World Changers

It was on April 14, 1978, when the self-proclaimed “Ming the Merciless” had summoned to his office Bernie Marcus, then chief executive of Handy Dan Home Improvement Centers, and Arthur Blank, then Handy Dan’s vice president of finance. “Ming” was actually “Sandy” Sigoloff, who had taken his nickname from the villain in the old Flash Gordon movie serials of the 1930s.

Sigoloff was the boss from hell: a mean-spirited, money-grubbing man who ruled by fear and fancied himself a turnaround ace. Sigoloff once told Marcus that when employees left him, “it was very important that he affect them economically, emotionally, and physically, so that people think twice before they ever turn on him.” It was the great misfortune—or lucky break—of their lives to find themselves in his employ.

They were called into Sigoloff’s offices in West Los Angeles for what was supposed to be a corporate planning meeting at Daylin, Inc., which owned 80 percent of the company they worked for. Instead, it was an execution. Sigoloff first fired Marcus, then Blank, and yet another executive on their team, falsely accusing them of trumped-up violations of National Labor Relations Board rules involving a decertification battle with a labor union.

It probably was the best thing that ever happened to them. Soon enough, the pair began meeting regularly at a coffee shop in the City of Commerce, putting a business plan together for what would become The Home Depot. They took everything they had learned but couldn’t implement under Sigoloff to create one of the most successful retail concepts in history.

Unlike existing home improvement stores, they envisioned immense warehouse stores of up to seventy-five thousand square feet (the largest Handy Dan store was less than half that size), with merchandise stacked to the ceilings. They’d buy direct from manufacturers, eliminating the middlemen, and only put highly trained people on the selling floor who could help customers through any home repair or improvement. The goal: to build the first nationwide chain of home improvement stores based on low prices, massive selection, and high customer service.

Ken Langone, who had made a good sum investing in Handy Dan, put together an investment group that coughed up $2 million in seed capital in exchange four 55 percent of the company. After many turndowns, Marcus and Blank persuaded a bank to extend a $5 million line of credit. And on June 22, 1979, the first two Home Depot stores opened in Atlanta with their children and wives handing out five hundred one-dollar bills to lure customers inside. The stores were cavernous, sixty-thousand-square-foot warehouses that dwarfed the competition and stocked twenty-five thousand different SKUs. Hundreds of empty boxes and thousands of empty paint cans were piled on the top racks of the store to give the impression that the place was stocked to the gills with merchandise.

It took months for customers to discover The Home Depot, but when they did they loved the place. Within six months, Marcus and Blank had three stores, two hundred associates, $7 million in sales, and losses of nearly $1 million. By 1980, however, the company was in the black by $856,000, and it went public in 1981 with almost double the profit, using the proceeds from the sale to begin its march across the country to become the nationwide retailer Marcus and Blank had envisioned.

The founders viewed the structure of the company as an inverted pyramid, with stores and customers at the top and senior management on the bottom. Blank demanded that associates take risks to succeed, saying, “It is your business, your division, your market, your store, your aisle, and your customer.”

From the start, associates were able to offer the best customer service in the industry, guiding customers through projects such as laying tile, changing a fill valve, or handling a power tool. Not only did store associates undergo rigorous product knowledge training, but they also began offering clinics so customers could learn how to do it themselves. The Home Depot revolutionized the home improvement industry by bringing the know-how and the tools to the consumer while saving them money.

Over the next two decades, the pair turned the original no-frills stores in Atlanta into a phenomenon: nearly 1,200 outlets in North and South America, $46 billion in annual sales, a great brand, and the instantly recognizable “orange apron,” which came to symbolize great customer service. By the time they would both leave their operating roles in the late 1990s, more than one thousand of the company’s associates had become millionaires.

Bernie: We didn’t believe that at the time, but in retrospect it was really fate for both of us. Many people who have success in their lives, it doesn’t happen because it’s planned. They are basically thrown into that chasm. In our case, being fired was probably the worst time I ever had outside the death of my parents. I had always been very successful at what I did. I had made money for a lot of people I worked for.

Sigoloff really was a monster. He called himself “Ming the Merciless” and he was proud of it. He loved the fact that he could destroy people. He loved firing people. He was one of these people who was called in to reorganize companies and he took great joy in being able to look people in the face and say, “I’m taking away your livelihood and not only that, I’m going to destroy you financially, mentally, physically, and emotionally.” And he did. I remember having breakfast with him one morning in Beverly Hills and I asked him, “How do you do that?” He said, “Because I really like it.” I remember going home that night and telling my wife Billi, “I just met a monster.”

He hated me because I always questioned him. At the time, our company was the only one he owned that made money. The company was very successful. He was jealous of it. He didn’t like the fact that we were independent. He didn’t like the fact that his board of directors was very engrossed with our management team. For Sandy Sigoloff, that was a no-no. In fact, I remember being in a board meeting when succession came up. He told the board he was going to start working on it. And one of the directors in the room said, “Why do you have to do that? Don’t knock yourself out. You’ve got the successor sitting in the room.”

And that was the end of my life. A year later, I was fired. Arthur was out of this but he was my guy. He was at the hip with me and being at the hip was at that time not a good place to be. It was like carrying a tumor on your side. So Arthur got sacked along with me.

About three years before, I happened to be with Ken Langone (a New York investor who was a major shareholder in Handy Dan). And I was telling him about a concept I had in mind that was going to put our store out of business. What we have to do now, I said, is build a new fence. It was really the concept of The Home Depot. It was going to be bigger than our store, carry a lot of merchandise. I wasn’t going to tell him or anyone else the details about the idea because anybody who heard about it might have tried it. Three years later, when we were fired, both Arthur and I didn’t have a clue about what we would do. Kenny (Langone) brought it up again. He said, “You’ve been hit in the ass by a golden horseshoe.” And so we began to talk about the idea. We put the concept on paper. Arthur put the budget together. From Sigoloff, what I personally learned was how never to deal with people in my whole life. Right, Arthur?

Bernie: Arthur and I used to have lunch every day and we used to talk about this maniac and how he dealt with people. No matter what we did, we learned a lesson: how not to deal with people, how not to treat people, how not to be offensive to people, how not to get the most out of people. We wanted people to respect us, not fear us. This whole culture concept really started with our mentor, Sandy Sigoloff.

Arthur: Most of our meetings were face to face. But after doing our original five-year plan, I remember calling Bernie on the phone and saying, “Listen, the numbers don’t work. They don’t add up. The expenses are too high and the volume is too low.”

“I’m going to have trouble doing this, Bernie,” I said. But it was true there was no history, no way of knowing for sure what our sales per square foot would be. It was conjecture based on the success of the forty-thousand-square-foot stores we had at Handy Dan. So I changed the volumes.

Arthur: But they were changed enough to get the positive attention of all of our initial investors. We were always forthright with our investors. We always worked on under-promising and over-delivering. That was our core philosophy from the very beginning. We told them this was a model. We think we could do it and ran through all the rationale.

Bernie: The word confidence is wrong. It was desperation. We were out of work. Neither of us had a lot of money. My parents were broke altogether. I was basically supporting my mother. We didn’t have any money to speak of and the question was what are we going to do with our lives? It was desperation time. I think that is a driving force. When you are desperate, you know you have to make it. We knew if we didn’t make it, that was it. For me, at the age of forty-eight, it was all over. Arthur had his CPA and his career ahead of him. I had been a pharmacist, and at that point they had already taken my license away. I couldn’t even go back to pharmacy.

It was desperation time and nobody had done this concept before: a big store, low prices, one-stop shopping, with qualified people on the floor. But we had to buy direct from manufacturers to get the prices that low. There were a lot of ingredients in this. Whether we could pull it off, we didn’t know for sure. Arthur was right in questioning me because the margin in the plan was the smallest in our industry. Many people, in fact, said, “You can’t do it.”

Arthur: We were fortunate because in the first two years we were private. We lost half our start-up money in the first nine months we were in business. Over that two-year period, all the competitors would come and visit, hearing about the big stores. But nobody knew what the volumes were. So everybody who came in said, “These poor bastards are going to go broke. They have too much inventory, too many people, the prices are too low, the service is too good.” They thought we would be out of business. There was no fear in our industry, “Oh, here comes The Home Depot.”

When we went public in the fall of 1981 and our numbers obviously were available to everybody, people really began to pay attention and got quite nervous. Even then, we controlled our expansion plans very carefully and everyone thought it would take us two hundred years before we expanded to Chicago and the rest of the country. Here’s what was really amazing to me at the time. Wherever we opened, every competitor felt their customers would be loyal to them because they were in business for ten, twenty, or thirty years. They were all convinced, regardless of how many towns we had successfully run through, that if they just continued to run their business, their customers would stand by them.

It seems to be that there were two very big contrarian ideas that you brought to the table: 1) Selling goods at low prices with high levels of service. If people paid less, they generally expected not to get much service. That was the cost of getting something for a bargain. 2) If you have low margins, you generally have to carry less inventory because you often lack the cash to put that much stuff on the shelves.

Bernie: That ignores the magic of the numbers. Take low prices and service. Our theory was if you had service, you could sell the customers products they might not feel they needed. The whole thing boils down to the quality of the people on the floor. We paid the highest price in retailing for our partners at that time and even today. We hired professional people: plumbers and electricians. We wanted to start something that had never been done before—the do-it-yourself business. We really invented the do-it-yourself business in the U.S.

If you were a homeowner before and your toilet went out, you would have to call a plumber. People didn’t put new lights in. They didn’t do it because you couldn’t buy the products. You had to go to a wholesale house. Everything was locked in. The magic of Home Depot was we invented and then had to sell the DIY concept. We spent a lot of time in every advertisement saying you could do it yourself. We’ll teach you. When people would come into the stores with a faucet looking for a replacement, our people would say, “You don’t need a new faucet. Why don’t you just put a new washer in?” We’d take their faucet apart on the floor and fix it for $2. That happened thousands of times.

Another example? Arthur started the ceiling fan business in the United States. Imagine people putting up a ceiling fan? It was unbelievable. The magic of the story is that guys would work for five hours putting a ceiling fan up. They would press the button and the thing would work and it was like a miracle. They could call their kids, their aunts, their uncles to show them the ceiling fan. The beginning of the DIY movement started at Home Depot.

Arthur: We did know that. There was some DIY in the United States, but the level of service that Bernie is describing was not there. The difference was that in most cases in retailing, the emphasis is on how to spend as little as you can on your employees. You control your payroll by controlling the dollars you are spending. Our notion was that payroll was not an expense. It was an investment and it belongs more on the balance sheet than on the operating statement. We hired the best people and thought of it as a capital investment in the business. We knew that if we hired the most experienced people in lumber, gardening, plumbing, and electrical supplies, they would produce for us the maximum amount of sales over time.

Most retailers thought if they could hire two people for $5 an hour, that was better than one person at $10 an hour. And we basically believed you’re better off hiring one at $10 an hour because not only is that person going to sell more, he or she is better trained and will set a better pace for the whole store. They would help you develop a trust relationship with the customer. Once that trust relationship is established, you can build on that. So customers really began to feel that when they came to Home Depot it was not about a transaction: how much they can get from me. Rather, it was about how can they solve my problem for the least amount of money? So when it came time to redo my bathroom or my kitchen or add a new room on the house, they would come back because the last time Bernie saved them some money on the faucet. Not only did the associates wear orange aprons, which meant that they bled orange, they wanted our customers to wear the orange inside of them. We had earned their loyalty. The customers felt this was “my store. I’m going to be treated well here. I trust the people here.”

This never, ever happens in a retail business. Think about this for a second. You come in and want to buy the Cadillac and the guy is selling you the Ford? On the contrary, you would be told, “The cheaper one is going to break. It’s not good enough. You need the better one.” This goes back to the bond we had with the customer. Because of it, you couldn’t take our customers away.

Arthur: It also had an impact on our associates. They understood that an important part of our culture was to walk in the shoes of our customers. They had a tremendous amount of personal pride in the company they were working for. They saw the company had great values. They knew we were not trying to take advantage of a customer by overselling him. That made them feel good about their jobs and who they worked for. They believed this company had a higher purpose than just selling.

Arthur: We had young children so we took them out of school in the morning. The store closed that night and they were still standing outside with dollar bills—and there was a limited number of dollars to give. Bernie and I were in one store and Pat Farrah (another member of the founding team) was in the other. We agreed to meet at Wendy’s for lunch. All three of us walked in at noon and sat down. And I remember we just stared at each other. No one said anything. I still can remember who finally said the first word.

Arthur: Over the next nine months, we really didn’t find our way by locking ourselves in a room. What we really did was spend an inordinate amount of time on the floor of the stores asking questions of our customers. “What do you like? What don’t you like?” We constantly changed and refined the model during that period of time. Bernie, myself, Pat, and others were fairly self-confident as human beings, but when it came to this, we thought we had the right concept but we really subordinated our feelings to those of the customer. We had a real sense of humility about that. We spent a lot of time listening to customers, changing the mix of merchandise, changing prices, changing vendors, changing service levels. And that began to pay off.

Arthur: We were trying to expand the industry. This was not just an attempt to grab market share. The DIY industry even then was growing. But how to accelerate that and put it on steroids that were approved was through these clinics. In many cases, customers walked in. They had the money and the desire. They just didn’t know how to do something. If they agreed we had the merchandise and the price was right but they felt no confidence in taking on the project, they weren’t going to do it. So we began to impart the product knowledge through formal clinics in the front or back of the stores and in one-on-one clinics that took place in the aisles. That was the difference.

Bernie: When we opened up, I would say that we talked about buying direct from the manufacturer in order to cut the price. The truth is, that never happened. We were buying through distributors. We did not have the ability to buy direct. Most manufacturers would not sell to us. It was a locked-in deal. And so we would go to someone like GAF or Georgia-Pacific and they wouldn’t sell to us. Breaking that down probably took seven to eight years. We literally had to teach the vendors how to sell to us.

Let me tell you a great story. We would take these vendors out to dinner and at the end of the night they would say, “You know, you’re great guys. We really enjoyed this, but we can’t sell to you.” Then, we would come back three months later and then months after that. We would be drinking tequila to get them to sell to us. Most of them still turned us down.

Bernie: All of them. If you couldn’t get the product at the direct price, our model wouldn’t work. Plus, people would come to our stores and not see that product. There were many vendors who didn’t allow their products to be in our stores, even buying through distributors. About 80 percent of the vendors refused to sell to us when we started. Ten years later, there were maybe three vendors who hadn’t sold to us.

I remember I was on a bus traveling to Chicago and we had worked on one vendor for three years and he finally agreed to sell to us. I remember sitting on a bus with the vice president in charge of sales. We had just closed the deal and he said to me, “Well, Bernie, you finally got it.”

Pat and I had to actually go out and teach the vendors how to produce product. We had to explain to them that if they produce more, their business would get better. Everybody found out he could sell twice as many toilets if we had them in stock. So we had to teach them how to supply our stores. It was like pulling teeth to get them to understand that. But then, all of a sudden, when they started to pile up stuff in our stores, it would disappear. They had never seen that before. They were used to dealing with hardware stores where they sold two or three. We would put stuff in and sell thousands.

The really smart ones would focus their business on getting product into our stores. We had the customers on one end. We had our associates on the other. And then we had the manufacturers who we had to teach how to deal with this business. We created many multimillionaires who were total schmucks when they started with us.

Bernie: He never did. In fact, we threw his light bulbs out of the store for that reason. I had a place in Florida and when you went down there in October and November, you sell a lot of bulbs due to the switch to daylight savings time. And GE was making our bulbs then. I went into the stores in Florida and found out we didn’t have a single sixty-watt bulb in stock.

We did that and when October and November came it was the same goddamn thing. There were no bulbs in the stores. And I found out the reason for it is because their year-end bonus was based on how much inventory they had at the end of the year. The following year, I flew to the Netherlands, met with the Philips people, and I came back and told Jack, “No more problems. We’re throwing you out.”

Arthur: On the positive side, Jack understood that their system was so geared to efficiency—their return on capital and their incentive plans—that they only knew one way. Our customers didn’t know or care when a vendor’s year-end is. They just want product. To his credit, Jack recognized that as being a deficiency in the company. That whole company was built on Black Belt efficiency. He understood they had taken this thing too far. He knew we were a customer-driven, customer-service business.

Bernie: He was full of crap. His thing was bottom-line oriented and ours was customer oriented and it just didn’t match. It didn’t work. We bought a few things from him, including refrigerators. But he never got the bulb business back. He didn’t deserve to get it back. And we helped to build Philips into a powerhouse in the United States. That was true of American Standard as well because Kohler refused to supply us for many years.

A lot of the strategy we learned as we went along. We weren’t that brilliant. What we did was listen very carefully to our associates and our customers. They knew more than we ever did. And so the arrogance wasn’t there. We knew our lives depended on these people.

Arthur: I remember one of the most critical times for our company, when we were approaching a billion dollars in volume. I was having lunch with Joe Ellis of Goldman Sachs, who was Goldman’s retail analyst at the time. He was considered a retail guru on Wall Street. I remember Joe saying to me, “You know, when you guys reach a billion in volume, this unique culture is going to change. You will not be able to run this company the same way. You won’t be able to maintain it.”

Bernie and I had been involved in hands-on training and would constantly visit stores. I remember being sobered by Joe’s comments. I went to see Bernie and told him what Joe said. Coming from Joe, this was not like some drunk in the street or some guy wandering out of Harvard Business School. This was a seasoned Wall Street veteran.

From that point forward, we realized we couldn’t really touch every associate moving forward. We did these breakfasts with Bernie and Arthur. We did a lot of video stuff, and we traveled the stores a great deal. We did everything we could, but at some point the numbers got so humongous—opening two hundred stores a year—that it became physically impossible to visit all the stores.

But when we promoted people, we realized that either they got the culture or they didn’t. They had to understand it. They had to understand what we were about. That became the ticket to get into the game. If you didn’t understand that, you never got promoted. We only promoted people who understood the culture, lived it, and would become the ambassadors for that culture.

Bernie: Arthur and I actually loved the customers. When I would go into stores, I would hug and kiss customers because I recognized that everything I had in my life came from them. That is the difference between me and Jack Welch. With Jack, the bottom line was the most important thing. With us, we said if we treat the customer right, we eventually would have the bottom line. Remember most customers are on loan. But if the customer is loyal to you, your company will be good, no matter what else happens. The customer comes first. Number two was the associate. We knew that the associate was critical. We loved our associates. We would walk into stores and hug them. And they knew we loved them. The feeling was there and it was mutual.

Listen, I can’t tell you how many people we had who got buried in orange aprons. That loyalty went so deep. That’s why we had ESOPs, stock options, and bonuses. Our associates were paid the highest amount in the retail industry, bar none. And we weren’t unionized. We did it because it was the right thing to do and they deserved to be treated that well.

Another factor was we always bought quality merchandise. Have it there for the customer and have it in the amounts that they need and a price that is reasonable and fair and as low as you can possibly sell it. That was the culture of The Home Depot, but it started with the customer.

Arthur: When a couple of consultants at McKinsey & Company were writing a book called The War for Talent, they went across the United States and Canada and interviewed many of our store managers and associates, including cashiers. I was the last to be interviewed, and the gentleman who came in was out of Chicago and he said, “I’ve been doing this for a lot of years. I’ve never seen a company where everyone could articulate the policies that Bernie and you express. And I spoke to about a hundred people. I don’t know how you’ve done it, but you have. It’s absolutely unbelievable.”

Arthur: The other thing we didn’t do was change the message every year. That was a big deal. So it wasn’t like, this year our top ten commandments are these. And a year from then say, “Okay, they’re stale. Let’s change them and put in another ten.” I was there twenty-three years saying the same stuff a thousand times over. There was never any confusion about what the company was about. It didn’t change while we were there. This was our culture.

Our business changed. Our store sizes changed. Our merchandise assortment changed. But the culture and the essence of what we were talking about never changed. They changed after we left the company, but those had been the core values of our company.

Bernie: Arthur and I were very consistent throughout the years we were together. We never confused anybody. If Arthur and I came to a different conclusion on an issue, no matter what it was, we would both eventually agree on a decision. From that point on, we never deviated. In typical partnerships and businesses, you always have somebody working against you. At Home Depot, our team could never work both sides of the street. You know the way a kid has a mother and a father and the father turns the kid down and then he goes right to the mother? They couldn’t do that in our company. We had disagreements. We would talk it over and say this is the policy.

And from that point on, it was unified. Everything fell in favor of the customer, the customer, the customer. We would say to people that everything we have in our lives and everything you have in your life depends on that customer. Your life and your career, whether you will be able to pay your mortgage or put your kid through college, everything depends on that guy who comes through the door every single day. We said it so frequently that they began to believe it.