Bernie Marcus: The Home Depot Story [Outliers]

It's April 1978, Bernie Marcus is 49 years old and his boss has just called the newspapers to announce that he's firing him. His boss even taunts him, "I'm going to fight you with the company's money and you're going to have to fight me with your own money, which you don't have." "The worst part is? He's right. Bernie has nothing." Bernie calls his friend, devastated, "Kenny, you told me I would get fired and it happened, and now he's trying to destroy my life." Ken's response, "You've just been kicked in the ass with a golden horseshoe." Bernie thought Ken had lost his mind, 18 months later, the Home Depot opened. 20 years later, Bernie was worth billions, so were his partners and thousands of regular employees that became millionaires. They've revolutionized how America thinks about home improvement. Getting fired was the best thing that ever happened at Bernie Marcus, and once you hear the story, you'll understand why your worst day might be your best opportunity. Welcome to The Knowledge Project, I'm your host, Shane Perish. This is an episode of Outliers, and it's all about mastering the best of what other people have already figured out, so you can use their lessons in your life. Today, we're going to talk about Bernie Marcus and the incredible story of Home Depot. Bernie had no money. He walked away from two investors because he didn't want to work with them. Banks turned him down everywhere. He was forced to open four massive stores at once when he could barely afford to. Yet, somehow Bernie built the company that changed how America thinks about home improvement. Where thousands of regular employees became millionaires through stock options, where employees chased customers into parking lots to solve their problems. Where a CEO in his 70s still worked the floor in an orange apron. Bernie's story reveals when to bet on yourself, why picking the right partners matters more than money and the deeper principles that create lasting success. It's time to listen and learn. Bernie Marcus exists because a doctor gave his mother the strangest medical advice I've ever heard. The year is 1929, and his mother has ruminoid arthritis so severe that she can barely walk. The pain is constant and debilitating. She's tried everything, but nothing works. And her doctor tells her something that sounds completely insane, have another baby. Pregnancy, he claims, might cure her arthritis. So Bernie Marcus was conceived not out of desire, but out of desperation. His mother was using pregnancy as medicine. And here's the wild part. It actually worked. After Bernie was born, she could walk again. Their arthritis didn't disappear. The pain stayed, but she got her mobility back. His father was a cabinet maker, brilliant with his hands, but terrible with money. Without Bernie's older brothers sending money home, the family would have been in serious trouble. There's a story Bernie tells about his mother that explains everything about how he'd later think about business. As porers, we were my mother used to take ice cream money away from my brothers and sister and me, often against our will, and give it to charity. Her sincere belief was that the more you give, the more you get. Many thought she was crazy at the time, but decades later, he'd give away billions. Bernie started working at 12, first as a soda jerk, and then as a busboy in the cat skills where Jewish kids made real summer money. He was saving for medical school. See, Bernie wanted to be a psychiatrist so badly that he spent hours reading the works of Freud and Young and even learned to hypnotize people. He went to Rutgers for pre-meds staying local to save money. Bernie befriended the dean and told him he was broke, but needed a scholarship for med school. The dean said he could get Bernie into Harvard. Then came the catch. It would cost $10,000. Harvard has a Jewish quota, the dean explained. The money ensures you get one of the spots. Bernie's family had never seen $10,000. All of his relatives combined couldn't scrape that together. His doctor dream died on the spot. In fact, he was so crushed that he dropped out of school. His mom eventually convinced him to go back for something, anything. So Bernie picked pharmacy school. Bernie became a pharmacist by default, but he hated every minute of it. A friend offered him 50% of a pharmacy he could work off over time. So Bernie took the deal, but it was a disaster from day one. Bernie wanted to be a psychiatrist, not count pills. He was angry and impossible to work with full of resentment. The fights with his partner get so loud the customers could hear them screaming in the back. One Saturday night, everything changed. Here's how Bernie tells it. I was alone in the store and eating dinner at the back counter between customers. That's when fate, a little guy with a big cigar in his mouth, walked into the store and changed my life. "Hey kid, come here, get me a cigar," he said. This fellow may have been two years older than I was, maybe three years at the most, so I walked up to him and said, "Pick a window." His big cigar dangling in his mouth, he looked at me confused. What do you mean, "pick a window"? Pick a window because 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 kidding. He put up his hands in a defensive way as if to suggest he meant no offense. But I was in a foul foul mood and I was prepared, calling me kid was the last straw. Wait a second, he said, you must have had an argument with your partner. How did you guess I asked disarmed by his intuition? "Hey, I've been in here before," he said. He introduced himself as Danny Kessler and said he was the chairman of a company called the United Church Chups. "What are you doing in this crummy store?" he asked me, "Why don't you get the hell out of here? Get into business that's more suited for your talents." And what business would that be? Discount stores, concession departments. I have the men's clothing concession in a whole bunch of stores and we are making a ton of money. There are lots of great stores doing this. Where are they? There's one not far from here, he said, "Why don't you come visit me here tomorrow?" So the next day, I did. Bernie had never seen a discount store before and what he saw that day changed everything and the future of retail. Each department was run by different operators. The volume was incredible. The energy was electric. Customers were flowing through like rivers, buying everything in sight. But one store grabbed him completely, two guys, and it was based in New Jersey. Bernie went back to two guys 10 times in two weeks studying every department, every detail. When he finally asked an employee who ran the place, the guy pointed to Herb Hubschmann. Bernie walked right up and poured on the charm. Herb was flattered enough to give him the full tour explaining how everything worked in great detail. At the end, Herb asked, "So what do you think?" Bernie knew he needed to get his attention. So he said something provocative. For the smartest guy in the world, you're the biggest schmuck I've ever met in my life. Herb was stunned. What are you talking about? Look how brilliant and innovative you are at Bernie went on. You have food in the store, you have appliances, you have this and that, but your cosmetics department is the worst I've ever seen. It's disgraceful. How can you let this happen? Well, Herb said sheepishly, "My brother runs it." Bernie 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 rent and I'll make a profit over that." You can't possibly make that deal, Herb's got, but Bernie did make that deal and within months he was running cosmetics and then sporting goods and then major appliances. By 28, Bernie was overseeing almost a billion dollars in merchandise and nearly 70% of all appliances sold on the East Coast because that's what two guys was doing. So why has no one ever heard of two guys? Because when Herb died, outsiders took over and tried to expand too fast. They stopped focusing on customers and started focusing on their own careers. Customers vanished and the company collapsed. Bernie would carry this lesson forever because when a business stops serving the customer and starts serving itself, it dies. After two guys, Bernie bounced through the executive roles, eventually landing at Daling Corporation as vice president of Hard Goods. He'd held big titles that made your retailers and helped build great businesses, but he realized something crucial. He'd never made real money. The real money came from owning equity and he'd never been given equity as part of his compensation and he never bought equity with his compensation. At Daling, he was given the reins of handy dan home improvement centers and that's where he met Arthur Blank. Arthur had joined Daling when they acquired his family's pharmacy business and Bernie met him at a corporate event and when Arthur's division was sold off, Bernie called him immediately and said, "Come work with me at handy dan." Arthur would later describe their relationship as a pitcher and catcher and baseball. Bernie was the pitcher, the center of attention and he was always throwing heat. Arthur, on the other hand, was the catcher. He was quietly calling the game and setting the pace. It worked because they shared the same values but brought different strengths to the table. What neither knew yet was that this partnership would revolutionize how American shop, build and think about home improvement. But first, they both had to get fired. handy dan had a weird ownership structure. Daling owned 81% of it and the public owned the other 19%. Companies did this in the 1970s thinking that a small public stake would boost value situations for the parent company. For tax reasons, the private stake had to exceed 80%. And the strategy ended up backfiring because handy dan went public at $12 a share and then a crash to $3. But there was a bigger problem or opportunity depending on how you look at it. A lawyer discovered that whoever controlled that 19% could effectively control the entire company and let me explain. As a fiduciary duty rules, the parent company which controlled the 81% of the company had to vote in the same proportion as the 19% that was owned by the public. So effectively, if you control the 19%, you control the company. And a man named Ken Langone had recently bought up nearly all of that 19%. Langone was an investment banker whose client owned a home improvement company. And asked who the best operators in the industry were, the answer was immediate handy dan. Ken thought there was terrible news because he had mistakenly believed that handy dan was in bankruptcy. And if that was the fate of the best, they didn't have a shot. But he'd gotten it wrong. Dalen, the parent company, went into bankruptcy, not handy dan. Ken rushed back to check the financials, not only was handy dan not bankrupt. It was a solid company doing very well despite the woes of its parent company. Bernie and Arthur had grown it from four stores to nearly 80 each doing $3 million here at the highest volumes in the industry. The company appeared to be earning $1.50 per share but traded at just $3. That was cheap even in 1976 terms. Ken called Bernie immediately. I think you have the greatest company I've ever seen in my whole life when Bernie confirmed the earnings were real. Ken said he was buying every share he could find. Mortgage your house if you have to, he said. Of the 475,000 public shares, Ken bought 400,000 of them. While Bernie liked and trusted Ken instantly, Dalen CEO, Sanford sigloff, would have a very different relationship with him. When Bernie introduced Ken to sigloff, Ken's instinct was immediate. As they walked away, 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." Soon after Ken discovered the fiduciary trick, the minority staked allowed him to control all of handy-dand. So when he discovered this, he called sigloff to discuss how they'd run the company together. What do you mean, we sigloff erupts and Ken explained the legal reality? Sigloff went ballistic. He had no intention of letting anyone influence how he ran things. Ken said he hoped they wouldn't have to test it, but the problem went deeper than just control. Bernie and sigloff were opposites in every way that mattered, too. Bernie believed businesses were built on relationships, and that's how he'd grown two guys and handy-dand a 3 million per store, the highest in the industry. When he worked with their banker, Rip Fleming, Bernie told him everything, the good, the bad, the opportunities, the problems. He was total transparency, Fleming became handy-dand's bigger supporter because of it. Sigloff, however, was the complete opposite, and he was the CEO of the parent company Dayland. He viewed partners especially bankers as idiots to manipulate his philosophy, was keep them in the dark and feed them crap like mushrooms. He'd intentionally drown them in meaningless charts and statements, so much paper that nobody could read it all. His goal was to confuse them into submission. Bernie refused to play that game to him, you could make money honestly, or you could make money once. Therefore, when these two philosophies collided, something had to give, and Ken Lengom was a bit to make sure it wasn't Bernie. Sigloff wanted credit for turning around Dayland from bankruptcy, but the only division with real cash flow was handy-dand. So he tried to buy out Ken, starting at $10, then $12, and then $14. Each time, Sigloff said no to Ken's price, he'd come back later to accept it only to find that Ken had raced it again. "Here's an excerpt from the book because you'd never believe how crazy Ken's negotiation went otherwise." So they're sitting in his office, and the stock is selling for about $8 a share in the public market. We know you're a box-dan, you can't sell any stock, you have no liquidity. How about if we pay you $10 a share? No way, Ken said, the price is 12. Forget it. Wanting to leave him swimming alone with his personal barracuda, which was the lawyer that was sitting in the room, Ken's lawyer, he'd left and he went to the men's room. So barely two minutes later, this guy follows them in, and he says, "Okay, I agree, $12. No, you don't understand, Ken told them. You offered to buy it for $10, and 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 $12." That offer is off the table, that's gone. We had an offer and it had no deal. What? I suggested a price of $12 in my office, right? He nodded, acknowledging, and you declined. Well, that's it, I don't want to sell now. You must have some price. Okay, Ken said, $14. This went back and forth for months until Bernie's sick of being in the middle of all these negotiations told Ken, "Get, sigle off, off my back, sell him the stock." But Ken warned him, "Bernie, trust me, you don't really want me to sell him the stock because if I do, I'm signing your death warrant. You are a dead man." Bernie didn't believe it. Sigleoff doesn't know this business. I know this business. He needs me to run it, but Ken kept warning him, and Bernie insisted. So Ken finally agrees to a price of $25.50 a share, so Dalin now owns everything. In the spring of 1978, Bernie and Arthur show up for a corporate planning meeting at Dalin headquarters, and Sigleoff lawyers and stenographers met them. Bernie thought it was a strange mix for a planning meeting, and they were fired on the spot. And Sigleoff had already called the papers so that the story would run the next morning. He voided Bernie's contract, and even taunted him. The only problem for you is that I'm going to fight you with the company's money, and you're going to have to fight me with your own money, which you don't have. And Bernie had to admit that he was right, he had nothing. Bernie's first call after getting fired was to Ken. Ken, a terrible thing has happened. You told me I would get fired, and it happened. And he is trying to destroy my life. Ken's response surprised Bernie. This is the greatest news I have ever heard. Bernie was shocked. What's the matter with you, Ken? He didn't you hear what I just said? No, you don't understand Ken said. You've just been kicked in the ass with the Golden Horseshoe. This is the greatest opportunity. Now we can open up the story you talked about when we were in Houston. Bernie's mind slowly shifted. He remembered what he told Ken in Houston when they'd open a handy dance store there. Ken asked why they needed so many stores in one city, and Bernie said something. He said because someday somebody's going to open up a store that's going to make all of our stores obsolete. Bernie had already been imagining what would become the home depot. He was a massive store, unlike anything else seen in America. If handy dance has 15 stores in Houston, three of my new stores would make these obsolete. Ken reminded that now unemployed Bernie, Bernie, you have repeatedly told me how handy dance this whole industry is vulnerable. Too many small change, no national companies and prices are too high. Do you still believe that? Bernie responded yes. After his call with Ken, Bernie had to call one other person's sole price. And if you listen to our sole price episode, you've heard a little bit of this story. Bernie and Saul had been friends for years. Saul had recently found the price club after being ousted from Fedmark by its new German owners, sensing a kindred spirit Bernie went to see him. Saul knew immediately what was on Bernie's mind and walked him into a room piled floor to ceiling with documents. These are depositions. Saul explained, "This is what I've spent the last three years in my life going through. Bernie was stunned. If he sued handy-dand, this would be his future." Saul told him the lawsuit consumed everything, every thought, all of his energy, and that even if you won, you still lost. Only the attorneys made money. That's exactly what happened to Saul. He won his lawsuit, but gained nothing. Do you have money to pursue this Saul asked? No I really don't, Bernie replied. Are your attorneys at least representing you on a contingency basis? No, Bernie said. He was paying them $200 an hour regardless of what happened back in the 70s, too. Saul laid it out, Bernie. When I sold my company, I went right out and started the price club. I had the money, so we were able to do that AND sue these bastards. You don't have the money to waste. Then Saul asked the real question, "Bernie, do you think you're talented?" Yes, I think I am. "Do you think you have the ability to build something, to create something? Do you feel good about yourself?" Yes, I do. Then why don't you just tell Sigalof to go F himself and get on with your life? Pay your lawyers what you owe them 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 a founder, you know naming your startup takes forever. You finally land on the perfect name only to find out that Peter from Delaware got to the dot com first. So you're stuck with two bad options. 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They needed two million dollars and finding somebody willing to bet on two fired executives was proving a little bit harder than expected. Ken Langon, new one person with that kind of money, Ross Perot. Perot had built EDS into the Microsoft of its era through military precision and sheer will and Ken set up a meeting in Dallas. Perot listened to their story, the firing, the vision for massive warehouse stores that would destroy traditional hardware retail. And he liked it. They had a deal for two million dollars per row would own 70% of home depot. Bernie and Arthur would split 25% and Ken would get 5%. But the deal fell apart and it wasn't over equity or strategy, it died over a car. Bernie had been driving a four year old Cadillac lease through handy Dan to save money he wanted to buy at its depreciated value rather than lease a new one. And Perot asked what kind of car it was, it's a Cadillac, Bernie replied, "My people don't drive Cadillacs, my guys at EDS drive Chevrolet's." Bernie explained them out, his used Cadillac was actually cheaper than a new Chevrolet and besides he was a big guy, he needed a bigger car. But Perot repeated, "My people don't drive Cadillacs and Bernie tried one more time." And Perot repeated it a third time, "My people don't drive Cadillacs." One of the third repetition, Bernie saw his future clearly, he just escaped one autocratic boss and was now about to sign up for another. This wasn't about the car, it was about control, and Bernie knew that he wouldn't be a real partner, he'd just be an employee with equity. Bernie asked to step outside with Ken, and he said, "If this guy is going to be bothered about what kind of car I'm driving, how much aggravation are we going to have when we have to make a really big decision?" And Ken thought Bernie had lost his mind, they were walking away from $2 million dollars, they desperately needed over a Cadillac. I would rather starve to death, Bernie said, "No way." And so they walked away from Ross Perot. The lesson here is what we see time and time again with outliers, bad money is worse than no money. Do you remember when I interviewed Whole Foods founder John Mackie? He called bad money hitchhikers, bad money will pay for the gas as long as you do what they want, and go where they want to go, and slowly you lose yourself and your vision of your company. So walking away from Perot left Bernie and Arthur desperate, Ken Lengon went to work convincing 40 investors, many of whom who'd made money on handi-dans docked to put up $25,000 each. They were betting on Bernie and Arthur themselves more than a business plan. And then Bernie discovered Pat Farrow. Farrow was a legend in California home improvement, a wild man with an enormous afro who'd just opened a store called Homeco. It had everything Bernie dreamed of, merchandise piled to the ceiling, rock bottom prices, employees who literally ran to help customers. When Pat quit National Lumber to start Homeco, five managers and 50 employees followed him. That's how much loyalty this guy inspired. Everyone loved him. And Bernie saw Homeco he was simultaneously thrilled and devastated. He was thrilled because someone had proven his concept work, devastated because that someone wasn't him. Bernie and Arthur decided to buy Homeco and make Farrow their partner, but during diligence they discovered a disaster. Pat was a merchandising genius, but he didn't understand how to run a business. His gross margins weren't the 44% industry standard, they were 12%. He was losing money on every sale, staying alive only because he wasn't paying his fenders. The deal was dead, Homeco went bankrupt within months. But Bernie still wanted Pat Farrow. So two days after Homeco closed, Bernie called him and said, "I still want you to join Arthur and me in this new venture." And Pat was beside himself, he couldn't believe this, he'd lost everything. He'd failed his investors and even filed personal bankruptcy. And here Bernie was offering him a partnership. You're a great merchant, Bernie told him you have a great concept, you just don't have us, you need us and we need you. And they also needed locations, but they couldn't afford to build anything, so they had to find massive spaces to lease. So Bernie wanted them near an airport hub for easy travel and in a city big enough to attract the talent they need at every level. So even though they could barely scrape together money for a single store, Bernie was already planning for a thousand. His goal was to create a dominant national chain. So they chose Atlanta. It fit all the criteria and Arthur knew the market really well. JC Penney was looking to sublease four massive department stores that were failing. The negotiations went great until Penney dropped a bomb. They had to take all four locations or none. And this was insane. They barely had any money for two stores let alone four. They hadn't proven the concept at all, but the deal was too good to pass up. They took it and went all in. They'd either open four stores and succeed spectacularly or fail. So now they had the partners. They had a concept and locations, but what they didn't have now was working capital. Their seed money could cover salaries and expenses for a couple of years, but not inventory or the daily cash flow needed to operate for massive stores. So can assure them it be fine. He knew banks everywhere, however, every single bank turned them down. Then came another near miss with the wrong partner, a Boston venture capitalist agreed to invest three million dollars. Finally, they thought, but as Bernie was driving the investor to the airport, after supposedly sealing the deal, but not signing, the man revealed his conditions, eliminate all company cars, cut manager salaries by 10% and then the kicker, no company paid healthcare. Four employees. Let me read to you what Bernie wrote in the book because I don't want to mess this up a bit at this moment. The blood rose up in my eyes. I swerved and pulled the car onto the shoulder of the highway. My gut told me this was a terrible mistake and my premonition so far had been right. Get out of the car I said, get out of the goddamn car. The man just looked at me. He thought I was crazy. We were in the middle of nowhere, cars and trucks were zipping by. 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. You can walk to the airport for all I care. Bernie reflected later, I am not a loose cannon. My mind was an overdrive, weighing the pros and cons. I put everybody's careers and jeopardy by rejecting him that way. I realized I was going to get the money we needed, but I just couldn't live with this guy. This company didn't blossom from miracles. It came from our instincts knowing whom to do business with and whom to avoid. For this second time, Bernie rejected desperately needed money because the partner was wrong. If they were going to succeed, it would be by taking care of their people, not cutting their health insurance to please some investor. Finally, desperately Bernie called Rip Fleming at Security Pacific Bank in LA. Rip had been their banker at Handy Dan and he knew Bernie and Arthur. He trusted them and he'd gone to bat for them before, but even Rip said no. The loan was too risky. It was too unconventional for his bank to consider. But Bernie refused to accept no for an answer, so he threatened to camp out in Rip's office with a sleeping bag until he said yes. More importantly, he reminded Rip what was at stake. He was not just a business opportunity, but the lives and careers of people who had believed in their dream. Rip fought for them inside Security Pacific. He got rejected three times by loan officers who saw nothing but numbers. Finally, Rip had enough. He stormed into his CEO's office, slammed the door, and threw his resignation letter on the desk. You don't need a banker. He told the CEO you need a computer, hire some young kid to come in here and do my job. I buy people. Bernie Marcus and Arthur Blank are good people and you have turned them and me down three times. You obviously don't need me here anymore. And the CEO to his credit realized at that moment that losing Rip Fleming meant losing $400 million in accounts. So suddenly this $3.5 million loan was a $400 million decision. So he had no choice. He tore up the resignation and called the loan officers and told them to make the loan, whether you like it or not. Rip never told Bernie what he did for him. In fact, Bernie didn't find this out until Rip's retirement party when he sat next to the CEO when he heard the story he broke down into tears. This man had risked his career for them and never said a word. The same thing happened to John Mackey at Whole Foods, isn't that crazy? There's one more absurdity in this story, full of them. Once they had financing for the locations in place, they still needed a name for the stores. The best idea they had come up with was MB's warehouse, which nobody liked. So they hired a fancy consultant who came back with bad Bernie's bill to all, complete with a cartoon mascot in a prison uniform with the tagline they locked me up because I sold it such low prices. Rip Fleming, their banker, savior diplomatically suggested they find another name. Eventually, an investor's wife driving home from a meeting and passing a railroad themed restaurant scribbled down a list of names, one of them combined home with DEPA. It wasn't love at first sight, but it sure beat bad Bernie's. As Bernie later reflected, the name is not the most important thing. It's the entity that creates value in the name. On opening day, they faced disaster, but it turned out to be a bonanza. They couldn't afford a major television commercial campaign. So the primary ad announcing the grand opening of Home Depot on June 22nd, 1979 was going to run the day before in the Atlanta Journal Constitution. But the day before opening when Bernie picked up his paper in his driveway and started to flip through to find their massive two-page spread, it wasn't there. So Bernie called the editor. His voice was breaking. You just killed us. You killed us. We're trying to get this company off the ground and you single, handedly put us out of business. The editor was contrite. He felt truly awful about the mistake, but that didn't help them on their opening weekend. They were broke. Their entire ad budget had gone to that opening spread. They had no margin for error. Opening day without advertising was like throwing a party without telling anyone. As part of their opening day strategy, they sent their kids and wives into the parking lot of all four stores and onto the street to hand out $701 bills to try to lure customers in. But things were so bad without the newspaper ad that literally couldn't give the dollar bills away. The ad finally ran on opening day itself and the newspaper was mortified by their error. They gave Home Depot the back page of their news sections for weeks. It was prime real estate they never could have afford it. So out of something bad came something really good. But that wasn't the only crisis on opening day. Pat Farah called Bernie before sunrise on an opening day. We have another disaster on our hands. You're going to go crazy when you see it. Mimi right away. Pat arrived early for the employee rally and found the store sparkling cleaned. The concrete floors had been waxed until they gleamed. What the hell happened, Pat demanded of the store managers who screwed up the store. New managers stood there beaming with pride. They brought in cleaning crews overnight as a surprise warning everything perfect for the grand opening. You are out of your mind, Pat screamed, get the forklifts, get the pallet jacks. Bernie Pat and anyone they could grab spent the remaining time before opening racing forklifts around the store deliberately skidding around corners scuffing and scratching those beautiful floors to make them look like a working warehouse again. The home depot wasn't supposed to be a supermarket or a department store. These were action places. The idea was for them to look shopped. It's why they didn't at first put in a rear entrance for lumber buyers. It's why they had all contractors and professionals go to the front registers right beside the do it yourself customers. That created action. We wanted the big stuff going at the front and loaded in the parking lot so that everyone saw it. On top of that, the do it yourself or saw that the contractor buying two units of sheetrock paid the same price as they did. There was no secret back door discount for contractors. We were priced right for everyone, not just a select group. Another important concept for us inside the store was that the merchandise not be constantly fronted. We didn't want products pushed to the front edge of the shelves. If everything is perfectly lined up that tells you it's not selling, there's no action. Besides, it takes too much energy to maintain the facade of fronting everything. We front the products once, but never again. That way we can see what is selling and our customers feel like there's action in the aisles. Facing the product is another practice. We don't believe it. Sears and true value face their product. Meaning they pay employees to go through the store and turn the labels out facing customers. It looks good, but it's tremendously expensive. We find it gets in the way of offering product at the lowest possible price. In the early days when customers were so scarce that Bernie could count them individually, he took every empty handed exit personally. He would literally run into the parking lot after people. What is it that we don't carry that you need while I didn't you buy something? He'd call after them. Usually the answer was simple. I didn't find what I came in for. Bernie's response never changed. Oh my gosh, I'm 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, I will deliver it to you personally. Then he would drive to a competitor with the product, buy it himself, peel off the price sticker and personally deliver it to the customer's home. Every product a customer wanted, they didn't have Bernie noted down and ordered. So within weeks it would be on Home Depot shelf. But more importantly, he was building customer trust one person at a time. This became everything at Home Depot. They do whatever it took to satisfy customers. And it wasn't just Bernie, everyone caught on. Here's one early example, a woman came in looking for a chandelier. So an associate helped her pick one out, but when she got it installed at home, she realized it was too small for her room. So she came back embarrassed asking for a bigger one, even though the first one was exactly the one she had requested. What did you do with the other one, the associate asked, oh I have it at home, I'll bring it back. I don't know how to take it down without being electrocuted, she said. The associate didn't hesitate. Tell me where you live on my way home. I will put the new one up for you, take the old one down and will give you an adjustment. Six months later, that same woman remodeled all 200 rental units she owned. Every single thing, toilet sinks, bathtubs, carpeting chandeliers, she bought from Home Depot. So this $75 chandelier exchange turned into hundreds of thousands of dollars. And here's another early example. Deleting department head who had 40 regular customers all wanting the same new black end acres, snake laid, but his store was sold out, so he called to every other Home Depot. In the district, asking if he could get some of their inventory, every one of them said, no, despite having inventory, they said they needed what they had. So he drove to the store, spot 40 lights on his own credit card, brought them back to his store, got himself a refund at the register and then walked to the other side of the counter, picked up all 40 lights and called each customer saying, I got your lights. The lesson here is pretty clear. Customer service isn't a department, it's a philosophy. Out of this obsession, the Home Depot developed what they call the customer's bill of rights. These were, they believe, the only things a customer wanted to pay for at the Home Depot. The right assortment, the right quantities, the right price, associates on the sales floor, who take care of customers, associates who have been trained properly in terms of product knowledge and the expectation that our associates will be there when the customers need them. Together, those six things represented excellent customer service, everything else Bernie argued was a waste. Customers didn't want to pay for wider aisles or brighter lights, they didn't want fancy displays or carpet of floors, they wanted help, knowledge, fair prices, and availability. That's it, this hasn't changed. This was revolutionary at the time, though in 1979, and it kind of still is. Bernie wanted the Home Depot to be the first truly national home improvement brand in America. There were a lot of successful territory chains and they were making good money running solid businesses, but nobody thought bigger than that, except for Bernie. He saw what Samuel and I had done with Walmart, taking a concept and spreading it coast-to-coast. He saw what his friend, Saul Price, was doing with PriceClub. He knew home improvement was ripe for the same transformation, and can believe him, Arthur believed him, Pat believed him, and more importantly, they convinced their vendors, bankers, and early investors to believe them too. They'd even convinced a few customers in Atlanta. Now they had to convince the rest of America. The path to becoming a household name started as most things did at the Home Depot, with doing something nobody expected, and learning from mistakes along the way. In 1980, the Home Depot had a problem. They'd hired an expensive California ad agency, and they were producing exactly nothing of value, so they fired them and hired a local Atlanta guy named Mel Finkel, who actually understood their customers. And Finkel had an idea, you ought to have Ludlow Porch do some commercials. Porch was a local radio personality in Atlanta. All right, Bernie told Finkel, let's try him. Two days later, Finkel played them the first Ludlow Porch commercial. Folks, I've just been down to a new place on Highway 41, the Home Depot. I walked around there, and they had this, and that, I tell you, if these stores were any bigger, we'd be paying Alabama sales tax. Better bring a sandwich too, because you're going to be walking around a while. They loved every second of it. How much does he want for these commercials, Bernie asked? 150, Finkel said, 150,000? Bernie was a gas. No way. They aren't that good. No Bernie Finkel said $150. Someone else said, well, then they can't be any good. And then Pat Farrell laughed, and he said, hey guys, what's the price that makes them good? Porch never spoke to Home Depot management, and Bernie never knew what he would say next, but he trusted him to say it right. His voice became synonymous with the Home Depot in Atlanta. To expand beyond Atlanta, however, they needed someone with a broader appeal than a regional radio guy. They found him in their old nemesis, Handy Dan. I'll Carol, the super handyman, had become Handy Dan's spokesperson after Bernie and Arthur were fired. He was nationally known for his newspaper and radio features, but he never heard of the Home Depot and turned Bernie down flat. But in what's becoming a pattern now, Bernie was not taking no for an answer. Look, Bernie tried again. I know you're coming to Atlanta for a home show. Let me at least pick you up your hotel and take you over to one of the Home Depot stores. If you don't think it's the greatest thing in business, I will never bother you again. Hoping to get Bernie off his back, Carol agreed. On the drive, Bernie painted a picture so unbelievable that Carol wondered what he'd gotten himself into. But this store was every bit as massive and overstocked as Bernie described. What really struck Carol was how Bernie knew every single associate by name, and they all knew him. Several times, Bernie got distracted while they were walking around asking you about this one's kids or that one's wife or a recent operation. That store visit changed everything. Carol became the Home Depot's spokesperson for the next eight years. His unexpected stock options made him incredibly wealthy. Home Depot was addicted to sales like a drug, though. Sales rose and fell with the publication of their bi-weekly catalog. Customers would wait to see what was on sale, then flood the store. Sales would spike for a day or two and then dribble down until the next catalog. This was in the days before UPC codes and computerized barcoding when every item had to be manually priced and stickered. When products went on sale and our catalog, it meant blurry eyed associates, red tagged, the items the night before. When the sale was over, if anything was left, they had to remove those red stickers and reprice the items by hand. It was a labor-intensive and error prone process. It was exhausting, inefficient, and all for a brief 25% bump in sales. Every day low pricing of the Home Depot originated with Salt Price and Sam Walton. Wherever Walton traveled, he would visit a Home Depot. When Bernie visited Wal-Mart's headquarters to learn about their employee stock option plan, Walton had something else on his mind. Why do you continue to run sales, Walton asks? Don't you run out of merchandise? Yeah, Bernie said we run out of merchandise all the time. In fact, we have to hold back stuff in the back room because otherwise, people will buy all the merchandise before our sale catalogs hit. Why don't you go to everyday low prices like we have? Walton and his partner, David Glass, explained how it worked on every level, concluding that if you take everyday low prices as a marketing philosophy and you list the pros and cons, you would never do anything other than everyday low prices. People who come out of a different background resistive. Manufacturers could plan production, stores stayed in stock. Employees weren't constantly repricing. Customers trusted that they were getting good deals on any day of the week. We saw the logic immediately, but selling it internally was brutal. Merchants love the sale. They lived for the excitement of creating new promotions to lower customers. But Bernie understood something deeper. Sales were actually a weakness. Everyday low prices meant more consistent sales overall. Minion easier to stand stock. Whatever the price we would previously have discounted an item, that's the price we should be selling in at all the time. The switch meant permanently marking everything down, which was a massive change to their piano. They were now public with high PE ratio, so one bad quarter could tank their stock. But Bernie and Arthur pushed forward. There was a reason most retailers can't and didn't do it. They didn't have the fortitude or the vision to make it happen. Home Depot was spending over 3% of gross sales on advertising while Walmart was only spending 1.5%. There was a lot of money to be saved, and it took over a year to implement the whole organization fighting them daily. When the sales curve flattened everyone panicked. Where were the spikes? But the new strategy actually raised sales across the board. They just couldn't see it as obviously because they were addicted to the drama of the spike. In 1981, an artist created a cartoon character who became their mascot, Homer. He wore plaid shirts and jeans, the typical DIYer, doing jobs around his house, and soon he was wearing a Home Depot hat and apron. Adding personality to their ads, the way Mickey Mouse did for Disney. But here's what made the Home Depot different from every other retailer. They discovered they didn't need Homer. They had something better, their own people. By the 90s, Home Depot's TV commercials started featuring their 160,000 associates in orange aprons. There were no scripts and no rehearsal. They just turned the camera on and asked an associate a question about paint, plumbing, or power tools. The passion was real, the knowledge was deep and nobody could sell the store better than the people who lived it every day. So those orange aprons became more iconic than any mascot could ever be. Bernie had discovered something crucial. You can't give authenticity to an actor. The best spokesperson for your company are the people who actually believe in what you're building. Therefore, while his competitors hired celebrities, Home Depot turned its floor workers into stars. And then there was the 1996 Summer Olympics in Atlanta where Home Depot's coming out party as a national brand happened. Atlanta was their hometown. They had more associates there than anywhere else and Home Depot had become as important to Atlanta as Coca-Cola or Delta or CNN. Sponsoring their city's Olympics was their debutante ball. They spent millions on NBC television and brought thousands of associates from Arizona and New Hampshire to Atlanta to participate. When you become one of the official Olympic sponsors, you get packages, including event tickets and accommodations. And Home Depot had 2,000 packages, and a half of them went to vendor partners. And the other half went to everyday associates. They were the only sponsor who gave such a high percentage of hospitality packages to their own employees. The associates they invited had been recognized for outstanding customer service. And in many cases, they were the people who'd never loved their hometown before. They'd never been on a plane. The vast majority were hourly employees and not managers or executives. The company was sending cashiers and floor workers on the trip of a lifetime. The message was clear. The people in the orange aprons weren't just employees. They were the company. As the Home Depot grew from four stores to hundreds and then approached a thousand burning face to question that every successful founder faces. How do you maintain a culture as you scale? And their answer was simple but required relentless execution. They never left the stores. Bernie and Arthur walked the floors. They talked to associates and customers. They talked classes and they showed up at store openings. They made themselves accessible to everyone. Bernie developed a test that revealed everything about a store's health to him. When he walked in unannounced, he timed how long it took for an associate to recognize him. Not because of ego, but because of what it revealed about the store. If he could spend 45 minutes in a store without anyone recognizing him, he knew they had a serious problem. Nobody was making eye contact. And if nobody was looking at his face, they weren't looking at a customer's faces either. But if someone said, "Hey, aren't you Bernie Marcus within five seconds?" He knew that store was watching, engaging, and connecting. Culture doesn't scale through memos or policies. It scales through human connection, repeated endlessly. And by the late 1990s, Home Depot had become more than just a home improvement retailer. When people considered taking on a home project, they thought of Home Depot first. The orange apron had become as recognizable as a Starbucks cup or a Nike swoosh. And they'd done it without sacrificing their original values, low prices, wide selection, and extraordinary customer service remained their north star. Bernie proved that culture isn't what you say it's what you repeatedly do. And what he did was show up over and over until showing up became the culture itself. By the mid-1990s, the Home Depot had become one of America's most admired companies. Bernie Marcus knew something most successful founders forget the higher you climb. The more dangerous it becomes to surround yourself with people who only tell you what you want to hear. You need to find people who are going to speak the truth. I had one good ability, Bernie said, "That was to surround myself with people who were great. If I surrounded myself with people who were smarter than I was, they would make me look even better." But it wasn't just about hiring smart people. It was about creating an environment where disagreement was encouraged and even expected. We fought with one another on things. If you surround yourself with people who agree with you all day, you're going to be in deep, deep trouble. This philosophy extended throughout Home Depot, store managers' challenge corporate decisions associates solve problems on the spot, even if it meant bending the rules. The message was clear, your job isn't to make executives comfortable, it's to make customers successful. In 1997, Bernie Marcus stepped down as the CEO after 19 years at the helm. Arthur Blank took over with Bernie staying on his chairman. The company they'd built now had over 500 stores and 24 billion in annual sales. And Bernie never stopped walking the floor. Even in his 60s and 70s, Bernie would show up unannounced at stores across the country, put on an orange apron and help customers. He'd still test how long it took for an associate to recognize him. In 2000, the board made a decision that nearly destroyed everything. They hired Robert and Adele from General Electric to be their new CEO. Arthur Blank stepped aside. It was time they thought for a professional management. Nardelli brought military discipline and efficiency. He wasn't interested in wearing orange aprons or walking the floor, he would have numbers not culture. Under his leadership profit margins improved, they expanded past 1000 stores. But something essential died. Customer service scores plummeted, employee morale cratered. The orange-blooded culture evaporated, associates who'd been there for decades started leaving. The stores became what they'd always fought against, just another big box retailer. The stock price which had rocketed for 20 years went flat. By 2007, even Nardelli's defenders couldn't ignore the damage. He resigned under pressure with a $210 million severance package that sparked public outrage. The board turned to Frank Blake, who did something remarkable. He called Bernie and Arthur and asked them to teach him how to rebuild what they created. Blake invested in training and powered associates again and brought back customer service over efficiency. Slowly the orange blood began to flow again. The Nardelli years proved Bernie's point, culture takes decades to build and can be destroyed in years. But if the foundation was real, you can resurrect it. Bernie became a billionaire many times over and so too did Arthur and Ken Pat if you're wondering. He didn't quite reach the billionaire status but he was pretty close. Importantly, thousands of regular home depot associates became millionaires through stock options, the lumber workers, the cashiers who joined early. That was what Bernie was most proud of. His mother had given his ice cream money away to charity, teaching him that the more you give the more you get. And Bernie would go on to give away more than $2 billion to charity. But Bernie's philosophy went deeper than charity. He believed every customer was on loan. They'd choose you today but could choose someone else tomorrow. And you have to earn their trust every single day with every single interaction through every single associate. That's why he chased customers into parking lots. That's why associates drove to competitors to buy products they'd run out of. Customers aren't transactions, the relationships and the only relationship that survives long term is the one where both parties win. On November 4th, 2024, Bernie Marcus passed away at 95. The home depot announced it is to us he was simply Bernie. By his death, the home depot had 2,300 stores across three countries, 150 billion in annual revenue and 460,000 employees. More importantly, it had fundamentally changed American culture. In 1981, Bernie asked the Rotary Club how many considered themselves do it yourselfers and 5% of people raised their hands. But in 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. Okay, let's get into some of the lessons I took away from this episode. One revenge costs everything but pays nothing. Bernie could have spent years suing handy-dance. All price showed him a room stacked full of depositions. This is what I've spent 3 years of my life doing. Bernie drives home and decides he's going to build and not sue. 18 months later, home depot opens. Most people waste their best years trying to prove how right they were. Winners focus on the outcome. To bad money is worse than no money. Ross Perot offered 2 million but it wasn't the right fit. A Boston investor offered 3 million but wants to cut employee health insurance. Bernie makes him get out of the car. On the side of the highway, I'd rather starve to death, he says. The wrong partner doesn't just slow you down, they kill everything you're trying to build. 3 Obsess over the customer. When a business stops serving customers and starts serving itself, it dies. Home depot associates would drive to competitors to buy out of stock items. Every customer is on loan, Bernie says. The moment you think they're yours, you've already lost them. 4. Genius in one area means disaster in another. Pat Farrah was a merchandising genius who was going bankrupt because he was a terrible business person. Burning wanted him to come in as one of the original founders to Home Depot though. You're a great merchant, you're a great concept, you just don't have us. You don't need perfect people, you need people who's strengths cover each other's disasters. 5. Sometimes you just have to burn the boats. Home Depot couldn't afford two stores when JC Penning demanded they take 4 or none. Most people think going slowly reduces risk but sometimes you need to go all in. 6. This does not equal value. Bernie fired the expensive California agency producing nothing and charging a lot. Instead, he hired a local radio guy, Ludlow Porch, for 150 per ad. Porch never even talks to management, he just tells stories that locals understand. Your best marketing comes from people who genuinely get your customers, not consultants with expense accounts. 8. Follow Your Instincts. This company didn't blossom from miracles, Bernie says, it came from our instincts, knowing whom to do business with and whom to avoid. Most people override their gut with logic, the best trust what they can't explain. 9. Go Positive and Go First. When you give customers exceptional customer service, they come back and bring friends. When you give communities support, they embrace your business. When you give associates respect and training, they become your best salespeople. 10. Sweat. The details. In the early days when customers left empty handed, Bernie took it personally. He'd literally run after them in the parking lot, asking them why they didn't buy anything. Discovering it was because of a product that didn't carry. He'd drive to a competitor by the product himself, peel off the price sticker and deliver it to the customer's home. Was this scalable? No. Was it profitable? Not in that single transaction. But Bernie learned what products they should carry and built a customer for life. 11. Higher overqualified people. They never wanted to start low and grow their ability to cope. You have a responsibility to share holders and to the other folks inside your company. You now have people in critical positions who have the horsepower to do the job. Higher people smarter than you. Why have I been successful in my whole life? Because I've always surrounded myself with people who are better than I am. But you can't hire smart people and let their potential just go to waste. You need to constantly challenge them. Give them responsibility and authority. They can and should surpass you. Bernie writes, "Some people are afraid to hire smarter people. They're insecure. That person is going to take my job, baloney, they're going to help you up." 12. Decentralize and Empower. One of the big advantages that we have over most of our competitors is being decentralized. It allows us to be close to the customers and access the best knowledge in the field. That way, we can do not only what is right for the stores, but also respond to the marketplace and support the associates in the store. 13. The one-man show doesn't make it. Pat was the consummate merchant and when he saw something wrong, he'd work around the clock to make it right. But he didn't understand that as the company got bigger, he had to become more of a teacher than a doer. Pat would rather do it himself and get the personal satisfaction of it being done than wait and get the satisfaction of training other people to do it. When you know how to do something and you don't share that knowledge, it's a waste. 14. We need to kill bureaucracy, I'm just going to read you an excerpt from Bernie here. If anything ever kills the personality of this company, it will be creeping bureaucracy. It is always there, unseen, and it's always trying to cover us like a fungus. Every bureaucrat who sends out a piece of paper to our stores that is not necessary is part of that. We fight the bureaucratic urge by giving our store managers the freedom. Some might call it a very long leash and the confidence in themselves that they would never have some place else. At the same time, we are our own worst critic. 15. Never stop. Bernie was a billionaire CEO. He still showed up at stores, unannounced, put on an orange apron and helped customers load lumber well into his 70s and 80s. Thank you for listening and learning with me. I'll see you next week.