Speaker 1: Bloomberg Audio Studios, Podcasts, radio News.
Speaker 2: Hello and welcome to another episode of the Odd Lots podcast.
Speaker 3: I'm Tracy Alloway and I'm Joe Wisenthal.
Speaker 2: Joe, you know what I did this weekend?
Speaker 4: Something outdoors in your garden or maybe a home construction project,
Speaker 4: but something that was very dirty and costly and time
Speaker 4: consuming and an.
Speaker 3: Economical Thanks Joe.
Speaker 5: Yeah, but.
Speaker 3: I'm sure it's very satisfying on some level.
Speaker 2: Well, I did do a lot of that. I'm restoring
Speaker 2: an orchard at the moment, and it's a lot of
Speaker 2: hard work and a lot of supplies. As you pointed out,
Speaker 2: I'm currently building a gate, and I think the gate
Speaker 2: is going to be phenomenally expensive by the time I
Speaker 2: finally finish it. But what I actually did this weekend,
Speaker 2: or one of the things I did, was I went
Speaker 2: over to tractor supply.
Speaker 4: Oh I'm jealous, you know, amazingly I still haven't been
Speaker 4: to one. Wait, Tracy, are you a hobbyist farmer? It
Speaker 4: would you call yourself that if you have an orchard?
Speaker 5: Right?
Speaker 2: Yeah, I mean I guess we have blueberries and raspberries
Speaker 2: and strawberries and apples and apple pears and all of
Speaker 2: that stuff. So yeah, yeah, I guess it's my hobby.
Speaker 4: You know, we did that episode about Tractor Supply last
Speaker 4: year with the professor who had done that HBS study,
Speaker 4: and by it sounds like you are the modal Tractor
Speaker 4: Supply customer.
Speaker 2: Please, Joe, I prefer cottage core elder millennials.
Speaker 3: Okay, well that's no.
Speaker 2: It makes me sound like a character out of like
Speaker 2: Final Fantasy or something.
Speaker 6: No.
Speaker 2: So I went over to Tractor Supply. And the reason
Speaker 2: I went is because it's chicken season. So they have
Speaker 2: all the baby chicks over there and you can kind
Speaker 2: of see them in their little enclosure, and I can
Speaker 2: fantasize about the day when I will have my own
Speaker 2: chicken and what kind I will get.
Speaker 4: But in the meantime, you have to build like ten
Speaker 4: other things like and then you can get around to
Speaker 4: building the chicken coop.
Speaker 2: Yeah that's right. I've got big plans for the chicken coop,
Speaker 2: all right. But the reason I bring it up is
Speaker 2: because Tractor Supply is a company that is sort of
Speaker 2: of perennial interest to us. So last year we recorded
Speaker 2: an episode with Michael Roberto when he published a case
Speaker 2: study for Harvard Business School on Tractor Supply, and even
Speaker 2: before then, I remember Samuel Rnes, the CORBU analyst, he
Speaker 2: had always called this company one of the most interesting
Speaker 2: retailers on the planet. So it's sort of loomed large
Speaker 2: over our consciousness. And I think the interesting thing about
Speaker 2: the Tractor Supply Company is there's this question of cyclical
Speaker 2: versus structural. So this is one of the companies who
Speaker 2: share a price and revenue really boomed during the pandemic.
Speaker 2: Lots of people were staying at home, lots of people
Speaker 2: became hobby farmers, as you point out Joe, buying tomato
Speaker 2: cages and growing their own vegetables from seed whatever, and
Speaker 2: so there was an expectation that a lot of that
Speaker 2: business would start to subside or at least slow down
Speaker 2: as people started going back to work, or some of
Speaker 2: the moving from urban areas to the suburbs started to reverse.
Speaker 2: But instead seems like this particular market just continues to grow,
Speaker 2: and Tractor Supply share price is still very, very high.
Speaker 4: You're absolutely right, So the stock is really close to
Speaker 4: an all time high, continues to power higher. You know,
Speaker 4: like fifteen years ago this was like an eight dollars stock.
Speaker 4: Today it's a two hundred and forty nine dollars stock.
Speaker 4: You look like you could be looking at a chart
Speaker 4: of in video or something, and it is striking that
Speaker 4: you don't have to be an AI company.
Speaker 7: To see charts like this.
Speaker 4: If you like find the right product, the right lane,
Speaker 4: the right store mix, et cetera, and you are on
Speaker 4: the right secular trends such as the rise of the
Speaker 4: hobbyist farmer, people moving out to the exerbs, growing their
Speaker 4: own chickens, et cetera. It's an amazing case study on
Speaker 4: how to like, how to execute.
Speaker 2: Absolutely So today I'm glad to say we really do
Speaker 2: have the perfect guest because we are going to be
Speaker 2: speaking to the CEO of Tractor Supply, mister hal Lawton.
Speaker 2: He joins us. Now, thank you so much for coming
Speaker 2: on the show.
Speaker 6: How Hi Tracy, Hi Joe, Thanks so much for having
Speaker 6: me on. Look forward to talking with you all today.
Speaker 2: Likewise, we are very very excited about this conversation, not
Speaker 2: least because it's a way for me to sort of
Speaker 2: reflect on my own spending happens so for Tractor Supply,
Speaker 2: but maybe just to begin with, you know, Joe called
Speaker 2: it the hobbyist farmer. There's a bunch of different names,
Speaker 2: cottage core, millennial type lifestyle, but like, who do you
Speaker 2: think of as your primary customer? Rural enthusiast is the
Speaker 2: other one that I remember.
Speaker 6: Yeah, you know, I think all those names are used
Speaker 6: frequently to reference our customer and kind of our Our
Speaker 6: main kind of theme that we ladder up to is
Speaker 6: life out here. And the reason for that is is
Speaker 6: we went out maybe seven or eight years ago and
Speaker 6: talked with our customers, and you know, these customers range
Speaker 6: from living in West Texas and they've you've got cattle,
Speaker 6: maybe living in Wisconsin and have a dairy farm, or
Speaker 6: you know, could be living here in Tennessee and have
Speaker 6: five to ten acres and they do a little gardening.
Speaker 6: Maybe they have some small animals, chickens, or they could
Speaker 6: half acre, you know, one acre unincorporated, you know, suburb
Speaker 6: exurb with you know, a raised bed garden in their backyard,
Speaker 6: or could be a dog breeder, and you know, just
Speaker 6: these whole range of customers that have different lives that
Speaker 6: they live. But what we found when we talked with
Speaker 6: them was they all used the words well out here
Speaker 6: in the description of their lifestyle, and it was just
Speaker 6: a very common phrase that all of our customers used,
Speaker 6: and so we ended up kind of laddering it up
Speaker 6: to that and saying, you know, we're built to serve
Speaker 6: life out here, and that plays itself out in so
Speaker 6: many different ways and so many, you know, variants of
Speaker 6: the lifestyle, whether it's hobby farmers, you know, horse owners,
Speaker 6: chicken owners, you know, whatever the passion they may be gardening,
Speaker 6: et cetera. But at the end of the day, they
Speaker 6: all have a lifestyle mentality philosophy that kind of ladders
Speaker 6: up to this notion of life out here, which is
Speaker 6: around freedom and self reliance, homesteading, the love of animals
Speaker 6: and pets and land.
Speaker 7: I love that.
Speaker 4: So since we are recording, since Tracy and I are
Speaker 4: in the Bloomberg HQ studios in Manhattan, I'm going to
Speaker 4: use the phrase out there, because we're certainly not out
Speaker 4: here right now, so we're talking about out there. You know, obviously,
Speaker 4: tractor supply has been growing a long time, and then
Speaker 4: it does seem to have at least helped been turbo
Speaker 4: charged by some of the changes that happened during COVID.
Speaker 4: I only realized this morning that you started in January
Speaker 4: twenty twenty, so you've probably never known like tractor supplying
Speaker 4: the normal times. But talk to us about, like how
Speaker 4: you distinguish sort of long term and short term trends
Speaker 4: in out heariness. Because I'm sure there was a bunch
Speaker 4: of people like, Oh, we're gonna move out to the country,
Speaker 4: We're gonna have chickens, we're gonna buy pets, et cetera.
Speaker 4: We know that some of that has slowed down or
Speaker 4: some of that was.
Speaker 3: A one off.
Speaker 4: So how do you think about the trajectory of the
Speaker 4: outhereeness and whether COVID was it an accelerant, was it
Speaker 4: something that went up and then we're back to trend, Like,
Speaker 4: how do you think about the growth of what's sustainable
Speaker 4: out there.
Speaker 6: It's a great question and it's one that's been asked
Speaker 6: repeatedly over the last few years about our business. To
Speaker 6: your point, we were eight point four billion dollars in
Speaker 6: revenue in twenty and nineteen. We did fourteen point six
Speaker 6: billion dollars of revenue in twenty twenty three. You know,
Speaker 6: that's roughly a twenty percent compound annual growth rad over
Speaker 6: those years, so significant growth for you know, particularly for
Speaker 6: our retailer with over two thousand store so reasonably mature.
Speaker 6: We would articulate that the majority of that sales lift
Speaker 6: we've seen and the increased customer transactions and new customers
Speaker 6: that are shopping us is structural in nature, and I
Speaker 6: can get into the reasons for that, but I would
Speaker 6: just say at the highest level, I think, you know,
Speaker 6: what we've seen in our business is very different than
Speaker 6: many of the other kind of COVID winners that you
Speaker 6: know went kind of boom to bus to some degree, right,
Speaker 6: whether it was everybody you know jumped on a peloton
Speaker 6: because they couldn't go to a gym, and then you know,
Speaker 6: we saw that reversion. Everyone started you know, using videos, meetings,
Speaker 6: things like zooms and stuff. And now you've got to
Speaker 6: shift back right where people are still doing that but
Speaker 6: obviously in person now. And you know, you look at
Speaker 6: even like other retailers who sell say electronics, who had
Speaker 6: a huge search because everybody needed a computer or a
Speaker 6: new router or you know need some other needed wanted
Speaker 6: a new TV, and then that all back. I mean,
Speaker 6: there's a lot of circumstances. We can think about different
Speaker 6: companies and different sectors that had a boom and then
Speaker 6: a reversion you know, with us, it's been different because
Speaker 6: for the most part it's been macro structural. But I
Speaker 6: would also assert that we've done some things hopefully that
Speaker 6: have helped make that, you know, structural. The big thing
Speaker 6: I would push on is really just the millennial generation.
Speaker 6: And at the timing that COVID was occurring, the millennial
Speaker 6: generation was kind of late twenties, early thirties, and you know,
Speaker 6: it'd been a question for a decade whether or not
Speaker 6: that generation was going to revert to to kind of
Speaker 6: the normal behavioral trends that other generations had followed, or
Speaker 6: were they going to be different. Right, we'd read the
Speaker 6: numerous stories on this is going to be a rental generation,
Speaker 6: and it's going to be an urban generation, et cetera,
Speaker 6: et cetera, right, and sharing generation, and you know, lesser kids,
Speaker 6: they're you know, lesser you know, buying homes and those
Speaker 6: sorts of things. And what we're seeing is that that
Speaker 6: gener generation is reverting to previous generational norms, they're just
Speaker 6: doing it a little later. And what we would articulate
Speaker 6: is that COVID was actually a.
Speaker 5: Catch up versus a pull forward.
Speaker 6: And historically that generation, say twenty six twenty five twenty
Speaker 6: seven would have started to you know, create household, buy homes,
Speaker 6: I begin to have children, those sorts of things, and
Speaker 6: they just pushed that out till twenty eight, thirty, thirty, two,
Speaker 6: thirty three, depending on where their age fell in that
Speaker 6: generational span. But you know, they're following the same steps,
Speaker 6: which is like, all right, like I've been in the
Speaker 6: city for.
Speaker 5: Five or ten years, I've kind of done that.
Speaker 6: It's time for me to you know, kind of get
Speaker 6: on with the next phase of my life. And many
Speaker 6: of them did that in twenty twenty and twenty twenty
Speaker 6: one and are continuing to do that.
Speaker 5: I mean, we still see.
Speaker 6: A net exodus out of urban even in twenty three.
Speaker 6: And when they're buying homes, both because of the current
Speaker 6: home environment they have to buy a bit more ex
Speaker 6: urban or country suburban as we would call it, but
Speaker 6: I think also their preference is to buy in those areas,
Speaker 6: and so they're buying homes and have been since twenty
Speaker 6: twenty in the areas where our stores are, and they're
Speaker 6: naturally wired for our type of business. You know, they
Speaker 6: come predisposed to gardening, they come predisposed to things like recycling,
Speaker 6: and and whether it's vegetarian or fresh foods. But you know,
Speaker 6: if you think about the mental lifestyle that they were living,
Speaker 6: even in a city, when they go out into kind
Speaker 6: of country suburbia, ex urban rural, you know, they want
Speaker 6: to have a similar mentality. So they get animals. They
Speaker 6: do raised bed gardens, they do chickens. In fact, now
Speaker 6: we're seeing that generation start to move into goats as
Speaker 6: they think about, you know, the vegetables and get the
Speaker 6: right milk.
Speaker 2: My husband and I have been talking about goats. We've
Speaker 2: been having a debate on goats versus sheep. Specifically, there's
Speaker 2: a type of sheet called a be doll sheep and
Speaker 2: it looks absolutely adorable. Sorry I interrupted you. How go ahead,
Speaker 2: I I could talk about it.
Speaker 4: Basically, you've catalyzed yet another whole in Tracy's pocket book
Speaker 4: with the sheep.
Speaker 7: The sheep, And.
Speaker 2: That's really interesting. And you sort of jogged my memory
Speaker 2: about some of the early commentary on millennials, and it
Speaker 2: was very much like, oh, this is a generation that
Speaker 2: just isn't going to own houses, when in fact, it
Speaker 2: seems like it just took everyone a little bit longer
Speaker 2: to actually buy a house for various reasons. But going
Speaker 2: back to something you you alluded to just then, you've
Speaker 2: sort of been riding a wave of, you know, a
Speaker 2: cultural trend and also demographic trend as millennials get older,
Speaker 2: and in some respects that could be considered a cyclical development.
Speaker 2: But you mentioned doing stuff to actually make it more
Speaker 2: permanent or more structural. What is it that you're doing
Speaker 2: to ensure that, you know, something that is would seem
Speaker 2: to be out of your control sticks around for longer.
Speaker 6: As we saw the surge in our business, we doubled
Speaker 6: down on the investment in our business across a variety
Speaker 6: of factors, with the primary goal of really staying ahead
Speaker 6: of our customer as it evolves and to illuminate that
Speaker 6: a little bit. In twenty nineteen, we spent two hundred
Speaker 6: and seventy five million dollars in capital expenditures. We're now
Speaker 6: spending between seven and eight hundred million dollars on an
Speaker 6: annual basis, So we've you know, nearly tripled the amount
Speaker 6: of capital that we're spending on the business on an
Speaker 6: annual basis, and we're doing it across avariety of areas,
Speaker 6: but really.
Speaker 5: All with the goal of, of.
Speaker 6: You know, better serving our customers and just making sure
Speaker 6: we're staying ahead of them as they're rapidly, you know,
Speaker 6: evolving in terms of both number needs and you know,
Speaker 6: kind of the ways that they're used to shopping. So
Speaker 6: a few examples of that one would be in our
Speaker 6: membership program or our loyalty program. We've always had a
Speaker 6: little well we've had a littalto program for the well
Speaker 6: over ten years, but it really was a modest program,
Speaker 6: kind of pre COVID, And in March of twenty one,
Speaker 6: we relaunched the program to be a tiered based rewards
Speaker 6: based system where kind of the more you spend, the
Speaker 6: more you earn, all with the goal of driving behavior,
Speaker 6: locking these new customers in getting them, you know, kind
Speaker 6: of as used as possible to routinely shopping tractors supply
Speaker 6: and you know, I can talk more about our Neighbor's
Speaker 6: Club program, but we now have thirty four million members.
Speaker 6: It represents nearly eighty percent of our sales. We've seen
Speaker 6: substantial benefits from that that investment. Second investment's been in digital.
Speaker 6: We launched a consumer mobile app in the summer of
Speaker 6: twenty twenty one. It now represents nearly forty percent of
Speaker 6: our sales online. We rolled out deliver from Store in
Speaker 6: a matter of weeks in the midst of twenty twenty
Speaker 6: and in addition to kind of the e commerce side
Speaker 6: of things, we've also rolled out in a bunch of
Speaker 6: technology for our team members to utilize in our stores,
Speaker 6: which has made them more efficient and sophisticated in serving
Speaker 6: our customers. And then the third thing I would highlight
Speaker 6: was we rolled out a store remodel program and we're
Speaker 6: now remodeling roughly fifteen percent of our stores on an
Speaker 6: annual basis. At the conclusion of twenty twenty three, remodeled
Speaker 6: forty percent of our stores. There's a number of things
Speaker 6: that we get out of that from a sales lift perspective,
Speaker 6: but one of the other important benefits is it contemporizes
Speaker 6: the store and really shifts it from what was historically
Speaker 6: perceived to be a kind of farm and ranch store,
Speaker 6: which you know, kind of the as you might imagine
Speaker 6: that when you're saying it, that was kind of the
Speaker 6: perception and a bit the style that we had in
Speaker 6: the store, and we, you know, we were able to
Speaker 6: contemporize it and make it feel a bit more like
Speaker 6: what it Millennial would think of when they walk into
Speaker 6: any sort of store, maybe they've been in an urban environment.
Speaker 6: But we didn't fancy it up quote unquote enough that
Speaker 6: our existing customer base they still felt really comfortable shopping it, right.
Speaker 6: We didn't kind of fire or alienate our existing customer
Speaker 6: But those would be three, you know, big investments that
Speaker 6: i'd highlight that we've made over the last few years,
Speaker 6: really all to serve our existing customer base is even better,
Speaker 6: but really to set ourselves up to be a retailer
Speaker 6: of choice for the new millennial customer.
Speaker 2: Joe, you know how you note that you're old. Tell
Speaker 2: me it's when businesses start catering to your taste and
Speaker 2: when you're.
Speaker 3: It's like, oh you're talking about me here.
Speaker 2: Yeah, pretty much. When CEOs come and say like, oh,
Speaker 2: we're redesigning our stores to appeal to millennials who might
Speaker 2: be more used to urban environments but are now in
Speaker 2: rural areas, that's how you know, and that's.
Speaker 3: How you feel like you're looking in a mirror.
Speaker 4: Actually, I want to ask, so, uh you recently I
Speaker 4: think in twenty twenty two, but a pet retailer pet
Speaker 4: sense and I'm curious in terms of like becoming less cyclical.
Speaker 4: I mean, you know, if people have animals or if
Speaker 4: people have pets, whether it's recession or a boom or whatever,
Speaker 4: they're probably going to feed them the same amount.
Speaker 7: How much does.
Speaker 4: That business allow you or was it sort of designed
Speaker 4: in order to sort of build some more acyclicality into
Speaker 4: the business.
Speaker 6: Nearly ninety percent of our customers have an animal or pet. Wow,
Speaker 6: seventy five percent of them have a dog. And then
Speaker 6: you know there's an array of cats and everything.
Speaker 4: It's just Tracy in this episode. Literally everything you say
Speaker 4: just comes back to Tracy. But yeah, keep going.
Speaker 2: Sorry, I'm the art more than our customer.
Speaker 6: Yeah, exactly, over half of our customers have more than
Speaker 6: two dogs. On average, our customer's dog weighs twenty pounds
Speaker 6: more than the average dog across the country. So you know,
Speaker 6: our customers have animals and past they almost all have dogs.
Speaker 6: Most have two dogs and their big dogs and a
Speaker 6: compelling kind of an element of our businesses for we've
Speaker 6: been around for eighty five years. We've really been were
Speaker 6: built even eighty five years ago to serve life out here.
Speaker 6: But our business model and our culture and our mission
Speaker 6: values have really been consistent throughout that entire eighty five years.
Speaker 6: But our business model has evolved over time to better
Speaker 6: server customers. So forty years ago, we didn't even sell
Speaker 6: animal feed for the most part, horse feed, coffee, chicken.
Speaker 5: Feed, et cetera.
Speaker 6: And now we're far and away the largest player of
Speaker 6: bagged animal feed in the United States between a twenty
Speaker 6: and twenty five percent market share.
Speaker 5: Twenty five years.
Speaker 6: Ago, we didn't even sell pet food and similar you know, realization,
Speaker 6: it's a better way for server our customers. It has
Speaker 6: less ups and downs both annually and also throughout the year,
Speaker 6: you know, seasonally. So let's start getting into pet food.
Speaker 6: And you know, now we're right at that number four,
Speaker 6: number five largest player and pet food in the country.
Speaker 6: And you know, one of the initiatives that we have
Speaker 6: in place to keep driving that expanded pet business is
Speaker 6: pet Sentence. And to your point, we did acquire that
Speaker 6: company seven to eight years ago, and in twenty twenty
Speaker 6: two we rebranded it to be pet Scents by Tractors Supply.
Speaker 6: We rolled out our neighbors Club membership program that was
Speaker 6: work that worked in Tractors Supply. We rolled that out
Speaker 6: to petscent So it works in both name plates now
Speaker 6: pet Sence. The ownership of pet Sentence really over the
Speaker 6: last decade almost has given us a lot of insights
Speaker 6: into the pet industry, given us access to brands that
Speaker 6: we would not have otherwise gotten access to, and allowed
Speaker 6: us to bring that knowledge and that those contacts into
Speaker 6: the core track supply and make the business better. We
Speaker 6: also are rapidly growing the pet Sence brand and we've
Speaker 6: got over two hundred stores now. They are in the
Speaker 6: same towns as a tractor supply. Ideally they're in a
Speaker 6: town that doesn't have a pet co. It doesn't have
Speaker 6: a Pet Smart. Typically our towns don't. We typically serve
Speaker 6: call it a twenty thousand person town. The tractor supply
Speaker 6: would be on the outs to the town typically wherever
Speaker 6: the more agg related you know, area is. But the
Speaker 6: Pet Sense we want that in the center of the town,
Speaker 6: kind of where the few restaurants are, the grocery store,
Speaker 6: some of the clothing stores that are in the town.
Speaker 6: You know, there might be a two three strip malls
Speaker 6: or malls in the town that are where the commercial
Speaker 6: activity is located. That's where we want a pet Sense
Speaker 6: and it does really two things. It serves that inner
Speaker 6: city quote unquote population that doesn't have big yards and
Speaker 6: doesn't have horses and cows and they've got you know,
Speaker 6: smaller animals and pets. But then also secondarily, in addition
Speaker 6: to serving that community in a specialty like way, it
Speaker 6: also serves convenience for the core tractor supply customers. So
Speaker 6: to say, on a Friday night, you're in town having
Speaker 6: dinner at the you know, olive garden, and you need
Speaker 6: to get some dog food or chicken feed on the
Speaker 6: way home just to get you through the weekend before you,
Speaker 6: you know, you do your annual your weekly shop at
Speaker 6: at track supply. Pet Sense also serves that in the
Speaker 6: so it's a great win win pet Sense tractor supply
Speaker 6: commonality on the brand pet Sense by tracks, by commonality
Speaker 6: on the loyalty program Neighbor's Club a purposeful overlap where
Speaker 6: it makes sense on assortment, but pet Sense doing it's
Speaker 6: what it's good at as well in terms of being
Speaker 6: a specialty player, carrying you know, more cats and even
Speaker 6: things for fish and lizards, and you know that sort
Speaker 6: of side of a pet specialty store.
Speaker 2: Joe, I have coyfish too.
Speaker 5: Of course you do.
Speaker 2: There you go, so one of the things I remember
Speaker 2: from when we spoke to Michael Roberto, the author of
Speaker 2: the Harvard Business case study on Tractor Supply. He talked
Speaker 2: about how the essence of business strategy is basically what
Speaker 2: you don't do, so what you decide not to do.
Speaker 2: After all, it's pretty easy to say, we're going to
Speaker 2: go after this massive market and this market, and we're
Speaker 2: going to sell this, this and that, and he described
Speaker 2: what Tractor Supply had done as a sort of judo
Speaker 2: strategy of basically avoiding head to head competition with bigger
Speaker 2: box stores like a Lows or a home depot. Can
Speaker 2: you talk a little bit more, perhaps about what you've
Speaker 2: decided not to do and how that maybe differentiates the business.
Speaker 6: So, and I think that's a very fair description of
Speaker 6: who we are. We want to be the best retailer
Speaker 6: serving life out here, and we're going to have store locations,
Speaker 6: store size, assortment, customer service technology, and then a supply
Speaker 6: chain you know, in the background, all built the most
Speaker 6: optimally serve life out here. And as a consequence of
Speaker 6: that strategy, you know, we're going to make a number
Speaker 6: of decisions to optimize around that, but also to position
Speaker 6: us uniquely against competition. So a couple things. Less than
Speaker 6: ten percent of our stores are suburban. Zero some of
Speaker 6: our stores are urban. So we are very purposely in
Speaker 6: ex Surban and rural communities, you know, very different than
Speaker 6: the vast, vast majority of retailers. You know, some of
Speaker 6: the names you mentioned are heavy urban, heavy suburban. They
Speaker 6: may dabble in ex Surban, but you know, very few
Speaker 6: are purposely building in rural America. So location wise, you know,
Speaker 6: we oftentimes be are have a twenty mile radius with
Speaker 6: minimal competition. The second thing would be store size. So
Speaker 6: our store size is eighteen thousand square feet plus or
Speaker 6: minus the size of sale Walgreens, And if you think
Speaker 6: about many of our competitors, they're going to have much
Speaker 6: larger store size. There's one hundred thousand square feet, eighty
Speaker 6: thousand square feet. That puts a lot of pressure on
Speaker 6: you to keep inventory, to keep the.
Speaker 5: Store updated, to staff it.
Speaker 6: And I think you know, what we've seen in retail
Speaker 6: over the last ten twenty years is a decreasing store size, right,
Speaker 6: and those retailers that have these large, large store sizes
Speaker 6: wish they had smaller ones. And you know, I always
Speaker 6: mask what the you know, if you look back over
Speaker 6: the history tracks by what are some of the most
Speaker 6: important decisions ever made? And you know, number one decision,
Speaker 6: most important decision are made was how we built our culture.
Speaker 6: Hands down, the writing of our mission and values, creating
Speaker 6: a culture around it and always staying on that path
Speaker 6: number one most important decision. But I'd say a very
Speaker 6: important second decision that was made was the size of
Speaker 6: our stores, and if anything, it forced us us to
Speaker 6: really prioritize and only have the assortment necesser to really
Speaker 6: serve life out here most optimally, and it creates this
Speaker 6: element of convenience.
Speaker 5: And we always say that our.
Speaker 6: Worst parking spot and our stores is better than the
Speaker 6: best parking spot at a big box store.
Speaker 5: Yeah.
Speaker 6: So another decision that we've made is how we execute online.
Speaker 6: Seventy five eighty percent of our online businesses picked up
Speaker 6: in store or fulfilled from a store, delivered from a store.
Speaker 6: You know, by comparison, most would be in the forty
Speaker 6: or fifty percent range in retail or even less. We've
Speaker 6: been very purposeful and not choosing not to compete in
Speaker 6: that kind of long tail assortment or to have a
Speaker 6: marketplace on our website because we just don't think that
Speaker 6: we're competitively advantaged in that area and that you know,
Speaker 6: we can build a robust, sustainable business uh in that area.
Speaker 6: You know, we know what we do best, which is
Speaker 6: serve rural America, serve life out here through an eighteen
Speaker 6: thousand square foot store base with you know, the best
Speaker 6: customer service in the industry from retail, and doing that
Speaker 6: with the technology that you know is best needed by
Speaker 6: our customers. And to your point, it's been very purposeful
Speaker 6: over decades and decades in terms of really defining who
Speaker 6: we are and building a real competitive advantage around that.
Speaker 2: So one thing I was wondering, and you mentioned the
Speaker 2: online business there and the idea of you know, click
Speaker 2: and collect, which I believe has been a source of
Speaker 2: growth for a lot of brick and mortar companies at
Speaker 2: this point. But you came from Macy's and I think
Speaker 2: home Depot before you joined Tractor Supply, and I think
Speaker 2: at Macy's you were actually heading up their online business.
Speaker 2: Can you talk a little bit more about how that
Speaker 2: experience may have informed Tractor Supplies online strategy took.
Speaker 6: One of the areas that I'm personally very passionate about
Speaker 6: is the intersection of retail and technology and how that
Speaker 6: allows you to better serve your customer, but also how
Speaker 6: that allows your team members, your employees to better serve
Speaker 6: your customers as well, like you're strengthening their ability to
Speaker 6: do so. And to your point, I spent ten years
Speaker 6: at Home Depot for which of that ten years I
Speaker 6: was running the online business there two thousand and nine
Speaker 6: to twenty thirteen, which was a pretty big time period
Speaker 6: for digital transformation in retail, coming on the heels of
Speaker 6: the Amazon and really coming on the forefront and then
Speaker 6: obviously the iPhone line. And then I spent three years
Speaker 6: at eBay running their North America business, you know, thirty
Speaker 6: billion dollar plus marketplace just in the United States and
Speaker 6: obviously global in nature, and through my three years there
Speaker 6: that was you know, big data, cloud computing kind of
Speaker 6: the mid twenty fifteen fourteen sixteen seventeen timeframe. And then
Speaker 6: in seventeen to twenty nineteen, that three year period, I
Speaker 6: worked at Macy's where I was President of business and
Speaker 6: did have responsibility for technology and online in that role.
Speaker 6: And you know, those experiences have had substantial impact on on,
Speaker 6: you know, my perspectives of how technology can drive the
Speaker 6: business better serve customers better, enable team members, and try
Speaker 6: to bring some of that in concert with the large
Speaker 6: team that we had that thinks about these things every day.
Speaker 6: And I think we've done an excellent job in the
Speaker 6: last handful of years, you know, from a technology perspective,
Speaker 6: and you know ways it's influenced us. As I mentioned earlier,
Speaker 6: the way we've executed our consumer mobile app strategy, the
Speaker 6: way we've executed our buyline pickup in store strategy, but
Speaker 6: also the way we've set up our team members to
Speaker 6: be successful.
Speaker 5: All of our team members wear headsets that allow for
Speaker 5: a variety of.
Speaker 6: Point to point communications, tasking knowledge tools, AI knowledge tools.
Speaker 6: All of our team members have a handheld device that
Speaker 6: they use for executing in the stores, but that's complemented
Speaker 6: by a bring your own device where we have our
Speaker 6: own app just for our team members, and all three
Speaker 6: of those work seamlessly. From our credentials and authentication perspective,
Speaker 6: then we're also rolling out now kind of computer vision,
Speaker 6: leveraging all of our cameras in our stores and taking
Speaker 6: them from being kind of dumb cameras to smart cameras
Speaker 6: and allowing us to create use cases to drive improve.
Speaker 5: Customer service in our stores.
Speaker 6: So you know, all these things that you know, I've
Speaker 6: had a chance to participate in over the last fifteen
Speaker 6: to twenty years in terms of just you know, technology trends.
Speaker 6: I think we're you know, trying to just leverage all
Speaker 6: of our learnings across those to create the best business
Speaker 6: we can. And of course we have a great team
Speaker 6: who does a lot of this work as well and
Speaker 6: have had you know, there's similar set of experiences over
Speaker 6: the last couple of decades.
Speaker 4: So obviously we're really interested in supply chains and things
Speaker 4: like that here on odd Lodds. So one of the
Speaker 4: questions or one of the things I think you said
Speaker 4: you have nine distribution centers around the country, and I
Speaker 4: think you're adding a tenth. I think, can you talk
Speaker 4: about the decision making that goes into the upfront cost
Speaker 4: of a new distribution center and what that unlocks in
Speaker 4: terms of possibilities at the end retail location.
Speaker 3: When you build one out.
Speaker 4: How do you think about when it makes sense to
Speaker 4: spend the money to build a new distribution center.
Speaker 6: In less than a month's time, our grand opening for
Speaker 6: our tenth distribution center will take place, and that's in
Speaker 6: Mammel Arkansas. We just opened our ninth distribution center a
Speaker 6: year ago a little every year ago in Nabarrow, Ohio.
Speaker 6: In addition to those and those ten distribution centers of
Speaker 6: which each are about a million square feet, we also
Speaker 6: have three import distribution centers that you know, kind of
Speaker 6: decon solid date product that it comes in on containers.
Speaker 5: And then we have sixteen mixing.
Speaker 6: Centers, which are cross dock facilities that in a label
Speaker 6: for faster replenishment on full palate goods, which is from
Speaker 6: us for the most part, our high velocity items that
Speaker 6: are big bagged items like food and feed, wood, Pellot's fertilizer,
Speaker 6: et cetera. So we have a very robust, you know,
Speaker 6: kind of multi building type strategy in our supply chain
Speaker 6: as we build. To get back to your question on
Speaker 6: the tenth distribution center, just kind of how do we
Speaker 6: think about that. There's really two facets to the buildout
Speaker 6: of one. One is just you kind of got to
Speaker 6: have it from a capacity perspective, and about every two
Speaker 6: hundred and fifty stores we have to build another distribution
Speaker 6: center to just be able to you know, kind of
Speaker 6: keep them in stock and have the capacity. All of
Speaker 6: our dcs run twenty four hours a day, seven days
Speaker 6: a week. We're maniacalon trying to make sure we get
Speaker 6: as much through put through them as possible. Obviously with
Speaker 6: team members in mind. As we think about that, part
Speaker 6: of it is you just kind of have to. But
Speaker 6: each of our dcs, in addition to that, does provide
Speaker 6: a substantial financial benefit as we roll out of DC.
Speaker 6: It takes caught up between one hundred and one hundred
Speaker 6: and fifty million dollars a capital to build one, and
Speaker 6: call it thirty to forty million dollars a year in
Speaker 6: annual operaing expense from a labor perspective, et cetera. But
Speaker 6: it allows us to significantly reduce our mileage on the
Speaker 6: truck perspective, so we can reduce the inbound miles from
Speaker 6: ours from our vendors to the DC because we've got
Speaker 6: more more dcs across the country and so you're reducing
Speaker 6: milage there. But then secondly, we're able to build a
Speaker 6: distribution center so that you know, the stores in which
Speaker 6: they serve are closer and we can reduce that distance
Speaker 6: as well. In fact, over the last six years, we've
Speaker 6: reduced our average truck distance by one hundred and twenty
Speaker 6: mile which has generated substantial freight savings for us. And
Speaker 6: so you know, our DCS as we think about it,
Speaker 6: and there's kind of two main drivers for it. One
Speaker 6: we just got to have it, but two, it does
Speaker 6: provide a substantial financial benefit for the business as well.
Speaker 6: And then what I would say is they also create
Speaker 6: a unique position for us in the marketplace where all
Speaker 6: of our core farm and ranch competitors for the most part,
Speaker 6: with exception of one or two, buy through distribution. And
Speaker 6: so that's going to slow their ability to replenish down
Speaker 6: and create a higher cost for that. And then those
Speaker 6: retailers that we compete with that are more national retailers
Speaker 6: that we compete with kind of category back category, say
Speaker 6: a home approvement retailer or a pet retailer. Last year,
Speaker 6: we processed over eight billion pounds of food and feed
Speaker 6: through our supply chain, and so you know, we're just
Speaker 6: experts at moving fifty pound bags of animal feed, foods, fertilizer,
Speaker 6: wood pellets, those sorts of things, and have far away
Speaker 6: the lowest cost to serve on those. So it gets
Speaker 6: us scale on a cost to serve, It gets us
Speaker 6: speed of replenishment, It reduces our transportation costs that you know,
Speaker 6: also just gives us that capacity to fuel our growth.
Speaker 2: There was a line in one of your most recent
Speaker 2: earnings calls that sort of caught my eye, and you
Speaker 2: were talking about how you had reduced the attrition rate
Speaker 2: in your supply chain team by implementing a new progressive
Speaker 2: wage scale. Is that just? Is that corporate speak for,
Speaker 2: you know, you gave everyone raises and they worked harder.
Speaker 5: Yes and no.
Speaker 6: So I'll start by saying one of the things that
Speaker 6: we've invested in over the last five years substantially is
Speaker 6: in wages. Earlier, when I was mentioning the investments that
Speaker 6: we've made in the business specifically referenced capital expenditures. There's
Speaker 6: obviously other line items that would be reflective of our investments,
Speaker 6: and one of those has been in wages. And our
Speaker 6: average hourly wage rate is nearly sixteen dollars. Now, that's
Speaker 6: inclusive of our forty five thousand team members, store team
Speaker 6: members and nearly five thousand distribution center team members. It
Speaker 6: can go back and point at numerous times over the
Speaker 6: last five years, we've made incremental wage adjustments for our
Speaker 6: team members. So in June of twenty twenty, well before
Speaker 6: others were doing so, we provided a dollar per hour
Speaker 6: wage increase for every team member hourly team member of
Speaker 6: the company. At that same time, we also started providing
Speaker 6: benefits to all part time team members. Up until then,
Speaker 6: you had to be full time to have access to benefits. Now,
Speaker 6: if you work fifteen hours or more a week at
Speaker 6: Tractor Supply, you have access to benefits the same benefits
Speaker 6: I do. It's one benefit set system for everyone, and
Speaker 6: that fifteen hours.
Speaker 5: Threshold is very low. To other retailers.
Speaker 6: If you were to go benchmark, most would be at
Speaker 6: least twenty most or twenty five and upwards of thirty.
Speaker 6: And we also started in June of twenty twenty providing
Speaker 6: restricted stock grants to our store managers so that they
Speaker 6: felt that empowerment, that ownership it, you know, in their
Speaker 6: in their role. Specific to our distribution centers. Two things
Speaker 6: we've done recently there. One is all of our supervisors
Speaker 6: and managers in the dcs now receive restricted stock, which
Speaker 6: wasn't the case prior, so again building ownership inside that
Speaker 6: distribution center of our management team in there. And then secondly,
Speaker 6: as far as our hourly team members, we shifted to
Speaker 6: what you you as you called it a progressive wage scale. Historically,
Speaker 6: our distribution centers would have gotten their raises once a
Speaker 6: year in an annual merit cycle. And you know what
Speaker 6: we found through that was in particular of the last
Speaker 6: two or three years as you had a real crunch
Speaker 6: around available labor, was that people wanted merit increases fast,
Speaker 6: stir more consistently. And so we went to a one
Speaker 6: where you at ninety days, do you get a raised.
Speaker 6: At one hundred and eighty days, you get a raised.
Speaker 6: At three hundred and sixty days, you get a raised,
Speaker 6: and then it's progressive from there. And so when you join,
Speaker 6: you know what you start at, and you know exactly
Speaker 6: what your rage rates are going to be as you
Speaker 6: look at it's.
Speaker 5: Very calendarized for you.
Speaker 6: And and so that gave people certainty, It gave people clarity,
Speaker 6: They gave them a reward, a little bit of a
Speaker 6: reward along, you know, along the way. Plus their managers
Speaker 6: now have stock incentive and you know, they're kind of
Speaker 6: treating it a bit more like you know, an ownership
Speaker 6: and mentality.
Speaker 5: And it's it's been very successful for us.
Speaker 6: And we had a fifty point a reduction in our
Speaker 6: supply chain attrition last year, and we're continuing to see
Speaker 6: attrition rates below down this year kind of three months in.
Speaker 4: So on your website it says currently I'm looking at
Speaker 4: your history page, it says there are twenty two hundred
Speaker 4: stores in the forty nine states, and I think your
Speaker 4: goal per the last conference call is to get up
Speaker 4: to three thousand stores, So I have I guess it's
Speaker 4: a two part question. Is what is the main constraint
Speaker 4: to adding stores? Is it available land? Is it just
Speaker 4: the capacity to plan them out?
Speaker 7: Like where is the heart?
Speaker 3: Is it materials and labor to build them?
Speaker 6: Like?
Speaker 4: What is that constraint? And then when you talk about
Speaker 4: new store productivity, and I think, as you've been saying
Speaker 4: that stores lately have been getting up to full productivity
Speaker 4: faster than they have in the past, what is the
Speaker 4: dial that you can turn to get a brand new
Speaker 4: store up and running so that it's sort of on
Speaker 4: par with the legacy stores.
Speaker 6: Well summarized Joe on kind of our store goal and
Speaker 6: the number of stores we open annually, So we have
Speaker 6: a three thousand store goal in the United States. We
Speaker 6: have a little over twenty two hundred stores, now we
Speaker 6: build annually around eighty stores, so we've got, you know,
Speaker 6: basically a decade left of new store growth. We do
Speaker 6: have a history of increasing that as but you know,
Speaker 6: but we feel very good about the three thousand store goal,
Speaker 6: and you know, perhaps there's some more upside beyond that.
Speaker 6: There's a variety of factors that limit the number of
Speaker 6: stores we build a year. As I mentioned, we're currently
Speaker 6: this year planning to build eighty tractor supply stores, and
Speaker 6: I should mentioned ten to twenty pet scent stores. I
Speaker 6: would say the main limiting factor is our culture. And
Speaker 6: I think the thing that keeps me up the most
Speaker 6: at night is not allowing our growth to exceed the
Speaker 6: pace of our culture. And we cannot be one of
Speaker 6: those companies that wakes up five years from ago. We
Speaker 6: just had incredible growth, but we're just not the same
Speaker 6: company that we were five years ago from a culture
Speaker 6: and customer service perspective. Obviously, in addition to that limiting factor,
Speaker 6: there's a variety of other things. Right, there's access to
Speaker 6: all the construction materials you need, there's access to you know,
Speaker 6: local permitting resources, there's access to you know, construction labor.
Speaker 6: All those things that We've had over the last two
Speaker 6: or three years nuances there that have impacted our ability
Speaker 6: to move faster on store rollout, just with you know,
Speaker 6: the supply cheam directions that curbent COVID and such, and
Speaker 6: the availability for people to.
Speaker 5: Get out and approve permits and those sorts of things.
Speaker 6: But that's all reasonably settled now, and I'd say it's
Speaker 6: mostly just back to normal, with the exception of the
Speaker 6: higher interest rates on building stores. But the main bottleneck
Speaker 6: on an annual basis is just making sure that we
Speaker 6: don't outgrow our culture. And you know, we bring every
Speaker 6: new store manager, so we have twelve percent store manager attrition,
Speaker 6: one of the lowest, perhaps the lowest in retail in
Speaker 6: terms of attrition. But at twenty two hundred stores, that's
Speaker 6: a couple hundred and fifty new store managers a year.
Speaker 6: Plus we have eighty news stores, so you're talking three
Speaker 6: thirty three hundred and fifty new store managers a year.
Speaker 6: We bring every one of those store managers to our
Speaker 6: store support center here in Brentwood, Tennessee, right outside of Nashville.
Speaker 6: They spend an entire week going through training. They also
Speaker 6: spend ninety days prior to starting at their store training
Speaker 6: at another store, and so we invest a lot of
Speaker 6: resource to make sure the store managers are up and
Speaker 6: running and that you can't tell a difference when you
Speaker 6: walk for when you go into one store versus another,
Speaker 6: and we're just so passionate about that.
Speaker 5: I think you know that is the primary limiting.
Speaker 6: Factor for our our new stores in terms of number
Speaker 6: a year, and then trying to get our stores up
Speaker 6: to volume as fast as possible is kind of every
Speaker 6: retailer's goal and focus. And typically they started about seventy
Speaker 6: percent of our estimated sales in the first year, and
Speaker 6: over a three or four year time period will ramp
Speaker 6: up to that one hundred percent of what we expect
Speaker 6: out of that store. And they are opening up at
Speaker 6: higher volumes than they did pre COVID, and they are
Speaker 6: ramping faster, and I think there's a number of reasons
Speaker 6: for that, but I think the biggest is the improvement.
Speaker 5: That we've made in our brand awareness.
Speaker 6: And pre COVID, our unated brand awareness was down in
Speaker 6: the thirties, and now post COVID, our unaated brand awareness
Speaker 6: is nearly doubled. And just so as we move into markets,
Speaker 6: more people are aware of us, they are more apt
Speaker 6: to consider shopping us. And you know that just allows
Speaker 6: us to ramp up to ramp up quicker.
Speaker 2: How important are partnerships to business growth now? Because famously
Speaker 2: you have a partnership with car Heart, So if you
Speaker 2: walk into a tractor supply store, you'll see lots of
Speaker 2: car Heart hats and you know, clothing of all sorts.
Speaker 2: But I think you also have some sort of deal
Speaker 2: with Yellowstone. And in the course of researching for this interview,
Speaker 2: I saw you have a line of garden clothes with
Speaker 2: Martha Stewart. Now, so that seems to be an area
Speaker 2: of interest for you. How do you identify these potential
Speaker 2: partnerships and then how important is that for the overall
Speaker 2: business mix?
Speaker 6: Nowadays Track Supply would not be the same company absit
Speaker 6: the many fantastic partners that we have, And that's really across,
Speaker 6: you know, all different facets of the business. Certainly on
Speaker 6: the on the product side, we have some great partners
Speaker 6: that work very closely with this help us create unique
Speaker 6: product experiences for our customers. It can only be found
Speaker 6: a tractors supply to your point, whether that's in apparel,
Speaker 6: car Heart, who we're you know, one of the largest
Speaker 6: seller of car hearts in the country and we have
Speaker 6: you know, nearly one hundred store within a store car.
Speaker 5: Heart across our store base.
Speaker 6: But even partners like Purina on the feed side, and
Speaker 6: you know are we have two private brands and feed
Speaker 6: do More in producers Pride, and we work very closely
Speaker 6: with Purina on the production of those and in fact,
Speaker 6: our do More brand is the only private brand product
Speaker 6: in the United States that had that carries the Purina.
Speaker 5: Checkerboard, you know.
Speaker 6: And you can go across our business and we've got
Speaker 6: these just really fantastic strong partner relationships on the product side,
Speaker 6: but also on the marketing side of your point. So
Speaker 6: we've got great relationships with Yellowstone and you know, Taylor
Speaker 6: Shared and that team, and we were, you know, one
Speaker 6: of the very first partners that they had and have
Speaker 6: always built custom commercials for that. And you know, Landy Wilson,
Speaker 6: we have a strong multi year relationship with their professional
Speaker 6: bull writing and we're one of the first inaugural sponsors
Speaker 6: with them as that as that has really grown as
Speaker 6: a sport and an enterprise. But then also if you
Speaker 6: look on the tech side, we have an incredibly strong
Speaker 6: partnership with Microsoft and Microsoft Azure particular and their cloud
Speaker 6: platform and their AI capabilities, and I'd say we're very
Speaker 6: much on the forefront of partnering with them and experimenting
Speaker 6: and developing scaled solutions. And then even if you look
Speaker 6: at like on the community side, we're far and away
Speaker 6: the largest contributor and have been for thirty plus years
Speaker 6: with FFA, the Future Farmers of America, and we're in
Speaker 6: our second year of the largest rural agriculture scholarship program
Speaker 6: in the country to million dollars a year, one hundred
Speaker 6: five thousand dollars scholarships and fifty ten thousand dollars scholarships.
Speaker 6: And so, you know, whether it's on the community side,
Speaker 6: whether it's on the tech side, whether it's on the
Speaker 6: merchandising side, or on the marketing side, you know, and
Speaker 6: in a variety of other stakeholders as well. We had
Speaker 6: just incredible partnerships people that that we've been with for
Speaker 6: quite some time, and you know, there's synergies between our
Speaker 6: businesses and their businesses, and it just really allows us
Speaker 6: to be the best company we can be.
Speaker 4: I just have one more question, but since you mentioned
Speaker 4: specifically interest rates, in the context.
Speaker 5: Of build out.
Speaker 4: Can you just give a little like more specifics about
Speaker 4: how does a high interest environment affect the math of
Speaker 4: store rollouts? And yeah, what and you mentioned that on
Speaker 4: your call. That came up as one of the challenges
Speaker 4: for twenty twenty three, along with weather and some other things.
Speaker 4: But talk to us a little bit about the effective
Speaker 4: interest the effective elevated interest rates on expansion decisions and
Speaker 4: how it changes how various investments pencil out.
Speaker 6: Yeah, absolutely so, I mean interest rates are significant in
Speaker 6: any sort of real estate project, right, And historically we
Speaker 6: have used third party contractors to develop our locations for
Speaker 6: us under assigned contract and our commitment is part of
Speaker 6: that signed contract is you know, typically at a minimum
Speaker 6: fifteen years or a twenty year lease within two to
Speaker 6: three options on the back end of that. So you know,
Speaker 6: we're signing up for fifteen to thirty years saying in
Speaker 6: a location with a lease dollars per month associated with that,
Speaker 6: and as part of that part of the agreement, then
Speaker 6: a developer would go build that store for us, right,
Speaker 6: and that includes acquiring the land, you know, building the store,
Speaker 6: and then once they've got us up and running, most
Speaker 6: of our landing lords will then sell that property to,
Speaker 6: you know, someone who wants to own the long term
Speaker 6: cash flow stream. So if you're a developer, you are
Speaker 6: typically funding the acquisition of that land and the build
Speaker 6: out of that store through some sort of financing, and
Speaker 6: then you're selling the property to someone who's counting on
Speaker 6: those cash flows. And so both the financing and the
Speaker 6: selling to someone who's kind of that cash flows are
Speaker 6: significantly impacted by interest rates. Right, what's the interest rate
Speaker 6: you're going to pay on sixty seven million dollars of
Speaker 6: capital for a year to fifteen months while you're building
Speaker 6: that store, and then when you sell that tractors supply
Speaker 6: to someone and it's got a three hundred thousand dollars
Speaker 6: year annual revenue stream associated with it, right from the least,
Speaker 6: what interest rate are they going to use to discount
Speaker 6: that cash flow back at?
Speaker 5: And so it has.
Speaker 6: Substantial implications on our real estate developers. And with the
Speaker 6: movement up in its rates obviously makes it more expensive
Speaker 6: to build, and then you obviously are monetizing those future
Speaker 6: cash flows at less right because of higher interest rates,
Speaker 6: And so they've got more risk and they've got a
Speaker 6: bunch of movement and so it has significant implications. And
Speaker 6: so one of the things we've done over the last
Speaker 6: twelve months is start to actually finance the build out ourselves.
Speaker 6: So we have gone probably about half of our stores
Speaker 6: this year. We will work with the developers still, we'll say, look,
Speaker 6: you just build the store, force, work with the contractors
Speaker 6: on the property, you know, work with the local scipalities
Speaker 6: around zoning and permitting and all those sorts of things.
Speaker 6: But don't worry about you know, buying the fixtures, buying
Speaker 6: the HVAC, you know, buying the concrete block, all those things.
Speaker 5: We're going to do all that.
Speaker 6: We will pay for it all and we're just going
Speaker 6: to give you a four or five hundred thousand dollars
Speaker 6: fixed fee to build that for us. But the idea
Speaker 6: that you need to finance them on the front end
Speaker 6: or worry about the sale on the back end, don't
Speaker 6: worry about that anymore.
Speaker 5: We will take that on.
Speaker 6: And what we found is that it frees up a
Speaker 6: lot of value because they were putting a lot of
Speaker 6: risk in the model, particularly with the variability and interest
Speaker 6: rates and how things are moving around, and so it's
Speaker 6: had significant impacts. We're fortunate to be investment grade in
Speaker 6: terms of debt rating to be billion dollars plus cash
Speaker 6: flow positive every year. So we've got a lot of
Speaker 6: levers that we can we can put in place to
Speaker 6: just kind of address that situation. But it's certainly been
Speaker 6: a big topic I think for all everyone in real
Speaker 6: estate over the last eighteen months.
Speaker 2: Since you guys are experts in moving big bags of stuff,
Speaker 2: so can you just start buying and also delivering materials
Speaker 2: for new stores to yourself?
Speaker 5: Right?
Speaker 6: That's and that's exactly part of the benefit that we've
Speaker 6: captured by bringing you know, kind of self development in
Speaker 6: the house is that we can go negotiate now for
Speaker 6: you know, eighty HVAC systems at one time. We can
Speaker 6: go negotiate for all the fixtures at one time, all
Speaker 6: the bailers that we have in the back of our store,
Speaker 6: all those sorts of things that in the past the
Speaker 6: contractor would have singularly sourced just for that store. We
Speaker 6: can now do it, you know, in large batches, fifty
Speaker 6: one hundred at a time and get a nice reduction
Speaker 6: and price by leveraging our volume.
Speaker 4: Last quick question for me, just I mean, I know
Speaker 4: you're writing these big secular trends, but things like inflation,
Speaker 4: et cetera, labor market. How do things look right now
Speaker 4: we're recording this April nine, twenty twenty four. Does it
Speaker 4: feel like we're something like a normal environment.
Speaker 6: I don't know if you're a retailer that feels perfectly
Speaker 6: normal right now on I'll get into that in just
Speaker 6: a second. But what I would say at the highest level,
Speaker 6: I think our economy is strong right now. I mean
Speaker 6: we're running, you know, as a country two three four
Speaker 6: percent GDP right kind of pick your quarter a month
Speaker 6: GDP solid right now. You've got consumers spending really leading
Speaker 6: the way on that. You know, the PCEE personal conception
Speaker 6: expenditures you know for the month of January and February
Speaker 6: very solid in that you know, two and a half
Speaker 6: to three and a half percent range, very solid growth there.
Speaker 5: You know.
Speaker 6: The only thing I think from a retailer perspective, why
Speaker 6: it doesn't feel normal right now is consumers are still
Speaker 6: shifting their spend from goods to services, and you know,
Speaker 6: pre COVID services, so things like you know, hotels, restaurants, entertainment, cruises,
Speaker 6: those are you know, airline tickets, those sorts of things.
Speaker 6: They were about sixty nine percent of a consumer spend,
Speaker 6: with goods being the other thirty one percent. During covid U,
Speaker 6: when people had less travel than they could go do
Speaker 6: you had these stimulus checks coming through and people were
Speaker 6: feeling the need to spend those goods as a percent
Speaker 6: of consumer expenditures gotten nearly as high as thirty seven percent,
Speaker 6: with services, you know by comparison, dropping down to sixty
Speaker 6: three Over the last eighteen months. As our economy is
Speaker 6: opened back up and people have gotten back to more
Speaker 6: normal spending, perhaps some pent up desire to travel, you've
Speaker 6: seen that services spin start to creep back towards sixty
Speaker 6: nine percent. I think at the end of February it
Speaker 6: was in the high sixty sevens, maybe right at sixty
Speaker 6: eight percent. So and if you look at the February SPIN,
Speaker 6: services were up six percent, whereas goods were only up
Speaker 6: one percent on spend. So there's a big swing happening
Speaker 6: right now between goods and services. But other than that,
Speaker 6: I think, you know, our economy seems to be very
Speaker 6: health healthy right now. The consumer continues to spend, you know,
Speaker 6: inflations moderating, I think people have started you see that
Speaker 6: lesser as a an issue when you do consumer surveys,
Speaker 6: and you know, I think our economies is very much stabilizing.
Speaker 5: Hats off to the FED for everything they've done.
Speaker 2: Hell a lot and CEO of Tractor Supply, thank you
Speaker 2: so much for coming on all thoughts and explaining exactly
Speaker 2: how you are capturing so much of my income. It
Speaker 2: was great, all right, Joe, Well, I thought that was fascinating,
Speaker 2: and I can see why I am in fact spending
Speaker 2: quite a decent amount of money at Chactor Supply in
Speaker 2: recent years. There's so much to pick out of that conversation.
Speaker 2: I mean, I thought the point about distribution was pretty interesting.
Speaker 2: This idea that you can build up and expertise in
Speaker 2: moving a particular type of things. So in this case,
Speaker 2: I guess big bags of animal feed and stuff like that,
Speaker 2: and so you can start to get efficiencies out of
Speaker 2: that and also maybe at some point point start to
Speaker 2: you know, negotiate supply for building your own stores in
Speaker 2: bulk purchase as well.
Speaker 4: No, I thought that was really fascinating as well, because
Speaker 4: you can imagine, right, and it's not you don't have
Speaker 4: to imagine that like, okay, in something like pet food
Speaker 4: or something like that, or feet. They're competing with a
Speaker 4: lot of other companies. But if pet if feed is
Speaker 4: such a dominant share of their own supply chain, then
Speaker 4: they can become the most efficient or theoretically the most
Speaker 4: efficient distributor of fifty pound bags in a way that
Speaker 4: you might not expect. Companies that specialize in so many
Speaker 4: other things to like build that expertise and so like
Speaker 4: a way of gaining scale and price competitiveness even from
Speaker 4: smaller side.
Speaker 2: Yeah, and the other thing I was thinking, and this
Speaker 2: came up in the episode we did before on the
Speaker 2: Harvard Business case study, but this idea of the choice
Speaker 2: of location for opening stores and not automatically migrating or
Speaker 2: being attracted to urban centers because I think, for you know,
Speaker 2: a large proportion of retail, the thinking is always you
Speaker 2: want to be where the people are. So even in
Speaker 2: the middle of New York, you will have in fact,
Speaker 2: I think we have a home depot right below the
Speaker 2: Bloomberg offices in Midtown Manhattan. Yeah, you will have those
Speaker 2: kind of big box stores, you know, a Target or
Speaker 2: a home depot or whatever. But it seems like in
Speaker 2: the case of Chactor Supply, they're sort of going where
Speaker 2: the animals are not necessarily where the people are.
Speaker 5: No totally.
Speaker 4: And then I love like also, you know, in terms
Speaker 4: of the strategic location hearing them walk through the math
Speaker 4: of the effective interest rates on store development, and I
Speaker 4: always joke, you know, it's like every company is a bank,
Speaker 4: but that is basically like what he described, which is like,
Speaker 4: why when Tractor Supply has like a great credit rating
Speaker 4: is really big, it's you know, it's not going to
Speaker 4: go away. Why not bring that sort of borrowing and
Speaker 4: lending capacity onto the Tractor Supply balance sheet and then
Speaker 4: free up the developer who then can focus on the
Speaker 4: one thing that they're really good at, which is constructing
Speaker 4: a building, rather than having the developer also take that
Speaker 4: financial risk and presumably pay a higher spread for their
Speaker 4: borrowing than tractor would you.
Speaker 2: Know the other thing I was thinking this might be
Speaker 2: kind of weird, but you know, Tractor Supply is sort
Speaker 2: of keying off this big demographic trend which we discuss
Speaker 2: aging millennials and the fact that millennials want more space
Speaker 2: and they're moving out of cities and they want pets
Speaker 2: and things like that. I sometimes wonder if like Tractor
Speaker 2: Supply is going to be the Harley Davidson of millennials,
Speaker 2: like everyone had pets when they were a certain age,
Speaker 2: just like all the Baby Boomers had a motorcycle when
Speaker 2: they were a certain age, and then it kind of
Speaker 2: ages out.
Speaker 3: I like the analogy. I'm done with that analogy.
Speaker 7: Oh you know what, Tracy. One other thing that we.
Speaker 4: Have to do more episodes on is, like I guess
Speaker 4: I would say, like the point suffocation or reward program
Speaker 4: Oh yeah, And I.
Speaker 7: Just feel like, you know, I'm starting to think that.
Speaker 4: You know, people like post about prices for anything, like
Speaker 4: inflation is out of control, and then another person posts like,
Speaker 4: here's a screenshot from Walmart dot com and these prices
Speaker 4: aren't nowhere near what you say, and stuff like that.
Speaker 7: Yeah, and I feel like there is this.
Speaker 4: Divide between the time people who are like have the
Speaker 4: time and capacity to be part of rewards programmed.
Speaker 2: I've said this so many times. It's the price pack
Speaker 2: architecture is becoming more sophisticated. And McDonald's is my sort
Speaker 2: of ultimate example of this, which is if you download
Speaker 2: the app, and if you take the time to order
Speaker 2: before you actually rock up to the little takeout window,
Speaker 2: you can get decent deals and they are like a
Speaker 2: significant percentage less than what you would get from just
Speaker 2: ordering spontaneously, and it is kind of it's weird, and
Speaker 2: it adds another layer of complexity to inflation. I think
Speaker 2: it also brings up questions about privacy and fairness and
Speaker 2: things like that.
Speaker 4: It's interesting to hear him talk about like how much
Speaker 4: he credits like that to like, you know, getting that
Speaker 4: consumer app. I think he said it was in summer
Speaker 4: twenty twenty one, and like the sort of taking it
Speaker 4: from a very rudimentary rewards program to more advanced one.
Speaker 3: Super interesting stuff.
Speaker 2: Absolutely, and we really should do that episode. Yeah, Okay, Well,
Speaker 2: in the meantime, shall we leave it there?
Speaker 3: Let's leave it there.
Speaker 2: This has been another episode of the Oudlots podcast. I'm
Speaker 2: Tracy Alloway. You can follow me at Tracy Alloway.
Speaker 4: And I'm Joe Wisenthal. You can follow me at the Stalwart.
Speaker 4: Follow our guest Tractor Supply CEO hel Lawton. He's at
Speaker 4: hell Lawton. Follow our producers Carmen Rodriguez at Carman Ermann
Speaker 4: dash El Bennett at Dashbot, Kelbrooks at Kelbrooks. Thank you
Speaker 4: to our producer Moses Ondam. For more odd Lots content,
Speaker 4: go to Bloomberg dot com slash odd Lots where you
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