Bernie Marcus: The Home Depot Story [Outliers]

0:00:10 it’s april 1978 bernie marcus is 49 years old and his boss has just called the newspapers to
0:00:16 announce that he’s firing him his boss even taunts him i’m gonna fight you with the company’s money
0:00:21 and you’re gonna have to fight me with your own money which you don’t have the worst part is he’s
0:00:28 right bernie has nothing bernie calls his friend devastated kenny you told me i would get fired
0:00:34 and it happened and now he’s trying to destroy my life ken’s response you’ve just been kicked in the
0:00:41 ass with a golden horseshoe bernie thought ken had lost his mind 18 months later the home depot
0:00:47 opened 20 years later bernie was worth billions so were his partners and thousands of regular
0:00:52 employees that became millionaires they’ve revolutionized how america thinks about home
0:00:57 improvement getting fired was the best thing that ever happened to bernie marcus and once you hear
0:01:02 this story you’ll understand why your worst day might be your best opportunity welcome to the
0:01:09 knowledge project i’m your host shane parish this is an episode of outliers and it’s all about mastering
0:01:15 the best what other people have already figured out so you can use their lessons in your life today we’re
0:01:20 going to talk about bernie marcus and the incredible story of home depot bernie had no money he walked away
0:01:25 from two investors because he didn’t want to work with them banks turned him down everywhere he was
0:01:32 forced to open four massive stores at once when he could barely afford two yet somehow bernie built the
0:01:37 company that changed how america thinks about home improvement where thousands of regular employees
0:01:42 became millionaires through stock options where employees chased customers into parking lots to solve
0:01:49 their problems where a ceo in his 70s still worked the floor in an orange apron bernie’s story reveals when to
0:01:55 bet on yourself why picking the right partners matters more than money and the deeper principles that create
0:02:03 lasting success it’s time to listen and learn bernie marcus exists because a doctor gave his mother the
0:02:10 strangest medical advice i’ve ever heard the year is 1929 and his mother has ruminoid arthritis so
0:02:18 severe that she can barely walk the pain is constant and debilitating she’s tried everything but nothing
0:02:25 works then her doctor tells her something that sounds completely insane have another baby pregnancy he claims
0:02:33 might cure her arthritis so bernie marcus was conceived not out of desire but out of desperation his mother was
0:02:39 using pregnancy as medicine and here’s the wild part it actually worked after bernie was born
0:02:44 she could walk again the arthritis didn’t disappear the pain stayed but she got her mobility back
0:02:50 his father was a cabinet maker brilliant with his hands but terrible with money without bernie’s older
0:02:55 brothers sending money home the family would have been in serious trouble there’s a story bernie tells
0:03:01 about his mother that explains everything about how he’d later think about business as poor as we were
0:03:06 my mother used to take ice cream money away from my brothers and sister and me often against
0:03:12 our will and give it to charity her sincere belief was that the more you give the more you get bernie thought
0:03:18 she was crazy at the time but decades later he’d give away billions bernie started working at 12
0:03:23 first as a soda jerk then as a busboy in the catskills where jewish kids made real summer money
0:03:30 he was saving for medical school see bernie wanted to be a psychiatrist so badly that he spent hours
0:03:36 reading the works of freud and young and even learned to hypnotize people he went to ruckers for pre-med
0:03:43 staying local to save money bernie befriended the dean and told him he was broke but needed a scholarship
0:03:49 for med school the dean said he could get bernie into harvard then came the catch it would cost ten thousand
0:03:56 dollars harvard has a jewish quota the dean explained the money ensures you get one of the spots bernie’s
0:04:01 family had never seen ten thousand dollars all of his relatives combined couldn’t scrape that together
0:04:06 his doctor dream died on the spot in fact he was so crushed that he dropped out of school
0:04:13 his mom eventually convinced him to go back for something anything so bernie picked pharmacy school bernie
0:04:20 became a pharmacist by default but he hated every minute of it a friend offered him 50 of a pharmacy
0:04:27 he could work off over time so bernie took the deal but it was a disaster from day one bernie wanted to be
0:04:34 a psychiatrist not count pills he was angry and impossible to work with full of resentment the fights
0:04:39 with his partner get so loud the customers could hear them screaming in the back one saturday night
0:04:45 everything changed here’s how bernie tells it i was alone in the store and eating dinner at the back
0:04:50 counter between customers that’s when fate a little guy with a big cigar in his mouth walked into the
0:04:56 store and changed my life hey kid come here get me a cigar he said this fellow may have been two years
0:05:03 older than i was maybe three years at the most so i walked up to him and said pick a window this big cigar
0:05:08 dangling in his mouth he looked at me confused what do you mean pick a window pick a window because
0:05:14 you’re going through one of them i want you to have a choice in which one and believe me he knew i wasn’t
0:05:21 kidding he put up his hands in a defensive way as if to suggest he meant no offense but i was in a foul
0:05:27 foul mood and i was prepared calling me kid was the last straw wait a second he said you must have had an
0:05:33 argument with your partner how did you guess i asked disarmed by his intuition hey i’ve been in here
0:05:38 before he said he introduced himself as danny kessler and said he was the chairman of a company called
0:05:43 united shirt shops what are you doing in this crummy store he asked me why don’t you get the hell out of
0:05:49 here get into business that’s more suited for your talents and what business would that be discount
0:05:54 stores concession departments i have the men’s clothing concession and a whole bunch of stores and we are
0:06:00 making a ton of money there are lots of great stores doing this where are they there’s one not far from
0:06:06 here he said why don’t you come visit me here tomorrow so the next day i did bernie had never
0:06:11 seen a discount store before and what he saw that day changed everything and the future of retail
0:06:18 each department was run by different operators the volume was incredible the energy was electric
0:06:24 customers were flowing through like rivers buying everything in sight but one store grabbed him
0:06:31 completely two guys and it was based in new jersey bernie went back to two guys 10 times in two weeks
0:06:36 studying every department every detail when he finally asked an employee who ran the place the guy
0:06:43 pointed to herb huppschman bernie walked right up and poured on the charm herb was flattered enough
0:06:48 to give him the full tour explaining how everything worked in great detail at the end herb asked so what
0:06:54 do you think bernie knew he needed to get his attention so he said something provocative for the
0:07:00 smartest guy in the world you’re the biggest schmuck i’ve ever met in my life herb was stunned what are
0:07:06 you talking about look how brilliant and innovative you are bernie went on you have food in the store
0:07:11 you have appliances you have this and that but your cosmetics department is the worst i’ve ever seen it’s
0:07:18 it’s disgraceful how can you let this happen well herb said sheepishly my brother runs it bernie
0:07:25 pounced herb from now on i will run this part of your business what your brother is doing in sales now i’ll pay as
0:07:32 rent and i’ll make a profit over that you can’t possibly make that deal herb scoffed but bernie did make
0:07:38 that deal and within months he was running cosmetics and then sporting goods and then major appliances
0:07:45 by 28 bernie was overseeing almost a billion dollars in merchandise and nearly 70 of all appliances sold
0:07:53 on the east coast because that’s what two guys was doing so why has no one ever heard of two guys
0:07:59 because when herb died outsiders took over and tried to expand too fast they stopped focusing on customers and
0:08:05 started focusing on their own careers customers vanished and the company collapsed bernie would
0:08:11 carry this lesson forever because when a business stops serving the customer and starts serving itself
0:08:17 it does after two guys bernie bounced through the executive roles eventually landing at dayling
0:08:24 corporation as vice president of hard goods he’d held big titles at major retailers and helped build great
0:08:29 businesses but he realized something crucial he never made real money the real money
0:08:34 company came from owning equity and he’d never been given equity as part of his compensation and he
0:08:41 never bought equity with his compensation at dalen he was given the reins of handy dan home improvement
0:08:48 centers and that’s where he met arthur blank arthur had joined dalen when they acquired his family’s
0:08:53 pharmacy business and bernie met him at a corporate event and when arthur’s division was sold off bernie
0:08:59 called him immediately and said come work with me at handy dan arthur would later describe their relationship as
0:09:04 as a pitcher and catcher as a pitcher and catcher and baseball bernie was the pitcher the center of
0:09:10 attention and he was always throwing heat arthur on the other hand was the catcher he was quietly calling
0:09:17 the game and setting the pace it worked because they shared the same values but brought different strengths
0:09:23 to the table what neither knew yet was that this partnership would revolutionize how americans shop
0:09:32 build and think about home improvement but first they both had to get fired handy dan had a weird ownership
0:09:40 structure dalen owned 81 of it and the public owned the other 19 companies did this in the 1970s
0:09:46 thinking that a small public stake would boost valuations for the parent company for tax reasons the
0:09:55 private stake had to exceed 80 and the strategy ended up backfiring because handy dan went public at 12 a
0:10:01 share and then it crashed to three dollars but there was a bigger problem or opportunity depending on how
0:10:08 you look at it a lawyer discovered that whoever controlled that 19 could effectively control the entire
0:10:15 company and let me explain because of fiduciary duty rules the parent company which controlled the 81 of the
0:10:22 company had to vote in the same proportion as the 19 percent that was owned by the public so effectively
0:10:29 if you controlled the 19 you controlled the company and a man named ken langone had recently bought up
0:10:36 nearly all of that 19 percent langone was an investment banker whose client owned a home improvement
0:10:42 company when asked who the best operators in the industry were the answer was immediate handy dan
0:10:49 ken thought that was terrible news because he had mistakenly believed that handy dan was in bankruptcy and if that was the fate of the
0:10:56 the best they didn’t have the best they didn’t have a shot but he’d gotten it wrong dalen the parent company went into bankruptcy
0:11:03 not handy dan ken rush back to check the financials not only was handy dan not bankrupt
0:11:10 it was a solid company doing very well despite the woes of its parent company bernie and arthur had grown it
0:11:16 from four stores to nearly 80 each doing three million dollars a year the highest volumes in the industry
0:11:23 the company appeared to be earning a dollar fifty per share but traded at just three dollars that was
0:11:29 cheap even in 1976 terms ken called bernie immediately i think you have the greatest company
0:11:35 i’ve ever seen in my whole life when bernie confirmed the earnings were real ken said he was buying every share he
0:11:44 could find mortgage your house if you have to he said of the 475 000 public shares ken bought 400 000 of them
0:11:51 while bernie liked and trusted ken instantly dalen’s ceo sanford sigaloff would have a very different
0:11:58 relationship with him when bernie introduced ken to sigaloff ken’s instinct was immediate as they walked away
0:12:05 he told bernie this is a real bad guy this is a guy you can’t trust and that would kill you in a second
0:12:12 soon after ken discovered the fiduciary trick the minority stake allowed him to control all of handy
0:12:18 dan so when he discovered this he calls sigaloff to discuss how they’d run the company together what
0:12:25 do you mean we sigaloff erupts and ken explained the legal reality sigaloff went ballistic he had no
0:12:31 intention of letting anyone influence how he ran things ken said he hoped they wouldn’t have to
0:12:37 test it but the problem went deeper than just control bernie and sigaloff were opposites in every
0:12:43 way that mattered too bernie believed businesses were built on relationships and that’s how he’d grown
0:12:49 two guys and handy dan to three million per store the highest in the industry when he worked with their
0:12:55 banker rip fleming bernie told him everything the good the bad the opportunities the problems it was
0:13:02 total transparency fleming became handy dan’s biggest supporter because of it sigaloff however
0:13:08 was the complete office and he was the ceo of the parent company dayland he viewed partners especially
0:13:14 bankers as idiots to manipulate his philosophy was keep them in the dark and feed them crap like mushrooms
0:13:20 he’d intentionally drown them in meaningless charts and statements so much paper that nobody could read it
0:13:27 all his goal was to confuse them into submission bernie refused to play that game to him you could make
0:13:33 money honestly or you could make money once therefore when these two philosophies collided something had to
0:13:41 give and ken langone was about to make sure it wasn’t bernie sigaloff won a credit for turning around
0:13:48 dayland from bankruptcy but the only division with real cash flow was handy dan so he tried to buy out ken
0:13:55 ken starting at ten dollars then 12 and then 14 each time sigaloff said no to ken’s price he’d come back
0:14:02 later to accept it only to find that ken had raised it again here’s an excerpt from the book because you’d
0:14:08 never believe how crazy ken’s negotiation went otherwise so they’re sitting in his office and the stock is
0:14:14 selling for about eight dollars a share in the public market we know you’re a boxed in you can’t sell any
0:14:22 stock you have no liquidity how about if we pay you ten dollars a share no way ken said the price is 12
0:14:28 forget it wanting to leave him swimming alone with his personal barracuda which was the lawyer that was
0:14:34 sitting in the room ken’s lawyer he left and he went to the men’s room so barely two minutes later this guy
0:14:41 follows him in and he says okay i agree 12 no you don’t understand ken told him you offered to buy it
0:14:47 for 10 i said no i offered to sell it to you for 12 and you said no now you’re back wanting to buy it at
0:14:55 12. that offer is off the table that’s gone we had an offer and a denial no deal what i suggested a price
0:15:01 of 12 dollars in my office right he nodded acknowledging and you declined well that’s it
0:15:09 i don’t want to sell now you must have some price okay ken said 14 this went back and forth for months
0:15:15 until bernie sick of being in the middle of all these negotiations told ken get sigil off off my back
0:15:21 sell him the stock but ken warned him bernie trust me you don’t really want me to sell him the stock because
0:15:28 if i do i’m signing your death warrant you are a dead man bernie didn’t believe it sigil off doesn’t know
0:15:35 this business i know this business he needs me to run it but ken kept warning him and bernie insisted
0:15:43 so ken finally agrees to a price of 25.50 a share so dalen now owns everything in the spring of 1978
0:15:49 bernie and arthur show up for a corporate planning meeting at dalen headquarters and sigil off lawyers
0:15:54 and stenographers met them bernie thought it was a strange mix for a planning meeting and they were
0:16:00 fired on the spot and sigil off had already called the papers so that the story would run the next
0:16:06 morning he voided bernie’s contract and even taunted him the only problem for you is that i’m going to
0:16:10 fight you with the company’s money and you’re going to have to fight me with your own money which you
0:16:17 don’t have and bernie had to admit that he was right he had nothing bernie’s first call after getting
0:16:21 fired was to ken ken ken a terrible thing has happened you told me i would get fired and it
0:16:29 happened and he is trying to destroy my life ken’s response surprised bernie this is the greatest news
0:16:35 i have ever heard bernie was shocked what’s the matter with you kenny didn’t you hear what i just said
0:16:41 no you don’t understand ken said you’ve just been kicked in the ass with a golden horseshoe this is the
0:16:47 greatest opportunity now we can open up the story you talked about when we were in houston bernie’s
0:16:53 minds slowly shifted he remembered what he told ken in houston when they’d open a handy dan store there
0:17:00 ken asked why they needed so many stores in one city and bernie said something he said because someday
0:17:05 somebody’s going to open up a store that’s going to make all of our stores obsolete bernie had already
0:17:11 been imagining what would become the home depot it was a massive store unlike anything else seen
0:17:17 in america if handy dan has 15 stores in houston three of my new stores would make these obsolete
0:17:23 ken reminded the now unemployed bernie bernie you have repeatedly told me how handy dan this whole
0:17:29 industry is vulnerable too many small chains no national companies and prices are too high do you still
0:17:36 believe that bernie responded yes after his call with ken bernie had to call one other person saul price
0:17:42 and if you listen to our saul price episode you’ve heard a little bit of this story bernie and saul had
0:17:49 been friends for years saul had recently found the price club after being ousted from fedmark by its new
0:17:56 german owners sensing a kindred spirit bernie went to see him saul knew immediately what was on bernie’s
0:18:03 mind and walked him into a room piled floor to ceiling with documents these are depositions saul
0:18:09 explained this is what i’ve spent the last three years of my life going through bernie was stunned
0:18:15 if he sued handy dan this would be his future saul told him the lawsuit consumed everything every thought
0:18:22 all of his energy and that even if you won you still lost only the attorneys made money that’s exactly
0:18:29 what happened to saul he won his lawsuit but gained nothing do you have money to pursue this saul asked
0:18:35 no i really don’t bernie replied are your attorneys at least representing you on a contingency basis
0:18:41 no bernie said he was paying them 200 an hour regardless of what happened back in the 70s too
0:18:47 saul let it out bernie when i sold my company i went right out and started the price club i had the money
0:18:53 so we were able to do that and sue these bastards you don’t have the money to waste then saul asked
0:18:58 the real question bernie do you think you’re talented yes i think i am do you think you have
0:19:04 the ability to build something to create something do you feel good about yourself yes i do then why
0:19:08 don’t you just tell sigilov to go f himself and get on with your life pay your lawyers what you owe them
0:19:15 walk away from it bernie drove back to la by the time he got home he knew what he had to do if you’re
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0:21:20 unemployed they were fired from handy dan trying to convince anyone who would listen that they could
0:21:26 revolutionize hardware retail with warehouse style stores they needed two million dollars and finding
0:21:33 somebody willing to bet on two fired executives was proving a little bit harder than expected ken langon
0:21:39 knew one person with that kind of money ross perot perot had built eds into the microsoft of its era
0:21:46 through military precision and sheer will and ken set up a meeting in dallas perot listened to their
0:21:52 story the firing the vision for massive warehouse stores that would destroy traditional hardware retail
0:22:00 and he liked it they had a deal for two million dollars per row would own 70 percent of home depot
0:22:06 bernie and arthur would split 25 percent and ken would get five percent but the deal fell apart and
0:22:14 it wasn’t over equity or strategy it died over a car bernie had been driving a four-year-old cadillac
0:22:19 leased through handy dan to save money he wanted to buy it at its depreciated value rather than lease
0:22:26 a new one and perot asked what kind of car it was it’s a cadillac bernie replied my people don’t drive
0:22:33 cadillacs my guys at eds drive chevrolets bernie explained the math his used cadillac was actually
0:22:39 cheaper than a new chevrolet and besides he was a big guy he needed a bigger car but perot repeated
0:22:46 my people don’t drive cadillacs and bernie tried one more time and pro repeated it a third time my people
0:22:53 don’t drive cadillacs after the third repetition bernie saw his future clearly he just escaped
0:22:59 one autocratic boss and was now about to sign up for another this wasn’t about the car it was about
0:23:05 control and bernie knew that he wouldn’t be a real partner he’d just be an employee with equity bernie
0:23:10 asked to step outside with ken and he said if this guy is going to be bothered about what kind of car
0:23:15 i’m driving how much aggravation are we going to have when we have to make a really big decision
0:23:21 and ken thought bernie had lost his mind they were walking away from two million dollars they desperately
0:23:28 needed over a cadillac i would rather starve to death bernie said no way and so they walked away
0:23:35 from rossborough the lesson here is what we see time and time again with outliers bad money is worse than
0:23:41 no money do you remember when i interviewed whole foods founder john mackey he called bad money hitchhikers
0:23:47 bad money will pay for the gas as long as you do what they want and go where they want to go and
0:23:54 slowly you lose yourself and your vision of your company so walking away from perot left bernie and
0:24:01 arthur desperate ken langon went to work convincing 40 investors many of whom who’d made money on handy
0:24:08 dan stock to put up 25 000 each they were betting on bernie and arthur themselves more than a business
0:24:15 plan and then bernie discovered pat farrow farrow was a legend in california home improvement a wild
0:24:22 man with an enormous afro who just opened a store called homeco it had everything bernie dreamed of
0:24:30 merchandise piled to the ceiling rock bottom prices employees who literally ran to help customers when pat
0:24:36 quit national lumber to start homeco five managers and 50 employees followed him that’s how much
0:24:43 loyalty this guy inspired everyone loved him when bernie saw homeco he was simultaneously thrilled
0:24:50 and devastated he was thrilled because someone had proven his concept work devastated because that
0:24:58 someone wasn’t him bernie and arthur decided to buy homeco and make farrow their partner but during diligence
0:25:04 they discovered they discovered a disaster pat was a merchandising genius but he didn’t understand
0:25:12 how to run a business his gross margins weren’t the 44 industry standard they were 12 he was losing
0:25:20 money on every sale staying alive only because he wasn’t paying his vendors the deal was dead homeco went
0:25:27 bankrupt within months but bernie still wanted pat farrow so two days after homeco closed bernie called
0:25:32 him and said i still want you to join arthur and me in this new venture and pat was beside himself he
0:25:38 couldn’t believe this he’d lost everything he’d failed his investors and even filed personal bankruptcy
0:25:45 and here bernie was offering him a partnership you’re a great merchant bernie told him you have a great
0:25:51 concept you just don’t have us you need us and we need you and they also needed locations but they
0:25:57 couldn’t afford to build anything so they had to find massive spaces to lease so bernie wanted them near an
0:26:04 airport hub for easy travel and in a city big enough to attract the talent they need at every level so even
0:26:09 though they could barely scrape together money for a single store bernie was already planning for a
0:26:16 thousand his goal was to create a dominant national chain so they chose atlanta it fit all the criteria
0:26:22 and arthur knew the market really well jc penny was looking to sublease four massive department stores
0:26:28 that were failing the negotiations went great until penny dropped a bomb they had to take all four locations or
0:26:34 none and this was insane they barely had any money for two stores let alone four they hadn’t
0:26:40 proven the concept at all but the deal was too good to pass up they took it and went all in they’d either
0:26:47 open four stores and succeed spectacularly or fail so now they had the partners they had a concept and
0:26:52 locations but what they didn’t have now was working capital their seed money could cover salaries and
0:27:00 expenses for a couple years but not inventory or the daily cash flow needed to operate for massive stores so
0:27:05 ken assured them it would be fine he knew banks everywhere however every single bank turned them
0:27:11 down then came another near miss with the wrong partner a boston venture capitalist agreed to invest three
0:27:18 million dollars finally they thought but as bernie was driving the investor to the airport after supposedly
0:27:25 sealing the deal but not signing the man revealed his conditions eliminate all company cars cut manager
0:27:33 salaries by 10 and then the kicker no company paid health care for employees let me read to you what
0:27:38 bernie wrote in the book because i don’t want to mess this up about this moment the blood rose up in my
0:27:45 eyes i swerved and pulled the car onto the shoulder of the highway my gut told me this was a terrible
0:27:53 mistake and my premonition so far had been right get out of the car i said get out of the goddamn car
0:28:01 the man just looked at me he thought i was crazy we were in the middle of nowhere cars and trucks were zipping by
0:28:09 i said get out of the car do you think i would get in bed with an imbecile like you get out of the effing car
0:28:17 you can walk to the airport for all i care bernie reflected later i am not a loose cannon my mind was
0:28:23 in overdrive weighing the pros and cons i put everybody’s careers in jeopardy by rejecting him
0:28:29 that way i realized that i was going to get the money we needed but i just couldn’t live with this guy
0:28:36 this company didn’t blossom from miracles it came from our instincts knowing whom to do business with and
0:28:43 whom to avoid for this second time bernie rejected desperately needed money because the partner was
0:28:48 wrong if they were going to succeed it would be by taking care of their people not cutting their
0:28:54 health insurance to please some investor finally desperately bernie called rip fleming at security
0:29:02 pacific bank in la rip had been their banker at handy dan and he knew bernie and arthur he trusted them
0:29:08 and he’d gone to bat for them before but even rip said no the loan was too risky it was too
0:29:13 unconventional for his bank to consider but bernie refused to accept no for an answer so he threatened
0:29:20 to camp out in rip’s office with a sleeping bag until he said yes more importantly he reminded rip
0:29:25 what was at stake it was not just a business opportunity but the lives and careers of people
0:29:32 who had believed in a dream rip fought for them inside security pacific he got rejected three times
0:29:39 by loan officers who saw nothing but numbers finally rip had had enough he stormed into his ceo’s office
0:29:46 slammed the door and threw his resignation letter on the desk you don’t need a banker he told the ceo
0:29:53 you need a computer hire some young kid to come in here and do my job i buy people bernie marcus and
0:29:59 arthur blank are good people and you have turned them and me down three times you obviously don’t
0:30:05 need me here anymore and the ceo to his credit realized at that moment that losing rip fleming
0:30:13 meant losing 400 million dollars in accounts so suddenly this 3.5 million dollar loan was a 400
0:30:19 million dollar decision so he had no choice he tore up the resignation and called the loan officers and told
0:30:26 them to make the loan whether you like it or not rip never told bernie what he did for him in fact bernie
0:30:32 didn’t find this out until rip’s retirement party when he sat next to the ceo when he heard the story
0:30:39 he broke down into tears this man had risked his career for them and never said a word the same thing
0:30:46 happened to john mackey at whole foods isn’t that crazy there’s one more absurdity in this story full of
0:30:52 them once they had financing for the locations in place they still needed a name for the stores the
0:30:58 best idea they had come up with was mb’s warehouse which nobody liked so they hired a fancy consultant
0:31:05 who came back with bad bernie’s bill doll complete with a cartoon mascot in a prison uniform with the
0:31:12 tagline they locked me up because i sold at such low prices rip fleming their banker savior diplomatically
0:31:17 suggested they find another name eventually an investor’s wife driving home from a meeting and
0:31:24 passing a railroad themed restaurant scribbled down a list of names one of them combined home with depot
0:31:32 it wasn’t love at first sight but it sure beat bad bernie’s as bernie later reflected the name is not the
0:31:40 most important thing it’s the entity that creates value in the name on opening day they faced disaster but it
0:31:46 turned out to be a bonanza they couldn’t afford a major television commercial campaign so the primary
0:31:53 ad announcing the grand opening of home depot on june 22nd 1979 was going to run the day before in the
0:31:58 atlanta journal constitution but the day before opening when bernie picked up his paper in his
0:32:05 driveway and started to flip through to find their massive two-page spread it wasn’t there so bernie called
0:32:10 the editor his voice was breaking you just killed us you killed us we’re trying to get this company off
0:32:17 the ground and you single-handedly put us out of business the editor was contrite he felt truly awful
0:32:25 about the mistake but that didn’t help them on their opening weekend they were broke their entire ad
0:32:31 budget had gone to that opening spread they had no margin for error opening day without advertising was like
0:32:37 throwing a party without telling anyone as part of their opening day strategy they sent their kids and
0:32:43 wives into the parking lot of all four stores and onto the street to hand out seven hundred one dollar
0:32:50 bills to try to lure customers in but things were so bad without the newspaper ad they literally couldn’t
0:32:56 give the dollar bills away the ad finally ran on opening day itself and the newspaper was mortified
0:33:02 by their error they gave home depot the back page of their news sections for weeks it was prime real
0:33:08 estate they never could have afforded so out of something bad came something really good but that
0:33:14 wasn’t the only crisis on opening day pat farah called bernie before sunrise on opening day we have
0:33:20 another disaster on our hands you’re gonna go crazy when you see it meet me right away pat arrived early
0:33:28 for the employee rally and found the store sparkling clean the concrete floors had been waxed until they
0:33:36 gleamed what the hell happened pat demanded of the store managers who screwed up the store two managers
0:33:42 stood there beaming with pride they brought in cleaning crews overnight as a surprise wanting
0:33:48 everything perfect for the grand opening you are out of your mind pat screamed get the forklifts get
0:33:55 the pallet jacks bernie pat and anyone they could grab spent the remaining time before opening racing
0:34:01 forklifts around the store deliberately skidding around corners scuffing and scratching those beautiful
0:34:07 floors to make them look like a working warehouse again the home depot wasn’t supposed to be a
0:34:14 supermarket or a department store these were action places the idea was for them to look shocked it’s
0:34:20 why they didn’t at first put in a rear entrance for lumber buyers it’s why they had all contractors
0:34:26 and professionals go to the front registers right beside the do-it-yourself customers that created action we
0:34:31 wanted the big stuff going at the front and loaded in the parking lot so that everyone saw it
0:34:36 on top of that the do-it-yourselfers saw that the contractor buying two units of sheetrock
0:34:42 paid the same price as they did there was no secret backdoor discount for contractors we were priced
0:34:49 right for everyone not just a select group another important concept for us inside the store was that
0:34:54 the merchandise not be constantly fronted we didn’t want products pushed to the front edge of the shelves
0:35:01 if everything is perfectly lined up that tells you it’s not selling there’s no action besides it takes too
0:35:07 much energy to maintain the facade of fronting everything we front the products once but never
0:35:13 again that way we can see what is selling and our customers feel like there’s action in the aisles
0:35:18 facing the product is another practice we don’t believe in sears and true value face their product
0:35:23 meaning they pay employees to go through the store and turn the labels out facing customers
0:35:29 it looks good but it’s tremendously expensive we find it gets in the way of offering product at the lowest
0:35:36 possible price in the early days when customers were so scarce that bernie could count them individually
0:35:42 he took every empty-handed exit personally he would literally run into the parking lot after people
0:35:48 what is it that we don’t carry that you need why didn’t you buy something he’d call after them usually
0:35:54 the answer was simple i didn’t find what i came in for bernie’s response never changed oh my gosh i’m
0:35:59 so sorry you didn’t find it we carry it we just happen to be out of it if you give me your name and address
0:36:05 i will deliver it to you personally then he would drive to a competitor with the product buy it himself
0:36:11 peel off the price sticker and personally deliver it to the customer’s home every product a customer wanted they
0:36:17 didn’t have bernie noted down and ordered so within weeks it would be on home depot shelf but more
0:36:23 importantly he was building customer trust one person at a time this became everything at home depot
0:36:30 they’d do whatever it took to satisfy customers and it wasn’t just bernie everyone caught on here’s
0:36:35 one early example a woman came in looking for a chandelier so an associate helped her pick one out
0:36:41 but when she got it installed at home she realized it was too small for her room so she came back
0:36:46 embarrassed asking for a bigger one even though the first one was exactly the one she’d requested
0:36:52 what did you do with the other one the associate asked oh i have it at home well bring it back i don’t
0:36:57 know how to take it down without being electrocuted she said the associate didn’t hesitate tell me where
0:37:03 you live on my way home i will put the new one up for you take the old one down and we’ll give you
0:37:10 an adjustment six months later that same woman remodeled all 200 rental units she owned every
0:37:15 single thing toilet sinks bathtubs carpeting chandeliers she bought from home depot so this
0:37:21 75 chandelier exchange turned into hundreds of thousands of dollars and here’s another early
0:37:27 example the lighting department head who had 40 regular customers all wanting the same new black and
0:37:33 decker snake light but his store was sold out so he called every other home depot in the district
0:37:37 asking if he could get some of their inventory every one of them said no despite having inventory they
0:37:43 said they needed what they had so he drove to those stores bought 40 lights on his own credit card
0:37:48 brought them back to his store got himself a refund at the register and then walked to the other side
0:37:54 of the counter picked up all 40 lights and called each customer saying i got your lights the lesson
0:38:01 here is pretty clear customer service isn’t a department it’s a philosophy out of this obsession
0:38:06 the home depot developed what they call the customer’s bill of rights these were they believed
0:38:12 the only things a customer wanted to pay for at the home depot the right assortment the right quantities
0:38:19 the right price associates on the sales floor who take care of customers associates who have been trained
0:38:25 properly in terms of product knowledge and the expectation that our associates will be there
0:38:31 when the customers need them together those six things represented excellent customer service everything
0:38:38 else bernie argued was a waste customers didn’t want to pay for wider aisles or brighter lights they didn’t
0:38:45 want fancy displays or carpeted floors they wanted help knowledge fair prices and availability that’s it
0:38:52 it this hasn’t changed this was revolutionary at the time though in 1979 and it kind of still is
0:38:58 bernie wanted the home depot to be the first truly national home improvement brand in america
0:39:04 there were a lot of successful territory chains and they were making good money running solid businesses
0:39:10 but nobody thought bigger than that except for bernie he saw what sam walton had done with walmart
0:39:15 taking a concept and spreading it coast to coast he saw what his friend sol price was doing with price
0:39:23 club he knew home improvement was ripe for the same transformation and ken believed him arthur believed
0:39:29 him pat believed him and more importantly they convinced their vendors bankers and early investors to believe
0:39:36 them too they’d even convinced a few customers in atlanta now they had to convince the rest of america
0:39:41 the path to becoming a household name started as most things did at the home depot with doing
0:39:48 something nobody expected and learning from mistakes along the way in 1980 the home depot had a problem
0:39:55 they’d hired an expensive california ad agency and they were producing exactly nothing of value so they fired
0:40:02 them and hired a local atlanta guy named mel finkel who actually understood their customers and finkel had an idea
0:40:09 you ought to have ludlow porch do some commercials porch was a local radio personality in atlanta
0:40:14 all right bernie told finkel let’s try him two days later finkel played them the first ludlow porch
0:40:20 commercial folks i’ve just been down to a new place on highway 41 the home depot i walked around
0:40:27 there and they had this and that i tell you if these stores were any bigger we’d be paying alabama sales tax
0:40:32 better bring a sandwich too because you’re going to be walking around a while they loved every second
0:40:40 of it how much does he want for these commercials bernie asked 150 finkel said 150 000 bernie was
0:40:47 aghast no way they aren’t that good no bernie finkel said 150 dollars someone else said well then they can’t
0:40:52 be any good and then pat ferret laughed and he said hey guys what’s the price that makes them good
0:40:57 porch never spoke to home depot management and bernie never knew what he would say next but
0:41:03 he trusted him to say it right his voice became synonymous with the home depot in atlanta to expand
0:41:09 beyond atlanta however they needed someone with a broader appeal than a regional radio guy and they
0:41:16 found him in their old nemesis handy dan al carroll the super handyman had become handy dan spokesperson
0:41:22 after bernie and arthur were fired he was nationally known for his newspaper and radio features but he
0:41:29 never heard of the home depot and turned bernie down flat but in what’s becoming a pattern now bernie
0:41:34 was not taking no for an answer look bernie tried again i know you’re coming to atlanta for a home
0:41:38 show let me at least pick you up at your hotel and take you over to one of the home depot stores if
0:41:45 you don’t think it’s the greatest thing in business i will never bother you again hoping to get bernie
0:41:51 off his back carroll agreed on the drive bernie painted a picture so unbelievable that carroll wondered
0:41:58 what he’d gotten himself into but this store was every bit as massive and overstocked as bernie described
0:42:04 what really struck carroll was how bernie knew every single associate by name and they all knew him
0:42:08 several times bernie got distracted while they were walking around asking about this one’s kids or that
0:42:15 one’s wife or a recent operation that store visit changed everything carroll became the home depot’s
0:42:24 spokesperson for the next eight years his unexpected stock options made him incredibly wealthy home depot
0:42:30 was addicted to sales like a drug though sales rose and fell with the publication of their bi-weekly catalog
0:42:35 customers would wait to see what was on sale then flood the store sales would spike for a day or two
0:42:42 and then dribble down until the next catalog this was in the days before upc codes and computerized
0:42:48 barcoding when every item had to be manually priced and stickered when products went on sale in our catalog
0:42:55 it meant bleary eyed associates red tagged the items the night before and when the sale was over if
0:43:00 anything was left they had to remove those red stickers and reprice the items by hand it was a
0:43:09 labor-intensive and error-prone process it was exhausting inefficient and all for a brief 25 bump in sales
0:43:16 every day low pricing at the home depot originated with sol price and sam walton wherever walton traveled he
0:43:22 would visit a home depot when bernie visited walmart’s headquarters to learn about their employees stock
0:43:29 option plan walton had something else on his mind why do you continue to run sales walton asks don’t
0:43:33 you run out of merchandise yeah bernie said we run out of merchandise all the time in fact we have to
0:43:38 hold back stuff in the back room because otherwise people will buy all the merchandise before our sale
0:43:45 catalogs hit why don’t you go to everyday low prices like we have walton and his partner david glass
0:43:51 explained how it worked on every level concluding that if you take everyday low prices as a marketing
0:43:57 philosophy and you list the pros and cons you would never do anything other than everyday low prices
0:44:05 people who come out of a different background resisted manufacturers could plan production stores stayed in
0:44:14 stock employees weren’t constantly repricing customers trusted that they were getting good deals on any day of the
0:44:20 the week bernie saw the logic immediately but selling it internally was brutal merchants loved the sale
0:44:26 they lived for the excitement of creating new promotions to lure customers but bernie understood
0:44:31 something deeper sales were actually a weakness everyday low prices meant more consistent sales overall
0:44:36 making it easier to stay in stock whatever the price we would previously have discounted an item
0:44:42 that’s the price we should be selling it at all the time the switch meant permanently marking everything
0:44:49 down which was a massive change to their pnl they were now public with high p/e ratio so one bad quarter
0:44:55 could tank their stock but bernie and arthur pushed forward there was a reason most retailers can’t and
0:45:01 didn’t do it they didn’t have the fortitude or the vision to make it happen home depot was spending over
0:45:08 three percent of gross sales on advertising while walmart was only spending 1.5 percent there was a lot of
0:45:14 money to be saved and it took over a year to implement the whole organization fighting them daily when the
0:45:20 sales curve flattened everyone panicked where were the spikes but the new strategy actually raised sales
0:45:26 across the board they just couldn’t see it as obviously because they were addicted to the drama of the spike
0:45:34 in 1981 an artist created a cartoon character who became their mascot homer he wore plaid shirts and jeans
0:45:41 the typical diy-er doing jobs around his house and soon he was wearing a home depot hat and apron adding
0:45:47 personality to their ads the way mickey mouse did for disney but here’s what made the home depot different
0:45:53 from every other retailer they discovered they didn’t need homer they had something better their own
0:46:00 people by the 90s home depot’s tv commercials started featuring their 160 000 associates in orange aprons
0:46:06 there were no scripts and no rehearsal they just turn the camera on and ask an associate a question about
0:46:12 paint plumbing or power tools the passion was real the knowledge was deep and nobody could sell the store
0:46:18 better than the people who lived it every day so those orange aprons became more iconic than any
0:46:25 mascot could ever be bernie had discovered something crucial you can’t give authenticity to an actor the
0:46:30 best spokesperson for your company are the people who actually believe in what you’re building therefore
0:46:37 while his competitors hired celebrities home depot turned its floor workers into stars and then there
0:46:44 was the 1996 summer olympics in atlanta where home depot’s coming out party as a national brand happened
0:46:49 atlanta was their hometown they had more associates there than anywhere else and home depot had become
0:46:56 as important to atlanta as coca-cola or delta or cnn sponsoring their city’s olympics was their debutante
0:47:03 ball they spent millions on nbc television and brought thousands of associates from arizona and new
0:47:09 hampshire to atlanta to participate when you become one of the official olympic sponsors you get packages
0:47:16 including event tickets and accommodations and home depot had 2 000 packages and half of them went to
0:47:23 vendor partners and the other half went to everyday associates they were the only sponsor who gave such a
0:47:28 high percentage of hospitality packages to their own employees the associates they invited had been
0:47:33 recognized for outstanding customer service and in many cases they were the people who’d never left
0:47:39 their hometown before they’d never been on a plane the vast majority were hourly employees and not managers
0:47:47 or executives the company was sending cashiers and floor workers on the trip of a lifetime the message was
0:47:54 clear the people in the orange aprons weren’t just employees they were the company as the home depot grew from
0:48:00 four stores to hundreds and then approached a thousand bernie faced a question that every successful
0:48:07 founder faces how do you maintain a culture as you scale and their answer was simple but required
0:48:13 relentless execution they never left the stores bernie and arthur walked the floors they talked to associates
0:48:19 and customers they taught classes and they showed up at store openings they made themselves accessible to
0:48:24 everyone bernie developed a test that revealed everything about a store’s health to him when he
0:48:30 walked in unannounced he timed how long it took for an associate to recognize him not because of ego but
0:48:36 because of what it revealed about the store if he could spend 45 minutes in a store without anyone recognizing
0:48:42 him he knew they had a serious problem nobody was making eye contact and if nobody was looking at his face
0:48:48 they weren’t looking at a customer’s faces either but if someone said hey aren’t you bernie marcus within
0:48:56 five seconds he knew that store was watching engaging and connecting culture doesn’t scale through memos or
0:49:02 policies it scales through human connection repeated endlessly and by the late 1990s home depot had become
0:49:07 more than just a home improvement retailer when people considered taking on a home project they thought
0:49:15 of home depot first the orange apron had become as recognizable as a starbucks cup or nike swoosh and they’d done
0:49:22 it without sacrificing their original values low prices wide selection and extraordinary customer
0:49:28 service remained their north star bernie proved that culture isn’t what you say it’s what you repeatedly
0:49:36 do and what he did was show up over and over until showing up became the culture itself
0:49:44 what’s up this is your favorite dj next up top tracks that aren’t holiday songs but totally should be
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0:50:14 hi welcome to mcdonald’s can i take your order hi oh wow uh can i get uh um yep the mcvalue menu
0:50:19 has a lot of delicious options for under four dollars each plus tax like a cheeseburger deluxe sweet chili
0:50:28 junior chicken mcdouble and chicken snack wrap so it’s okay to take a minute when ordering the mcvalue
0:50:33 menu so many options for under four dollars each plus applicable taxes at participating mcdonald’s
0:50:38 restaurants in canada prices exclude delivery by the mid-1990s the home depot had become one
0:50:44 of america’s most admired companies bernie marcus knew something most successful founders forget the
0:50:49 higher you climb the more dangerous it becomes to surround yourself with people who only tell you
0:50:55 what you want to hear you need to find people who are going to speak the truth i had one good ability
0:51:00 bernie said and that was to surround myself with people who were great if i surrounded myself with people
0:51:07 who were smarter than i was they would make me look even better but it wasn’t just about hiring
0:51:13 smart people it was about creating an environment where disagreement was encouraged and even expected
0:51:17 we fought with one another on things if you surround yourself with people who agree with you all day
0:51:24 you’re going to be in deep deep trouble this philosophy extended throughout home depot store managers
0:51:29 challenge corporate decisions associates solve problems on the spot even if it meant bending
0:51:36 the rules the message was clear your job isn’t to make executives comfortable it’s to make customers
0:51:44 successful in 1997 bernie marcus stepped down as the ceo after 19 years at the helm arthur blank took over
0:51:51 with bernie staying on as chairman the company they’d built now had over 500 stores and 24 billion in annual
0:51:57 sales and bernie never stopped walking the floor even in his 60s and 70s bernie would show up
0:52:03 unannounced at stores across the country put on an orange apron and help customers he’d still test how
0:52:09 long it took for an associate to recognize him in 2000 the board made a decision that nearly destroyed
0:52:16 everything they hired robert nadeli from general electric to be their new ceo arthur blank stepped aside it
0:52:22 was time they thought for professional management nardeli brought military discipline and efficiency
0:52:27 he wasn’t interested in wearing orange aprons or walking the floor he wanted numbers not culture
0:52:35 under his leadership profit margins improved they expanded past 1000 stores but something essential
0:52:42 died customer service scores plummeted employee morale cratered the orange-blooded culture evaporated
0:52:47 associates who’d been there for decades started leaving the stores became what they’d always fought
0:52:54 against just another big box retailer the stock price which had rocketed for 20 years went flat
0:53:00 by 2007 even nardeli’s defenders couldn’t ignore the damage he resigned under pressure
0:53:05 with a 210 million dollar severance package that sparked public outrage
0:53:11 the board turned to frank blake who did something remarkable he called bernie and arthur and asked
0:53:17 them to teach him how to rebuild what they created blake reinvested in training empowered associates
0:53:23 again and brought back customer service over efficiency slowly the orange blood began to flow again
0:53:28 the nardeli years proved bernie’s point culture takes decades to build and it can be destroyed in years but
0:53:35 if the foundation was real you can resurrect it bernie became a billionaire many times over and so too
0:53:40 did arthur and ken pat if you’re wondering he didn’t quite reach the billionaire status but he was
0:53:46 pretty close more importantly thousands of regular home depot associates became millionaires through stock
0:53:52 options the lumber workers the cashiers who joined early that was what bernie was most proud of
0:53:56 his mother had given his ice cream money away to charity teaching him that the more you give
0:54:01 the more you get and bernie would go on to give away more than two billion dollars to charity
0:54:06 but bernie’s philosophy went deeper than charity he believed every customer was on loan they’d choose
0:54:11 you today but could choose someone else tomorrow and you have to earn their trust every single day with
0:54:17 every single interaction through every single associate and that’s why he chased customers into parking
0:54:24 lots that’s why associates drove to competitors to buy products they’d run out of customers aren’t
0:54:30 transactions they’re relationships and the only relationship that survives long term is the one where both
0:54:39 parties win on november 4th 2024 bernie marcus passed away at 95 the home depot announced it is to us he was
0:54:47 simply bernie by his death the home depot had 2300 stores across three countries 150 billion in annual
0:54:56 revenue and 460 000 employees more importantly it had fundamentally changed american culture in 1981 bernie asked the
0:55:03 rotary club how many considered themselves do-it-yourselfers and five percent of people raised their hands but in
0:55:15 1997 at the same club he asked the same question and almost everybody raised their hand we had changed america bernie said and he was right
0:55:22 okay let’s get into some of the lessons i took away from this episode one revenge costs everything but
0:55:29 pays nothing bernie could have spent years suing handy dan sal price showed him a room stacked full of depositions
0:55:35 this is what i’ve spent three years of my life doing bernie drives home and decides he’s going to build and not
0:55:41 that’s you 18 months later home depot opens most people waste their best years trying to prove how
0:55:47 right they were winners focus on the outcome to bad money is worse than no money ross perot offered
0:55:53 two million but it wasn’t the right fit a boston investor offered three million but once to cut
0:55:59 employee health insurance bernie makes him get out of the car on the side of the highway i’d rather starve to
0:56:04 death he says the wrong partner doesn’t just slow you down they kill everything you’re trying to build
0:56:10 number three obsess over the customer when a business stops serving customers and starts serving itself
0:56:16 it dies home depot associates would drive to competitors to buy out-of-stock items every
0:56:21 customer is on loan bernie says the moment you think they’re yours you’ve already lost them
0:56:27 number four genius in one area means disaster in another pat farrow was a merchandising genius he was
0:56:33 going bankrupt because he was a terrible business person bernie wanted him to come in as one of the
0:56:37 the original founders to home depot though you’re a great merchant you’re a great concept you just don’t
0:56:43 have us you don’t need perfect people you need people whose strengths cover each other’s disasters
0:56:49 number five sometimes you just have to burn the boats home depot couldn’t afford two stores when jc
0:56:55 penny demanded they take four or none most people think going slowly reduces risk but sometimes
0:57:02 you need to go all in number six price does not equal value bernie fired the expensive california
0:57:09 agency producing nothing and charging a lot instead he hired a local radio guy ludlow porch for 150 per
0:57:14 ad porch never even talks to management he just tells stories that locals understand your best
0:57:20 marketing comes from people who genuinely get your customers not consultants with expense accounts
0:57:26 number eight follow your instincts this company didn’t blossom from miracles bernie says it came
0:57:31 from our instincts knowing whom to do business with and whom to avoid most people override their gut with
0:57:37 logic the best trust what they can’t explain number nine go positive and go first when you give
0:57:42 customers exceptional customer service they come back and bring friends when you give community support
0:57:47 they embrace your business when you give associates respect and training they become your best sales
0:57:54 people number ten sweat the details in the early days when customers left empty-handed bernie took it
0:57:59 personally he’d literally run after them in the parking lot asking them why they didn’t buy anything
0:58:03 discovering it was because of a product they didn’t carry he’d drive to a competitor buy the product
0:58:09 himself peel off the price sticker and deliver it to the customer’s home was this scalable no was it
0:58:14 profitable not in that single transaction but bernie learned what products they should carry
0:58:22 and built a customer for life number eleven hire overqualified people they never wanted to start low and
0:58:27 grow their ability to cope you have a responsibility to shareholders and to the other folks inside your
0:58:32 company and have people in critical positions who have the horsepower to do the job hire people
0:58:38 smarter than you why have i been successful in my whole life because i’ve always surrounded myself
0:58:43 with people who are better than i am but you can’t hire smart people and let their potential just go to
0:58:49 waste you need to constantly challenge them give them responsibility and authority they can and should
0:58:55 surpass you bernie writes some people are afraid to hire smarter people they’re insecure that person is
0:59:02 going to take my job baloney they’re going to help you up number 12 decentralize and empower one of the
0:59:07 big advantages that we have over most of our competitors being decentralized it allows us to be close to the
0:59:14 customers and access the best knowledge in the field that way we can do not only what is right for the
0:59:20 stores but also respond to the marketplace and support the associates in the store number 13 the
0:59:25 one-man show doesn’t make it pat was the consummate merchant and when he saw something wrong he’d work
0:59:30 around the clock to make it right but he didn’t understand that as the company got bigger he had to
0:59:36 become more of a teacher than a doer pat would rather do it himself and get the personal satisfaction of it
0:59:42 being done then wait and get the satisfaction of training other people to do it when you know how
0:59:49 to do something and you don’t share that knowledge it’s a waste number 14 you need to kill bureaucracy
0:59:54 i’m just going to read you an excerpt from bernie here if anything ever kills the personality of this
1:00:01 company it will be creeping bureaucracy it is always there unseen and it’s always trying to cover us like a
1:00:06 fungus every bureaucrat who sends out a piece of paper to our stores that is not necessary
1:00:13 is part of that we fight the bureaucratic urge by giving our store managers the freedom some might call
1:00:20 it a very long leash and the confidence in themselves that they would never have someplace else at the same
1:00:28 time we are our own worst critic number 15 never stop bernie was a billionaire ceo he still showed up at
1:00:34 stores unannounced put on an orange apron and helped customers load lumber well into his 70s and 80s
1:00:46 thank you for listening and learning with me i’ll see you next week