Tractor Supply Co. has grown from a small mail order business set up in the 1930s into the biggest farm and ranch retailer operating in the US. Along the way, its share price has soared from around $1 in the 1990s to well over $200 today. The company has managed to tap into a wave of enthusiasm for hobby farming, pet care and rural living, with its revenues jumping 70% between 2019 and 2022. So what accounts for the success of Tractor Supply, such that analysts have referred to it as "one of the most interesting retailers on the planet"? And can it keep up the rapid growth? In this episode we speak with Bryant University Trustee Professor of Management Michael Roberto, who just published a Harvard Business School case study on the company.
Key insights from the pod:
How Harvard Business School cases are created — 4:20
Who is the target customer of Tractor Supply? — 7:02
The “judo strategy” of business competition — 10:06
The origins and history of the company — 12:22
Tractor’s unique approach to customer service and hiring — 13:46
How the company embraced e-commerce — 18:38
What is a “chicken swap”? — 21:37
What Tractor Supply and Trader Joe’s have in common — 24:20
Can the pandemic home improvement boom continue? — 28:20
Tractor Supply’s foray into sporting goods — 33:50
Why it’s so hard for retailers to pivot to new store formats — 36:17
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Tracy Alloway (00:10):
Hello, and welcome to another episode of the Odd Lots podcast. I'm Tracy Alloway.
Joe Weisenthal (00:13):
And I'm Joe Weisenthal.
Tracy (00:16):
Joe, did you enjoy the tomatoes that I brought you?
Joe (00:19):
Tracy (00:35):
Thank you. I appreciate that.
Joe (00:37):
They look so good. They exceed the hype.
Tracy (00:40):
Let me tell you, a lot of equipment goes into growing tomatoes. So you look at the tomato and you think, I have probably spent maybe 50 bucks in tomato cages and fertilizer and compost in order to grow that one tomato.
Joe (00:54):
How many hours of your labor?
Tracy (00:55):
Well, I don't count that
Joe (01:01):
But yes, it's like gardening ... all that stuff, is a lot of gear. And one thing I know about you, Tracy...
Tracy (01:05):
Uh, oh.
Joe (01:08):
No, no, this is a compliment ... which is that if you get into something like growing tomatoes, you take it very seriously.
Tracy (01:22):
No, I kind of did just throw the seeds in the ground. Although, actually, that's not true. I started them in an AeroGarden in the kitchen, in February. And then I planted them in the ground. But my point is that there are a lot of people nowadays who are into growing their own food or maybe having their own chickens for eggs. Lots of people have pets, including myself. And, of course, there are businesses who cater to this particular type of thing.
Joe (01:50):
Right. Not me, because I don't have a garden or I don't have chickens or anything. But yes, absolutely. The sort of small farms, large gardens, et cetera, seems to be a booming area. Hobbyist chicken owners like you, maybe one day in the future. And now there's probably a lot of money to be made in selling to people like you.
Tracy (02:10):
Yeah. I am still very focused on my dream of declaring egg independence one day. But in the meantime, do you remember a couple months ago we were speaking with Samuel Rines from Corbu? And he mentioned a specific company that fits perfectly into this particular business. He talked about Tractor Supply, and he called it one of the most interesting retailers on the planet.
Joe (02:33):
Right. I've always been curious about this company, because it's one of the most remarkable stocks. Several years ago it was a $1 stock. As of today, when we're recording this, on August 15, it's a $222 stock. One of the huge sectoral winners. But also it's one of these companies where if you live in New York City you would probably never encounter them. But for much of the country, it's just this massive retail brand that's thriving and take taking over.
Tracy (03:04):
Yeah. It's sort of one of those sleeper hits, kind of like Monster Beverage. Or Domino's Pizza. And I'm happy to say, where I live in Connecticut, there is indeed a Tractor Supply store and I enjoy going there. They let dogs in on a leash. So Pablo gets to come with me and sniff all the dog treats and look at the baby chicks and things like that. It is a fun experience.
Joe (03:25):
So the question is, how did this company build an absolute juggernaut? How did they find people like you? How do people like you find Tractor Supply and what is it that they have that others haven't been able to replicate or can't stomp out? Like why doesn't Home Depot or Lowe's or Walmart ... or Amazon? How do they thrive?
Tracy (03:46):
This is exactly it. And how much of it is them riding this sort of cottage core, millennial, hobby farm wave versus something maybe a little bit different? So I'm very pleased to say that we are finally doing our Tractor Supply episode -- our long awaited Tractor Supply episode -- and we do have the perfect guest. We're gonna be speaking with Michael Roberto. He is the Bryant University Trustee Professor of Management, and he has just published a case study for Harvard Business School, all on the Tractor Supply store. Michael, thanks so much for coming on Odd Lots.
Michael Roberto (04:19):
Thanks for having me, Tracy.
Tracy (04:20):
So I have a really basic question just to begin with, but: Harvard Business Studies. I hear about them all the time, and I think you wrote a very famous one about Trader Joe's, but what are they exactly? And how do they come about being created? How do you choose which companies to look at?
Michael (04:38):
So I've been writing Harvard cases since I was on the faculty there more than 20 years ago. And cases are supposed to put the students in the role of a senior leader at the business and put some decisions in front of them, put some data in front of them, and ask them, instead of listening to a lecture, the students are supposed to grapple with a real world situation. And the idea is that the case is not an analysis in the sense that the professor's opinion shouldn't shine through. And we want the student to do the analysis. So in the case of Tractor Supply, why is this firm so successful? We want the student to infer that based on an in-depth reading of the case.
Tracy (05:15):
I feel a lot of pressure now. I feel like I should have read the case study and come away with a lot of conclusions, but actually, I just have a bunch of questions.
Joe (05:22):
Well, I do wanna get to the company, but since we are talking about these case studies. First of all, how did you pick this company? But then beyond that... ok, you say, "I'm going to do something on Tractor Supply." What is the research, what is the time process? What do you do then?
Michael (05:37):
So first, in terms of how I find them all sorts of different ways, very opportunistically. In the case of Trader Joe's and Tractor Supply, they're both cases where I worked with David Ager at Harvard on both cases, and they're both places where I love them as a customer. I was struck by their customer service, struck by their success and wanted to learn more. But in other cases, I'll write cases about companies that I've never been a customer for. So just finishing one up on Viking Cruise Lines. I've never been on a Viking cruise, but I got a mailing one day and it intrigued me and that began my research. As for how I write these cases: in the case of Tractor, I dug around for a while trying to find someone at the firm that I could make contact with. And I finally did and explained to them the process of running a case. And they were gracious enough to invite me down to Franklin, Tennessee, just outside of Nashville. Brentwood, actually. And I spent a day there immersed in interviews with a number of their people. And then it's months of library research, online research, reading everything from stock analyst reports to, obviously, the 10Ks and the like.
Tracy (06:39):
Do you go to a lot of the stores? Do you get to look at the baby chickens and admire some of the, I don't know, fruit trees and fruit bushes that they're selling?
Michael (06:48):
Yeah. So I visited a number of stores and actually spent about a half a day with the store manager and district manager at the store closest to my home, interviewing them, talking to their customers, their employees, really trying to get an in-depth understanding of a store.
Joe (07:02):
So for someone who say, lives in New York City and doesn't have any reason to buy chicken gear, if someone says, "What is Tractor Supply Company?" What is it?
Michael (07:10):
It is a store for the hobby farmer. This is a person who's not making a living off of their land. This is a hobby. They have a full-time job and they're growing tomatoes, like Tracy, or they're raising chickens.
Tracy (07:22):
I feel seen. Yes.
Michael (07:24):
Exactly. And so it's a combination of buying feed for your animals, buying various supplies, or even buying animals themselves, like baby chicks. They sold nearly 11 million chicks last year. A pretty remarkable number.
Tracy (07:37):
So one thing I didn't realize, because I'm only familiar with the one Tractor Supply store where I live now in Connecticut, but they've been quite particular about their rollout strategy of stores. Can you explain where they tend to be located and how that might differ from some other competitors?
Michael (07:58):
It's really interesting to look. Their CEO Hal Lawton likes to joke that there's not one within 30 miles of New York City, but there's three within a 20-minute drive of Odessa, Texas. Right? Actually, one of the things I did in the case is I charted the Charlotte, North Carolina, metropolitan area. And if you look there, there's an interstate, Highway 45, that kind of encircles the city. Within that beltway, there are eight Lowe's stores. And not a single Tractor Supply. But on the outskirts of that city, now you begin to start seeing those Tractors show up in a number of smaller towns.
Joe (08:32):
Just for what it's worth, for listeners, a little more numbers. Current market cap of the company: $24 billion. A little over 2,300 stores. What is it about the perimeter? Is it just they want to be around people, their customers have yards, their customers have a lot of space, basically? What is it about that strategy?
Michael (08:50):
They want people who have some land. This is key. Typical customer has somewhere between one and 10 acres of land. So you have people who have the opportunity to have animals or to have a large vegetable garden, to have a barn or a shed and fencing. Things that would require upkeep. Right? And so they're looking for that. They also want to have people who are interested in that rural lifestyle. So they call some of these people "rural enthusiasts." They might not live on a farm. Right? They might live in the suburbs like me. A neighbor across the street from me is a millennial couple, and they've got chickens, right? They built a chicken coop from Tractor Supply. They only have about a half acre of land. So those are what they would call rural enthusiasts. And then the hobby farmer has a little more land. They might have a few more animals and a lot more vegetables or fruit trees.
Tracy (09:36):
So why don't we just get to that sort of important question, which is, what is it about this business that has made it special or successful in your mind? And how much of it is they've discovered a niche; a growing niche at this moment in time. The hobby farmer, the cottage core millennial, call it what you want, versus they are doing something different from other rural or home good stores like Lowe's, Home Depot, maybe a Runnings, something like that.
Michael (10:06):
John Ordus, who's the head of stores for the company, told me "We clearly want to stay out of the headlights of Lowe's and Home Depot." So their strategy is very explicit, right? David Yoffe and Michael Cusumano are two business school professors who coined this term "judo strategy" many years ago. And the idea is: avoid head-to-head competition with the big giants and even use the giants' strengths against them, the way you would in judo. And I think Tractor has done that really well. They have this very eclectic product mix. For example, you can't paint your kitchen with supplies from Tractor Supply, but you can paint your barn or your tractor, right? So whereas if you go into Lowe's, there's this enormous paint section. So they're very careful to avoid that direct head-to-head competition. And then they've got this really eclectic product mix.
Tracy (10:54):
Well, this actually leads into one thing I wanted to ask you, which is why don't they compete on sort of home construction materials? And I think you mentioned in your case study that at one point they attempted it, but it turned out to be something of a disaster.
Michael (11:08):
They went through a near-death experience, not simply because of that, but around that time. This was in the late seventies, early eighties. And they exited that market. And that's another principle of judo strategy is, when confronted directly by a more formidable competitor, back away. And realize what your strengths are and what theirs are. And the bottom line is, Home Depot has tremendous economies of scale. So just looking at their sales, right, they're more than 10 times the size of Tractor Supply. So think about trying to buy lumber and buy a lot of those building materials. Tractor's just not gonna be able to do it the way Home Depot can do it. And so it's trying to avoid that competition and instead compete, you know, in these other areas. And, of course, one key to this model is animal feed, because people have to buy feed for their animals. Come recession, come boom, it doesn't matter. And you know, as one of the executives told me, people love to talk about their animals as much as many people love to talk about their children. Right? So they love their animals and they're gonna take good care of them no matter the economic conditions.
Joe (12:22):
Can I just ask one sort of more step-back question? The company was formed in 1938, and I think it started as a mail order catalog. Did it at one point have a more explicit professional farmer standpoint? Or did it evolve into this sort of niche it found, of the sort of non-professional? And how did it find that groove?
Michael (12:45):
They did start out as mail order and then a store in North Dakota. Actually their first retail store. They started out during the Great Depression and they absolutely were serving professional farmers and selling them tractor parts. Today, that's a small part of their business. They really went through a major transition after the founders sold. They were part of two different conglomerates. Remember the big conglomerates of the seventies? And as you know, many of them did not thrive. And so eventually, Tractor gets bought out and a man named Tom Hennessy leads a management buyout. And he really re-fashions the strategy around the hobby farmer. And that's led to four decades of remarkable success.
Joe (13:23):
So when it comes to targeting the hobby farmer, it seems like obviously part of it is, as you say, the product mix and getting it right and just having a very different overall set of goods than one might get at a Home Depot or Lowe's. What about the role of customer service in that? And how important is that element in terms of having staff that really thinks about this particular customer?
Michael (13:46):
So they do a couple of interesting things. One of the most interesting things is they say, we hire our customers. They want people who....
Joe (13:53):
Tracy, don't go.
Tracy (13:54):
It is tempting. It's tempting.
Michael (13:57):
They actually will reach out to people they see in the stores often. My neighbor, Scott, has been approached several times about going to work there.
Joe (14:20):
Sorry. Is that rare? In your experience of covering other stores, is that unique or do other companies also do that?
Michael (14:28):
I think others try to do it. It becomes more and more difficult as companies grow. And I think Tractor has been able to maintain that, but it is a question going forward. You know, they're up over 2,000 stores and that's always a question. "Can we continue to find people who have that knowledge?" I think that's what the home improvement chains used to do very, very well. And it's been a challenge as they've grown.
Tracy (14:48):
So this is one of my enduring frustrations with our local Lowe's, which is you go in and you ask a question and rarely, I would say, do you get reliable information back. But is it different at Tractor Supply?
Michael (15:01):
These people are incredibly knowledgeable, but they also say to me, you know, we learn from our customers. One great story: a district manager told me was about a customer who explained to him how he could detect what kind of animal was attacking his chicken coop. And so it's something he didn't know, right? But these conversations happen. They talk about creating community, and this is a big part of the customer service story as they say. You know, our customer is the kind of person who wants to put their foot up on a bag of feed corn and talk to other customers. And then if you listen to those conversations, you learn a great deal about customer needs, customer wants, and the lifestyle of those customers.
Tracy (15:40):
Wait, how do you tell what's been attacking your chickens? I guess there'd be tracks, right? I know some people install video cameras as well to monitor.
Michael (15:48):
Well, you certainly can do that, but it turns out it has something to do with some animals will essentially devour the chicken right there and then. And so you'll see all the feathers in one place and others will take the chicken away until you'll see this trail across your yard or property. This is beyond my knowledge, Tracy, that's all I can tell you.
Tracy (16:07):
I gotta ask at Tractor Supply.
Joe (16:08):
This is not the Harvard Business School typical curriculum.
Michael (16:11):
Correct.
Joe (16:12):
Man, so many questions. You know, you mentioned the sort of near-death experience that they had when they've tried to go into building supplies. They have had some history of consolidation and buying competitors. Can you talk a little bit about the company's acquisition strategy and how it thinks about when it's opportune to buy and bring another company into the fold?
Michael (16:33):
They have been very careful about their acquisition strategy over the years. I think they've done two things with it, Joe. One is they've tried to use it to fill in pockets geographically. To accelerate their ability to saturate the market rather than relying strictly on organic growth. But I think the second and maybe even more important part of their strategy, has been to learn about particular categories where certain rivals have had strength. So currently their most recent acquisition looks to me, at least as an outsider, like an attempt to learn more about sporting goods. This is a company, Tractor Supply, that doesn't have as big of a presence in things like.....
Joe (17:07):
Which company?
Michael (17:09):
This is Orscheln [Farm & Home]
Joe (17:10):
Orscheln. Ok.
Michael (17:12):
And of course, I think they're at the point now though, where they may run up against antitrust issues. Right. They had to divest some of those stores as part of that deal, and I wonder if they'll be able to do any further acquisitions in the farm and ranch store space. But up till now, it has been a nice compliment to organic growth. And this knowledge they've acquired, as I say most recently, this one is allowing them to dabble a bit more in sporting goods — fishing, as an example, of something where they think there might be opportunity. But they know there are some formidable high knowledge players in that space, like Bass Pro Shops. So they wanna learn more, right?
Tracy (17:47):
Don't they have some partnerships as well? I think they sell Carhartt.
Michael (17:51):
They have an amazing partnership with Carhartt. They're one of the largest retailers of Carhartt apparel. And the new store remodels they've been doing as part of Project Fusion. They've been sort of making these Carhartt "store within a store" little shops; consolidating the products they sell. Ariat Boots, for example. Another great partnership that they have. And of course they have really ridden the Yellowstone trend. You know, if you read the Wall Street Journal a few months ago, it talked about how millennial New Yorkers who've never seen a farm in their life are running around wearing Yellowstone apparel. And so they've partnered with Lainey Wilson, the country music sensation, who's also a star on Yellowstone. And they do sell some Yellowstone apparel as well.
Joe (18:33):
What is their online component and how have they navigated e-commerce?
Michael (18:38):
So this has been a push, most recently. Hal Lawton became CEO just before the pandemic began. He had been at Macy's running e-commerce for them and, before that, running e-commerce for Home Depot for many years. And so Hal brought a lot of that knowledge with him. And so they've made a big push. They were already starting to dabble with the idea of "buy online, pick up in store." And then of course with the pandemic, they rushed out that process across the whole network. They found something pretty interesting. They admitted to me that some of the executives were skeptical about this because they thought, "Well, are we gonna get less store traffic and less impulse buying if people are simply picking up at the curb?" But what they found is that people live, in some cases, a pretty long distance from a Tractor Supply store. So what they wanna do is they want to be able to get online, see that the product is in the store, know they can pick it up. Let's say it's feed for their horse. But then once they get there, right? Now they've made that trip, they're gonna go in and talk to their fellow customers. They're gonna go in the store, buy other things, but they don't wanna make that trip unless they know what they absolutely need is there. So they're using the "buy online, pick up in store" process really interestingly.
Tracy (19:44):
Just to press on this point though, how are they competing against Amazon? Because Amazon does have, as far as I can tell, a pretty good network, even in rural areas. It's not hard to get a bag of bird seed, for instance, off Amazon. In some cases, you can get it in two or three days. So how do they compete with that?
Michael (20:04):
There's no question that the online players like Amazon are competitors. And I think one of the things that's different is they're selling big bulk pet food, right? Much bigger bags than you can buy, for example, at the supermarket. Huge bags of animal feed, the kind of things that are pretty hard to transport, right? And so that's a key thing that's helping them deal with the online threat.
Joe (20:24):
Out of curiosity, where does the farmer shop who's like, "Oh, it's not a hobby anymore." Who's the next above that's like, "Oh, this is actually becoming a professional thing." Someone who actually sells goods, maybe at a farmer's market or something like that? Who's their competitor for the larger scale customer?
Michael (20:40):
Yeah. There are large, you know, Agway and other players that serve farmers. Obviously, John Deere on the equipment side has dealerships throughout the country. As do other players in the tractor business. So you've got people who are serving the professional farmer on the high end. That's been consolidating over the years. Very large players doing that. But there's really a much more fragmented market for the hobby farmer. Their largest competitor only has about 180 stores.
Joe (21:05):
Who is that?
Michael (21:06):
That's Bomgaars now. And they've got over 2,000. So this is a formidable advantage they have in a fragmented market. The other thing I'd say, by the way, about the online presence is this is creating community. And they actually talk about it. Like they say, "You know, we're a little bit Home Depot, we're a little bit Target and we sell stuff for your home. We sell cool stuff like Target, but we're a little bit Starbucks about community." And this is the other piece that helps them against Amazon. So you can wash your pet...
Tracy (21:33):
I was about to ask about the pet grooming stations. A little bit Petco too, right?
Michael (21:37):
Yes, absolutely. So they have self wash, pet wash stations. You can get your pet or your animal vaccinated. But my favorite thing they do is the "chicken swap." This is actually in many cases organized by customers, but Tractor Supply hosts it in their parking lot. And hobby farmers come and they bring their animals. And believe it or not, they swap animals, they swap knowledge. And Tractor, of course is out there hosting the event. This is the kind of experiential retail that online players can't compete with as effectively.
Joe (22:10):
Tracy, I think we should film, we should do a live video episode at a chicken swap.
Tracy (22:15):
I would love to, Joe. Yes. Let's all do a field trip to my local Tractor Supply for the chicken swap.
Joe (22:22):
Let's do it. You know, I gotta say, I did not expect to get watery in my eyes reading a Harvard Business School case study, but I did at the intro of yours, because it starts with an anecdote of a farmer who delivered a calf in the middle of the night and needed something right away and called the manager. What happened? Tell the story.
Michael (22:44):
These stories are incredible that I heard from around the country, you know. And this one was, the manager hears that a calf is being born. They go to the store, they get the materials the farmer needs.
Joe (22:54):
At like 1:00 AM.
Michael (22:54):
In the middle of the night they go there and deliver the product to the farmer's home and the farmer wants to pay. And they were like, "Listen, the calf needs to be born. You need to deal with that. Just come in later in the week and pay." And they took care of the customer. One of my other favorite stories is this grandmother was walking through the store looking to buy feed for her granddaughter's horse. And one of the associates in the store realizes that this poor grandmother is kind of lost. Because usually the girl's dad, her son would be buying it. But he died a few days earlier. The store manager runs out, buys a sympathy card, has all the team members sign it, and puts a $250 gift card in there for the grandmother before she walks out the door that day. These are these, you know, as they call it, "going the country mile" efforts, which are a key part of their sort of cult, if you will.
Joe (23:40):
Can we talk a little bit more about that and maybe even beyond Tractor, because I imagine lots of companies would like to instill something like this in their workforce, right? I imagine every manager would love it if their employees had the wherewithal to identify that, buy the card, get the other people in the store to sign it. But I also imagine that is not easy to engender and it's probably not easy at a time of high labor turnover, in which you have a lot of new people who don't have that. Are there any patterns from Tractor, specifically, or other companies that predict whether a company is able to get this out of their workforce?
Michael (24:20):
You know, you mentioned earlier, the other case that I've become well known for, that I wrote with David as well. David Ager. And that's Trader Joe's. And I think about those two companies, and boy, they have incredibly passionate customers, who often become passionate employees. They treat them well. They pay them well, they offer them good working conditions, but it's much more than that, in my opinion. Because frankly, they can get the same pay or better at another retailer in many cases. But it is about the kind of environment where they give them some autonomy to really engage with the customer. They're not working off a script, they're not necessarily always doing the exact same task. They crosstrain them at Trader Joe's. They crosstrain them at Tractor Supply. This ability to do a variety of tasks to find meaning in your work, because you're passionate about what you're doing. These are really important things.
Tracy (25:10):
I wanted to ask a related question. I'm trying to think how to phrase this, but how much of that dedication has to do with the actual material you're dealing with? So feed for animals and agrarian equipment and growing things, versus the business model and the things the company is doing to engender, I guess, employee dedication. Could this be replicable at a place like Home Depot? Or does it take a specific type of person to really do it?
Michael (25:40):
I think this can apply to other retailers as well in different spaces. But I think this common tie among these kinds of players that I've seen is that they are finding these sort of very passionate customers. People that already care deeply about the product or the lifestyle. I mean, the people at Trader Joe's; there's no more cult-like brand, right? People line up. I remember when they opened the store near Columbus Circle. The lines were incredible. Right? So that certainly helps. But I think it's also about telling your employees that they're not robots. They can actually engage and have some ability to think on their own about how can we serve that customer.
Tracy (26:16):
Well, the other thing I want to ask you about is, I guess, the pay structure at Tractor Supply and how much does that feed into engendering employee loyalty and dedication. I was reading the business case, and one of the unusual things it seems that Tractor Supply is doing is they're providing profit shares for not just managers, but for even part-time employees.
Michael (26:38):
This is unique. So many of the store managers I talked to said that at prior retailers where they worked, the managerial staff would get profit sharing, but you wouldn't see it flow all the way down to the store employees, even part-timers. And, you know, last year I think they paid more than a dollar per hour extra as part of profit sharing to your frontline team member in the store. That's pretty significant for someone. I think the other thing they've done is they've had to, because the market conditions raised wages pretty considerably during the pandemic. So we've seen a 35% increase in wages, and that's just to keep up with Walmart and Target and others who've been increasing wages. So they've had to do that, but they've also extended benefits and improved benefits for people. And then they did some very pandemic specific things.
Michael (27:20):
For example, they offered employees who had kids who were being schooled at home, who didn't have a good personal computer, and they bought them Chromebooks or other personal computers. About 3,000 of these. For the children and grandchildren of their associates. So they did take these extra steps to care for their employees during the pandemic that I think have paid off as well. The other thing I think they've done, is they've tried not to extend themselves. So they've been hiring aggressively. They say they've tried to keep revenue per full-time equivalent roughly equal, even as revenue has exploded. Rather than trying to drive margin improvement in a dramatic way, they've reinvested both in the workforce and then in store remodels. So it's a nicer place to work as they've improved the stores, too.
Joe (28:20):
Let's talk more about the pandemic and how they've navigated the last few years, because this has been a really tough environment for anyone, for obvious reasons. But I have to imagine there are some added complications, or maybe that's not the right word, but with Tractor Supply in part because it's been hard to know, and it may be still be TBD, the degree to which certain lifestyle patterns that came about in 2020 and 2021 are going to persist. And so obviously there were probably a lot of people that in 2020 are like, "I'm gonna get chickens, I'm going to do this." And then in 2023, it's like, "I have a full-time job. I don't have time for chickens." These are hard things to navigate and it's hard to know what's gonna last and what's gonna be persistent and so forth. Talk to us a little bit about like the pandemic shock, the consumption boom and how they've sort of managed to balance things out.
Michael (29:11):
This is the big question to me, and the big question in the case. We've seen the companies that have flamed out, right? We've seen the Pelotons of the world, right? But we've also seen some firms that they haven't flamed out, but they've seen a reset. So Home Depot just this morning announcing earnings. And comps are down 2%. So, not dramatically, but this is a company that was recording pretty incredible comps. Home Depot and Lowe's were. As for Tractor, I mean, comps peaked over 20% during 2020. That's a crazy number. You know, I worked at Staples before I became an academic. I mean, 20% comps. I've never heard of such a thing. And yet, last year they were a little over 6%. Now this recent quarter, they were like 2.5%. So they've settled down, but they're still positive. The question is how much of a reset is happening. And are these trends permanent, as you say? Will people continue to raise the chicks? And I think this is the challenge they're navigating going forward that will be really important for them to navigate. So far they've done a pretty good job relative to a lot of the other... I'll call them pandemic flashes in the pan, at retaining customers.
Joe (30:15):
And the stock is way up since 2020. So clearly it's not one of these, you know, mountaintops that's just back to the base.
Tracy (30:21):
So when you spoke to management, did you get any inklings or clues about what's next in terms of the strategy? Because for the past few years, it has just been, expansion, managing through the pandemic and trying to match supply with demand.
Michael (30:34):
Well, one of the biggest things they've been doing is transforming their side lots. I think this is a really interesting play. It comes with some risks. So if you know the side lot, maybe the one you go to, Tracy, it's got a lot of large agricultural equipment. Big fencing, for example. For your goats, right? And it's spread out typically in the sort of side parking lot. And what they've realized, there's a lot of wasted real estate there. Because you've really spread that stuff out and they've looked to actually build some small garden centers. They've opened a few hundred of these around the country, but Hal Lawton told me we want to over-index on certain kinds of gardening. So in other words, they're looking to sell more fruit trees than you would get at many other places. They're gonna sell less flowers and more vegetables. Because they don't want to compete head-to-head again with some of those big players in the home improvement space.
Tracy (31:25):
So Home Depot and Lowe's sell all the annuals and perennials and they're doing something different.
Michael (31:28):
Right. And so they're gonna have a little bit of that, Tracy, but they're gonna over-index, they said. So now why is this potentially a risk? Well, it's appealing for me as someone with a big garden, the notion that I can go to Tractor now where I go anyway for a lot of things, but this does nudge them closer to head-to-head competition. Even with that over-indexing, their product mix is now going to overlap just a little bit more with some of these other players. And this is an issue, I think, as firms try to drive comps. As they mature. Even if they start out not competing very directly with other players, they encroach gradually. Think about Starbucks and Dunkin, two firms that 30 years ago looked radically different. And yet Dunkin sells lattes, right? Starbucks has drive-throughs. They've grown more alike. We call this "strategy convergence" and that is the risk. But I think that's one key area. And then the other key area, Joe and Tracy, is obviously I think, the idea of exploring sporting goods as a result of the recent deal. I will note that the store nearest me, the store manager said he's had a lot of success, for example, selling kayaks already in his store.
Joe (32:35):
I mean, it's interesting. You talk about when it comes to the outdoor space that they wanna sell more plants, but maybe fruits and vegetables is a way to differentiate themselves from the big flower sellers. Is there a way in sport sporting goods that it can differentiate itself from a Bass Pro Shop? A way so that they could sell sporting goods, but in a way that's more Tractor and keeping to their true audience?
Michael (33:00):
I wish I knew, right? I don't know because, I mean, I am a Big Bass Pro customer. My son loves to fish. The knowledge the folks at Bass Pro have and the selection. I mean, I can't imagine Tractor in their small stores is ever going to be able to offer that kind of selection.
Joe (33:15):
Why isn't Bass Pro publicly traded? Who owns them?
Michael (33:17):
Oh, Johnny Morris, the founder, still owns them, I believe. I might be wrong there, Joe, but I believe he still owns the company and that's very much a destination retail kind of place. People drive. I think I wrote in the case that in four or five states in the US, a Bass Pro is the biggest tourist destination in the state.
Joe (33:34):
Really? That's amazing.
Michael (33:35):
Pretty incredible.
Joe (33:36):
Is it in Memphis, right? There's the Bass Pro Shop Pyramid. I've always wanted to go to that.
Michael (33:43):
I do think there's a few things. For example, Tractor sells gun safes. The Tractor near me doesn't sell guns. So that's an interesting niche thing. And by the way, I think they said to me, "You know, people buy them for things other than guns." So they just happen to be called gun safes, right? So they found a little niche. This is this eclectic product mix that they've found. My favorite, of course, is the toolboxes for the trucks that are branded Tractor Supply. People are literally advertising for the company and they just somehow spotted this opportunity.
Tracy (34:15):
The Tractor Supply baseball hats as well. Those are all over.
Michael (34:17):
I think they told they sold almost a million of them.
Joe (34:20):
Can you bring me one, Tracy?
Tracy (34:20):
I'd be glad to bring you one. Any excuse to go to the Tractor Supply store.
Joe (34:24):
Are buying decisions made at the local level? Is there a store buyer or regional buyer? Who is empowered to make these choices? And I imagine that the good mix must be different in different locations in the country.
Michael (34:37):
It is. So they, they are working from their store support center in Tennessee, but they are in close communication with the local markets. And there's quite significant differences you could imagine, right? The Northeast, you have much colder temperatures. So raising chicks, for example, looks really different in the Northeast than it does in Texas, for example, just simply because of the temperatures. But also in terms of the types of things that you have. So you're not having cattle in the northeast, generally speaking. But you might have someone with a few cows or a few bulls in Texas, for example. So they very much work on their team to tailor their products around the country. So the stores look a little different as you go around the country.
Tracy (35:20):
Is that very different to how some other big box stores operate?
Michael (35:25):
No, I think the good ones all try to tailor. I know that at Trader Joe's, they certainly try to deal with the fact that, for example, the demographic composition of the population looks very different in Southern California than it does in Boston. And so I think Trader has been very effective at trying to understand that. So you'll see some differences. Obviously in Trader's case, it's always that same private label strategy, right? So they're not messing with that. That's really fundamental to them. But the mix of the products is going to look different based on their assessment of the demographic composition of the population.
Tracy (35:58):
So just going back to the purpose of the Harvard Business case study. If you are a student reading this document, what managerial conclusions do you think they should come away with here?
Michael (36:11):
Oh boy.
Tracy (36:11):
I guess I'm asking you to do their work for them. Sorry.
Michael (36:12):
I'm giving it away!
Joe (36:14):
If you're a student, don't listen to this part.
Michael (36:17):
Yeah, yeah. No, for me, I am gonna teach some of these principles of judo strategy. How does a smaller player compete against players that are ten times their size, find a way to not compete head-to-head or try not to, and to even use the strengths of those rivals against them. Think about it. Can a large home improvement chain, or can a Petco, do the chicken swaps? I think that's hard to do actually. You know, store models are incredibly rigid. That's one thing you note about retail. Think about how many retailers, for example, large retailers have tried to open smaller format stores and failed.
Joe (36:51):
Why do they fail?
Michael (36:53):
It turns out it's like a machine, when you run a retailer. You have two, three-thousand, four-thousand stores. They're all roughly the same size. They're cookie cutters, right? And now suddenly you want to operate a very different store format. Much smaller, much more neighborhoody. It turns out it's really difficult. And what firms do is, we call this straddling. So to give an example. Trader Joe's. How come no one has been able to copy them? Well, remember Whole Foods tried that little experiment with the “365 by Whole Foods” stores. These were these small little stores that only sold the Whole Foods private label. Total debacle. They closed them all, right? Why? Because they were not as good as a Whole Foods. And not as good as a Trader Joe's. They were this hybrid, four-humped camel that they tried to create. This is the same thing Delta did when they created Song. Not as good as Delta, not as good as Southwest. Some kind of weird thing in-between.
Joe (37:45):
What is another — maybe in a different industry or something — a company that you would teach as an example of a successful judo strategy?
Michael (37:55):
As I say, I'm just finishing up a case on Viking Cruise Lines. This is a really interesting company. I'll tell you how I got interested. I got a brochure. I was really mad, Joe, when I got the brochure, because Viking targets “mature couples.” And I was like, "Wait a second, I'm not a mature couple!”
Joe (38:11):
“Why am I getting this? Why am I getting this?"
Tracy (38:14):
That's how you know you're getting old when you start ticking different boxes for demographics and you start getting exactly those targeted ads.
Michael (38:20):
And my wife really rubbed it in. She's a few years younger than me and she goes, "Well, I didn't get the brochure." But, you know, there's a page in the Viking brochure and it says "what Viking doesn't do." And this intrigues me because this is what I teach. The idea of what Michael Porter once wrote. The idea of: the essence of strategy is choosing what not to do. Making trade-offs. Trader not selling branded goods and not doing self-checkout and not doing traditional TV ads. All the things Trader Joe's doesn't do. Tractor not doing a lot of the things that big home improvement chains do. Well, what about Viking? No one under the age of 18 can go on one of their ships.
Tracy (38:57):
Oh, I love it.
Michael (38:57):
So it is truly for the mature couple. They don't allow you to bring your family. There's no casinos. They over-index on river cruising. Dominate in river cruising. Smaller boats, much more intimate. So they found a way, right? And as it turns out, Royal Caribbean? All about the big boats. "Wait, holy cow, we've got to compete in the river segment?" By the time they realized what was going on, Viking had established a dominant presence on the European rivers with these smaller boats. And it's just another example of a firm that really did this quite well.
Tracy (39:28):
Here's the important question. Are you going to go on a Viking cruise now?
Michael (39:31):
So now I'm intrigued, but I think I'm still too young, Tracy. I hope so. But I'm intrigued.
Joe (39:37):
There's what, 2,100 or 2,000 of these locations. How much more space is there in this country for Tractor?
Michael (39:47):
So Tractor just announced with their recent quarterly earnings release that they've raised their target for stores to 3,000 across the country. Analysts reacted really positively to that. I always worry about aggressive growth targets, but that's not a dramatic number. They're already over 2000. But you always worry about that saturation issue when you're trying to grow locations, no question about it. So yes, they are going to try to get to 3,000, but not overnight. I think it looks to be a fairly gradual plan. And I think it's interesting. Some of the retailers who've taken that slow, gradual approach... that's hard to do. Management gets antsy sometimes. Let's see if they stick to it. But right now the plan is a gradual growth to 3,000.
Tracy (40:30):
Alright, well Michael, thank you so much for coming on Odd Lots and explaining the Tractor Supply business case. Really appreciate it. That was fun.
Joe (40:37):
That was so good. Thank you so much.
Michael (40:38):
Thanks, Joe. Thanks, Tracy.
Tracy (40:53):
So Joe, have you been hobby farm-pilled?
Joe (40:56):
I'm really excited about our live video episode from the chicken swap. So yes, a hundred percent. And in the meantime, I am putting in an order for a hat. I'll pay you back. You don't have to buy it for me, but next time please pick me up a Tractor Supply hat.
Tracy (41:09):
I already told you I'm grateful for any excuse to go to my local Tractor Supply. The other thing is I wonder if we could expense chicken purchases on Bloomberg, in the name of Odd Lots.
Joe (41:21):
Yes, we definitely can.
Tracy (41:21):
Excellent. Well, no, that was really interesting. I think also the “judo strategy” analogy of zigging where other companies are zagging makes a lot of sense. And trying to compete, you know, essentially competing in the same space, but in a slightly different way.
Joe (41:39):
Can I say... I would not mind if we did a lot more of these business strategy episodes. We've done some company episodes before. Monster.
Tracy (41:48):
Monster. Did we ever do a Domino's one?
Joe (41:49):
We did a Domino's one. But thinking about these things. "Oh, the essence of strategy is like what you don't do." Or the judo strategy or why is it that retailers have a hard time moving from large format to small format? Walmart's tried this, Amazon's tried a bunch of physical stores. I never know if they work. I could see us doing way more like this episode, because that seems like a fruitful area to learn how these companies actually operate.
Tracy (42:15):
Totally. And also just getting an opportunity to ask more questions about pricing as well. Because I'm still really interested in how individual corporate pricing decisions are feeding into the bigger macro picture.
Joe (42:27):
Also, how do you get that right mix? Because it's not totally intuitive to me that, "Okay, vegetables and gun safes and kayaks and a certain size feed," but obviously that's what the company's special sauce is, is getting that. And then also I imagine every company, like I said, would love to have employees who would be that attentive to customers. But that's got to be really hard to build.
Tracy (42:53):
Well, I will tell you, I plan to put in some blueberry bushes this fall, hopefully. And I plan on getting them from Tractor Supply. And getting some recommendations for which ones might work. Anyway. Should we leave it there?
Joe (43:05):
Let's leave it there.
You can follow Michael Roberto at
@MichaelaRoberto