The Exchanges

Q But when you contacted these companies that made things for, uh, you know, manufacturers and wholesalers, and you said, hey, we want to sell this to consumers, because I'm assuming that, you know, we're talking about, what, cardboard boxes, we're talking about plastic tubs. Did any of them, I'm, I'm imagining some of them were like, consumers, why would consumers want this?

A Yeah, they, they, they all were like that, and I'd say about half of them Really wanted their products to be sold on the retail level to consumers because they love their products, and they, nobody had any earthly idea what they did when they went to work every day, and this would give exposure to their beloved products. The other half of them were very worried about litigation and, and consumers hurting themselves on it, so, uh, it was, it was difficult to convince them to sell to us because, um, you know, it just never been done before. So it was a matter of comforting I mean, you know, we'd contact them a half dozen times before we'd finally, uh, get them to agree to sell to us. We're trying to, we're trying to buy from them. Uh, but then, you know, their experimentation was rewarded because we, in most cases, wound up being one of their biggest customers.

AI assessment note: “Yeah, they, they, they all were like that”

Q Right. Um, there's a little bit of a backstory, which is, it's sort of, we'll go back, but also forward, which is, you had a high school friend named Garrett. Right. Garrett Boone. And you and Garrett worked together at Montgomery Ward in the Paint department. This is important because you would eventually start a business together because did that happen in already in high school?

A Yeah, um, you know, Garrett and I both worked retail all of our lives. I started actually at a Sherwin-Williams paint store at 15, and Garrett Boone had a master's degree in history from Rice, and he didn't want to teach. And so what do you do with a master's in history from Rice? Well, he's the paint department manager at Montgomery Wards, and I was a high school kid working part-time at Montgomery Wards, and he's 10 years older than me, and learned a lot from him, and we really, But we, we made that paint department at Montgomery Wards the best department in the whole store. We won all the awards. We would hit the sales numbers. We would get the display numbers. We just, you know, we loved it, and we, we started even then talking about, ah, doing our own, opening our own retail store someday.

AI assessment note: “we started even then talking about, ah, doing our own, opening our own retail store”

Q in the store, it was unusual. You had to expand because 1600 square feet is small, especially given that you were selling storage supplies. Um, how are you financing the growth of the store? Because within a year or two, you would have another store in Dallas and then you, you know, growing store by store. Was it all just cash flow from the business was financing the next location?

A Yeah, um, you know, it's an alien concept, I guess, to the way businesses are developed today, but there's a, there's a patience involved to where that's all the money you have. Uh, we, we didn't really want to borrow money, uh, even from the bank. Uh, we certainly didn't want to, you know, raise capital and add new, uh, investors, and we didn't do that for many decades. Uh, we generated a lot of earnings, and then we put that money back in the business. We just incrementally grew, uh, Totally financed by the earnings of the business. We were much more interested in growing the business than we were taking money out and buying a new car for ourselves or something, and we paid each other, we paid each other 700 dollars a month for a long, long time, and then we went to a thousand dollars a month. We didn't spend money on anything except growing the business, and so that, that went on for many, many years like that. We, It never even occurred to us to raise capital by having other equity owners come in, and we were afraid to borrow money from the bank.

AI assessment note: “Totally financed by the earnings of the business.”

Q some money into the business. I guess your co-founder Garrett was looking to, you know, to liquidate some of his holdings. He'd been to, you know, I'm sure your wealth, his wealth had been tied up in the business for so, so long. And, and apparently he was looking to maybe, um, take some money off the table. Is that why you guys brought in an outside private equity firm?

A Yeah, uh, you know, Garrett was 10 years older than, than me, and, uh, John Mullen was a year or two older than, uh, Garrett, and they were looking to, uh, sell some of their stock. We were a little Spartan about how we didn't take any money, we didn't pay ourselves, uh, very much at all, and we didn't take any money out of the business, and so at some point, you have to figure out, uh, what to do about that. Uh, so we interviewed over a hundred private equity firms when we chose the, our private equity partners. I'm told nobody's ever interviewed half that many, but it was the most important decision we've ever made, and then ultimately even went the, into the public, uh, market. Uh, each of those things, each of those steps dramatically changes the business as you begin to worry about things like equity and partners, You know, until then, you're able to focus on employees, product, and customers, and Wall Street banks and equity owners are not a distraction. You know, they're not taking up the key people's time.

AI assessment note: “Yeah, uh, you know, Garrett was 10 years older... they were looking to, uh, sell”

Q And I would say, well, but consumers want to buy this. They want to make their own. It was just, it was that, probably that weird. What, Kip, do you remember, I mean, we mentioned cardboard boxes. Do you remember what other products you were trying to, to, to maybe see if you could sell, like if you could, if you could put it in the shelves at that time?

A Sure. You know, I mean, wire baskets that were used in the, uh, poultry business for egg collections or gardening, glass jars and bottles that were used for manufacturers to put their salsa, uh, in. And, and we also had to teach these manufacturers how to sell to a retailer. It's like, oh, we're not going to just buy one time from you. We're going to be buying every month or six weeks from you. So you need to give us this price, Not the one-time price. It was, it was leading, leading them by the hand, and they were scared, and so it was really relationship building, which was very instructive later on in life when we were competing against the mass merchants, you know, trying to, trying to have relationships with manufacturers.

AI assessment note: “wire baskets that were used in the, uh, poultry business... glass jars and bottles”

Q Never. Just would never work. We're total opposites. Obviously, we've had married couples on the show. I shouldn't say obviously. We've had lots. But, but there are plenty of people who've said, no, no, there's just no way we could work together. So I, I don't think there's a, you know, hard and fast rule about this, but why do you think you guys were able to make this work?

A Sharon was, um, she's, in my opinion, she's the greatest person I've ever known. I think, I think she's smarter than I am. I just felt privileged to be able to partner with her. I think a lot of it has to do with having that kind of respect for one another. We're well aware of what the other does better than the other, and Sharon clearly could do the product selection, product creation, merchandising at a level that Even our mentors like Stanley Marcus admired and loved, so I wouldn't dare try to tell her how to do that. We gave each other a lot of leeway. I may have been the CEO, but I certainly didn't feel like her boss. In fact, I, I joke to friends that, uh, when Sharon and I disagree, which is not that often, but when we do, I, I usually find out two years later that she was right.

AI assessment note: “I think a lot of it has to do with having that kind of respect”

Q nearly 70%. I mean, this was, this is post recession. Obviously, there's a lot of, um, direct to consumer internet businesses that are starting up. Um, uh, competitors like Ikea are getting into the storage business at this point. What, what was going on? What would you remember about that time and, and why growth started, not growth, but, but even net sales, uh, net income started to, to decline.

A Well, you know, you had a kind of a change in retail begin about that time. Most people would say Amazon. Amazon had a lot to do with it. Our average customer drove 21 minutes to get to our store. 21 minute drive time on average. So we began to lose our under 25 dollar sales. Because if you're going to buy three sweater boxes, uh, you might as well just buy it online from Amazon, you know, sweater boxes, sweater box. Now, if you're going to redo your pantry, you know, then you drive, you want to come to us. And so everything was more global. Competition was more fierce and Amazon type sales became, of course, bigger and bigger, bigger. So we would hire great people, train them, Pay them twice what anybody else would pay them, and then hope that they would interact for an hour with our customers to reorganize their linen closet. Uh, Amazon, there's no human contact. Everything's transactional. It's quick, easy. There's no great locations. It's an opposite form of retail. The American public was, was, uh, surveyed at that time about who provides the greatest service In retail, I expected Stanley Marcus or the Container Store or Crate and Barrel, one of those kind of companies to win. It was Amazon. I'm like, they don't provide any service at all. But what they do is they're, they make the transactions so easy and so, and so consumer focused. In a way, they're more consumer focuse…

AI assessment note: “So we began to lose our under 25 dollar sales.”

Q Yeah. Indeed. Indeed. Kip, you, you briefly mentioned this idea when you talked about Amazon, right? So much has changed in retail, uh, What do you see happening in retail today that is, you know, even more potentially disruptive, that could be the next thing that is going to shape how we shop?

A Well, the, the whole frictionless, um, no people involved definition of service, um, the difference between the Container Store and Neiman Marcus and companies like that, where you have this individualized, great salesperson selling a solution. I mean, a solution, not an item. That's kind of gone away, and now people are doing it on their, on their own. There's really no people involved. There's no reason to have the highest paid, best salespeople in the industry anymore. I mean, we would have people come in that have been driven crazy by their toy storage area of their home for four or five years, and in, in 45 minutes, we could solve that problem for them, and when they, when they left the store, they were elated, but it's hard to do online, and it's not what retail is really all about anymore.

AI assessment note: “the whole frictionless, um, no people involved definition of service”

Q together, and falling off my stepladder building it, but I built it. Um, and that acquisition of Alpha Was really a game changer, right? Because it all of a sudden you get into the business of not only are you selling the storage products, but you're also building or people are building closets. And so, I mean, how did, how are you guys able to acquire that without outside investment?

A Well, we didn't have much money. Uh, we didn't have any experience in acquisitions. It was a David and Goliath struggle. I remember we were like sweating blood trying to, to win the acquisition because other better finance people were competing with us. But the employees, the people of Alpha, uh, love the container store. They, they were really in favor of it being us. And, um, it was the greatest product we'd ever been associated with. It was the ultimate Way to design a closet, and it was about 25% of our sales. We were the importer, distributor, marketing agent, and retailer. There were no middlemen. It was our, our highest volume and our highest margin product, and that is really a key to business success. If, if your best-selling product's also your highest gross margin product, you're going to do well.

AI assessment note: “the people of Alpha, uh, love the container store. They, they were really in favor”

Q Well, what would you tell them? Would you, would you tell your employees about, like, what was discussed at board meetings?

A Oh, yeah. Uh, we, we would bring them into the solution of every, every problem. We would share all sales numbers, all, everything on the P&L. Uh, another foundation principle is intuition does not come to an unprepared mind. You need to train before it happens. You're not really genius unless you're not just using logic at work, you're using intuition at work. We want you to use your intuition. We authorize you to be brave enough to you. You'll make more mistakes, but you'll also be much more genius by, by using your intuition. So seven such principles as this, and, uh, that started with the Houston store and this foundation principles thing. It was the only way we knew how to deal with the mayhem that we were experiencing every day in that store.

AI assessment note: “We would share all sales numbers, all, everything on the P&L.”

Q wonder whether, was there a world where there could have been a pivot that would have stabilized a container store's finances Better? I don't know. I mean, maybe the answer is no. I don't, I don't know, because obviously you're a publicly traded company. The stock prices by 20 16 is down, you know, over 80% from its, its high. Um, and that's a lot of pressure on the business.

A Well, I want to reiterate that, you know, we had, uh, we had 40 years of being the most successful business around. It was, it was, it was giddy. It was crazy, you know, and then this hit us kind of like a tidal wave, uh, this change in retail, and, and now I think that the employee orientation and the foundation principles and the selling solutions rather than items Uh, still apply, but it's hard to weather that kind of storm, frankly, when you're a public company. You know, Wall Street isn't very patient. They're, they're interested in this quarter's earnings and this year's earnings, and we were trying to be stewards. If you and I had a farm, and we only worried about the productivity of that farm this month, this quarter, it may not be a very good farm in five years. So we, We were accustomed to being private and patient and long-term oriented, and, uh, perhaps we didn't react quickly enough to those changes.

AI assessment note: “perhaps we didn't react quickly enough to those changes.”

Q know, I'll, I'll have made it, and I can retire, and here you are. You've done it. What are you prioritizing now? What is, I mean, you mentioned travel, of course, and things that you can do, but what about in a bigger way? What are some of the priorities that you and Sharon have kind of established for, you know, for the rest of your time here on Earth?

A Sharon and I built this business together, and I love, I think you should work with the people you love. People say, oh, you shouldn't work with your spouse. You shouldn't work with your friends. Yes, you should. That's who, that's exactly who you should work. It doesn't always work out, but it doesn't always work out to work with people who are not your spouse and not your friends, and we loved it. I think more than anybody I know loved their work, but now we love retirement even more than that. I mean, the freedom of My God, the lack of stress. I feel like a liberal arts student trying to decide what I'm going to major in. You know, I could do whatever the hell I want.

AI assessment note: “I feel like a liberal arts student trying to decide what I'm going to major”

Q Okay. I want to bring Kip in. Um, Kip, I'm curious from a, a retail perspective, right? If Juliet was looking to get this into a store, like if somebody put this into the container store, how would a customer discover it?

A Well, it would be, it would be actually well placed in the container store because you have a very high service level, you know, so that they could relate, you know, the product. I, I was thinking this is more of a specialty independent, uh, retail store product than a mass merchant where there's no service at all. Um, it's very interesting. I guess it's, uh, BPA free, yeah? And I think it's so important that you, uh, you said you really were particular on that, and, um, You just need to make that clear to everybody. I mean, particularly parents, right? And so that's, um, I would say that you need to just quintuple your efforts to make sure everybody understands that that is the materials that you've, that you've used.

AI assessment note: “well placed in the container store because you have a very high service level”