Clarity on Its Market Is Driving Home Depot’s Growth 30 Years Later

Last week I shared my takeaways from reading Built from Scratch: How a Couple of Regular Guys Grew The Home Depot from Nothing to $30 Billion, a book about Home Depot’s founding. One thing I learned is that Home Depot’s founders rethought their market, which changed their growth strategy.

They initially went after the do-it-yourself market, which was consumer focused. Then they realized they were serving the home-improvement market. This change in how they thought about and defined their market was important because home improvement included contractors too. Home improvement was a much bigger and more fragmented market than do-it-yourself. This decision played a role in Home Depot’s annual revenue increasing from $20 billion in 1996 to $135 billion in 2023.

Today it was announced that Home Depot is acquiring SRS Distribution Inc., a “distributor of building products . . . serving the professional roofing contractor’s business.” The deal is for about $18.25 billion. The stated logic behind the deal is that it will help Home Depot grow its business with contractors.

The Home Depot’s founders haven’t run the company for over twenty years. But their insight about what their market is and what customers they serve is still driving the growth strategy today, even if it’s growth through acquisition rather than organic growth.

Markets matter a lot more than some entrepreneurs realize. I’d say it’s one of the most important factors that impact business success and growth potential. Building a big business in a small market is hard because there aren’t enough people willing to buy your product or solution. Home Depot’s realization about its market roughly thirty years ago has allowed it to build a massive business, and it still provides growth opportunities, as shown by today’s announcement.

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Customer Discovery as a Job

Today I caught up with a friend who told me about his job. He talks to his employer’s biggest customers to understand their problems. He puts together events where the company’s biggest customers share the problems they’re encountering and expecting to encounter and how these problems are painful. He then makes these customers aware of solutions offered by his company that can solve their problems and connects them to the appropriate person who can close the deal (sometimes he can).

The interesting part of his job is hearing from various large customers in a single setting where he’s able to see across entire industries. He can identify trends and problems his customers are having early. As I listened, I thought, His job is to do customer discovery.

This got me thinking. Not all companies offer this kind of role. But if you’re an aspiring entrepreneur working at a company that does, it’s a great opportunity. Doing this job is a terrific way to identify problems and quantify how painful they are before you make the full-time leap. It helps you thoroughly understand problems, which should help you build a better solution, and lets you build deep relationships with potential future customers. All while still collecting a salary (and hopefully saving too).

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Excited to Learn

I’m continuing with my learning survey, which turned into a customer discovery exercise. I’ve been intentional about talking with entrepreneurs and investors who provide early-stage entrepreneurs with capital to build businesses.

Today I spoke with someone who has founded multiple companies and is now a venture capital investor. After I finished asking him questions, I shared what I’ve learned so far and some of my insights. As we chatted more about learning, he shared personal stories about how learning the right things at the right time changed the trajectory of his life. The more he spoke, the more excited he became.

As I reflected on this conversation, I realized that most people who’ve been part of my survey have shown similar excitement. The conversations have illuminated lots of friction for people learning outside of structured learning environments like school. But even with this friction, entrepreneurs and investors have a thirst for wisdom and are excited about learning. My conversations have led me to believe that that thirst isn’t being quenched in a way that suits their on-the-go, digital lifestyle.

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Running Multiple Start-ups

An early-stage founder chatted with me about an idea he’s considering. He wants to start a second business. The second business will be in a space adjacent to that of his current business. He plans to have a partner who will handle a fair amount of the daily execution, and he’ll be the strategy, vision, and go-to-market person. He asked for my thoughts.

My gut reaction was that it’s a bad idea, but I thought more about it. I thought about the entrepreneurs I know personally and others I’ve read about. I ended up landing on two key areas to consider:

  • Know yourself – Entrepreneurs come in various personality types. Some founders do their best work when they obsess about a single thing. They’re thrown off when they’re asked to focus on multiple unrelated things. These founders tend to do one thing extremely well. Conversely, some founders are action junkies. They couldn’t sit still if their life depended on it. They thrive in environments where they have to juggle multiple unrelated balls. They’re bored with the idea of focusing on one thing and get excited by new things. These founders get lots of things done, but the quality of the execution isn’t as high as it could be. They want to check the box and move to the next thing on their to-do list. These are just two types of founders. There are others. I’d want to be honest with myself about how I’m wired and whether another business is a good fit for my personality.  
  • Define the end game – What’s the end game for the second company? Is it to build a small lifestyle company for cash flow? Or to build a high-growth rocket ship to eventually sell or IPO? Or something in between? All are great paths, but they require different levels of energy and execution. For example, if your first company is a high-growth start-up and you plan for your second company to also be one, that’s going to require a lot of energy and be difficult (not impossible) for most people to execute. Elon Musk does it, so it’s possible, but it’s not easy. Alternatively, if you want to build a lifestyle business to enhance your lifestyle, it’ll require good execution but less effort than a high-growth company. Having a clear idea of what I want to build with the second company is something I’d get clarity on before I dig in.

The answer to whether starting a second company is a good idea is, It depends. It depends on what that second company will look like if successful and on whether the founder can successfully juggle more than one business.

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How I Save Interesting Podcast Points

I’ve been listening to more podcasts recently. I’m usually doing something else at the same time (e.g., exercising), so the time feels more productive. One of the problems I’ve had is noting important things I hear in podcasts. It’s inconvenient (and sometimes dangerous) to abruptly stop what I’m doing to note what I heard and when I heard it.

I figured I’m not the only person having this problem, so I did some research. I came across the Snipd app. It’s a podcast player that generates transcripts using AI. As you listen to a podcast episode, the app allows you to highlight and save parts you want to revisit with the simple tap of a button. You can even export the highlights to other systems, such as notetaking apps.

I began testing the free version of Snipd recently. I haven’t tried all its features, but so far it’s materially better than what I was doing before. The friction to record podcast insights has been reduced drastically.

I’m going to continue testing the app, but so far I like it and plan to add it to my list of learning tools.

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Successful Founders Understand Their Business’s Costs

Earlier this week, I shared how Pat Farrah became a Home Depot cofounder. Farrah was an entrepreneur who started Homeco, a concept similar to what Home Depot would become.

The language of business (i.e., accounting) is critical for entrepreneurs, but Farrah didn’t speak it. Equally as important, Farrah didn’t know what his costs were. His bank accounts had money in them, so he thought he was doing well. He and his top lieutenants even bought Porsches and Cadillacs. While Homeco was going through due diligence to be acquired, Farrah shared that he had no idea what his margins were or how much money he was making. When his suitors asked him, he guessed that his margins were 23% and he was solidly profitable. After the suitors cleaned up his books and audited them, they learned that the true margin was half Farrah’s estimate. And Homeco wasn’t just unprofitable, it was bleeding so much money that it was already insolvent by the conclusion of the audit. The acquisition was canceled. Homeco failed. Farrah was forced to file for personal and business bankruptcy.

The most successful entrepreneurs running profitable companies have the wisdom to get a handle on costs. Their focus on generating a profit usually leads them to learn basic accounting concepts (or hire someone knowledgeable about them). Their understanding of their costs leads to better decision-making and a company that generates cash (i.e., profits) instead of consuming cash.

Understanding costs served me well as a bootstrapped entrepreneur. I remember watching a competitor sell a popular automotive part for less than our cost. Customers loved the item, and it drove a significant amount of revenue to this competitor. Our team wanted me to compete on price so we could capture some of that revenue, but I declined. It didn’t make sense to lose a material amount of money on each transaction. Selling below cost is unsustainable. We didn’t have outside investors, so every dollar mattered. I reasoned, Why play a game we know we can’t win? Over time, I started to see other decisions this competitor made, and I suspected its leaders didn’t have a good grasp of its costs. A year or so later, it went out of business. I suspect that not tracking its costs caught up with it.

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Weekly Reflection: Week Two Hundred Eight

This is my two-hundred-eighth weekly reflection. Here are my takeaways from this week:

  • Entrepreneurship – Some of the most successful companies are built by people who experience a problem firsthand and set out to solve it. Living the pain of the problem gives them unique insights and passion that increase their chances of success.
  • Investing – Just because something is cheap, that doesn’t make it a good buy. Quality still matters more.
  • Reddit – This IPO was completed yesterday. I’m curious to see how the stock performs in the next week or so. Its performance will likely have a significant impact on technology companies’ decisions about whether to pursue an IPO this year.

Week two hundred eight was another week of learning. Looking forward to next week!

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Redefining the Market Led to $152 Billion a Year

I’m enjoying reading Built from Scratch: How a Couple of Regular Guys Grew The Home Depot from Nothing to $30 Billion, a book about Home Depot’s founding. It was published in 1999, and initially I was worried because it missed the last 25 years of the company’s history, but I realized I was looking at it the wrong way. Because the book covers a shorter period, it goes into more detail about things I care about most—mainly the actions taken in the early days and the wisdom gained from them. If the book covered 25 more years, it would have to be twice as long or less detailed.

I’m a fan of founders thinking about the market for their products or solutions. It’s hard to build a big business in a small market—there just aren’t enough people willing to pay for what you’re selling. Given the importance of markets, I’m always curious about how founders who achieved outsize success thought about their market in the early days and how that shaped their strategy.

This book detailed how the Home Depot founders thought about their market and how their thought process and strategy evolved. Again, this book was published in 1999, so the data reflect that period. Here’s what they realized:

  • In 1996, the do-it-yourself industry was thought to be $135 billion in annual sales. Home Depot had sales of $20 billion that year, so 15% of the market. That left 85% of the market for it to go after—$135 billion is a big market, and 15% leaves a lot of room for growth.
  • The founders realized their market wasn’t the do-it-yourself market; it was the home improvement market. The home improvement market included consumers (do-it-yourselfers) and businesses doing home improvements (i.e., contractors). This expanded market included anything needed to maintain and improve homes and was more fragmented, which equaled more opportunity.
  • The home improvement market in 1996 was $365 billion, not $135 billion, meaning Home Depot had only 5% of the market.
  • Selling to smaller contractors was a huge opportunity. The company retooled its stores and operations to cater to smaller contractors in addition to consumers.

Home Depot redefined “the pond in which we fish,” as they put it in the book. The realization that its market was much bigger than consumers doing weekend projects led to an adjustment of their growth strategy.

Over 25 years have passed since this strategy was implemented. I was curious how it played out, so I checked Home Depot’s SEC filings and found its 2023 10K (annual report). The company reported annual revenue for 2023 of $152 billion.

Markets matter a lot. Founders should understand their market and formulate their growth plan accordingly. Home Depot found a large and growing market that helped propel the company to levels of success the founders never dreamed of.

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Look at Failed Companies for Cofounders

I’m reading Built from Scratch: How a Couple of Regular Guys Grew the Home Depot from Nothing to $30 Billion. It’s about the founding of Home Depot and its growth until 1999, the year the book was published.

One thing that stood out to me was how Bernie Marcus and Arthur Blank identified another cofounder, Pat Farrah. Farrah was a merchandising and marketing genius who started a home improvement superstore called Homeco in California in 1978. Farrah’s store was packed with customers because of his innovative approaches to marketing and merchandising. Marcus and Blank heard about Homeco and went to visit. They were blown away by what Farrah had created and how he’d built the business. It was exactly what Marcus had envisioned for the yet-to-be-named start-up, but Farrah had beaten them to the launch.

Farrah’s skills helped get Homeco’s stores full of customers and sales growing straight out of the gate. But his weaknesses ended up sinking his company. Farrah didn’t understand accounting, processes, or controls. Homeco was doing brisk business. Stores were packed and money was coming in. But Farrah didn’t know whether Homeco was making money. Vendors were sending products but weren’t being paid. It turned out that Homeco was losing money rapidly. Farrah had no idea until Blank brought some things to his attention. Homeco closed a few months after Blank warned Farrah about the issues, and Farrah filed for personal and business bankruptcy.

Farrah had failed as an entrepreneur, but Blank and Marcus looked past that. They recognized that his talents in merchandising were unlike anything they’d seen in anyone else. They wanted those skills at Home Depot, so just two days after Homeco folded, they mounted a full-court press to convince Farrah to help them launch Home Depot. They reasoned that Homeco had failed because Farrah had skills gaps that made the business vulnerable. They also noticed that where Farrah’s skills were weak, Marcus’s and Blank’s were strong. And vice versa. Marcus and Blank figured the three of them could be a complementary unit with exceptional skills in all the key areas needed for Home Depot to survive. Failure or not, Farrah had to be part of the team. Farrah eventually agreed to join as a cofounder, and the first Home Depot store opened in June 1979.

I like the approach Blank and Marcus took to identifying a cofounder: find an entrepreneur who has failed but has skills that complement those of the founding team, filling the gaps. The failed entrepreneur likely has learned a lot from his (or her) failure, has free time, and wants another shot to prove he (or she) can succeed as an entrepreneur.

A failed founder joining the right cofounders at another company can be a win-win for everyone. It worked out pretty well for the Home Depot founders.

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Actions Speak Louder Than Words

Today I had a chat with the founder of an early-stage company. He’s done discovery and built an MVP. People are using his mobile app, but he’s noticed something odd. Users are telling him one thing, but in the app they’re doing something different. The founder has been leaning into what users have said they want, but the features built to satisfy them haven’t resonated with them. He’s frustrated.

Building a company that sold products to consumers taught me something: for many reasons, consumers don’t always say what they mean. Sometimes they act without thinking about or understanding what’s driving them. They don’t have clarity on their motives, so it’s not realistic to expect them to clearly articulate them to me.

When I found myself in situations where consumer actions and words didn’t align, I followed a simple rule: actions trump words. What people do is likely an accurate reflection of what they’re thinking or feeling, so lean into their actions. It’s easy to say something but not mean it—the energy and time required are minimal. It takes more energy to act. People usually act when they’re driven by a belief or feeling that warrants exerting energy.

I suggested that this founder consider diving deeper into what users are doing by asking clarifying questions about what’s driving their actions—I suspect something is. This may get the founder one step closer to product–market fit.

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