39:44Ben They just bet on themselves. They said, I think the best ROI thing we can do is buy Home Depot stock with this $8 billion. So right away, they bought back 14% of the total outstanding shares in the first year. And Frank would go on to buy back 30% of all outstanding shares over the course of his tenure.

2:40:06Ben He dramatically shrunk the size-

2:40:09David Yeah.

2:40:09Ben of the shareholder base. Those buybacks-

2:40:10David Yeah.

2:40:14Ben were done mostly at $30 to $50 a share. I mean, today, Home Depot is $340 a share.

2:40:17David Yeah. This is "ballsy" is putting it mildly. Buying back 30% of your company's share base starting in the summer of 2007.

2:40:32Ben Well, you're in the housing industry.

2:40:34David While you're in the housing industry, as the housing bubble is popping real time, continuing this buyback program through the financial crisis. This is all Ken Langone right here. To the extent that Ken sinned at Home Depot during the Nardelli era, he is atoning for his sins here.

2:40:55Ben And we'll put this chart in the email. The graph of the total number of outstanding shares is almost this perfect uphill-downhill that's centered right around the year 2001, where when the company was in its growth phase, it was doing all these new equity offerings, creating more and more and more shares all the way up through about 2001.

2:41:15Ben Then they slowly started buying them back during the Nardelli era. Then Frank and, again, Ken just go nuts and say, no, no, no, this company at the core is awesome. We want to own as much of it as we possibly can. It's flattened out in recent years because they've done some more recent giant acquisitions and they had COVID and good reasons to flatten them out.

2:41:36Ben But the number of outstanding shares today is almost all the way back down to where it was at IPO.

2:41:42David I know, this is just incredible. And in big part, thanks to this, through the financial crisis, Home Depot stock performs great. This is like so counterintuitive. You would think that the financial crisis would be terrible for Home Depot stock. But from 2008 to 2012, Home Depot stock is up 132%. And then it continues after that.

2:42:09David 2013, it's up 33% including dividends, 27% 2014, 26% in 2015. Compounding is back, baby.

2:42:20Ben Why is it just Wall Street suddenly believing a narrative that Frank walks on water, or what's intrinsically happening that is driving the value of this company?

2:42:30David Well, this gets into the next, and frankly, probably the biggest thing that Frank Blake did for Home Depot, which is how they grew the company despite not growing store count, and that's e-commerce. And this is absolutely awesome because as we've alluded to throughout the episode, the internet actually represented a pretty big disruptive threat for Home Depot, not from Amazon.

2:43:00David We'll get to Amazon in a minute, but actually from YouTube. Like, you're unbundling the core value prop of the knowledge in the stores has gone, you know, first to the internet and a little bit during the beginning of the Nardelli era. But once YouTube comes along in 2006, 2007, this is a big-time threat to the company.

2:43:25David It doesn't matter where you get your goods anymore if you get your knowledge for free on YouTube.

2:43:32Ben That's interesting. It sounds great in the abstract. I wonder if you're actually a, you know, Home Depot store manager, how much this actually impacts you. I'm sure people come in being like, "I learned this on YouTube," and then you gotta be like, "Like, okay, but you think you know everything right now, but let me save you some trouble." I suspect there's a lot of that going on.

2:43:51David But I think over time, YouTube gets pretty good at surfacing the best videos—

2:44:00Ben High quality. Yeah.

2:44:00David —for home projects, DIY.

2:44:03Ben Yep. I think that's probably right.

2:44:05David Yep. Yep. So a big part of the way that Home Depot reinvents itself here in this era to maintain its relevance for customers is e-commerce. So Frank invests a lot of capital into building distribution centers, which is interesting because they're not growing stores.

2:44:28Ben Right, right. In 2009, they opened 12 big distribution centers that they call rapid deployment centers. This is a huge shift from the original model where manufacturers would ship directly to the store. This is centralizing the supply chain.

2:44:43David Yes.