INTRO: For the longest time, the
two biggest retailers in the world were Amazon and Walmart. Alibaba was briefly ahead of Walmart over
the past few years, but ever since their stock got crushed, they have fallen back underneath Walmart.
I don’t think any of these companies surprise any of us though as Walmart,
Amazon, and Alibaba sell everything underneath the sun. But ironically, none of these retailers
are currently the second largest retailer in the world. That title actually goes to the Home Depot.
Not only does Home Depot have a higher market cap than Walmart, but they’re actually pulling in more
profit. Over the past 12 months, the Home Depot profited $21.38 billion while Walmart profited
$18.43 billion. Yet, the Home Depot isn’t hyped up by the media, its founders aren’t criticized to
death, and they aren’t constantly accused of being a monopoly. To most people, Home Depot is just the
friendly neighborhood hardware store, and that’s pretty much it. So, how did such an inconspicuous
and relatively niche home improvement retailer become the world’s largest physical retailer?
ROUGH BEGINNINGS:
Taking a look back, Home Depot is actually a relatively young retailer being founded in
1978 by four men named Bernard Marcus, Arthur Blank, Ron Brill, and Pat Farrah. At the time,
the booming 60s had come to a close and the inflation crisis was nearing an end.
Homeowners who had bought their homes during the economic boom of the 1960s were in a really good
position as their homes had skyrocketed in nominal value due to rampant inflation. So, these guys had
plenty of equity in their homes, and as long as their jobs somewhat kept up with inflation, their
monthly mortgage payments had become significantly more affordable. So, a lot of homeowners were in
a position where they could afford to fix up their houses or even upgrade their houses. But,
unfortunately, the process of improving your home was super tedious especially if you were trying to
do it by yourself. Homeowners often had to shop around multiple hardware stores to buy simple
tools and if you needed something unique, you were basically screwed. Home Depot’s founders
had of course picked up on this shortfall and felt that they could address the issue. So,
Bernard and Arthur contacted an investment banker named Ken Langone to secure some start-up capital.
They would use this money to lease some retail space from JCPenney
and open the first two stores in Atlanta Georgia called Atlanta’s Do It Yourself WareHouse.
But despite the quick start, Home Depot didn’t enjoy quick success.
When the store opened its doors, the founders decided to do a promotional campaign where they
would hand out $700 to random people and invite them to come spend it at the store.
But they weren’t even able to hand out all the money by the end of the first day as they couldn’t
convince enough people to try the store. Things weren’t much better on the supplier side either.
Most vendors didn’t want to deal with a new store without a proven business model. In fact,
things were so bad that the founders resorted to stocking the stores with empty boxes and
paint cans to make the store look fuller than it really was. Despite the bleak outlook, it didn’t
take long for Home Depot to lock in on their first differentiating factor which was customer service.
CUSTOMER SERVICE:
From the very beginning Home Depot prioritized great customer service, but it wasn’t until a
few months into running that store that customer service became a differentiating factor. Bernard
recalls that one day early on, a customer came to the store to return an item. But the customer
felt that the employees and Bernard had been so helpful that they felt bad about returning
the item and asking for their money back. So, the customer brought some okra that they had grown in
the garden to give to Bernard during the return. Of course, the okra didn’t make it any easier to
run the business, but it clearly showcased the importance of happy customers. From then on,
the Home Depot accepted a strict policy of: the customer is always right. One of the best examples
of this was when a customer tried to return a tire at Home Depot. You see, one of Home Depot’s
first stores was built inside a warehouse that was originally a tire store. One day,
a customer came to the store to try returning a tire they had bought from the old store,
and despite not having sold the tire themselves, Home Depot accepted the return. The tire was then
hung on the cashier's stand to remind employees of the company's core values. Aside from keeping
customers happy, Home Depot also prioritized employee happiness. Bernard and Arthur knew first
hand how important this was as they were on the other side of the coin not too long ago. Before
starting Home Depot, Bernard and Arthur were both working at a hardware company called Handy Dan.
Bernard had been serving as president and Arthur had been serving as CFO, but despite their high
ranking positions, they were both fired by Sanford Sigiloff, who was the CEO of the parent company.
Sanford was notorious for putting employees under extreme pressure and brutally firing dozens of
employees at a time. He was even nicknamed Ming the Merciless, so Arthur and Bernard were well
aware of how it felt to have a douchebag boss, and they were determined to avoid a similar path. To
this day, employee satisfaction is one of the key advantages Home Depot has against Walmart.
Home Depot currently has an A- company culture score while Walmart has a C-. Despite such great
core values though, the company still wasn’t doing all that well in the 1970s. Home Depot ended their
first year in business with only $81,700 in sales and that was from running three stores. But it was
just a matter of time until these investments into their customers and employees started to pay off.
MASTERING ONE INDUSTRY:
By this point, it was clear that simply offering a great customer experience and convenience wasn’t
enough to attract large numbers of customers. Retail giants like Lowe’s were starting to place a
greater emphasis on home improvement which simply made it even harder to compete. Home Depot needed
something extra to stick out and they would hit the jackpot when they started hiring tradespeople.
Home Depot started hiring full time electricians, plumbers, carpenters, and painters. These guys
would stand around their respective departments and answer specific customer questions. For
example, what’s the difference between a breaker and a fuse, when are you supposed to use primer,
how do you fix a clogged drain, and so on and so forth. Home Depot encouraged customers to call
the store if they had any questions, and many stores even ran instructional workshops. This
made Home Depot the go to place if you wanted to ask questions or get advice. And given that
most homeowners are noobs or amateurs at home improvement, this attracted a lot of customers.
Within the first half of the 1980s, Home Depot's sales exploded from $81,700 in 1979 to $256
million in 1984. And, now that Home Depot had serious sales, suppliers started taking them much
more seriously. Home Depot was able to negotiate rock bottom prices and they passed on these rock
bottom prices to their customers. So, not only were customers able to get super low prices,
but they were able to get knowledgeable customer support for free. Shopping at Home Depot was a no
brainer for most customers, but it wasn’t all that rosey from the back end. Hiring this many experts
while maintaining razor thin profit margins was super expensive. The company went public on the
NASDAQ in September of 1981 and this helped them raise $4.093 million, but their debt was much
larger than just a couple million dollars and it was growing exponentially. Between 1983 and 1985,
the company’s long term debt skyrocketed from a manageable $4 million to a scary $200 million.
This made investors extremely nervous and many of them left in droves. By 1986, Home Depot
stock had sold off 67%. Nonetheless, Home Depot continued on their relentless expansion effort.
THRIVING AGAINST AMAZON:
In 1989, Home Depot would successfully overtake Lowe’s in sales which made them the largest
home-improvement chain in the US. But, their biggest threat hadn’t even been founded yet,
and that’s of course Amazon. There’s no doubt that physical retailers have gotten destroyed
over the past 20 years due to the rise of online sales. But, not only has Home Depot not
been hurt by onlines sales, but they’ve actually thrived in the online environment. You see, when
it comes to home improvement items, there’s often a sense of urgency with each purchase.
Maybe you’re mounting some cabinets and run out of screws or maybe you cut a piece of wood too small.
Most people don’t want to wait 2 days or even 1 day for Amazon prime shipping.
Their first instinct is to run to Home Depot so they can get back to work as soon as possible.
And given that 90% of the US lives within 10 miles of a Home Depot, running to Home Depot is a far
better option than waiting for an Amazon delivery. This sense of urgency has created a natural
advantage for Home Depot’s physical locations, but Home Depot has done much more than simply rely on
this advantage. Home Depot has transformed their stores into a hub for online shopping.
For example, if you look up what you need on their website, you won't have to spend any time
searching for the product. Not only does their website tell you what aisle a product is on,
but it’ll tell you what bay it’s on. They even have an option to text you the location of the
product so that you don’t have to look it up again in the store. You can also choose store
pickup which makes the entire process even easier. Most of the well performing retailers like Best
Buy and Walmart have adopted similar models, but this has proven especially effective for
Home Depot. And that’s just the buying process, when it comes to home improvement, there’s a lot
of returning because you either bought the wrong thing or you bought too many. And I think we’d all
agree that most of us don’t wanna sit around shipping stuff back to Amazon. By this point,
Home Depot had stores, customers, and revenue. The only thing left to do was rake in the profit.
REAPING THE REWARDS:
Over the past ten years, Home Depot has basically shut down their expansion efforts. Their global
store count has barely moved over the past decade, but their net margin has gone to the moon.
Since the 2008 financial crisis to today, Home Depot’s net margin has boomed from just 3-4% to a
solid 10%. To put that in perspective, Walmart’s net margin is currently at just above 1%.
To make things even better, Home Depot’s revenue has also boomed over the past year and half from
$112 billion to $147 billion. It looks like being stuck at home has resulted in a lot more demand
for home improvement items. I’m sure skyrocketing lumber prices have just helped the situation even
further. All of this growth has pumped Home Depot stock to above $400 which comes out to
over a 1.3 million percent lifetime return. That’s nearly 7 times Apple’s lifetime stock returns.
At the end of the day, while Home Depot overtaking Walmart may be surprising at first glance,
when you take a look at Home Depot’s fundamentals and compare it against Walmart’s, it makes perfect
sense. Not only is Home Depot cheap and ubiquitous like Walmart, but they also provide a combination
of knowledge, expertise, and convenience that you just can’t find in any other singular location.
And as long as Home Depot upholds their excellent service, they’ll probably just
continue to outperform Walmart. Do you guys prefer Home Depot or Lowes? Comment that down below.
Also, drop a like if you’re glad to see other retailers challenging Walmart’s dominance.
And of course, consider joining our discord community to suggest future
video ideas and consider subscribing to see more questions logically answered.