A bunch of companies saw their share prices boom during the pandemic. Peloton surged because no one could go to gyms. Zoom jumped because no one could go to the office, and so on. Since then, many of these companies have come crashing down back down to earth. However, one pandemic winner that has yet to see its stock price mean-revert is Tractor Supply Co. Its shares have been up about 270% since their 2020 lows. The retailer has ridden a demographic and cultural shift as more Millennials move away from cities and decide to become hobby farmers growing their own chickens, vegetables, and fruit. In this episode, we speak with CEO Hal Lawton about the Tractor Supply business model, including how it's bucked the post-pandemic pattern and what it's doing to lock in customers for the long term. This transcript has been lightly edited for clarity.
Key insights from the pod:
The typical Tractor Supply customer — 4:47
Sustainable vs. cyclical growth — 7:26
Customer retention and rewards — 13:19
Petsense acquisition — 17:48
Tractor Supply vs. Big Box stores — 22:17
How Tractor Supply decides to open distribution centers — 29:36
Wages and distribution workers — 33:44
Constraints on opening new stores — 37:28
Partnerships with brands — 41:36
The impact of higher rates on expansion — 44:41
Bringing self-development in-house — 48:03
Economic conditions right now — 48:55
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Tracy Alloway (00:20):
Hello and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal (00:24):
And I'm Joe Weisenthal.
Tracy (00:25):
Joe, you know what I did this weekend.
Joe (00:27):
Something outdoors in your garden, or maybe a home construction project, but something that was very dirty and costly and time-consuming and uneconomical.
Tracy (00:38):
Thanks Joe. Yeah, kind of nailed it.
Joe (00:40):
I nailed it, but I’m sure it’s very satisfying on some level.
Tracy (00:43):
Well, I did do a lot of that. I'm restoring an orchard at the moment, and it's a lot of hard work and a lot of supplies as you pointed out. I'm currently building a gate and I think the gate is going to be phenomenally expensive by the time I finally finish it. But what I actually did this weekend, or one of the things I did was I went over to Tractor Supply.
Joe (01:04):
Oh, I'm jealous. You know, amazingly, I still haven't been to one. Wait, Tracy, are you a hobbyist farmer? Is that, would you call yourself that if you have an orchard?
Tracy (01:14):
Yeah. I mean, I guess we have blueberries and raspberries and strawberries. Yeah. And apples and apple pears and all of that stuff, so, yeah. Yeah. I guess it's my hobby.
Joe (01:25):
You know, we did that episode about Tractor Supply last year with the professor who had done the HBS study and by it sounds like you are the modal Tractor Supply customer.
Tracy (01:36):
Please, Joe. I prefer Cottage Core Elder Millennial.
Joe:
Okay, well that too.
Tracy:
No, it makes me sound like a character out of like Final Fantasy or something. No. So I went over to Tractor Supply and the reason I went is because it's chicken season. So they have all the baby chicks over there and you can kind of see them in their little enclosure and I can fantasize about the day when I will have my own chickens and what kind I will get.
Joe (02:01):
But in the meantime, you have to build like 10 other things, and then you can get around to building the chicken coop.
Tracy (02:06):
Yeah, that's right. I've got big plans for the chicken coop. Alright, but the reason I bring it up is because Tractor Supply is a company that is of perennial interest to us. So last year we recorded an episode with Michael Roberto when he published a case study for Harvard Business School on Tractor Supply.
And even before then, I remember Samuel Rhines, the Corbu analyst, he had always called this company one of the most interesting retailers on the planet. So it sort of loomed large over our consciousness.
And I think the interesting thing about the Tractor Supply company is there's this question of cyclical versus structural. So this is one of the companies whose share price and revenue really boomed during the pandemic. Lots of people were staying at home, lots of people became hobby farmers as you point out, Joe, buying tomato cages and growing their own vegetables from seed, whatever.
And so there was an expectation that a lot of that business would start to subside or at least slow down as people started going back to work or some of the moving from urban areas to the suburbs started to reverse. But instead, it seems like this particular market just continues to grow and Tractor Supply’s share price is still very, very high.
Joe (03:28):
You're absolutely right. So the stock is really close to an all-time high, continues to power higher. You know, like 15 years ago, this was like an $8 stock. Today it's a $249 stock. You look like you could be looking at a chart of Nvidia or something. And it is striking that you don't have to be an AI company to see charts like this, if you find the right product, the right lane, the right store mix, etc. And you are on the right secular trends -- such as the rise of the hobbyist farmer, people moving out to the exurbs, growing their own chickens, etc. -- it's like an amazing case study on how to like how to execute.
Tracy (04:03):
Absolutely. So today I'm glad to say we really do have the perfect guest, because we are going to be speaking to the CEO of Tractor Supply, Mr. Hal Lawton he joins us now. Thank you so much for coming on the show, Hal!
Hal Lawton (04:16):
Hi Tracy. Hi Joe. Thanks so much for having me on. Look forward to talking with y'all today.
Joe (04:19):
Likewise.
Tracy (04:20):
We are very, very excited about this conversation, not least because it's a way for me to sort of reflect on my own spending habits over at Tractor Supply, but maybe just to begin with, you know Joe called it the hobbyist farmer. There's a bunch of different names, Cottage Core, Millennial-type lifestyle. But who do you think of as your primary customer? ‘Rural enthusiasts’ is the other one that I remember.
Hal (04:47):
Yeah. You know, I think all those names are used frequently to reference our customer and kind of our main kind of theme that we ladder up to is ‘life out here.’ And the reason for that is we went out maybe seven or eight years ago and talked with our customers and, you know, these customers range from living in West Texas and they've got cattle, maybe living in Wisconsin and have a dairy farm or, you know, could be living here in Tennessee and have five to 10 acres and they do a little gardening.
Maybe they have some small animals, chickens, or they could half acre, you know, one acre unincorporated, you know, suburb excerpt with a raised bed garden in their backyard or could be a dog breeder. And you know, just this whole range of customers that have different lives that they live.
But what we found when we talked with them was they all used the words ‘well, out here,’ in the description of their lifestyle. And it was just a very common phrase that all of our customers used. And so we ended up kind of laddering it up to that and saying, you know, we are built to serve life out here.
And that plays itself out in so many different ways and so many, you know, variants of the lifestyle, whether it's hobby farmers, horse owners, chicken owners, whatever the passion. They may be gardening, etc. But at the end of the day, they all have a lifestyle mentality, philosophy, that kind of ladders up to this notion of life out here, which is around freedom and self-reliance, homesteading the love of animals and pets and land.
Joe (06:26):
I love that. So since we are recording, since Tracy and I are in the Bloomberg HQ Studios in Manhattan, I'm going to use the phrase ‘out there’ because we are certainly not out here right now. So we're talking about out there, you know, obviously Tractor Supply has been growing a long time and then it does seem to have at least helped, been turbocharged, by some of the changes that happened during Covid.
I only realized this morning that you started in January, 2020, so you've probably never known Tractor Supply in the normal times. But talk to us about how you distinguish sort of long-term and short-term trends in ‘out hereness.’ Because I'm sure there was a bunch of people like ‘Oh, we're going to move out to the country, we're going to have chickens, we're going to buy pets, etc.’
We know that some of that has slowed down or some of that was a one-off. So how do you think about the trajectory of the out hereness and whether Covid was an accelerant? Was it something that went up and then we're back to trend? How do you think about the growth of what's sustainable out there?
Hal (07:26):
It's a great question and it's one that's been asked repeatedly over the last few years about our business. To your point, we were $8.4 billion in revenue in 2019. We did $14.6 billion of revenue in 2023. You know, that's roughly a 20% compound annual growth rate over those years.
So significant growth for, you know, particularly for our retailer with over 2,000 stores so reasonably mature, we would articulate that the majority of that sales lift we've seen and the increased customer transactions and new customers that are shopping us is structural in nature. And I can get into the reasons for that.
But I would just say at the highest level, I think, you know, what we've seen in our business is very different than many of the other kind of Covid winners that went kind of boom to bust to some degree, right? Whether it was everybody, you know, jumped on a Peloton because they couldn't go to a gym. And then, you know, we saw that reversion, everyone started using videos meetings. Things like Zooms and stuff.
And now you've got a shift back, right? Where people are still doing that, but obviously in person now. And you know, you look at even other retailers who sell, say, electronics who had a huge surge because everybody needed a computer or a new router or, you know, need some other needed, wanted a new TV.
And then that all reverted back. I mean, there's a lot of circumstances we can think about different companies and different sectors that had a boom and then a reversion. You know, with us it's been different because for the most part it's been macro structural. But I would also assert that we've done some things hopefully that have helped make that, you know, structural.
The big thing I would push on is really just the Millennial generation and at the timing that Covid was occurring, the Millennial generation was kind of late twenties, early thirties. And, you know, it'd been a question for a decade whether or not that generation was going to revert to kind of the normal behavioral trends that other generations had followed, or were they going to be different, right?
We'd read the numerous stories on ‘This is going to be a rental generation and it's going to be an urban generation,’ etc., etc. And a ‘sharing’ generation and, you know, lesser kids. They're [buying fewer] homes and those sorts of things. And what we're seeing is that that generation is reverting to previous generational norms. They're just doing it a little later. And what we would articulate is that Covid was actually a catch up versus a pull forward.
And historically that generation, say 26, 25, 27, would've started to, you know, create households, buy homes, begin to have children, those sorts of things. And they just pushed that out ‘till 28, 30, 32, 33, depending on where their age fell in that generational span. But, you know, they're following the same steps, which is, like, all right, I've been in the city for five or 10 years, I've kind of done that. It's time for me to, you know, kind of get on with the next phase of my life.
And many of them did that in 2020 and 2021 and are continuing to do that. I mean, we still see a net exodus out of urban even in ‘23. And when they're buying homes, both because of the current home environment, they have to buy a bit more ex-urban or country-suburban as we would call it.
But I think also their preference is to buy in those areas. And so they're buying homes and have been since 2020, in the areas where our stores are, and they're naturally wired for our type of business. You know, they come predisposed to gardening, they come predisposed to things like recycling and whether it's vegetarian or fresh foods.
But, you know, if you think about the mental lifestyle that they were living, even in a city when they go out into kind of country suburbia, ex-urban, rural, you know, they want to have a similar mentality. So they get animals, they do raised bed gardens, they do chickens. In fact, now we're seeing that generation start to move into goats as they think about, you know, Tracy, they raised their vegetables, Tracy, that's now they're getting their own milk.
Tracy (11:53):
My husband and I have been talking about goats. We've been having a debate on goats versus sheep specifically. There's a type of sheep called a baby doll sheep. And it looks absolutely adorable. Sorry, I interrupted you Hal, go ahead. I could talk about goats for like twenty minutes.
Joe (12:07):
Basically, you've catalyzed yet another hole in Tracy's pocketbook with the sheep and goat discourse.
Tracy (12:30):
That's really interesting. And you sort of jogged my memory about some of the early commentary on Millennials, and it was very much like ‘Oh, this is a generation that just isn't going to own houses,’ when in fact, it seems like it just took everyone a little bit longer to actually buy a house, for various reasons.
But going back to something you alluded to just then, you've sort of been riding a wave, you know, a cultural trend and also a demographic trend as Millennials get older, and in some respects that could be considered a cyclical development. But you mentioned doing stuff to actually make it more permanent or more structural. What is it that you're doing to ensure that, you know, something that would seem to be out of your control sticks around for longer?
Hal (13:19):
As we saw the surge in our business, we doubled down on the investment in our business across a variety of factors with the primary goal of really staying ahead of our customer as it evolves. And to illuminate that a little bit, in 2019, we spent $275 million in capital expenditures.
We're now spending between seven and $800 million on an annual basis. So we've nearly tripled the amount of capital that we're spending on the business on an annual basis. And we're doing it across a variety of areas, but really all with the goal of, you know, better serving our customers and just making sure we're staying ahead of them as they're rapidly, you know, evolving in terms of both number needs and kind of the ways that they're used to shopping.
So a few examples of that. One would be in our, our membership program, our, our loyalty program.
We've always had a, well, we've had a loyalty program for well over 10 years but it really was a modest program kind of pre-Covid. And in March of ‘21, we relaunched the program to be a tier-based rewards based system where kind of the more you spend, the more you earn, all with the goal of driving behavior, locking these new customers in, getting them, you know, kind of as used as possible to routinely shopping Tractor Supply.
And, you know, I can talk more about our Neighbors Club program, but we now have 34 million members. It represents nearly 80% of our sales. We've seen substantial benefits from that investment. [The] second investment's been in digital, we launched a consumer mobile app in the summer of 2021. It now represents nearly 40% of our sales online. We rolled out delivery from store in a matter of weeks in the midst of 2020.
And in addition to kind of the e-commerce side of things, we've also rolled out a bunch of technology for our team members to utilize in our stores, which has made them more efficient and sophisticated in serving our customers.
And then the third thing I would highlight was we rolled out a store remodel program, and we're now remodeling roughly 15% of our stores on an annual basis, at the conclusion of 2023 re-remodeled 40% of our stores. There's a number of things that we get out of that from a sales lift perspective, but one of the other important benefits is it contemporizes the store and really shifts it from what was historically kind of perceived to be a kind of farm and ranch store. Which, you know, kind of the, as you might imagine that when you're saying it, that was kind of the perception and a bit the style that we had in the store.
And we were able to contemporize it and make it feel a bit more like what a Millennial would think of when they walked into any sort of store. Maybe they'd been in an urban environment, but we didn't fancy it up, quote, unquote, enough that our existing customer base, they still felt really comfortable shopping it. We didn't kind of fire or alienate our existing customer, but those would be three, you know, big investments that I'd highlight that we've made over the last few years, really all to serve our existing customer base even better, but really to set ourselves up to be a retailer of choice for the new Millennial customer.
Tracy (16:42):
Joe, you know how you know that you're old?
Joe (16:43):
Tell me.
Tracy (16:45):
It's when businesses start catering to your taste
Joe (16:48):
Yeah, you're like ‘Oh, you're talking about me here.’
Tracy (16:50):
Yeah. Pretty much, it’s when CEOs come and say ‘Oh, we're redesigning our stores to appeal to Millennials who might be more used to urban environments, but are now in rural areas.’ That's how you know.
Joe (17:02):
That's how you feel like you're looking in a mirror. Actually, I want to ask, so you recently, I think in 2022, bought a pet retailer: Petsense. And I'm curious in terms of becoming less cyclical, I mean, you know, if people have animals or people have pets, whether it's a recession or a boom or whatever, they're probably going to feed them the same amount. How much does that business allow you? Or was it sort of designed in order to sort of build some more a cyclicality into the business?
Hal (17:31):
Nearly 90% of our customers have an animal or pet. 75% of them have a dog. And then, you know, there's an array of cats and…
Joe (17:42):
Everything is just Tracy in this episode. Literally everything you say just comes back to Tracy. But yeah, keep going, sorry.
Tracy (17:48)
I'm the archetype customer, yeah.
Hal (17:48):
Exactly. Over half of our customers have more than two dogs. On average, our customers’ dog weighs 20 pounds more than the average dog across the country. So, you know, our customers have animals, they almost all have dogs, most have two dogs and they’re big dogs.
And a compelling kind of element of our businesses is -- we've been around for 85 years -- we've really been, we're built even 85 years ago to serve life out here. But our business model and our culture and our mission values have really been consistent throughout that entire 85 years. But our business model has evolved over time to better serve our customers. So 40 years ago, we didn't even sell animal feed for the most part. Horse feed, cow feed, chicken feed, etc. Now we're far and away the largest player of bagged animal feed in the United State, between a 20% and 25% market share.
25 years ago we didn't even sell pet food. And similar, you know, realization, it's a better way for us to serve our customers. It has less ups and downs, both annually and also throughout the year, you know, seasonally. So let's start getting into pet food.
And, you know, now we're right at that number four, number five largest player in pet food in the country. And you know, one of the initiatives that we have in place to keep driving that expanded pet business is, is Petsense. And to your point, we did acquire that company seven, eight years ago. And in 2022, we rebranded it to be Petsense by Tractor Supply. We rolled out our Neighbors Club membership program that worked in Tractor Supply -- we rolled that out to Petsense, so it works in both name Nameplates.
Now Petsense, the ownership of Petsense really over the last decade almost, has given us a lot of insights into the pet industry, given us access to brands that we would not have otherwise gotten access to, and allowed us to bring that knowledge and that those contacts into, into the core Tractor Supply and make the business better.
We also are rapidly growing the Petsense brand, and we've got over 200 stores now. They are in the same towns as a Tractor Supply. Ideally they're in a town that doesn't have a Petco, it doesn't have a PetSmart. Typically, our towns don't, we typically serve, call it a 20,000 person town. The Tractor Supply would be on the outskirts of the town, typically wherever the more ag-related, you know, area is. But the Petsense, we want that in the center of the town, kind of where the few restaurants are, the grocery store, some of the clothing stores that are in the town. You know, there might be a two, three strip malls or malls in a town that are where the commercial activity is located. That's where we want a Petsense. And it does really two things. It serves that inner city, quote unquote population that doesn't have big yards and doesn't have horses and, and cows, and they've got, you know, smaller animals and pets.
But then also secondarily, in addition to serving that community in a specialty way, it also serves convenience for the core Tractor Supply customer. So say on a Friday night, you're in town having dinner at the, you know, Olive Garden, and you need to get some dog food or chicken feed on the way home just to get you through the weekend before you, you know, you do your annual, your weekly shop at Tractor Supply. Petsense also serves that need.
So it's a great win-win, Petsense, Tractor Supply commonality on the brand. Petsense by Tractor Supply, commonality on the loyalty program, Neighbors Club, a purposeful overlap where it makes sense on assortment, but Petsense doing what it's good at as well in terms of being a specialty player, carrying, you know, more cat and even things for fish and lizards and, you know, that sort of side of a pet specialty store.
Tracy (21:25):
Joe, I have Koi fish too.
Joe (21:29)
Oh, of course you do.
Hal (21:28):
There you go.
Tracy (21:30):
So one of the things I remember from when we spoke to Michael Roberto, the author of the Harvard Business Case study on Tractor Supply, he talked about how the essence of business strategy is basically what you don't do. So what you decide not to do.
After all, it's pretty easy to say ‘We're going to go after this massive market and this market, and we're going to sell this, this, and that.’ And he described what Tractor Supply had done as a sort of judo strategy of basically avoiding head-to-head competition with bigger box stores like a Lowe's or a Home Depot. Can you talk a little bit more perhaps about what you've decided not to do and how that maybe differentiates the business?
Hal (22:17):
So, and I think that's a very fair description of who we are. We want to be the best retailer serving life out here, and we're going to have store locations, store size, assortment, customer service, technology, and then a supply chain, you know, in the background, all built to most optimally serve life out here.
And as a consequence of that strategy, you know, we're going to make a number of decisions to optimize around that, but also to position us uniquely against competition. So a couple things, less than 10% of our stores are suburban. 0% of our stores are urban. So we are very purposely in ex-urban and rural communities, you know, very different than the vast, vast majority of retailers. You know, some of the names you mentioned are heavy urban, heavy suburban. They may dabble in ex-urban, but you know, very few are purposely building in rural America.
So location wise, you know, we oftentimes have a 20 mile radius with, you know, minimal competition. The second thing would be store size. So our store size is 18,000 square feet, plus or minus the size of, say, Walgreens. And if you think about many of our competitors, they're going to have much larger store size. There's a hundred thousand square feet, 80,000 square feet that puts a lot of pressure on you to keep inventory, to keep the store updated, to staff it.
And I think, you know, what we've seen in retail over the last 10, 20 years is a decreasing store size, right? And those retailers that have these large, large store sizes, wish they had smaller ones. And you know, I always ask what the, you know, if you look back over the history of Tractor Supply, what are some of the most important decisions they ever made? And, you know, number one decision, most important decision ever made, was how we built our culture. Hands down, the writing of our mission and values, creating a culture around it, and always staying on that path, number one most important decision.
But I'd say a very important second decision that was made was the size of our stores. And if anything, it forces us to really prioritize and only have the assortment necessary to really serve life out here most optimally. And it creates this element of convenience. And we always say that our worst parking spot at our stores is better than the best parking spot at a big box store.
So another decision that we've made is how we execute online. 75, 80% of our online businesses picked up in store or fulfilled from a store, delivered from a store. You know, by comparison, most would be in the 40 or 50% range in retail or even less.
We've been very purposeful in not choosing not to compete in that kind of long tail assortment or to have a marketplace on our website because we just don't think that we are competitively advantaged in that area. And that, you know, we can build a robust, sustainable business in that area.
We know what we do best, which is serve rural America, serve life out here through an 18,000 square foot store base with, you know, the best customer service in the industry from retail, and doing that with the technology that, you know, is best needed by our customers. And to your point, it's been very purposeful over decades and decades in terms of really defining who we are and building a real competitive advantage around that.
Tracy (25:48):
So one thing I was wondering, and you mentioned the online business there and the idea of, you know, click and collect, which I believe has been a source of growth for a lot of brick and mortar companies at this point, but you came from Macy's and I think Home Depot before you joined Tractor Supply, and I think at Macy's, you were actually heading up their online business. Can you talk a little bit more about how that experience may have informed Tractor Supply’s online strategy?
Hal (26:19):
I'd say one of the areas that I'm personally very passionate about is the intersection of retail and technology and how that allows you to better serve your customer, but also how that allows your team members, your employees to better serve your customers as well. Like you're strengthening their ability to do so.
And to your point, I spent 10 years at Home Depot, four of which, of that 10 years, I was running the online business there -- 2009 to 2013 -- which was a pretty big time period for digital transformation in retail, coming on the heels of Amazon and really coming on the forefront. And then obviously the iPhone launching.
And then I spent three years at eBay running their North America business, you know, $30 billion+ marketplace just in the United States and obviously global in nature. And through my three years there, that was, you know, big data cloud computing, kind of the mid-2015, 14, 16, 17 timeframe. And then in ‘17 to 2019, that three-year period, I worked at Macy's where I was the president of the business and did have responsibility for technology and online in that role.
And those experiences have had substantial impact on my perspectives of how technology can drive the business, better serve customers, better enabled team members, and try to bring some of that in concert with the large team that we had that thinks about these things every day.
And I think we've done an excellent job in the last handful of years, you know, from a technology perspective, and, you know, ways it's influenced us is, as I mentioned earlier, the way we've executed our consumer mobile app strategy, the way we've executed our buy online pickup and store strategy, but also the way we've set up our team members to be successful.
All of our team members wear headsets that allow for a variety of point-to-point communications, tasking knowledge tools, AI knowledge tools. All of our team members have a handheld device that they use for executing in the stores, but that's complimented by a bring your own device, where we have our own app just for our team members, and all three of those work seamlessly from a credentials and authentication perspective.
Then we’re also rolling out now, kind of computer vision leveraging all of our cameras in our stores and taking them from being kind of dumb cameras to smart cameras and allowing us to create use cases to drive improved customer service in our stores.
So, you know, all these things that I've had a chance to participate in over the last 15, 20 years in terms of just technology trends, I think we're trying to just leverage all of our learnings across those to create the best business we can. And of course we have a, a great team who does a lot of this work as well and have had, you know, their similar set of experiences over the last couple of decades.
Joe (29:03):
So obviously we're really interested in supply chains and things like that here on Odd Lots. So one of the questions, or one of the things I think you said, you have nine distribution centers around the country, and I think you're adding a 10th, I think. Can you talk about the decisionmaking that goes into the upfront cost of a new distribution center and what that unlocks in terms of possibilities at the end retail location when you build one out, how do you think about when it makes sense to spend the money to build a new distribution center?
Hal (29:36):
In less than a month's time, our grand opening for our 10th distribution center will take place, and that's in Maumelle, Arkansas. We just opened our ninth distribution center a year ago, little over a year ago, in Navarre, Ohio.
In addition to those and those 10 distribution centers of which each are about a million square feet, we also have three import distribution centers that, you know, kind of deconsolidate product after it comes in on containers. And then we have 16 mixing centers, which are cross dock facilities that are a label for faster replenishment on full pallet goods, which is from us, for the most part are high velocity items that are big bagged items like food and feed, wood pellets, fertilizer, etc. So we have a very robust, you know, kind of multi-building type strategy in our supply chain as we build.
To get back to your question on the 10th distribution center, just kind of how do we think about that? There's really two facets to the build out. One is just, you kind of got to have it from a capacity perspective and about every 250 stores we have to build another distribution center to just be able to, you know, kind of keep them in stock and have the capacity. All of our DCs run 24 hours a day, seven days a week.
We're maniacal on trying to make sure we get as much throughput through them as possible. Obviously with the team members in mind, as we think about that, part of it is you just kind of have to, but each of our DCs, in addition to that, does provide a substantial financial benefit. As we roll out a DC it takes, call it, between a hundred and $150 million of capital to build one and call it 30 to $40 million a year in annual operating expense from a labor perspective, etc.
But it allows us to significantly reduce our mileage on the truck perspective so we can reduce the inbound miles from our district, from our vendors to the DC because we've got more, more DCss across the country. And so you're reducing mileage there.
But then secondly, we're able to build a distribution center so that, you know, the stores in which they serve are closer and, and we can reduce that distance as well. In fact, over the last six years, we've reduced our average truck distance by 120 miles, which has generated substantial freight savings for us.
And so, you know, our DCs as we think about them, there's kind of two main drivers for it. One, we just got to have it, but two, it does provide a substantial financial benefit for the business as well. And then what I would say is they also create a unique position for us in the marketplace where all of our core farm and ranch competitors, for the most part, with exception of one or two, buy through distribution.
And so that's going to slow their ability to replenish down and create a higher cost for that. And then those retailers that we compete with that are more national retailers that we compete with kind of category by category, say a home improvement retailer or a pet retailer. Last year we processed over 8 billion pounds of food and feed through our supply chain.
And so, you know, we're just experts at moving 50 pound bags of animal feed, food, fertilizer, wood pellets, those sorts of things. And have far [and] away the lowest cost to serve on those. So it gets us scale on a cost to serve. It gets us speed of replenishment, it reduces our transportation costs, but you know, also just gives us that capacity to fuel our growth.
Tracy (33:21):
There was a line in one of your most recent earnings calls that sort of caught my eye and you were talking about how you had ‘reduced the attrition rate in your supply chain team by implementing a new progressive wage scale.’ Is that just, is that corporate speak for, you know, you gave everyone raises and they worked harder?
Hal (33:44):
Yes and no. So I'll start by saying one of the things that we've invested in over the last five years substantially is in wages. Earlier when I was mentioning the investments that we've made in the business, I specifically referenced capital expenditures, there's obviously other line items that would be reflective of our investments. And one of those has been in wages.
And our average hourly wage rate is nearly $16 now, that's inclusive of our 45,000 team members, store team members, and nearly 5,000 distribution center team members. I can go back and point at numerous times over the last five years, we've made incremental wage adjustments for our team members. So in June of 2020, well before others were doing so, we provided a dollar per hour wage increase for every team member, hourly team member in the company.
At that same time, we also started providing benefits to all part-time team members.
Up until then, you had to be full-time to have access to benefits. Now if you work 15 hours or more a week at Tractor Supply, you have access to benefits. The same benefits I do, it's one benefit set, system for everyone.
And you know, that 15 hour threshold is very low compared to other retailers. If you were to go benchmark, most would be at least 20 or 25 and upwards of 30. And we also started in June of 2020 providing restricted stock grants to our store managers so that they felt that empowerment, that ownership in their role.
Specific to our distribution centers. Two things we've done recently there. One is all of our supervisors and managers in the DCs now receive restricted stock, which wasn't the case prior. So again, building ownership inside that distribution center of our management team in there.
And then secondly, as far as our hourly team members we shifted to what you, as you, called it, a progressive wage scale. Historically, our distribution centers would've gotten their raises once a year in an annual merit cycle. And what we found through that was, in particular of the last two or three years as you had a real crunch around available labor, was that people wanted merit increases faster, more consistently.
And so we went to one where at 90 days you get a raise, at 180 days you get a raise, at 360 days you get a raise, and then it's progressive from there. And so when you join, you know what you start at and you know exactly what your wage rates are going to be as you look out, it's very calendarized for you.
And so that gave people certainty, it gave people clarity, they gave them reward, a little bit of a reward along the way. Plus their managers now have stock incentive and, you know, they're kind of treating it a bit more like an ownership mentality. And it's been very successful for us. And we had a 50-point reduction in our supply chain attrition last year, and we're continuing to see attrition rates below down this year, kind of three months in.
Joe (36:46):
So on your website it says currently, I'm looking at your history page, it says there are 2,200 stores in the 49 states. And I think your goal per the last conference call is to get up to 3,000 stores. So I have, I guess it's a two part question, what is the main constraint to adding stores? Is it available land? Is it just the capacity to plan them out? Like where is the heart [of the constraint]? Is it materials and labor to build them? What is that constraint? And then when you talk about new store productivity, and I think as you've been saying that stores lately have been getting up to full productivity faster than they have in the past, what is the dial that you can turn to get a brand new store up and running so that it's sort of on par with the legacy stores?
Hal (37:28):
Well-summarized, Joe, on kind of our store goal and the number of stores we open annually. So we have a 3,000 store goal in the United States. We have a little over 2,200 stores now. We build annually around 80 stores. So we've got, you know, basically a decade left of new store growth.
We do have a history of increasing that but, you know, we feel very good about the 3,000 store goal and you know, perhaps there's some more upside beyond that. You know, there's a variety of factors that limit the number of stores we build a year. As I mentioned, we're currently this year planning to build 80 Tractor Supply stores, and I should mention, 10 to 20 Petsense stores.
I would say the main limiting factor is our culture. And I think the thing that keeps me up the most at night is not allowing our growth to exceed the pace of our culture.
And, you know, we cannot be one of those companies that wakes up five years from now and go ‘God, we just had incredible growth, but we're just not the same company that we were five years ago from a culture and customer service perspective.’
Obviously in addition to that limiting factor, there's a variety of other things, right? There's access to, to all the, you know, construction materials you need. There's access to, you know, local permitting resources. There's access to construction labor, all those things. And we've had over the last two or three years, nuances there that have impacted our ability to move faster on store rollouts, just with, you know, the supply chain disruptions, the curb with Covid and such, and the availability for people to get out and approve permits and those sorts of things. But that's all reasonably settled now.
And I'd say it's mostly just back to normal with the exception of the higher interest rates on building stores. But the main bottleneck on an annual basis is just making sure that we don't outgrow our culture. And, you know, we bring every new store manager, so we have 12% store manager attrition, one of the lowest, perhaps the lowest in in retail in terms of attrition.
But at 2,200 stores, that's a couple hundred, 50 new store managers a year. Plus we have 80 new stores. So you're talking 330, 350 new store managers a year. We bring every one of those store managers to our store support center here in Brentwood, Tennessee, right outside of Nashville. They spend an entire week going through training. They also spend 90 days prior to starting at their store training at another store. And so we invest a lot of resource to make sure the store managers are up and running and that you can't tell a difference when you go into one store versus another.
And we're just so passionate about that. I think, you know, that is the primary limiting factor for our new stores in terms of number a year. And then trying to get our stores up to volume as fast as possible is kind of every retailer's goal and focus. And typically they start at about 70% of our estimated sales in the first year. And over a three or four year time period will will ramp up to that a hundred percent of what we expect out of that store.
And they are opening up at higher volumes than they did pre-Covid, and they are ramping faster. And I think there's a number of reasons for that, but I think the biggest is the improvement that we've made in our brand awareness and pre-Covid, our unaided brand awareness was down in the thirties and now post-Covid, our unaided brand awareness has nearly doubled. And just so as we move into markets, more people are aware of us, they're more apt to consider shopping us, and you know, that just allows us to ramp up, to ramp up quicker.
Tracy (41:00):
How important are partnerships to business growth now? Because famously you have a partnership with Carhartt, so if you walk into a Tractor Supply store, you'll see lots of Carhartt hats and you know, clothing of all sorts, but I think you also have some sort of deal with Yellowstone. And in the course of researching for this interview, I saw you have a line of garden clothes with Martha Stewart now. So that seems to be an area of interest for you. How do you identify these potential partnerships and then how important is that for the overall business mix nowadays?
Hal (41:36):
Tractor Supply would not be the same company without, you know, the many fantastic partners that we have. And that's really across, you know, all different facets of the business. Certainly on the product side, we have some great partners that work very closely with us, help us create unique product experiences for our customers that can only be found at Tractor Supply, to your point, whether that's in apparel, Carhartt we’re, you know, one of the largest seller of Carhartts in the country.
And we have, you know, nearly a hundred store within a store, Carhartt across our store base. But even partners like Purina on the feed side and, you know, we have two private brands in Feed do more and Producer's Pride, and we work very closely with Purina on the production of those. And in fact, our Do More brand is the only private brand product in the United States that carries the Purina checkerboard,
And you can go across our business and we've got these just really fantastic strong partner relationships on the product side, but also on the marketing side -- to your point. So we've got great relationships with Yellowstone and you know, Taylor Sheridan and that team. And we were, you know, one of the very first partners that they had, and have always built custom commercials for that. And, you know, Lainey Wilson, we have a strong multi-year relationship with, or professional bull riding, and we're one of the first inaugural sponsors with them, as that has really grown as a sport and an enterprise.
But then also if you look on the tech side, we have an incredibly strong partnership with Microsoft and Microsoft Azure in particular, and their cloud platform and their AI capabilities. And I'd say we're very much on the forefront of partnering with them and experimenting and developing scaled solutions. And then even if you look at like on the community side, we're far and away the largest contributor and have been for 30 plus years with FFA, the Future Farmers of America.
And we're in our second year of the largest rural agriculture scholarship program in the country. It's a million dollars a year, a hundred $5,000 scholarships and, and 50 $10,000 scholarships. And so, you know, whether it's on the community side, whether it's on the tech side, whether it's on the merchandising side or on the marketing side, you know, and in a variety of other stakeholders as well, we had just incredible partnerships people that we've been with for quite some time. And, you know, there's synergies between our businesses and their businesses and it just really allows us to be the best company we can be.
Joe (44:09):
I just have one more question, but since you mentioned specifically interest rates in the context of build out, can you just give a little more specifics about how does a high interest environment affect the math of store roll rollouts and you mentioned that on your call, that came up as one of the challenges for 2023 along with weather and some other things, but talk to us a little bit about the effect of elevated interest rates on expansion decisions and how it changes how various investments pencil out?
Hal (44:41):
Yeah, absolutely. So I mean, interest rates are significant in any sort of real estate project, right? And historically we have used third party contractors to develop our locations for us under a signed contract. And our commitment is part of that signed contract is, you know, typically at a minimum 15 years or a 20-year lease within two to three options on the back end of that.
So, you know, we're signing up for 15 to 30 years, say in a location with a lease, dollars per month associated with that. And as part of that part of the agreement, then a developer would go build that store for us, right? And that includes acquiring the land, you know, building the store. And then once they've got us up and running, most of our landlords will then sell that property to, you know, someone who wants to own the long-term cash flow stream.
So if you're a developer, you are typically funding the acquire acquisition of that land and the build out of that store through some sort of financing. And then you're selling the property to someone who's counting on those cash flows. And so both the financing and the selling to someone who's counting on [those] cash flows are significantly impacted by interest rates, right? What's the interest rate you're going to pay on $6 to $7 million of capital for a year to 15 months while you're building that store?
And then when you sell that Tractor Supply to someone and it's got a $300,000 a year annual revenue stream associated with it right from the lease, what interest rate are they going to use to discount that cash flow back at? And so it has substantial implications on our real estate developers. And with the movement up in interest rates, obviously it makes it more expensive to build, and then you obviously are monetizing those future cash flows at less, because of higher interest rates.
And so they've got more risk and they've got a bunch of movement. And so it has significant implications. And so one of the things we've done over the last 12 months is start to actually finance the build out ourselves. So we have gone, probably about half of our stores this year, we will work with the developers still. We'll say ‘Look, you just build the store for us, work with the contractors on the property, you know, work with the local municipalities around zoning and permitting and all those sorts of things, but don't worry about, you know, buying the fixtures, buying the HVAC, you know, buying the concrete block, all those things. We're going to do all that. We will pay for it all, and we're just going to give you a four or $500,000 fixed fee to build that for us. But the idea that you need to finance it on the front end or worry about the sale on the back end, don't worry about that anymore. We will take that on.’
And what we found is that it frees up a lot of value because they were putting a lot of risk in the model, particularly with the variability in the interest rates and how things are moving around. And so it's had significant impacts. We're fortunate to be investment grade in terms of debt rating, to be billion dollars plus cashflow positive every year. So we've got a lot of leverage that we can put in place to just kind of address that situation. But it's certainly been a big topic, I think for everyone in real estate over the last 18 months.
Tracy (47:55):
Since you guys are experts in moving big bags of stuff, can you just start buying and then also delivering materials for new stores to yourself, right?
Hal (48:03):
Right, and that's exactly part of the benefit that we've captured by bringing, you know, kind of self-development in-house, is that we can go negotiate now for, you know, 80 HVAC systems at one time, we can go negotiate for all the fixtures at one time. All the bailers that we have in the back of our store, all those sorts of things that in the past the contractor would've singularly sourced just for that store, we can now do it in large batches, 50, a hundred at a time and get a nice reduction in price by leveraging our volume.
Joe (48:39):
Last quick question for me, I mean, I know you're writing these big secular trends, but things like inflation, etc., labor market, how do things look right now? We're recording this April 9th, 2024, does it feel like we're something like a normal environment?
Hal (48:55):
I don't know, if you're a retailer that it feels perfectly normal right now, and I'll get into that in just a second. But what I would say at the highest level, I think our economy's strong right now. I mean, we're running, you know, as a country, two, three, 4% GDP, right? Kind of pick your quarter and month.
GDP’s solid right now. Wou've got consumer spending really leading the way on that. You know, the PCE, Personal Consumption Expenditures, you know, for the month of January and February are very solid in that, you know, two and a half to three and a half percent range. Very solid growth there.
You know, the only thing I think from a retailer perspective why it doesn't feel normal right now is consumers are still shifting their spend from goods to services and pre-Covid services.
So things like, you know, hotels, restaurants, entertainment, cruises, airline tickets, those sorts of things. They were about 69% of a consumers’ spend, with goods being the other 31%. During Covid, when people had less travel that they could go do, you had these stimulus checks coming through and people were feeling the need to spend those, goods as a percent of consumer expenditures got nearly as high as 37% -- with services by comparison, dropping down to 63%.
Over the last 18 months since our economy's opened back up and people have gotten back to more normal spending, perhaps some pent-up desire to travel, you've seen that services spend start to creep back towards 69%. I think at the end of February. It was in the high 67s, maybe right at 68%. And if you look at the February spend, services were up 6%, whereas goods were only up 1% on spend.
So there's a big swing happening right now between goods and services. But other than that, I think, you know, our economy seems to be very health healthy right now. The consumer continues to spend, you know, inflation's moderating. I think people have started, you see that lesser as an issue when you do consumer surveys. And you know, I think our economy is very much stabilizing. Hats off to the Fed for everything they've done
Tracy (51:11):
Hal Lawton, CEO of Tractor Supply. Thank you so much for coming on Odd Lots and explaining exactly how you were capturing so much of my income. It was great.
All right, Joe. Well, I thought that was fascinating and I can see why I am in fact spending quite a decent amount of money at Tractor Supply in recent years. There's so much to pick out of that conversation. I mean, I thought the point about distribution was pretty interesting, this idea that you can build up an expertise in moving a particular type of thing. So in this case, I guess big bags of animal feed and stuff like that. And so you can start to get efficiencies out of that and also maybe at some point start to, you know, negotiate supply for building your own stores in bulk purchase as well.
Joe (52:06):
No, I thought that was really fascinating as well, because you can imagine, right? And it's not, you don't have to imagine that like, okay, in something like pet food or something like that, or feed, they're competing with a lot of other companies. But if feed is such a dominant share of their own supply chain, then they can become the most efficient, or theoretically the most efficient, distributor of 50 pound bags in a way that you might not expect companies that specialize in so many other things. It's like [they] build that expertise and so a way of gaining scale and price competitiveness even from smaller side.
Tracy (52:43):
Yeah, and the other thing I was thinking, and this came up in the episode we did before on the Harvard Business case study, but this idea of the choice of location for opening stores and not automatically migrating or being attracted to urban centers, because I think for, you know, a large proportion of retail, the thinking is always you want to be where the people are. So even in the middle of New York, you will have -- in fact I think we have a Home Depot right below the Bloomberg offices in Midtown Manhattan -- you will have those kind of big box stores, you know, a Target or a Home Depot or whatever. But it seems like in the case of Tractor Supply, they're sort of going where the animals are, not necessarily where the people are, right?
Joe (53:25):
No, totally. And then I loved, also, you know, in terms of the strategic location, hearing him walk through the math of the effective interest rates on store development. And I always joke, you know, it's like every company is a bank, but that is basically what he described, which is why when Tractor Supply has a great credit rating, is really big, it's not going to go away, why not bring that sort of borrowing and lending capacity onto the Tractor Supply balance sheet and then free up the developer who then can focus on the one thing that they're really good at, which is constructing a building, rather than having the developer also take that financial risk and presumably pay a higher spread for their borrowing than Tractor would.
Tracy (54:12):
You know, the other thing I was thinking, and this might be kind of weird, but you know, Tractor Supply is sort of keying off this big demographic trend, which we discussed -- aging Millennials and the fact that Millennials want more space and they're moving out of cities and they want pets and things like that. I sometimes wonder if Tractor Supply is going to be the Harley Davidson of Millennials. Like, everyone had pets, um, when they were a certain age, just like all the Baby Boomers had a motorcycle when they were a certain age and then it kind of ages out gradually.
Joe (54:43):
I like that. I like that analogy. I'm done with that analogy. Oh, you know what, Tracy? One other thing that we have to do more episodes on is, I guess, I would say like the pointsification or reward program. And I just feel like, you know, I'm starting to think that, you know, people like post about prices for anything. They're like ‘inflation is out of control’ and then another person posts ‘here's a screenshot from walmart.com and these prices are nowhere near what you say,’ and stuff like that. And I feel like there is this divide between people who have the time and capacity to be part of rewards system…
Tracy (55:18):
I've said this so many times. It's the price pack architecture is becoming more sophisticated and McDonald's is my sort of ultimate example of this, which is if you download the app and if you take the time to order before you actually rock up to the little takeout window, you can get decent deals and they are like a significant percentage less than what you would get from just ordering spontaneously. And it is kind of, it's weird and it adds another layer of complexity to inflation, I think. And also brings up questions about privacy and fairness and things like that.
Joe (55:55):
Yeah, it was interesting to hear him talk about like how much they he credits that to , you know, getting that consumer app. I think he said it was in summer of 2021, and the sort of taking it from a very rudimentary rewards program to more advanced one. Super interesting stuff.
Tracy (56:12):
Absolutely. And we really should do that episode. Okay, well in the meantime, shall we leave it there?
Joe (56:18)
Let's leave it there
You can follow Hal Lawton at
@hallawton
.