What are some of the strategies of the most successful businesses around the world?
From Chick-fil-A and Starbucks, to Ikea and Target, WSJ talked to CEOs and business leaders about their unique approach leading these major brands.
0:00 Chick-fil-A
8:36 Costco
14:38 Starbucks
21:52 IKEA
27:38 Crocs
33:50 Dollar General
39:41 Sephora
45:45 Target
52:20 Airbnb
59:35 Home Depot
The Economics Of
How do the world’s most successful companies generate revenue? In this explainer series, we’ll dive into the surprising stories behind how businesses work–exploring everything from Costco’s “treasure-hunt” model to the economics behind Amazon’s AWS.
Published on May 20, 2023 (The Wall Street Journal YouTube channel)
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Chick-fil-A
From a fried chicken sandwich and coffee to beauty and retail, we uncover the surprising stories behind the world’s most successful companies: their profits, how they’ve expanded, and how they’ve navigated a changing economic climate.
Our first story is about America’s favorite chicken fast food company, Chick-fil-A, a business based on a secret recipe. This is the Chick-fil-A chicken sandwich, which, according to multiple industry surveys, is America’s favorite fast food. Visit a Chick-fil-A anywhere in the United States, and you’re likely to see a long line of customers patiently waiting to order the restaurant’s flagship menu item.
There you guys go, thank you so much!
My pleasure, y’all have a great rest of your day!
In part, thanks to its famous chicken, today Chick-fil-A is the third largest U.S. restaurant chain by domestic sales.
We’re still seeing tremendous growth in our business. So far this year, we’re up about 20 percent.
So, how did this private Atlanta-based fast food chain become one of the most popular restaurants in America? This is the economics of Chick-fil-A.
Chick-fil-A has long had a unique approach to business that the company credits with its success. From the beginning, Chick-fil-A’s business was built on a recipe. After testing hundreds of methods, restaurateur Truett Cathy developed a faster way to cook boneless chicken using a pressure cooker and peanut oil.
It’s perfect, and so we’ve kept that locked away in a vault and will continue to use that same recipe. None of the employees have access to it, so it is still shrouded in a lot of mystery. There are recipe sites where you can try to recreate it, but they have never put it out officially.
The original chicken sandwich is the same today as in 1967: a breaded breast of chicken, two pickles, both placed on a buttered toasted bun. Chick-fil-A has long taken pride in its commitment to selling high-quality products. In fact, Chick-fil-A’s name is a take on chicken fillet, with a capital A at the end symbolizing top quality.
While other fast food chains tend to expand their menu offerings over time to attract new customers, Chick-fil-A’s business model has always been to maintain a small menu focused on chicken sandwiches.
They like to say it’s simple, so they want to keep customers knowing what’s on that menu to be able to easily decipher what they want. We think about the way that we serve guests; that consistency is really important, that we get hot sandwiches, cold salads, and just tasty products.
Customers seem to agree. Since its creation in 2015, the American Customer Satisfaction Index has been dominated by Chick-fil-A. Chick-fil-A often rates very high. Even though the service and the drive-through can be slower, people are very happy with the quality of the service they get in general.
Today, many Chick-fil-A restaurants use a practice known as upstream ordering, where an associate will take a customer’s order while they’re still waiting in line to start before the pandemic, but it has really proved very important to the pandemic when they closed their dining rooms, which really meant the drive-through is the major channel of sales. So, if you go to a Chick-fil-A now, in many locations, you will see workers out in the drive-through with tablets. Instead of speaking into a speaker box and kind of mumbling your order and it maybe getting screwed up, you’re telling this person directly next to your car what you want.
To ensure quality in every one of its locations, Chick-fil-A uses a different franchise model than most other fast food chains. Unlike most chains where the franchisee covers most of the costs of opening the restaurant, Chick-fil-A owns every one of its locations. The company also selects the locations and builds the restaurants.
We really think that that’s a key differentiator in the way that we operate. We’re not looking for a financial investor or people that want to buy a big market and open a bunch of stores. Chick-fil-A states on their website franchising is not an opportunity for passive financial investment, working from the sidelines or adding to a portfolio of business ventures. Franchisees are called operators, and each operator is hand-picked by Chick-fil-A after a rigorous interview process. Chick-fil-A likes to say it’s about like going to Harvard MBA. It can take anywhere from 12 months to 24 months, so you really have to want to do this and be willing to go through the initial paperwork but then extensive interviews.
Out of the more than 8,000 applicants Chick-fil-A receives annually, the company only selects about 130 new operators a year. That’s an acceptance rate lower than Stanford.
One of the skills that we really look for is somebody that’s really good at developing people. A lot of the stores have over 100 employees; they’ve got to be really, really good at pouring in and developing people in teams and leadership teams.
If selected, Chick-fil-A franchisees need only an initial investment of ten thousand dollars, which covers the franchise fee to become an operator. That’s much lower than the startup cost for a McDonald’s franchise, which requires a 45,000-dollar franchise fee as well as 1.3 to 2.3 million dollars of additional investment.
If they’re paid 10 or 15 locations, it’s hard to have that market presence and to really know their team members and the communities that we serve. And we’ve got a lot of interest to become operators and feel like that model is going to be really important. It’s what’s gotten us to where we are.
Chick-fil-A credits this hands-on approach with the success of its restaurants, which on average make far more off of each location than their competition. For years, Chick-fil-A’s footprint was mostly in the Southeast, but today they can be found across the country.
They have about 2,600 restaurants throughout the country. They’re also located in Canada, and they are opening in Puerto Rico. We’re opening about 100 stores a year right now, and we’ve got a lot of growth potential here just domestically in the United States, but we’re also looking at International as well.
Since 2007, Chick-fil-A has nearly doubled its restaurant count to 2,598. Compared to a lot of other chains, that’s still slow. Like, Chipotle is opening 200 restaurants a year.
No matter which Chick-fil-A location you eat at, the company says its values are reflected in its day-to-day operations.
Very close culture. They’re also invested in its values, which they do say are based on Judeo-Christian values. You don’t have to be a Christian to work there, but they do take some of these basic values of humility and generosity. If you want to go to a prayer service while you’re there, you certainly can.
From its inception, founder Truett Cathy’s Christian faith played a major role in the company’s business strategy. It’s why Chick-fil-As are never open on Sunday—not just so workers can attend church, but also so they can rest in general.
We feel like we make up for the sales in the Monday through Saturday, and that anticipation of, ‘Ah, I can’t get Chick-fil-A today, so I want to make sure to go first thing Monday morning.’
It’s also the reason the company has never gone public.
I don’t think we will ever—actually, I know we’ll never go public. And there’s not a real benefit for us to do that. We’ve grown conservatively, and so we don’t need a lot of investors or extra cash to go and build new stores or new businesses.
Part of Cathy’s values are reflected in how employees are treated and how they’re expected to treat customers.
Thank you!
Pleasure. You have a great day.
Although you won’t see it in restaurants where the employees are masked up, Chick-fil-A has long asked employees to greet customers warmly with a smile.
Even if it’s just on a very small interaction, you can share a lot by just the smile that team member has with guests. It’s just a small little thing that we can do that makes a difference.
Occasionally, Chick-fil-A’s values have attracted scrutiny, especially when the company’s foundation donates to conservative groups or causes.
There’s been some groups perceived as anti-gay, and this has attracted attention from progressive groups.
The company’s foundation in the last year has focused its charitable giving on three different areas: homelessness, hunger, and education.
I think the most important thing for us being in the restaurant business is that we serve everybody. My grandfather—I love how he talked about it with politics. He would say, ‘I’m not right wing or left wing; I’m the whole chicken.’
When you go to headquarters in Atlanta, there is this rock with a quote from Truett that is just displayed prominently. It says what Chick-fil-A’s corporate purpose is: to glorify God by being a faithful steward of all that is entrusted to us, to have a positive influence on all who come in contact with Chick-fil-A.
I do think that reflects this very higher, noble sense of company self. They believe they do more than just serve chicken sandwiches.
Thank you so much!
Pleasure. Have a nice one!
Costco
If you’ve ever shopped at Costco, you may have noticed that it’s a little different. Costco is not engineered for a quick shopping trip. It is exactly the opposite. This is the economics of Costco. It’s not a grocery store. It’s not a small corner store. It’s huge. It’s cavernous. The ceiling is high. Goods are literally stacked on pallets up to almost the ceiling. That’s all part of the model and the experience.
Okay, first thing we got is a five dozen eggs. Then we got salmon for you.
Unlike most stores, there are no aisle signs or in-store maps to help direct shoppers. Instead aisles are simply numbered. What’s more, Costco constantly moves some of its products and cycles in new products. So, what gives? Why are Costco’s stores designed this way, and how has it helped the company grow into the retail behemoth that it is today?
Costco is a big fan of using treasure hunt retail psychology to draw you in, which is basically having items on the shelf that are at a “wow” price because they’re such a good discount or they’re just really interesting, and they’re not going to be there forever. The big idea behind Costco’s treasure hunt strategy is that by encouraging customers to explore and ensuring that there’s always a new batch of interesting deals, customers end up shopping longer and buying more products.
Today, I went to Costco thinking I’m just going to get a few items, but I ended up with a whole entire cart.
When you go into the store, it doesn’t feel the same as the last time you were there. So, you have a sense of urgency about purchasing and also just a sense of wanting to come back, right, and check out what’s going on. If it was the same every time, you might not come as often.
Today, Costco is one of the world’s largest retailers, boasting over 803 locations and 275,000 employees. Costco was part of sort of this early warehouse club concept, which was really about, instead of like going to the store to buy a single item, you come to the store, pay a membership, and maybe your small business, and we’ll offer you wholesale prices—basically lower prices.
Most members pay an annual fee of $60 for the basic plan, but customers can upgrade to the executive membership, which offers more perks, for $120 a year. Membership dues are also how Costco makes most of its money.
I think Costco’s management’s main goal is always this ethos of, can we offer more exciting items at a better price to keep memberships growing? The model is, make money on the membership, sell things as cheaply as possible. They can’t just raise the price on something to increase the profit. That’s against the internal code.
That also includes things like, let’s save money in how much time we spend putting products on shelves. So that’s part of the reason why you see these pallets of goods stacked up to the ceiling. There’s not a lot of time spent taking apart those pallets and putting each individual product on the shelf. If they eliminate that, there’s a little bit of labor savings, there’s some time savings because they’re just putting all that stuff out on a pallet, and you take it.
Costco says that an average item in the store is only marked up 11 percent compared to the 25 to 50 percent often seen in retail. This commitment to low prices hasn’t just kept customers loyal; it has also helped spread the brand.
There’s a psychology to finding a deal that’s very satisfying for people. People enjoy the product selection at Costco. They have very skilled merchants that usually have been employed there for a very long time and really know what a Costco customer likely would want, and they’re good at getting good prices on those products.
I got your protein-flavored vanilla.
And that sort of creates a certain frenzy around finding those things.
I got the Kirkland brand microwave popcorn. I got two packs of bottled water.
Most retailers might assume that shoppers want more choices, not less. They sell a limited number of items, so that means they have to be pretty precise. They think about giving space to a product in their store differently than a Walmart would, and if that product doesn’t sell, it’s out of there. It’s very cutthroat. If you’re a product on the shelf, you have to earn your place.
The average Costco warehouse stocks about 3,700 products at any given time—less than one-tenth of most supermarkets, which stock 40,000 to 50,000 items. But even though Costco stocks fewer items, the items they do stock have a reputation.
I see you’ve noticed me rolling up the sleeves on my new Kirkland Signature quarter-zip my mother got me for the holidays.
Kirkland is Costco’s private label brand. It’s their store brand. It’s a brand that, when they want to offer something at a certain price that they don’t feel a manufacturer or supplier can do, they build it themselves. Since it was launched in 1995, the in-house brand has built a reputation for quality and low prices on everyday items. Today, Kirkland products make up a quarter of Costco’s $166 billion in annual sales.
But when you talk to customers, I think they generally feel that it doesn’t necessarily need to be fancy because they’ve already bought into this Costco pitch, which is, this is high quality, and it’s a lower price, and you don’t need to be afraid of it.
That customer loyalty helped Costco remain strong during the pandemic. Costco is certainly a model that has not only survived the pandemic but has really thrived in the pandemic. Despite the increased popularity of online shopping, Costco has leaned into its strategy of driving members to its stores.
It’s really interesting to me because for years, people have questioned Costco, saying, “Amazon’s going to get you; you’ve got to get bigger online,” and that really hasn’t played out yet. They’ve said explicitly, “We prefer people to come into the store and shop. We want impulse buys. We want people to come in and see what we have and buy more. We work better that way, and it’s cheaper.”
Starbucks
If you’ve ever ordered something at Starbucks, you’ve probably loaded one of these. Starbucks, between October and December, is set. Something like three billion dollars of value is loaded onto these cards. I mean, that’s a lot of money—so much money, in fact, that if Starbucks were a bank, it would rank as the 385th biggest in the country. And it’s money that Starbucks gets to use up front as revenue before a single product is even purchased. Eventually, it is a liability if someone chooses to use it, and you will find that in lots of gift card programs, there are plenty of people who never use it.
So, how important are Starbucks’s mobile app and gift cards to its bottom line, and what role does technology play in its continued evolution? This is the economics of Starbucks.
In 1971, the first Starbucks, a small, unassuming café, opened in Seattle’s downtown. Fast forward 50 years, and that store is still in operation, but Starbucks is a global coffee giant. Only McDonald’s is bigger than Starbucks when it comes to market cap, so they are really a powerhouse when it comes to the whole restaurant industry.
In its early years of operation, Starbucks expanded slowly and only within Seattle. It wasn’t until 1987, when the original owners sold the company to its then-marketing director, Howard Schultz, that the Starbucks that we know today took root. Schultz began expanding Starbucks outside of the city and introduced Americans to what was then a little-known Italian drink: the espresso.
They were really founded on this coffeehouse culture that they make each beverage by hand according to order. As Starbucks has grown, that has gotten more complicated. Today, Starbucks says they make more than 170,000 different varieties of drinks.
These beverages can be very complex. They can take a while; they can take many different ingredients. And so it’s good for Starbucks in that these tend to be higher-priced beverages, but for workers, the baristas, they can be very complicated.
The company’s early investment in espresso has transformed into many different signature drinks, from the creation of the Frappuccino to the launch of the Pumpkin Spice Latte.
Pumpkin Spice Latte, high private.
They really didn’t know that it would take off like it did, but clearly, it has formed quite a phenomenon all around the world. Really, we introduced pumpkin spice this year. One additional thing in Starbucks’ evolution is cold beverages have become much more important to the company, whether it’s just an iced coffee, a Nitro iced coffee, or all these cold foam and cold brew.
Increasingly, this is so important to their revenue. The company’s gone through periods where Frappuccino sales have softened, but they’ve come up with more cold drinks to keep people interested and keep people ordering.
In part due to the company’s Seattle founding, technology has played a large role in Starbucks’ dominance. A key moment of that was the founding of its mobile app in 2009, which was very early for one of these kinds of apps. They really saw this as a digital flywheel.
At the end of 2021, mobile orders accounted for nearly a quarter of all Starbucks transactions in the U.S., many of those purchased through a virtual Starbucks gift card, which was previously the only way a customer could order on their phone. Today, a little under one half, or 44 percent, of all transactions at Starbucks are done with a Starbucks card. In fact, so many Starbucks customers use a Starbucks card or the Starbucks mobile app to purchase items that Starbucks says it holds about 2.4 billion dollars in cash that was uploaded by customers to be used later. That number exceeds the deposits at many American banks.
Starbucks also gets a lot of data from that. They own a lot of that data in a way that many companies don’t because they have created this whole ecosystem where people are using the Starbucks app, their mobile ordering, and they’re hooked into that Starbucks unique proprietary system.
As mobile payments rise, Starbucks’ business priorities have shifted. Prior to the pandemic, approximately 80 percent of U.S. Starbucks transactions were on the go, either as drive-through or mobile order. Starbucks started in cities but really has spread all around the country, including suburbs, and a lot of that is through drive-throughs. These alternate pickup options are becoming increasingly important to the company’s bottom line, especially during the pandemic.
These stores have been a lifeline to Starbucks because they kept running and people could easily queue up and go without having to enter an actual café.
Starbucks has long said that it remains committed to a set of values established early in the company’s existence. Starbucks is very committed to trying to create a connection between its baristas and its customers, even in its drive-through. They talk about this on earnings calls, that there are these customer connection scores. They want to make sure that everyone is feeling good about their Starbucks experience, which is getting increasingly challenging when you’re ordering through a drive-through or a mobile app; you’re trying to get in and out.
Starbucks says those values also appear in the manner in which their stores are designed, the items you will find in the store. They really choreograph that down to where the basket of waters is placed into a store. They want this all to feel very similar.
Starbucks has long touted its internal culture, which it says is built on a strong relationship between management and employees. The workers at its stores are not called workers or baristas; they’re called partners, and this is very central to the company’s ideology. Part of that is that all these partners do get shares in the company. It’s called Beanstalk.
That relationship may look different going forward for some Starbucks locations after two of three Buffalo stores voted in favor of unionization. Since then, Starbucks has thrown a huge amount of energy and resources into this issue, and executives have traveled to Buffalo extensively to meet with workers to try to understand their concerns.
According to the company, they want to maintain this direct relationship with their workers. They call unions an intermediary; they do not want that relationship to be severed. But according to these workers who support the union, they want a more direct relationship with the company.
In a statement to the Wall Street Journal, Starbucks said:
“Starbucks’s success past, present, and future is built on how we partner together always with our mission and values at our core. From the beginning, we’ve been clear in our belief that we are better together as partners without a union between us at Starbucks, and that conviction has not changed.”
They are the world’s biggest coffee chain. They are very dominant when it comes to coffee sales, and they are really synonymous with coffeehouse culture in a lot of ways, but they do face increasing pressures.
IKEA
You know, they don’t tell you, “Don’t lay on the bed.” You’re supposed to lay on the bed.
If you’ve ever visited an IKEA, you’ve likely encountered their store’s endlessly winding floor plan. This layout can be confusing—that is by design. IKEA may be the biggest furniture retailer on the planet, but it’s certainly not conventional. The Swedish furniture giant asks its customers to build their own products and distributes those products in minimalist flat-packed boxes. So, how have these retail strategies, as well as their famous Swedish meatballs, contributed to the company’s runaway success?
This is the economics of IKEA, a look at the innovative business practices that have transformed modern life.
When you step into an IKEA, you immediately sort of are put on this path. IKEA store layout is a fixed path design, which means there’s a designated route that all customers must follow that guides you through the store in one direction.
It’s not a grab a carton of milk and get out kind of store; it’s the opposite of that. It’s very much set up to spend a day, think about rooms, you know, dream about what you really want your bedroom to look like.
A floor plan of most IKEA stores resembles a maze that curves about every 50 feet to keep customers curious about what comes next. Since an average IKEA store is around 300,000 square feet, or five American football fields, that means a lot of walking. An IKEA is, to some, frustratingly winding, but really, it’s laid out as an experience to get you to buy more.
IKEA is famous for putting its customers to work. Unlike most furniture retailers that sell products pre-assembled, many of IKEA’s pieces have to be built by their customers. But why?
As many couples and their therapists well know, building your own IKEA cabinet can be challenging. The big idea behind the IKEA effect is that consumers are more attached to and have more positive feelings towards objects or things that they’ve put effort into, and that we actually think that they’re more valuable because of that.
The IKEA effect was first coined in 2011 by researchers who noticed a similar phenomenon in other products and businesses. When instant cake mixes were first introduced in the 1950s, they didn’t sell well. Then they said, “Let’s add a fresh egg.” It was this idea that we want to feel like we’re just participating enough to not feel guilty about taking a shortcut.
When you make a cake from a mix, which do you want: a fresh egg cake or a cake made with dried eggs? For higher, lighter, tastier cake, why, fresh eggs, of course!
The idea that we should love building products isn’t necessarily what IKEA intended. If you’ve ever shopped at one of IKEA’s massive warehouse stores, you’re likely aware of the unconventional product names. But what you may not realize is that in creating these items, IKEA sometimes comes up with a price tag first.
Sort of a classic example that they talk about all the time is the one-dollar light bulb. They had this idea that a one-dollar LED light bulb, you know, this new type of light bulb, would be hard to achieve, but if they could achieve it, lots of people would buy LED light bulbs. So they just sort of designed backward from the price point in mind.
That obsession with low prices is a large part of why IKEA is the world’s largest furniture retailer today. IKEA has 445 stores operating in 52 countries.
You know, obviously, if you go into a student dorm room, you’re going to find a lot of IKEA, but you’ll also find some IKEA products in a wealthy person’s home, and that’s really what they’re going for.
Today, IKEA is the very definition of mass market appeal, but when the company first began as a Swedish mail-order business in 1943, well-designed furniture tended to be expensive and, as a result, out of reach for most—seen as a serious long-term investment. Ingvar Kamprad, who founded the company as a teenager, pushed forward the idea that furniture could be flat-packed to massively reduce the cost of shipping and transportation.
Flat packing is really the largest, arguably, IKEA invention that really led to the company’s growth. And the idea is that instead of buying, you know, a piece of furniture all put together, it’s deconstructed into a flat pack. You can fit more in a truck, you can fit more in the IKEA warehouse, and you can also get it in your car. The trade-off is, you know, you put it together at the end.
Flat packing is a practical aspect of the philosophy that has long guided IKEA’s success, called democratic design. It’s this idea that everything is in balance: both price, form, function, the aesthetic, the sustainability. This vision to create a better everyday life for the many people was set forth more than 30 years ago by Kamprad in a manifesto now presented to every IKEA employee.
And they talk about it almost religiously. And fundamentally, it’s this idea that when designing a product, they think about it can’t just be really cool looking, it can’t just be functional—it has to be all those things.
Despite the long shopping trips and the DIY, customers can’t seem to get enough of IKEA. Perhaps it’s as simple as labor leaves, leading to love.
Crocs
They are so cute, and they even smell like the cereal, y’all!
Crocs, the colorful shoe that first became popular in the early 2000s, hit its peak in 2021. The company reported a record annual revenue of 2.3 billion dollars in 2021, up over 60 percent from the previous year, and its stock reached record highs.
The past few years for Crocs has been this moment of heavy collaboration, constant releases. They’re really trying to put themselves in front of people that might not have considered Crocs prior.
The company’s success coincided with the pandemic, leading some to credit the shoe’s popularity to timing, especially as its stock price has been dropping since the pandemic boom has waned. But other comfortable footwear brands didn’t take off the way Crocs did. So, how did Crocs make a name for itself during the pandemic, and how did it find success as one of fashion’s most divisive shoes?
This is the economics of Crocs.
The company was founded in 2002, the same year it debuted its classic clog. The name Crocs was inspired by crocodiles, which live on land and in water.
When Crocs were first released, they were intended for a consumer that was looking at them as a functional thing, so probably gardeners, people that, you know, were on boats, people that worked all day on their feet, people that worked on a line in the kitchen.
Part of what makes them so functional is the material, a proprietary closed-cell resin called Croslite that’s slip-resistant, lightweight, and easy to clean.
Producing a molded shoe is certainly simpler in a lot of ways than assembling a sneaker. The most underrated advantage they have over the marketplace is that it’s clear that they’re able to kind of do things that other companies would not be able to do because of their scale and because of their production capabilities.
Crocs’ sales took off in the first three quarters of 2005. It sold 4.4 million shoes, hitting a revenue of 75 million dollars. Part of the reason for its initial success was that the shoe was easy to get; it was available at retail stores, gift shops, and mall kiosks. In 2006, Crocs purchased Jibbitz, a company that made small plastic shoe charms. That same year, the company went public and became the largest ever U.S. footwear IPO at the time. But in 2008, in the midst of the financial crash, the company suffered a net income loss of 185 million dollars.
Though the initial craze had simmered, the brand still managed to hang on to a relatively large customer base over the next few years, thanks to its global presence. In 2014, Crocs started making major changes to its business model, closing dozens of stores, shifting away from malls, and turning to online sellers like Amazon.
Crocs announced today it will eliminate nearly 200 jobs and close a number of retail stores as part of a restructuring effort.
The company also cut back on the number of styles it sold by between 30 and 40 percent and refocused on the classic clog that made it famous. The following year, Crocs invested in a global marketing push to relaunch its brand image. Despite its efforts, the company’s stock held steady until 2020, when the global pandemic hit.
Prior to people working from home and, you know, not wearing their dress shoes, not wearing their heels, there was already this rising wave of comfort-minded, comfort-first footwear that was really becoming more popular. Of course, that accelerated during the pandemic.
The comfort aspect is what many call the key to Crocs’ success, but another important factor is how easy it is to customize the shoe with Jibbitz.
You move them to different Crocs over time. As you’ve got a green pair, a camo pair, or a pink pair, the Jibbitz would stay with you, and they were yours. They were almost like the way a keychain on a backpack was at a certain point.
This idea of individuality and self-expression is one that the brand emphasizes through its marketing campaign and on social media. The uniqueness of the shoe’s design has sparked debate.
Even going back to Crocs’ early days, there were two warring factions: “Crocs are ugly and they’re a blight on society, and we need to get rid of them,” and “I don’t care how comfortable they are; they’re ugly.” And then there were people that said, “No, they’re cute and they’re kind of doughy and they’re fun.”
Look how freaking cute these are!
Crocs leaned into this polarization, partnering with celebrities and well-known brands to create limited-edition versions of the classic clog.
I think that’s probably the biggest shift within the fashion world of the past decade is that people truly seem to design for Instagram because you want to stop people from scrolling, and certainly a shoe plastered with fried chicken does that.
In 2018, Crocs says its Balenciaga clog, an 850-dollar, 4-inch platform shoe, sold out within hours. And in 2021, Crocs says it partnered with more than two dozen brands, artists, and creators through collaborations and license programs.
Sometimes it was through Jibbitz, but sometimes it was like these kind of crazy revamping of what their clog was.
Constantly releasing new collaborations has not only kept Crocs in the press, but it has also helped it break into new markets.
There are Croc collectors that go after every model.
I am overflowing with Crocs.
The same way that Nikes resell on websites like StockX and eBay, Crocs are now reselling. Crocs and other comfortable shoes may have peaked with the pandemic as people begin to migrate back into work and consider more traditional footwear, but many others are still prioritizing comfort.
We’re seeing that with a lot of doughy running sneakers that people are wearing. We’re seeing that certainly with the growth of slides, which is a huge business in the luxury market.
Crocs’ stock has dropped around 60 percent since its November 2021 high.
I think the market’s nervous about the short term, right? So, we’re definitely seeing supply constraints in the first quarter.
But the company says its fourth straight year of revenue growth was fueled by continued global demand, and it expects revenues to grow to over 5 billion dollars by 2026.
I think that, at a certain point, you can only reach so many consumers, but I think for now, they have been able to convince enough consumers that they deserve space within their closet, and they’ve got to have the two fingers.
Dollar General
Dollar General’s business model: it’s a retailer that can make a lot of money selling very cheap goods to a relatively small number of people. If you’ve ever shopped at a Dollar General, you might have found the store on a remote road, like this one. It has every appearance of being in the middle of nowhere, but this is a meticulously planned, very well thought-through strategy—a strategy that’s been key to Dollar General’s success in rural America.
The company is bucking current retail trends by expanding rapidly and opening stores away from population centers. Dollar Generals go where Walmarts aren’t, but it’s not just the strategic locations far away from big-box stores. Dollar General employs a number of tactics to keep operating costs down, including leasing stores, paying employees low wages, and selling limited products. And yes, that includes stuff that isn’t really a dollar. Dollar General is almost something unto itself. It kind of takes pieces from a lot of different retailing models. This is the economics of Dollar General.
After more than 30 consecutive years of sales growth, Dollar General has become one of the most profitable and fastest-growing retailers in the U.S. Last year, the company brought in more than 30 billion dollars in sales. So, how has a store that sells products at rock-bottom prices managed such extreme growth?
They add about two and a half stores every day in the United States. Just for scope, there’s more than four times as many Dollar Generals as there are Walmarts. There’s more Dollar Generals than there are McDonald’s in the United States.
There are currently more than seventeen thousand Dollar Generals in the U.S., but if you don’t live in rural America, you might not have ever even stepped foot inside the store.
Where would you typically find a Dollar General? You’d think of a two-lane road, think of places where the houses are far apart, farmlands, kind of lower-income communities. You might find them by a post office or a church or at an important intersection.
This is often a deliberate decision. The company has formulas for identifying locations to open stores. Often, the Dollar General will be down the road, miles away from the nearest town and Walmart, in areas with limited shopping options. Three-quarters of Dollar General stores serve communities of twenty thousand people or less. According to the company, it looks for need first and foremost, so it’s going to look for a place that we might call a food desert, where there is not a grocery store, not a big-box store. Its target demographic is households with people making forty thousand dollars or less, and it looks for a place where it can get inexpensive real estate.
To keep costs down, Dollar General tends to lease its properties rather than buy them. Inside the stores, it has a limited selection of products that it buys in bulk, which gives the company more buying power with suppliers. Most Dollar General stores don’t offer fresh produce and, compared to grocery stores, have fewer perishable items, which have a shorter shelf life and bring in lower margins.
You walk into a Dollar General, you’re going to see metal shelves. It’s going to be quite bare-bones. Think linoleum, think bright lighting. You won’t see a lot of people working there.
By paying low wages to a minimal, often part-time staff, the company keeps labor costs low. The median annual income for employees is just over sixteen thousand dollars, according to Dollar General. Dollar General says they employ more than a hundred and fifty-seven thousand individuals and that they offer employees competitive wages and benefits.
These stores are staffed at minimum levels, so there aren’t many employees. They pay closer to a gas station attendant than even a Walmart employee, so it’s people that, much like their customer base, live in an area where there aren’t a ton of other options.
Despite the name, not everything costs a dollar, but prices are extremely cheap and often significantly lower than grocery and drugstores. Critics say Dollar General’s strategies harm local communities by not providing healthy food options and potentially hurting the local small business economy. Dollar General says that they are not a grocery store and that they are serving customers who would otherwise not have access to an affordable retail option. Ultimately, the low prices and the convenience for rural customers are what keep people coming back.
Some shoppers have even found items for under a dollar. Penny shopping at Dollar General—let’s go! At the first store, I found Propel water for one cent. At least use the Dollar General app, scan, and verify it’s a penny before heading to the register.
Dollar General is on pace to continue growing. The company grew 16 percent during the pandemic, a time when other retailers saw growth in e-commerce, not in-person shopping. Dollar General plans to open about a thousand stores this year. When you have a business model that involves small-footprint stores without a lot of embellishments or bells and whistles, a company can do that quickly and they can do it cheaply.
Dollar General is also branching out and going in new directions. It’s been experimenting with stocking more fresh and refrigerated food and moving towards urban centers. It plans to expand PopShelf, a new chain aimed at higher-income suburban customers.
PopShelf, in addition to being located in different places, will aim to sell things that are more fun—so not as much staples that you need to get by day to day, but things like decorations, party supplies—a little bit more fun than necessary.
Dollar General says the new expansion isn’t necessarily a shift from their overall growth strategy. They say they can serve a diverse customer base with stores in urban, rural, and suburban locations. Yet even as Dollar General expands its offerings and target demographics, the company expects that its core customers will continue to be shoppers in small towns without other options.
Sephora
There really is a before and after Sephora when it comes to the makeup industry. Until about 20 years ago, this is how most Americans shopped for luxury makeup: a sales representative of the brand would stand behind the makeup counter and help customers make a purchase. That completely changed with Sephora. Now it’s a free-for-all. People walk into the stores, they test whatever they want, nothing is behind the glass.
So how did this French retailer come to dominate the global personal care and beauty product industry, and what business practices helped make it the industry leader that it is today? This is the economics of Sephora.
Today, the beauty retailer employs over 36,000 people in more than 2,700 stores in over 35 countries. Those stores carry over 250 beauty brands.
At this point, Sephora is like kind of my second home.
The Sephora that we know today has its roots in a small perfume shop that opened in 1969 in Limoges, France. At that time, the perfume and cosmetics market was dominated by a service-based retail model in which staff typically received commissions based on sales. Instead, Sephora used the assisted self-service model, in which customers are free to test products in the store.
We have a full station where you can just like literally grab whatever, and you can try on the lipsticks, you can try on the eyeshadows. I always leave looking like a literal different person than I arrived.
Sephora customers can still request help from a sales associate, who Sephora calls a beauty advisor.
There’s a little bit more trust with the sales representatives in the Sephora store because they’re brand agnostic. So they can tell you maybe you should buy the mascara from this brand, but you should buy the blush from a different brand.
Sephora also bucked convention in the manner in which it displayed its products.
So makeup items are next to each other, whereas from the same brand, a fragrance would be in the fragrance aisle, and the same brand, a skin care product will be in the skincare aisle.
Then, in 1997, founder Dominique Mandonnaud sold Sephora to the large luxury retail conglomerate LVMH. One of the advantages of being owned by a conglomerate like LVMH is that the company can jump very quickly on trends. And actually, several of the brands that are sold in Sephora stores are owned by LVMH. One of the popular brands owned by LVMH is Fenty Beauty by Rihanna.
And then Fenty, of course, has a huge section, the whole row of Fenty. We got the lip glosses up front.
Sephora’s success also stems from its exclusive line of products. There’s a little bit of tension in the relationship between a store and a brand because Sephora is such a hot store for makeup brands to sell their products in, Sephora ends up having a lot more leverage in that relationship.
The Sephora Collection.
The challenge for high-end beauty brands these days is that they’re really facing a conundrum. They’ve become increasingly dependent on Sephora for sales growth, but because LVMH also produces beauty brands, there’s an element of competition there, and more brands are coming out constantly. The shelf space is shrinking.
Five Sephora products you need to try, part 10.
In part due to that product exclusivity, Sephora boasts a loyal customer base.
Here are five Sephora products you need to buy tonight. Sorry, I don’t make the rules; you just have to.
So what you’ll find oftentimes on Instagram or TikTok is that people have these haul videos where they’re showing all the products that they bought at Sephora, and they’re going one by one talking about them.
This is the closest tinted face oil, and it’s 42 dollars. I recommend this product to everyone.
And they’re always like, “I’m paying 42 dollars for a face oil.” Yes, you are.
Many faithful customers are members of Sephora’s Beauty Insider program, which has three different tiers and more than 25 million members. The lowest tier is the Beauty Insider. The next level up is VIB or Very Important Beauty Insider, which users must spend 350 dollars in a calendar year to unlock. The top level is called Rouge, which customers can access after spending at least a thousand dollars in a calendar year. Benefits like savings increase with each tier.
I’m Rouge. Don’t judge me. I know I spend a lot of money, okay? I get it.
But the real advantage for Sephora with the Beauty Rewards program is that every time a customer goes in there, Sephora knows exactly what they bought. And that is very valuable information for the company to understand who the customer is, what they’re purchasing, and then down the road, to be able to market in a very personalized way to that customer.
Yet, as much as the company profits on exclusivity with its products, when it comes to Sephora’s consumer base, the retailer takes inclusivity seriously. One of the ways that Sephora has tried to become more inclusive is by featuring a larger number of brands in their stores. They’ve made an effort to include black-owned brands and then also by pushing brands to expand their product lines and offer products that appeal to people from different racial groups, different ethnicities.
In 2021, Sephora relaunched Color IQ, a skin tone matching technology that the company offers to assist customers in selecting the most natural products for their skin tone.
And Sephora is still expanding. In December 2020, the company announced a partnership with the department chain Kohl’s to install 850 shops inside Kohl’s stores by 2023. Since opening 200 Kohl’s locations this summer, Sephora has added 200,000 new Beauty Insiders.
In a statement to the Wall Street Journal, a Sephora spokesperson said, “We want to be an unequivocal global leader in the prestige beauty space and a purpose-driven brand that is a transformative opportunity for everyone we touch.” They continued by outlining three main areas: customers, brands, and teams.
Sometimes when customers step out of a Sephora store, they will have splotches of makeup all over their arms, and that really showcases what they’ve been doing in the store.
Target
Walk into a Target anywhere in the U.S., and you’re likely to find sleek mannequins, elaborate displays, and fancy lighting. Target is very focused on the aesthetics of their stores and their products. That is what they hope makes it feel like an elevated discount store experience.
This elevated experience, which has led some to nickname the store “Tar-zhay,” is part of the company’s strategy to differentiate itself from competitors and draw customers through the door. But what’s happening in the front of a Target store is only a portion of the retailer’s secret to success. This is the economics of Target.
Target to me is so interesting because really they’re a department store that became a discount store, and they were always going after sort of a higher-end discount store image, and that’s remained true to today. Target positions itself as the option for cheap yet chic items, and customers can see the two ideas combined when walking around the store in certain areas like apparel, home goods, and electronics. Target stages items with lavish lighting and displays, but just across the way, you’ll still find the standard merchandise aisles with uniform fluorescent lights.
Target has always tried to sort of meld these visual expectations that we have from a department store, like the mannequins and the good lighting and like a display for cosmetics, with a discount model. They also want you to feel like you’re getting a good deal, and I think you see that as they iterate on store designs, they still strive for that combination.
According to a study by Hawk Incentives, when a customer feels like they’re getting a good deal, it can make them feel smart and in turn increase sales.
Don’t get distracted at Target. Don’t get distracted at Target. Don’t get distracted—oh, I need that!
Retailers always are looking for this balance of things that bring you to the store that you need, like a gallon of milk, and the things that you might buy on a whim that they actually make more money off of.
Target’s store design is one of several factors that have helped the retailer expand in recent years. The business has grown more than 35 percent in the last two years, crossing 100 billion dollars in annual revenue, driven in large part by the pandemic and a decision Target made five years ago to invest in its stores.
Lots of retailers said, “Hey, Amazon is here. Let’s stop building stores; let’s remodel what we have. Let’s develop an e-commerce model. Let’s invest in other things.” Target has continued adding stores. Some of them tend to be smaller stores, different types of formats, while they’ve invested in e-commerce, but they haven’t completely pulled back on expanding their store count.
The retailer has over 1,900 locations in the U.S., which is smaller than Walmart but bigger than Costco. Around 75 percent of the U.S. population lives within 10 miles of one of these stores. So, Target, like lots of established big retailers, has this huge benefit right now, which is they have the stores already, and you probably live pretty close to one. And that’s enabled them to, say, offer things online for pickup in the store parking lot, which has been wildly successful for them during the pandemic because they have that store for you to go and pick up your online order at.
The majority of operations like in-store and curbside pickup and fulfillment for online orders get started in the back room of the stores.
It’s been so interesting because they started to say, “We’re going to use our stores. We’re not going to build big e-commerce warehouses. We’re going to use our stores.” Several years ago, there was a little bit of skepticism in the market because it didn’t seem like you could really be that efficient in that model. But in the end, they say they’ve saved a lot of money because, a) they’re not building a huge warehouse which costs a lot of money up front, and b) they already have the trucks coming to their stores with their goods, and they’re just using those stores to the maximum possibility.
Last year, Target’s brick-and-mortar locations handled more than 95 percent of over 100 billion dollars in sales. So, walk around any Target, and you’re likely to see this operation in action. Workers move carts throughout the store, gathering and scanning items, while others watch for cars pulling up and deliver their orders.
In effect, Target hires workers specifically for its fulfillment operations. The company calls this role a fulfillment expert. They’re either out on the floor collecting goods off the shelves just like a shopper or they’re in the back room packing up things into boxes and getting them labeled appropriately. They’re really more like warehouse workers.
Now, the company is taking this a step further in an effort to bridge the gap between its stores and its delivery locations by doing these things called sortation centers, which allow them to basically have orders from stores that are being packed up by fulfillment workers sent to that more central location but still kind of close to stores, and then picked up and sent out from there.
Target’s success is also strongly dependent on the items in its stores. At any given time, about one-third of Target’s inventory is exclusive to the retailer through private labels. Similarly, designers will often partner with Target for a limited-time capsule collection.
These capsule collections for Target are sort of marketing, right? It’s a way to say, “Hey, we’re high design; big designers are interested in working with us.” So, it gives them a little bit of that cachet.
These collections are nearly as fundamental to Target as its Bullseye logo. In the late 90s, top makeup artist Sonia Kashuk partnered with Target to create a professional makeup line at affordable prices. Sixteen years later, Target bought the line, and today, this line is only one of Target’s more than 45 private labels.
They have become huge brands for Target, and they’ve added more and more, and now it’s a pretty significant percentage of their sales. And private label, like at all companies, can be lower price for the consumer but more profitable for the retailer. So, there’s a big interest for any retailer going in that direction.
According to a report by CB Insights, retailers can earn 25 to 30 percent higher gross margins on private labels compared to manufacturer brands. Target has yet to share the precise margin on its private labels, but currently, 11 of its brands are worth at least one billion dollars, with four brands crossing the two billion mark.
While Target has transitioned through many iterations since it got its start in 1962—changing store designs many times and acquiring businesses within its larger brand—the company continues to evolve with the ever-changing customer.
They tend to kind of change strategy quickly when things aren’t working, and I think we see them in the middle of potentially another version of that because the consumer is changing so much right now.
But even as the company evolves, some aspects remain the same.
I think the most consistent thing for Target has been this image, this idea that they’re an elevated brand. They’re different than their competitors; they have stuck with that since the beginning, and they still really lean on it today.
Airbnb
This is a tiny home on Airbnb. So far this year, this listing has brought in over twenty thousand dollars for its host. The typical U.S. host in 2021 earned over thirteen thousand eight hundred dollars, according to the company. The tiny home doesn’t cost a lot to build, and yet it could charge hundreds of dollars a night.
Airbnb posted a profit in its second quarter as guests booked a record number of stays and experiences, and hosts increased prices for rentals amid high inflation. But people didn’t book as much as analysts had projected, and the company’s summer bookings forecast fell short of expectations.
Obviously, it’s an incredibly dynamic period of time, but I’m still expecting an incredibly strong period of travel even if people pull back spending some.
So, how did the largest home-sharing platform in the U.S. navigate its biggest crises, and could it borrow those lessons to weather fears of a recession? This is the economics of Airbnb.
Airbnb started around the time of the 2008 financial crisis. This was a time when people were really hard-hit by the recession, and they were looking for a way to make an extra buck. In 2016, the company launched Airbnb Experiences, which let travelers book classes, tours, and outings. Airbnb also spent more as it grew.
The CEO branched out into all kinds of things. He wanted to have a media studio; he wanted to branch into transportation. And then the pandemic hit. Business was down 80 percent, forcing Airbnb to take on two billion dollars in debt and pause all non-essential projects.
I hope I never do a side project again in my life. I learned a lesson. I think the lesson is when you try to do new things, the side things don’t work.
The summer of 2020 was a turning point for Airbnb. People started quarantining with their families, friends started taking staycations while they could work remotely, so that’s something that definitely benefited Airbnb. Local travel became its stronghold, and people started using the platform for longer stays. The company was one of the hottest public listings of 2020, though its stock price has fallen since then amid a broad market cool-off. In August, Airbnb projected record third-quarter revenue on the back of higher rental prices and said it expects to post its first full-year profit this year.
A lot of businesses have lucky moments, but there’s something to be said about getting lucky and also being able to ride that wave and capitalize on it.
That’s what Airbnb says it has done from the start. Back then, in 2008, a lot of people turned to hosting because they were losing their homes, housing prices were dropping, and a lot of people, because they didn’t have as much money, were looking for more affordable ways to travel than ever before. That really helped them bring a lot of people who were looking for ways to make up for lost income onto the platform. And you can really see them capitalize on timing during the pandemic as well.
Airbnb redesigned its app and website to focus on local stays during the pandemic. Last summer, it launched a flexible search feature which curates trips for people who don’t know where they want to go.
The pandemic and remote work gave us that flexibility. You know, we could travel during the week and still work remote, so Airbnb starts noticing this trend and says, “Oh my God, we can, you know, we can sort of capitalize on this,” and they do.
In May, Airbnb launched another redesign of its search tool that split homes into more than 50 categories as a way to steer people to places they wouldn’t otherwise have picked. So, what they’re trying to do is they’re trying to fill existing homes instead of adding more and more homes. Some analysts say this is key to the company’s future growth since global occupancy rates are low.
When it comes to addressing safety issues on its platform, some cities have complained that Airbnb has been too hands-off. They’re not actively monitoring these properties because, frankly, they can’t. They don’t own them. So that’s really where a lot of their problems stem from.
Four people were killed, and another four were hurt. All of it happened in a house rented out on Airbnb.
After a 2019 Halloween shooting, the company announced safety measures including a 24/7 neighborhood hotline to field complaints.
We’ve banned all parties globally on Airbnb. We have a risky reservation queue where we’re looking at any suspicious activity, and we have a pretty hands-on team that’s using some pretty advanced machine learning technology to essentially identify anything we think is suspicious. If it is, we’ll continue to seek more information.
The company says the number of party complaints has dropped 44 percent in the last two years. Airbnb has also been trying to reduce that rate further by doing things like blocking one or two-night stays on New Year’s Eve and Halloween for guests without a history of positive reviews. But incidents keep happening.
Earlier this year, we had a shooting in Pittsburgh, and again, you know, people were injured.
City officials have also blamed Airbnb for ruining the long-term rental market in some small communities.
What’s happened is a lot of people are just snapping up properties and renting them, and as a result, locals don’t have enough properties to rent long-term.
Airbnb doesn’t think that it’s actually affected the long-term rental market, but if you ask city officials, they have a different story. For example, in 2020, the mayor of Sedona, Arizona—a tourist hotspot—said that the demand for Airbnb rentals worsened the shortage of affordable housing and demolished the long-term rental market.
If we are part of the problem, we are going to work with cities. That’s why we’ve done numerous agreements with cities to create restrictions. We actually do want Airbnb to get more and more into long-term housing. We want people to really feel invested in the community.
One of the things that Airbnb is doing now is it’s trying to direct people to areas where it has supply, and that sort of also takes the load off of certain places that everyone might go to and that might get sort of overburdened.
In April, Airbnb announced that its employees can work from almost anywhere without a pay cut. So, if more businesses do follow Airbnb’s lead, Airbnb stands to gain in its home rental business because that would mean more digital nomads, more people traveling, and likely booking more Airbnbs.
But some travelers are concerned about rising nightly rates, and some analysts believe that hotel chains and competitors like Expedia Group stand to gain as business travel picks up this year. So, the question is, can Airbnb keep up the momentum?
We’re an incredibly lean company. We’ve already been preparing for a storm that we thought was inevitable for years to come.
Airbnb dramatically cut costs during the pandemic, and analysts have credited the company for keeping those down even as travel rebounded. While a potential economic downturn could decrease demand, Airbnb says it could also bring more hosts to the platform.
As the economy is going to be slowing down, I think more and more people are going to be interested in saving money, and I think they’re also going to be interested in new ways to make money.
Unlike hotels with fixed properties, Airbnb can flexibly offer lodging options that serve travelers’ changing needs, like it did during the switch to local travel.
I think even as we’re entering a recession, people have been kind of isolated for years and they’re yearning to get out, and the one thing I think you’re going to see them spend money on is they’re going to continue to travel.
Home Depot
If you’ve ever seen a commercial for the Home Depot, you might be familiar with this tune:
It’s a good time to be a doer.
Home Depot and its theme song have inspired a wave of videos on social media, revealing its cultural status as the go-to home improvement store for many during the pandemic.
Home Depot is the world’s largest home improvement retailer with over 2,300 stores across North America.
What we’ve seen is home price appreciation and housing activity at unprecedented levels, and what we know is that when homes become more valuable, those homeowners are more willing to spend on them.
With its 2021 fiscal year sales larger than both Lowe’s and Ace Hardware combined, one of Home Depot’s biggest advantages is its foothold in the professional customer space. That is, electricians, remodelers, plumbers, and other home professionals that place more lucrative orders.
So, how exactly has Home Depot attracted more professional customers, and what other strategies have helped it become a leader in the home improvement retail industry? This is the economics of Home Depot.
Walk into a Home Depot, and you’ll see a huge floor space with dozens of long aisles, everything from screws and other hardware to tools to major appliances, garden supplies, doors, windows, toilets—really anything you need for a home improvement project. A typical Home Depot store stocks about thirty thousand to forty thousand items throughout the year. Most locations are around one hundred four thousand square feet. The scale of the store gives customers the opportunity to buy raw materials in bulk and pick up items quickly.
They try to be somewhere that you can go if you’re just an individual trying to fix up something in your kitchen. They also try to be a place that you can go if you’re a contractor trying to buy lumber to help renovate somebody’s home or if you’re a plumber that needs all kinds of pipe fittings. So, they really try to be a good source on both sides of that equation.
Home Depot began when co-founders Bernie Marcus and Arthur Blank were fired from a home improvement company called Handy Dan. They wanted to launch a store that would be significantly bigger and cheaper than competitors. In 1979, they opened their first two Home Depot locations in Atlanta. The Home Depot founders had a vision for a home improvement retailer that could be a one-stop shop for the DIY or do-it-yourself customer.
You’ve never seen anything like it. The home improvement customer to us is unique. They’re a doer. That’s where that word comes from.
Since its founding, Home Depot has grown into a multi-billion dollar company that increasingly caters to the professional contractor as well as the DIY consumer. While many industries like service and hospitality took a hit during the pandemic, Home Depot’s revenue continued to grow. The pandemic fueled a boom in the home improvement industry as people spent more time and money on remodeling projects.
Between the middle of 2020 and the middle of 2021, there were four straight quarters where Home Depot grew its sales by more than 20 percent year over year, which is a very fast pace for a large established company.
Home Depot says they are seeing increasing demand for professional projects as people feel comfortable inviting contractors back into their homes.
There’s been this buildup of projects that require professionals that more recently people have been willing to get to, and that’s sort of led to a second wind of sales growth.
What kind of person would come here at 5:45 a.m.? Well, there’s Carly, a carpenter.
Home Depot has positioned itself to attract more business from these contractors and home professionals, particularly ones that place big orders.
In the 2021 fiscal year, about 50 percent of its sales came from pro customers, even though they made up less than 10 percent of its customer base. In comparison, about 20 to 25 percent of Lowe’s total sales come from pro customers, according to the company.
As a key part of its pro customer strategy, Home Depot has invested 1.2 billion dollars in expanding its supply chain and distribution network. The company says it is building 150 new distribution centers to help speed up the replenishment of store shelves and quickly deliver purchases to customers’ doors.
Each facility, with some as large as about 14 professional football fields, can hold a huge amount of inventory and deliver orders directly to a project site.
One thing we know that’s important to our pros is the delivery of products to the job site. We’ve shifted our model to a network of nearly 150 distribution centers that are engineered to deliver those big and bulky products that are unique to the Home Depot and unique to the pro. Think lumber, think doors, think windows, think vanities. We’re designing a network that will deliver those goods same day or next day to 90 percent of the population in our market.
The home improvement giant’s distribution network works in tandem with their online strategy, giving pro customers more flexible options that better align with busy schedules.
We’re one of the largest e-commerce retailers in the country by volume. When people come to pick up orders from our lockers or from our service desk, they often shop for more products in the store, and so that’s an economic flywheel that our website creates for our company. These possibilities have really helped the company grow its sales quite a bit over the last two years. Sales from e-commerce channels have gone up by about a hundred percent, so basically doubled.
Though Home Depot has seen a long period of consistent revenue growth, the home improvement retail space remains a competitive and fragmented market.
This is a space where customers are very sensitive to prices. So if one brand is charging a higher price for a certain type of equipment, that’s something that buyers could pick up on and could easily shift to another retailer. So Home Depot is definitely very sensitive to other big chains, to smaller mom and pop stores.
The industry is also sensitive to economic fluctuations, especially with spending trends tied to the housing market.
Going back to the Great Recession and the financial crisis 10 years ago, that was a very difficult time for home improvement retailers, a turbulent period for Home Depot. In the last couple years, during the pandemic, the housing market’s been very strong. Certainly, the company would be in a very different position if there was some kind of big downturn in the housing market in general.
