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Culture, Enculturation and the Cult of Home Depot

This article was originally published on MastersInvest.com.


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Have you heard the story about the two guys who were fired from their jobs running a US hardware chain, who then went on to build a hardware powerhouse that delivered investor returns that made the S&P500 and even Buffett’s Berkshire Hathaway look pedestrian? That’s right, I’m talking about Home Depot, which since inception has been an astounding compounding machine

Like Buffett himself, Home Depot’s co-founders, Bernie Marcus and Arthur Blank, have shared the secrets to their success in the 1999 book ‘Built from Scratch – How a Couple of Regular Guys Grew the Home Depot from Nothing to $30b‘. Home Depot turned the hardware industry upside down. They introduced big box stores which utilised high volume turnover and direct product sourcing to offer unbeatable prices, they encultured and empowered their staff to harvest customer relationships and they grew the market for do-it-yourselfers by teaching their customers the needed skills to save money. Fast forward to today and Home Depot’s market capitalisation is an astonishing $229b!

The history of retailing is filled with once-great companies that disappeared off the face of the earth. It’s one of the toughest industries to survive in, let alone prosper, given the minimal barriers to entry, changing customers demands and ruthless competition.

Retailing is a tough, tough business, partly because your competitors are always attempting and very frequently successfully attempting to copy anything you do that’s working. And so the world keeps moving. It’s hard to establish a permanent moat that your competitor can’t cross.” Warren Buffett

In light of the above, it’s should come as no surprise that the defining characteristic underpinning Home Depot’s success is Culture. In recent posts we’ve learnt the importance of culture and you’ll see how Marcus and Blank have leveraged it to phenomenal success. 

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Buffett has long advised studying great businesses as case studies to improve one’s investment skills.  ‘Built from Scratch’ is one of the most enlightening business books I’ve had the pleasure to read. It tells the tale of what the two founders learned about customers, associates, competitors, growing a business, building a brand, and many other topics everyone in business needs to know. You won’t find anything in the way of margin guidance, inventory turns, staffing ratios or comparable store sales; all that stuff that tends to fill analyst models. This is all qualitative stuff. 

Below you’ll find some some of my favourite passages from the book, nuggets of wisdom that can help you frame the questions you ask and worthwhile observations in your own quest to find compounding machines

Push Boundaries

“We were always pushing boundaries beyond where our industry’s conventional wisdom suggested we could go.”

“No one believed we could do it, and very few people trusted our judgement.”

Culture

Ten years ago, The Home Depot advertised stores that were bigger than two and a half football fields. That was a point of difference. Today, who isn’t bigger than two and a half football fields? We also said we carried more than 30,000 items. That was a point of difference. Well, who doesn’t have more than 30,000 items today? And who doesn’t have low-price guarantee? If all those things have become a commodity, why is The Home Depot still so successful? It is the culture of the people.

The numbers are important as a measure of our success. But we’ve attained them because of a culture that is agile and flexible enough to change direction as quickly as events demand it.”

“You can copy a Black & Decker drill and sell it for the same price that we do, but you can’t copy The Home Depot culture. We think we’re very difficult to emulate without believing in the same values that we do.”

“Another important issue for us in considering an acquisition is culture. If ours is not akin to what we’re acquiring, it represents a major problem. Is what they believe in similar to what we believe in? If not, we’re going to have to work very hard to make it fit, and it may not be worth it. That’s why we generally prefer to build from within.”

 Home Depot Share Price vs S&P500 and Berkshire Hathaway.     Source: Bloomberg

Home Depot Share Price vs S&P500 and Berkshire Hathaway.     Source: Bloomberg

Competitors

“The Home Depot is far ahead of Lowe’s in every major measurement of success. We produce on average about 40 percent more volume out of our big boxes than they do at a 40 percent greater rate of profitability.”

“When you only copy somebody and don’t really understand why they’re doing what they’re doing, you’re never going to be as good as the original. That’s Lowe’s problem vis-a-vis The Home Depot. They copy almost everything we do, from store design to marketing. But the reason they still only achieve about 60 percent of our volume is that they don’t understand the essence of what we do: take care of the customers.”

“The industry knew we were edging closer and closer to them but they never prepared for us. They all knew that we would eventually present a direct threat, but they couldn’t think in terms other than the way they had for decades.”

“The way we did business was hard for old-timers to understand. They couldn’t understand sales volume and velocity as opposed to gross margin. Their key was selling less at a higher price; ours was selling more at a lower price. They couldn’t understand our dynamics or the numbers.”

“The fact we were able to design our company on a clean sheet of paper and weren’t hampered by years of tradition and years of people being committed to a certain sort of business form played to our advantage with both customers and the industry.”

The Customer

“Whatever it takes, serve the customer.”

“Nobody could compete with us on price.”

“Never, ever take the customer for granted.”

“The key is not to make the sale. The key is to cultivate the customer.”

“We believe in doing more than customer service. We call it customer cultivation. If you cultivate it will bear more fruit.”

“Every business is there to please the customer.”

“One of our values: caring for the customer. Care for them today and they’ll be back tomorrow.

“We don’t just develop an intellectual relationship with our customers and associates. There also needs to be a tight emotional bond. At the end of the day, we’re in the people business. And people need bonds with each other.”

“The reason we have our business is because customers trust us.”

“We did not for one minute take the customers coming own our store for granted. We really wanted them back, and our entire service culture developed from that. It wasn’t some lofty idea written by out-of-town consultants in a policy book nobody read. It was necessary.”

“The job of the people working in the stores [is] to do whatever it takes to make customers happy.”

“We are in the business not to destroy a competitor but to serve the customer. If, as a result of that, we end up hurting a competitor, that is fine, but it can’t be our focus. Our focus has to be on the customer. The truth of the matter is, we have to win the customer. We don’t have to beat the competitor, we have to win the customer.”

“The way to win the hearts and minds of customers is with merchandise, price comparisons, and sufficient stock. But that is the mechanical part of the business. We win their hearts and their minds with our people.”

“If I ever saw an associate point a customer toward what he or she needed three aisles over, I would threaten to bite that associate’s finger. You won’t even see aisle numbers in our stores. There is not a retailer on the face of the globe with 1,000,000 square foot stores other than Home Depot without some aisle numbers. Why? Well, if we had aisle numbers, when a customer asks, “Do you know where I can find this widget?” it would be very easy for our associates to point and say, “aisle eight.” If there are no aisle numbers, the employee has to say, “Let’s take a walk and we’ll find it together.””

“Our people were already instructing weekend warriors in an informal way. Putting on How-To-Clinics became a way of formalising the teaching and making it available to all of our customers and further cultivating their interest in do-it-yourself home improvement. We saw people who were all thumbs before they came into The Home Depot go on to do room additions or build their own homes. That’s a big part of how we created demand that never existed before.”

“We gave customers the knowledge to do it themselves at the right price. Today, you could install a Mills Pride kitchen yourself for $3,000 that would have cost you $25,000 and the services of a pro twenty years ago.”

“Home Depot is and always will be evolving to find new and better or additional ways to serve our customers.”

People

“Why have I been successful my whole life? Because I’ve always surrounded myself with people who are better than I am.”

“The company didn’t blossom from miracles. It came from our instincts, knowing whom to do business with and whom to avoid.”

“The single most important reason for the Home Depot’s success is our effort to take care of associates.”

“You can teach anyone about a drill, but you can’t teach people how to smile and be kind to other people.”

“We learned that love and compassion do a hell of a lot more than just buying people.”

“Hire the best people. Payroll is not an expense to us; it’s an investment.” 

“The people at the stores are the most important after customers – because they interface with the customer, and since Bernie and I really couldn’t begin to tell you how to wire a house, we are the least important when it comes to satisfying a customer.”

“Everyone who works at the Home Depot is an associate of Bernie and me.”

“[Sales Associates] are the heroes of the company, the ones who create a cult among our customers. We’re trying to make our customers bleed orange.”

“We value what the salesperson on the store floor says just as much – sometimes more – than what a district manager says, if they’re right. That’s because the salesperson touches the customer more.”

“We also put a larger percentage of our overall sales back into store payroll, putting more people on the sales floor than anyone else.”

“We’re only as good as our people – especially the men and women working in our stores. If the front line isn’t absolutely committed to the cause we can’t win.”

“Setting the stores gives our people ownership. We don’t own these stores; they do.

“We pay people what they are worth. That is the cornerstone of the culture of the company.”

“When it comes to people, you must look past the numbers, past the resumes, and look at their heart and soul. And you must treat people as you would want to be treated.”

“One of our values is caring for our people. If we expect them to take care of our customers, we’ve got to take care of our associates.” 

“Our theory has always been that if we were going to get rich, we wanted our associates to get rich with us. If we were going to benefit, they were going to benefit as well. That has always been a part of our philosophy.”

“Everyone has a stake in the company that goes beyond earning a day’s wage. Associates have a real vested interest in cultivating customers and building lifelong relationships with them.”

“Our associate turnover is very low for the home improvement industry.”

“Our competitive advantage is having knowledgeable salespeople.”

“As good as we are on price, that is never the most important decision. More important is product and project knowledge.”

“Our Atlanta Training Center teaches new and existing store managers and district managers how and why our culture, philosophy and leadership approach works.”

“What makes us so different from anyone else in our industry is that we take the inverted management structure so seriously.”

“Bernie and I believe it’s all about trust. With the right value system and the right knowledge to do their job, people can be trusted to make the right decisions. If you can operate with that kind of trust, you don’t have to micromanage. And people will do more good for the company than anyone could ever dictate.”

“There is a cultural adjustment that must take place for anyone to be valuable to this company.”

Head Office

“The sign at the front entrance of our main offices in Atlanta says “Store Support Center” Not “World Headquarters.” It is not a corporate ivory tower. It is truly the store support center. We want everybody in this building to know that we are here to support the stores.” 

“Everyone’s career depends on how the associates in the stores function. If the people in the Store Support Centre or divisional offices don’t feel like they are selling a product to customers in the stores, then they are part of a bureaucracy, and they will stymie the stories, not help them.”

“We don’t care what your job is. What have you done to sell a product to our customers? What have you done to bring a customer into our stores? What have you done to make a manufacturer want to sell to our company? You have a role, and if you don’t think you do, you don’t belong here. If you don’t know what that role is, you need to find out.”

Decentralisation and Empowerment

“Our store managers and their assistant managers have more operating and decision-making leeway than in any other retail chains in America. We want them to roam and test parameters to see how far they can move out on the fringe of the property.”

“One of our big advantages that we have over most of our competitors is being decentralised. 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 stores.”

“We insist, we demand that our people take risks, and then take responsibility for those risks. “It is your business, your division, your market, your store, your aisle, and your customer. It is not a Home Depot customer, it is your customer.””

“Don’t wait for some Home Depot bureaucrat to give you an answer or fix your problem. And don’t blame somebody else. If you have something that needs to be fixed, fix it.”

“We expect the associates to run their store like it is their own business, tailoring a great deal of the product selection to local needs and buying local products.”

“Our people are shopkeepers. As long as they run their business well or reasonable well, we don’t bother them.”

“Our culture is about making sure people understand that they are empowered to do what is right. We worry about the other stuff; just do what is right now.”

Values

“Our values are the magic of Home Depot. By consistently and emphatically teaching and enculturating them through the ranks of managers and on to the people working in the stores, we know that each and every one of these 160,000 folks will take care of the customer and each other. The rest takes care of itself.”

“If a company’s values are nothing more than words hanging in the lobby of a corporate headquarters for visitors to see, they’re a fantasy, dead on arrival.

“A sure way to grow the company is to clearly state our values and install them in our associates. Values are beliefs they do not change over time; they guide our decisions and actions. They are the principles, beliefs, and standards own our company. We call this process of enculturation ‘bleeding orange.'”

“Our values empower our people to be their best. If we can implant a value system that lets them apply their basic goodness and ingenuity to the Home Depot and its customers, that’s all we need to succeed.”

“These values are our company. They are out belief system, and we believe in them as much today as when the first Home Depot stores opened in June 1979. Without them, we’re no different than our competition. Our competitors could copy them just as they’ve copied our stores, products, and merchandising ideas. But they would have to believe in the ideas underlying these values to make them effective, and that’s a tough step to take.”

“We believe there is no perfect, ongoing formula, as long as your values remain constant.”

Transparency

“Managers can ask any kind of question no matter how blunt, invasive, or even offensive it might be. These meetings are intended to be naked, honest exchanges of information and opinions. Bernie insists on it – no pussyfooting around.

A Vision

“A great company goes beyond making money. A great company has a mission, a vision, a dream.”

“You must stick to a vision and turn people into believers.

Setting examples

“If an associate picked something up off the floor, it was because we did it first. We set the example. Few people ever felt that they were working for somebody.”

“Let me go back to the essence of what the company is: Role-modelling. Every manager and every district manager in this company is a trainer and a teacher.”

Change

“The world changes, the environment changes, competition changes, people change, everything changes. Retailers can’t ever stay the same. If you don’t change you are a dead duck. You must wake up every morning and wonder, “Who will destroy me today if I don’t keep my eyes open?” You must constantly think about ways to out-manoeuvre the competition and be the number one horse.”

“Responding to change is one of the reasons for the success of the Home Depot.”

Innovation

“Much of our success through the years has resulted from a love of discovering and inspiring new products, putting a new sales spin on reliable classics, and our passion for seeing them move through the cash registers.”

“We are always looking over our shoulders. The essence of keeping our company great is its non-stop reinvention, because if you are in constant motion, nobody can catch you. You must maintain that motion, whether it be physical layout of the store, merchandising, advertising, or a thousand other factors. It is no different than changing your clothes everyday. If your spouse wore the same clothes everyday, after a while, you’d stop looking at him or her.”

“No matter what your business, you cannot stay still for any length of time, or our competitors will scratch and crawl over you.”

“[We do] workouts. This involves getting all the people closely tied to any given business problem and to lock themselves in a room together – for as long as two days – and work out potential solutions. Even if it’s something we’re doing well, how can we do it better?”

Flexibility

“Our flexibility and our enhanced ability to adapt, is not only to positive developments but to negative ones, too. That was a very, very important issue that goes back to finding out what you are doing right and what you are doing wrong.

Planning Ahead

“One of the key strategies of this company has always been to do things before we needed to do them. That might sound obvious, but lots of companies get painted into a corner, then have to react instead of pre-act.”

Humility & Studying Failure

“You can’t ever, ever take it for granted that you own the business. Because everybody who does eventually disappears of the face of the earth. We learned that by studying people who failed and understanding why they failed. Failures – especially our own – are great teaching tools. If someone fell on his face prior, why would you do the same thing again?”

“Bernie and I relearn our business firsthand from people on the floor of the stores. The associates know more about the products and what the customers are looking for than we do. It is a changing, teaching experience.”

“We are not more important that the customer.”

“Even our investors find it hard to believe the founders of the company still participate in training managers, expounding the The Home Depot explicit values, as if that were beneath us.”

Store Walks

“Store walks are such an important and valuable tool to this company, that they’re required not just of our executives, but of our board of directors, too.”

“It flattens the management pyramid by creating communication from the very top to the very bottom of the company.”

“Some managers manage by walking fast and looking worried. We would rather them take their time, focus, see what the customer is seeing, talk to the customer, and interact, because that is where you get all your answers.

“Bernie and I probably spend 25 to 30 percent of our time in the stores. The balance is spent training managers in our culture and teaching merchandising.”

Common Sense & Bureaucracy

“Common sense was an overriding factor in everything we did. Nothing but our values, ethics, and morality were set in concrete.”

“Bureaucracy is giving in to stupidity and ignoring common sense. When you know something is wrong and you don’t challenge it, you have become bureaucratic. The root cause of creating a bureaucratic environment is when people are afraid to make mistakes. We want our people to be unafraid of making mistakes.”

“The culture of this company intentionally beats down our associates’ fear of bureaucracy, opening up very honest face-to-face interaction. Smart associates are not afraid of us.”

“If anything ever kills the personality of this company, it will be creeping bureaucracy.”

Summary

Payroll is not an expense, its an investment. Place customers at the forefront and encourage staff to interact with them. Learn from your mistakes and the mistakes of others. Have Management and Board Members walk the store floors. Empower your people. Share the winnings. Set the example. Innovate and drive constant change. Remove bureaucracy. Support your staff.

But why do all of this? Because great Culture is a competitive advantage that is hard to compete against. And its hard to argue against when you look at Home Depot’s returns since inception. $100 invested in 1981 would have earned you $2,377 on the S&P, $9,719 within Berkshire Hathaway, and an astonishing $569,000 in Home Depot.

And you don’t have to be a rocket scientist to see that in the end it’s very easy maths indeed. Great Culture = Great Business.

 

 

 

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Further Reading: 
Investment Masters Class: Learning from Arthur Blank

The Home Depot: Built from Scratch

 

 

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